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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]

FOR THE FISCAL YEAR ENDED AUGUST 31, 1995 COMMISSION FILE NUMBER 0-17393

MEGATEST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 94-2422195
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

1321 RIDDER PARK DRIVE, SAN JOSE, CALIFORNIA 95131
(408) 437-9700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock,
$0.001 par value

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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this Form 10-K. [X]

The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $189,861,000 as of October 17, 1995, based
upon the last reported sales price on the Nasdaq National Market on such date.
Shares of Common Stock held by each officer and director have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

There were 7,434,720 shares of the Registrant's Common Stock issued
and outstanding as of October 17, 1995.

DOCUMENTS INCORPORATED BY REFERENCE:
None

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PART I

ITEM 1. BUSINESS

Megatest Corporation ("Megatest" or the "Company") designs,
manufactures, markets and services automatic test equipment (ATE) for the
integrated circuit industry. Megatest currently offers four product lines--one
for testing memory ICs and three for testing logic ICs. The Company's Genesis
IIex and Genesis G-III memory test systems test a broad range of memory ICs,
such as DRAMs and non-volatile memories ("NVMs"), including FLASH memories and
EPROMs. The Company believes that it is the leading supplier of ATE for
testing FLASH memories, the fastest growing type of standard memory IC. The
Polaris and Vega Series, Megatest's second and third generation logic testers
using its Tester-Per-Pin architecture, test a wide variety of high-performance
logic ICs, including RISC and CISC processors, digital signal processors, and
custom, semi-custom and application specific ICs. The Voyager Series tests
logic devices such as FPGAs, PLDs and microcontrollers and some memory IC
devices. The Polaris and Vega systems support a recently introduced option
which incorporates certain analog functions to address the growing mixed-signal
requirements of some logic ICs. The Company markets its test equipment
worldwide to IC producers, both those who manufacture ICs for resale and those
who manufacture ICs for inclusion in their own products, as well as to IC
customers such as manufacturers of computers and other electronic systems.

PROPOSED MERGER WITH TERADYNE

On September 5, 1995, the Company entered into an Agreement and Plan
of Merger and Reorganization (the "Merger Agreement") with Teradyne, Inc.
("Teradyne") and M Merger Corp., a Delaware corporation and wholly-owned
subsidiary of Teradyne ("Merger Sub"). Pursuant to the Merger Agreement, and
upon the satisfaction of all closing conditions, Merger Sub will merge (the
"Merger") with and into Megatest, and Megatest will become a wholly-owned
subsidiary of Teradyne.

Upon the closing of the Merger each outstanding share of Megatest
common stock will be converted into the right to receive 0.9091 shares of
Teradyne common stock, subject to the following adjustment (.9091 shares, as
adjusted, the "Exchange Ratio"): (i) if the Final Teradyne Stock Price (as
defined below) is equal to or less than $36.00 per share, no adjustment to the
Exchange Ratio shall be made; (ii) if the Final Teradyne Stock Price is greater
than $36.00 per share then the Exchange Ratio shall be adjusted pursuant to the
following formula:

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Exchange Ratio = ----------------------------------------
(Final Teradyne Stock Price x .02) + .38

but in no event will the Exchange Ratio be greater than .9091 or less than
.8333. "Final Teradyne Stock Price" shall mean the average of the closing
prices of Teradyne common stock for the twenty consecutive days on which
Teradyne common stock is traded on The New York Stock Exchange ending on the
fifth calendar day immediately preceding the Special Meeting of Megatest
stockholders held for the purpose of approving the Merger.

The closing of the transaction is subject to certain conditions,
including approval by Megatest's stockholders. The transaction is
expected to be accounted for as a pooling-of-interests.

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PRODUCTS

Since introducing its first tester in 1976, the Company has sold
approximately 2,850 memory and logic testers. Megatest's Polaris, Vega and
Genesis test systems are composed of a "mainframe" unit and one or more test
heads. The mainframe contains most of the testing circuitry, including the
computer control unit, test pattern and timing generators, as well as the power
supplies and cooling systems necessary for operation. The test heads contain
highly specialized pin electronics that connect to the IC being tested. The
Voyager Series utilizes "tester-in-a-testhead" architecture, in which all
tester modules reside in the testhead, close to the ICs under test. The base
unit of a Voyager Series thus contains only the computer control unit, power
supplies and cooling system. For each of the Company's testers, the test head
is brought into contact with the ICs being tested through use of the tester's
own manipulator system and IC handlers and wafer probers provided by other
manufacturers. Megatest's products range in price from approximately $200,000
for a minimally configured memory tester to over $4,000,000 for a fully
configured logic system.

GENESIS MEMORY TEST SYSTEMS

The Genesis memory test systems are used for a variety of different
memory IC types. The wide range of memory IC configurations necessitates
testers that can accommodate varying data formats, operating speeds and
specialty modes. The Genesis systems are designed for cost-effective,
general-purpose, high-volume memory IC testing. All versions feature a
parallel-test architecture. The Company's original Genesis II was introduced in
1988, an enhanced Genesis IIex version was introduced in 1991, and the current
Genesis G-III system was introduced in July 1993. The Company shipped its
first Genesis G-III in February 1994.

The Genesis systems are designed with the high-voltage capability
required for testing many currently available NVMs, such as FLASH memories,
EPROMs and EEPROMs. This high-voltage feature is also used to test special
access modes for certain specialty memory ICs. The Genesis IIex is capable of
fully testing memory ICs at up to 33 MHz, and has the ability to test special
access modes at up to 50 MHz. The Genesis G-III is capable of fully testing
memory ICs at up to 66 MHz. The Company believes these capabilities enable
either Genesis system to test virtually all DRAMs and NVMs currently in volume
production. In addition, the added capabilities of the Genesis G-III are
designed to enable it to test new, high-performance DRAMs and NVMs.

The Genesis systems incorporate a number of features to increase
tester throughput. They allow parallel testing of up to 32 DRAMs at one time,
and their modular test head design allows easy integration with standard wafer
probers and IC handlers. The Company offers interfaces for most wafer probers
and IC handlers currently available, and designs custom interface applications
for others as necessary. The Genesis systems are available in configurations
with one to four test heads. Field upgrades are available to expand testers up
to their maximum configuration.

VLSI LOGIC TEST SYSTEMS

Megatest's family of VLSI Logic test systems is used to test a wide
variety of logic IC devices. This family of systems is based on a
Tester-Per-Pin architecture pioneered by Megatest. Tester-Per-Pin provides
individual testing resources for each pin of the IC being tested, including a
timing generator, pin driver and comparator, parametric test unit, dynamic
current load, vector memory and serial scan path. Megatest believes such
architecture offers greater efficiency and flexibility in testing than other
current architectures. The high level of control of complex test patterns and
increased timing flexibility provided by the Tester-Per-Pin architecture are
critical for uncompromised, cost-efficient testing of the many different logic
IC types, speeds and configurations.

The VLSI logic family was designed to optimize high-volume IC
manufacturing applications in order to reduce the customer's total cost of
ownership. The family consists of two models: the Polaris series designed to
test the current generation of high performance processors, and the Vega
Series, introduced in January 1995 and targeted at the most advanced high
performance processors under development. Logic ICs are tested by using a
truth table containing input test patterns and anticipated results. The more
complex the logic IC, the longer the truth table must be. The Polaris series
permits truth tables of up to thirty two million vectors, while the Vega
permits truth tables of up to sixty four million vectors. To support the
varying testing demands of complex logic ICs, the testers are offered in
configurations ranging from 32 to 384 pins and support a recently introduced
option which incorporates certain analog functions to address the growing
"mixed-signal" requirements of some ICs. The

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Polaris and Vega series incorporate a Sun Microsystems SPARC central processor
as their test system controller and SPARC workstations and fileservers as their
front-end user interface. These systems facilitate access to testing data and
integration into engineering and test floor management systems. In addition,
the Vega is compatible with the Company's previous generations of logic
testers, in that test programs written for the MegaOne and Polaris can be used
on the Vega.

The Vega and Polaris are available in configurations of one or two
test heads, allowing different ICs to be tested on each head, thereby
increasing tester utilization and IC test throughput while minimizing factory
floor space. In addition, both testers have the capability to test multiple
ICs in parallel on each test head. Each test head is mounted on a
pneumatically controlled test head manipulator which allows the operator to
position the test head easily in virtually any orientation for docking to a
wide range of wafer probing and IC handling equipment. The manipulator and
docking mechanism are designed to enable rapid reconfiguration from one IC type
to another. The design also includes a chilled water cooling system, which
maintains a lower internal operating temperature than conventional air cooling
systems. This lower temperature extends the operating life of the internal
electronic components, improves overall system reliability, and provides
quieter operation. Efficient cooling also improves the stability and
repeatability or accuracy of testing results.

Expandability in pin count, upgradeability in test speed and test
system controllers, and the ability to add a second test head at a much lower
cost than purchasing a new tester are available to customers as field
modifications. These modifications permit customers to purchase only the
capability they currently require, while preserving the option to upgrade later
as their testing needs grow.

VOYAGER TEST SYSTEM

The Voyager test system tests logic IC devices such as FPGAs, PLDs and
microcontrollers, and some memory IC devices. The Voyager system employs a
tester-in-a-testhead design concept to meet special needs of high-volume,
high-speed device manufacturers. Introduced in 1993 by Micro Component
Technology, Inc. (MCT) as the Model 1149, the system offers configuration
flexibility for supporting boundary scan and other built-in self test IC
circuits. All tester modules reside in the testhead, close to the ICs under
test, which enables higher accuracy and throughput at reduced costs. Several
kinds of pin electronic modules can be placed in any position to accommodate
special test needs.

The Voyager's testhead configuration flexibility allows IC
manufacturers to optimize testing costs for special purpose products.
Manufacturers of field programmable logic devices such as FPGAs and PLDs, for
example, often require multiple level, high-voltage programming pulses to load
program data into ICs. The Voyager offers an optimized pin electronics module
for such needs. Manufacturers can populate Voyager testheads with up to 768
pin channels for testing devices in parallel, and can easily optimize Voyager
system configurations to accomplish proprietary device programming techniques
at low cost. The Company believes the combination of parallelism and accuracy
offers favorable cost of ownership benefits for its customers. Megatest
offers interfaces for most wafer probers and IC handlers currently available,
and designs custom interfaces for others as necessary.

CUSTOMERS AND MARKETS

The Company believes that once an IC manufacturer has selected a
particular ATE vendor's tester for a generation of ICs, and made the
substantial investment required to develop test program software and
interfaces, the manufacturer will tend to purchase testers from that ATE vendor
for the entire generation of ICs, and subsequent generations of similar ICs as
well. Accordingly, Megatest expends substantial efforts to maintain its
relationship with its existing key customers in order to increase the
likelihood that these manufacturers will continue to select the Company's
testers for their future generations of ICs.

Sales to four customers accounted for approximately 67% of net
revenues in fiscal 1993, sales to four customers accounted for approximately
71% of net revenues in fiscal 1994, and sales to three customers accounted for
approximately 58% of net revenues in fiscal 1995. In particular, sales to
Texas Instruments, Inc., which purchases logic and memory testers, accounted
for approximately 27%, 34% and 25% of net revenues, respectively, during those
periods; sales to Intel Corporation, which purchases memory testers, accounted
for approximately 10%, 15% and 19% of net revenues, respectively, during those
periods; and sales to Samsung Electronics

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5

Company, which purchases memory and logic testers, accounted for approximately
10%, 4% and 14% of net revenues during those periods. The Company expects that
sales of its products to TI, Intel and Samsung will continue to account for a
high percentage of net revenues in the foreseeable future, and believes that
its success depends in large part upon the success of the ICs being tested by
these and other key customers. The loss of a major customer or a reduction in
orders by such customers, including reductions due to market or competitive
conditions in the IC industry, would have an adverse effect on the Company's
results of operations. In addition, the Company's ability to increase its
sales will depend in part upon its ability to obtain orders from new customers.
No assurance can be given that the Company will be able to do so.

As of August 31, 1995, the Company's backlog of scheduled but unfilled
orders was approximately $51.1 million, compared with approximately $16.2
million as of August 31, 1994. Substantially all of the backlog as of August
31, 1995 is expected to be shipped in fiscal 1996. The Company includes in
backlog only those orders for which a signed purchase order has been received
from the customer and for which a delivery schedule has been specified. All
orders are subject to cancellation by the customer with limited charges.
Because of orders received for test systems to be shipped in the same quarter
and possible customer changes in delivery schedules and cancellation of orders,
the Company's backlog at a particular date is not necessarily indicative of
actual sales for any succeeding period.

The Company's business depends upon the capital expenditures of
manufacturers of ICs and products utilizing ICs. The IC industry is highly
cyclical and has historically experienced recurring periods of oversupply,
which often have had a severe negative effect on the IC industry's demand for
test equipment. The Company's business and operating results in prior years
were adversely affected by industry-wide downturns. In recent years, the
Company's revenues have increased substantially, reflecting increased demand
for ICs by manufacturers of computers and other electronics systems. There can
be no assurance as to how long demand for ICs will continue to increase, and
the Company believes that the market for semiconductor capital equipment will
continue to be susceptible to significant fluctuations. In particular, the
Company experienced a drastic reduction in new orders from major memory and
logic customers during the first quarter of fiscal 1995, followed by record
orders for the final three quarters of fiscal 1995 and record revenues in the
third and fourth quarters of fiscal 1995. Although the Company attempts to
mitigate the risk of cyclicality in the IC industry and changes in any segment
of the industry by participating in both the memory and logic IC testing
markets, factors affecting both markets such as reduced demand by computer
manufacturers would, and factors adversely affecting either market or
particular segments within either market could, adversely affect the Company's
business and financial performance. No assurance can be given that the
Company's revenues and operating results will not be materially and adversely
affected if slowdowns or changes in the IC industry occur, especially if both
the memory and logic IC markets experience slowdowns at the same time.

SALES, SERVICE AND CUSTOMER SUPPORT

Megatest sells and services its products worldwide, primarily through
its own sales and support organization and through independent representatives
in certain areas of the world. Megatest provides its customers with
comprehensive support and service before, during and after delivery of its
products. As is typical for the ATE industry, Megatest experiences a long
sales cycle for new customers and new products. To support the sales process
and enhance customer relationships, the Company endeavors to add value prior to
selling a test system by working closely with the prospective customers to
develop hardware and software test specifications and benchmarks, and often
designs customized applications to enable customers to evaluate its testers.

Prior to system shipment, Megatest's support personnel assist the
customer in site preparation and inspection and provide customers with training
at Megatest's facility or on-site. The customer's employees receive
instruction both in system hardware and in software tools developed
specifically for writing and debugging test programs for the Company's systems.
The Company's customer training program also includes instruction in the
maintenance of its testers. In addition, the Company's support personnel
assist the customer in the development of software test programs and
handler/prober interface designs customized for the ICs to be tested. The
Company's field support personnel work closely with the customer's employees to
install the system and demonstrate system readiness.

The Company typically provides a one-year warranty against defects in
its testers, computer peripherals and related system components, and offers its
customers additional support after the warranty period in the form of

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maintenance contracts for specified time periods. The Company's service
personnel perform necessary maintenance of the Company's products, including
module repair, hardware and software problem resolution, preventive maintenance
and field upgrades. Megatest also provides after-sales support in the form of
engineering assistance for developing testing techniques and test plans for
particular applications. The Company believes that its ability to provide
complete solutions to testing problems enhances its ability to sell multiple
systems to the same customer and, in general, assists the Company in the
development of its future products.

During fiscal 1994 and 1995, export sales, primarily to customers in
the Asia-Pacific region, accounted for 52% and 58% of net revenues,
respectively. The Company's export sales are generally made in United States
dollars or dollar equivalents. To support its customers, Megatest maintains
customer support centers at its San Jose, California headquarters and in 13
other offices located near key customer sites in Arizona, Colorado, Idaho,
Minnesota, Massachusetts, New York and Texas in the United States; in Korea,
Singapore, Taiwan and the Philippines in the Far East; and in France.

ENGINEERING AND PRODUCT DEVELOPMENT

The market for IC testing is characterized by rapid technological
change. The Company believes that continued and timely development and
introduction of new products and enhancements to existing products are
essential for the Company to maintain its competitive position. Accordingly,
Megatest has allocated in the past, and expects to continue to allocate in the
future, significant resources to engineering and product development
activities. The Company's products must be available on a timely and
cost-effective basis to enable customers to integrate them into their
operations as they begin volume manufacturing of the next generation of ICs.
Failure to have a competitive tester available when required by an IC
manufacturer could make it substantially more difficult for the Company to sell
testers to that manufacturer for a number of years. The Company has in the past
experienced delays in introducing certain of its products and enhancements, and
there can be no assurance that it will not encounter technical or other
difficulties that could in the future delay the introduction of new products or
enhancements.

The Company works closely with its customers to define new product
features and to identify emerging applications for its products. A significant
portion of the Company's current efforts are focused on two new products: the
recently introduced Vega series logic tester, and the Company's next-generation
memory tester. In addition, the Company continues to focus engineering and
product development resources on product features and product upgrades in each
of the memory and logic test product lines, involving activities in
mechanical, electrical and software design. The Company's inability to
complete the development of its new products or its inability to manufacture
and ship these products in volume and in time to meet the requirements for
testing the next generation of ICs could adversely affect the Company. There
can be no assurance that the Company will be successful in the introduction and
volume manufacture of its new products, that such introduction will coincide
with the development by IC manufacturers of their next generation of ICs, or
that such products will satisfy customer needs or achieve market acceptance.
In addition, the Company may incur substantial costs to ensure the
functionality and reliability of its next-generation testers, including the
Vega series, early in their product life-cycles. Any of such events would
adversely affect the Company's business. Furthermore, announcements by the
Company or its competitors of new products could cause customers to defer
purchases of the Company's existing products, which would also adversely affect
the Company.

Engineering and product development expenses were $12.2 million, $15.9
million and $20.2 million in fiscal 1993, 1994 and 1995, respectively.
Included in fiscal 1995 expenses was approximately $2.2 million attributable to
the Company's engineering and product development activity in Minnesota. The
Company acquired this activity in connection with its acquisition of the
Voyager product line from MCT. In addition, the Company wrote off $8.8 million
of in-process technology in connection with the Voyager product line
acquisition.

MANUFACTURING AND SUPPLIERS

The Company's manufacturing strategy is to perform only those
manufacturing activities which yield the greatest added value or which require
unique technology or specialized knowledge. The Company seeks to subcontract
all other manufacturing activities to established fabricators and assemblers
who can perform these activities more cost-effectively. The Company's
principal in-house manufacturing activities consist of subassembly testing,
final system integration and test.

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The Company relies on Solectron Corporation as well as other outside
contractors to procure components and assemble them into the highly-complex
circuit boards used by the Company in its testers. These circuit boards, which
are manufactured to the Company's design specifications, constitute a
significant portion of the Company's testers. This arrangement provides the
Company with access to advanced circuit board manufacturing technology without
requiring the Company to expend significant resources to acquire, develop and
maintain such technology. Assembly of these circuit boards is an extremely
complex process. The Company's reliance on Solectron in particular and other
outside contractors in general involves several risks, including reduced
control over pricing and timely delivery of components. While the timeliness,
yield and quality of deliveries to date from the Company's outside contractors
have been acceptable, the Company has experienced delays in deliveries and
quality problems, which have adversely affected the Company's ability to ship
products, and there can be no assurance that manufacturing problems will not
occur in the future.

The Company uses standard components and prefabricated parts
manufactured to its design specifications. Most components are available from
a number of different suppliers, although certain components and subassemblies
are obtained from a single supplier or a limited group of suppliers. The
Company has experienced, and may in the future experience, delays in obtaining
adequate supplies of certain Ics and other components and sub-assemblies used
in its current products and products under development, and in some cases the
Company has been required to modify the design of its products to address the
inability to obtain components. The manufacture of many of the Company's sole
and limited source components is extremely complex. The Company's reliance on
the suppliers of these components exposes it to production difficulties and
yield and quality variations experienced by these suppliers. Although the
Company seeks to reduce its dependence on its sole and limited source
suppliers, and attempts to maintain an adequate inventory of all single-source
components, disruption or termination of certain of these sources could occur
and could have an adverse effect on the Company's operating results. A
prolonged inability to obtain adequate yields or deliveries from its sole or
limited source suppliers, or any other circumstance that would require the
Company to seek alternative sources of supply or to manufacture its circuit
boards or other components internally, would significantly delay shipments of
the Company's products and have an adverse effect on the Company's operating
results.

COMPETITION

The integrated circuit ATE industry is highly competitive. Megatest
faces substantial competition throughout the world, primarily from ATE
manufacturers in the United States and Japan. The Company's primary
competitors in the memory IC testing market are Advantest Corporation,
Teradyne, Inc., Minato Electronics, Inc., Ando Electric Co., Ltd. and Asia
Electronics, Inc., and in the logic IC testing market are Advantest
Corporation, Teradyne, Inc., Schlumberger Limited, LTX Corporation,
Hewlett-Packard Company and Credence Systems Corporation. Many of the
Company's competitors have substantially greater financial resources, more
extensive engineering, manufacturing, marketing and customer service and
support capabilities, and greater name recognition than the Company. Megatest
expects its competitors to continue to improve the performance of their current
products and to introduce new products with improved price and performance
characteristics. From time to time the Company's testers are sold as used
equipment at prices substantially below the prices of new testers sold by the
Company. Such sales of used testers may materially and adversely affect the
Company's sale of new testers. Certain of the Company's customers, including
IBM and TI, have also developed testers.

The principal elements of competition in the Company's markets include
price, product performance and throughput capability, quality and reliability,
customer service and support including the availability of applications
packages. Although the Company believes that it competes favorably with
respect to each of these factors, new product introductions by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products. The Company believes that to remain competitive,
it will require significant financial resources in order to invest in new
product development, to introduce next generation memory and logic test systems
on a timely basis, and to maintain customer service and support centers
worldwide. In addition, increased competitive pressure could lead to
intensified price-based competition, resulting in lower prices and adversely
affecting the Company's operating results. In particular, at the end of a
product life cycle and as competitors introduce more technologically advanced
products, pricing pressure for that product typically becomes more intense.
There can be no assurance that the Company will continue to compete
successfully in the future.

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Japanese IC manufacturers have a dominant share of the market for
DRAMs and certain other types of ICs for which the Company's testers are used.
Japanese ATE manufacturers are well-established in the Japanese ATE market, and
it is difficult for non-Japanese test equipment companies to penetrate the
Japanese ATE market. To date, the Company has not established itself as a
major competitor in the Japanese ATE market. There can be no assurance that
the Company will be able to achieve significant sales to Japanese IC
manufacturers.

PATENTS AND LICENSES

The Company holds seven United States patents. Although the Company
believes that these patents may have value, the Company also believes that its
future success will depend primarily on the technical competence and creative
skills of its personnel, rather than on its patents. However, in the absence
of patent protection, the Company may be vulnerable to competitors who attempt
to imitate the Company's products. In addition, other companies and inventors
may receive patents that contain claims applicable to the Company's products.
The sale of the Company's products covered by such patents could require
licenses that may not be available on acceptable terms.

As is typical in its industry, the Company has at times been notified
of claims that it may be infringing patents issued to others. Historically,
the Company has been able to negotiate licenses on terms which it believes are
reasonable. With respect to one claim pending against the Company, see Item 3
of this Annual Report on Form 10-K. No assurance can be given that
infringement claims by third parties in the future will not materially and
adversely affect the Company's business and operating results.

EMPLOYEES

As of August 31, 1995, the Company had a total of 580 full-time
employees. In addition, the Company had 81 consultants and agency
temporaries. Many of the Company's employees are highly skilled, and the
Company believes its future success will depend in large part on its ability to
attract and retain such employees. None of the Company's employees are
represented by a labor union, and the Company has experienced no work
stoppages. The Company considers its employee relations to be good.

The Company's future success depends in part upon its ability to
attract and retain qualified management, technical, sales and support personnel
for its operations. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting or retaining
such personnel. The loss of any key employee, the failure of any key employee
to perform in their current positions or the Company's inability to attract and
retain new skilled employees as needed could materially and adversely affect
the Company's performance.

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ITEM 2. PROPERTIES

The Company maintains its headquarters in San Jose, California. This
facility, totaling 112,000 square feet, contains corporate administration,
sales and customer support, manufacturing and engineering. In addition, the
Company executed a lease in August 1995 for 17,000 square feet adjacent to its
corporate headquarters. This facility will house sales and certain customer
service departments. The lease on this facility expires in September 1997. In
the United States, the Company maintains seven sales and customer support
offices in Newton, Massachusetts; Austin, Texas; Dallas, Texas; Monument,
Colorado; Fishkill, New York; Boise, Idaho and Phoenix, Arizona, and an
engineering operation in Fridley, Minnesota. Sales and customer support are
also provided in five additional facilities located in Europe and the Far East.
The Company believes that its existing facilities are adequate to meet its
current and foreseeable requirements and that suitable additional or substitute
space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

On March 27, 1995, Credence Systems Corporation ("Credence") named the
Company as a defendant in a patent infringement lawsuit originally filed by
Credence against MCT in the U.S. District Court for the Northern District of
California (the "Court"). The suit alleges that the Company's manufacture and
sale of certain Voyager assets acquired by the Company from MCT infringe a U.S.
patent held by Credence. On April 24, 1995, the Company filed with the Court a
counterclaim against Credence for a declaratory judgment that the Credence
patent is invalid and unenforceable, and that the manufacture and sale of
Voyager assets do not infringe the Credence patent. Although the outcome of
any litigation is uncertain, the Company believes that the resolution of such
matter will not have a material adverse effect on the Company's operating
results or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during
the fourth quarter of fiscal 1995.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK

The Company's Common Stock trades on the Nasdaq National Market under
the symbol "MEGT." The following table sets forth for the periods indicated the
high and low sale prices for the Common Stock as reported by the Nasdaq
National Market.

HIGH LOW
---- ---

FISCAL 1994
Quarter ending November 30, 1993 . . . . . . . . . . . . . . . . . . . . . . 23 1/4 10 1/8
Quarter ending February 28, 1994 . . . . . . . . . . . . . . . . . . . . . . 20 1/2 11 1/2
Quarter ending May 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 23 1/2 13 1/2
Quarter ending August 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . 20 1/4 13 1/2
FISCAL 1995
Quarter ending November 30, 1994 . . . . . . . . . . . . . . . . . . . . . . 20 1/2 8 1/4
Quarter ending February 28, 1995 . . . . . . . . . . . . . . . . . . . . . . 11 3/8 5 1/8
Quarter ending May 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 14 8 1/2
Quarter ending August 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 24 1/8 11 7/8

The Company believes that factors such as announcements of
developments related to the Company's business, quarterly fluctuations in the
Company's financial results and general conditions in the IC equipment
industry, the IC industry or the economy could cause the price of the Company's
Common Stock to fluctuate, perhaps substantially. In addition, in recent years
the stock market in general, and the market for shares of small capitalization
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. Many
companies in the IC equipment industry, including the Company, have recently
experienced historical highs in the market prices of their common stock. No
assurance can be given that the market price of the Company's Common Stock will
not experience significant fluctuations in the future, including fluctuations
which are unrelated to the Company's performance.

BENEFICIAL OWNERS

As of October 13, 1995, there were approximately 1,900 beneficial
owners of the Common Stock.

DIVIDENDS

To date, the Company has not paid any cash dividends on shares of its
Common Stock. The Company presently intends to retain all future earnings for
its business and does not anticipate paying cash dividends on its Common Stock
in the foreseeable future.

9
11

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. The selected consolidated financial data set forth
below as of August 31, 1995 and 1994 and for the years ended August 31, 1995,
1994 and 1993 have been derived from the audited consolidated financial
statements of the Company included elsewhere in this Annual Report on Form
10-K. The selected consolidated financial data set forth below as of August
31, 1993, 1992 and 1991 and for the years ended August 31, 1992 and 1991 are
derived from audited consolidated financial statements of the Company not
included in this Annual Report on Form 10-K.

Year Ended August 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands, except per share amounts)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Product sales . . . . . . . . . . . . . . $ 97,459 $ 99,441 $77,818 $63,077 $53,459
Development revenues . . . . . . . . . . -- 850 587 2,414 6,217
-------- -------- ------- ------- -------
Net revenues . . . . . . . . . . . . 97,459 100,291 78,405 65,491 59,676
Cost of sales(1) . . . . . . . . . . . . 59,537 56,196 44,065 35,814 35,690
-------- -------- ------- ------- -------
Gross profit . . . . . . . . . . . . 37,922 44,095 34,340 29,677 23,986
-------- -------- ------- ------- -------
Engineering and product development . . . 20,158 15,878 12,205 11,097 9,574
Selling, general and administrative . . . 21,364 18,069 16,032 13,917 11,810
Write-off of acquired in-process
technology 8,837 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses . . . . . . 50,359 33,947 28,237 25,014 21,384
-------- -------- ------- ------- -------
Income (loss) from operations . . . . . . (12,437) 10,148 6,103 4,663 2,602
Interest income (expense), net . . . . . (167) 1,315 (139) (499) (105)
-------- -------- ------- ------- -------
Income (loss) before income taxes and
cumulative effect of accounting
change (12,604) 11,463 5,964 4,164 2,497
(Provision) benefit for income taxes . . 414 (2,364) (685) (300) (271)
-------- -------- ------- ------- -------
Income (loss) before accounting change . (12,190) 9,099 5,279 3,864 2,226
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . -- 1,700 -- -- --
-------- -------- ------- ------- -------
Net income (loss) . . . . . . . . . . . $(12,190) $ 10,799 $ 5,279 $ 3,864 $ 2,226
======== ======== ======= ======= =======
Income (loss) before cumulative effect of
accounting change per share . . . . $ (1.69) $ 1.26 $ 1.11 $ 0.95 $ 0.58
======== ======== ======= ======= =======
Net income (loss) per share . . . . . . . $ (1.69) $ 1.50 $ 1.11 $ 0.95 $ 0.58
======== ======== ======= ======= =======
Average common and common equivalent
shares outstanding . . . . . . . . . 7,230 7,204 4,752 4,075 3,823
======== ======== ======= ======= =======

August 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . $ 11,609 $ 19,404 $17,278 $ 6,877 $ 6,038
Working capital . . . . . . . . . . . . . 44,859 55,846 43,868 19,031 16,606
Total assets . . . . . . . . . . . . . . 118,858 101,083 67,664 41,157 40,412
Long-term obligations . . . . . . . . . . 11,728 414 804 2,181 2,075
Total stockholders' equity . . . . . . . 65,408 76,247 51,813 22,532 18,628

______________
(1) Cost of sales does not include costs of $0.2 million, $0.2 million,
$2.5 million and $3.5 million in fiscal 1994, 1993, 1992 and 1991,
respectively, relating to development revenues. Such costs are
included in engineering and product development expenses.

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12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

Megatest was founded in 1975 and introduced its first product, which
tested both memory and logic ICs, in 1976. Since then, the Company has sold
approximately 2,850 testers to manufacturers of memory and logic ICs as well as
to IC customers such as electronic systems manufacturers. The Company's
strategy has been to participate in both the memory and logic IC test markets,
to help reduce the effects of cyclicality in each of these markets. The
Company's principal product lines are its Genesis memory test systems and its
Polaris, Vega and Voyager logic test systems.

Megatest's net revenues increased in fiscal 1993 and 1994 principally
due to demand for memory ICs, particularly FLASH memories and DRAMs. Increased
sales of the Company's memory testers more than offset a decline in sales of
logic testers to IBM, which significantly reduced its purchases from the
Company during fiscal 1993, due in part to the Company's completion of
development agreements for the Polaris and declines in the market for the
mainframe computers which used the logic ICs tested by Polaris testers. In
addition, memory product sales in fiscal 1994 were enhanced by the introduction
in the second quarter of the Genesis G-III tester.

The Company believes that its sales growth in recent years has been
due in large part to strong demand by manufacturers of personal computers for
ICs tested by the Company's products, and expects to remain susceptible to the
volatility of the computer market. During the first two quarters of fiscal
1995, the Company experienced a severe slowdown in sales of all of the
Company's products and from all of its major customers. Sales of both logic
and memory products began to rebound late in the second quarter of fiscal 1995,
to customers in all geographic areas, and the Company achieved record incoming
orders in each of the final three quarters of fiscal 1995. The Company
returned to quarterly profitability in the third quarter.

On November 22, 1994, the Company acquired the 1149 Tester product
line and follow-on in-process technology (the "Voyager") from Micro Component
Technology, Inc. ("MCT") for $13.9 million, which includes acquisition related
expenses of $1.1 million. The purchase of the product line included
substantially all of the assets and intellectual property and the assumption of
certain liabilities, approximating $2.1 million, associated with the Voyager.
As a result of the acquisition of the Voyager, the Company recorded a one-time
write-off of in-process technology of $8.8 million, which contributed to the
Company's losses in its first quarter and for the fiscal year ended August 31,
1995. Excluding the one-time write-off of in-process technology, the results
of operations for the Voyager product line from the date of acquisition through
August 31, 1995 increased Megatest's loss from operations approximately $2.4
million.

On September 5, 1995, the Company entered into the Merger Agreement
with Teradyne and Merger Sub. Pursuant to the Merger Agreement, and upon the
satisfaction of all closing conditions, Megatest will become a wholly-owned
subsidiary of Teradyne. See Item 1 of this Annual Report on Form 10-K.

11
13

RESULTS OF OPERATIONS

The following table sets forth the percentage relationships of certain
items from the Company's consolidated statements of operations.

Year Ended August 31,
1995 1994 1993
------ ------ ------

Net revenues . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . . . . 61.1 56.0 56.2
----- ----- -----
Gross margin . . . . . . . . . . . . . . . . 38.9 44.0 43.8
----- ----- -----
Engineering and product development . . . . . . . 20.7 15.8 15.6
Selling, general and administrative . . . . . . . 21.9 18.1 20.4
Write-off of acquired in-process technology . . . 9.1 -- --
----- ----- -----
Total operating expenses . . . . . . . . . . 51.7 33.9 36.0
----- ----- -----
Income (loss) from operations . . . . . . . . . . (12.8) 10.1 7.8
Other income (expense), net . . . . . . . . . . . (0.1) 1.3 (0.2)
----- ----- -----
Income (loss) before income taxes and cumulative
effect of accounting change . . . . . . . . (12.9) 11.4 7.6
(Provision) benefit for income taxes . . . . . . 0.4 (2.3) (0.9)
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . . -- 1.7 --
----- ----- -----
Net income (loss) . . . . . . . . . . . . . . . . (12.5)% 10.8% 6.7%
===== ===== =====

Net Revenues

The Company's net revenues increased from $78.4 million in fiscal 1993
to $100.3 million in fiscal 1994 and decreased to $97.5 million in fiscal 1995.
The increase in fiscal 1994 was primarily attributable to increased sales of
memory testers, which grew 45% from fiscal 1993, while sales of logic testers
increased 13%. The Company encountered a slowdown in sales in early fiscal
1995. During the first half of fiscal 1995, sales of all of the Company's
products, in all geographic areas, were well below the comparable periods of
fiscal 1994. However, beginning in the second quarter of fiscal 1995, orders
for all products rebounded significantly, enabling the Company to achieve
record net revenues for the final two quarters of fiscal 1995. The increased
demand for the Company's products is attributable to increased demand for FLASH
memories and DRAMs from customers using the Company's memory testers and for
DSP devices from customers using the Company's logic testers. Memory testers
as a percentage of systems revenue has increased from 55% in fiscal 1993 to 61%
in fiscal 1994 and 68% in fiscal 1995. Service revenue, which includes product
revenue from sales of spare parts and service contracts, was 24% of total
revenue in fiscal 1995, compared to 18% in fiscal 1994 and 20% in fiscal 1993.
Service revenue is expected to continue to represent a significant portion of
the Company's revenue as the installed base of testers increases and as a
result of the Company's continued emphasis on the sales of spare parts, custom
interfaces and service contracts.

Gross Margin

The Company's gross margin increased from 43.8% in fiscal 1993 to
44.0% in fiscal 1994, reflecting a shift in product sales mix from Polaris
logic testers to higher margin Genesis IIex memory testers, offset by
incremental manufacturing costs incurred in bringing the Genesis G-III tester
to market. The Company's gross margin decreased to 38.9% in fiscal 1995, due
to the low sales volume during the first half of fiscal 1995. Manufacturing
spending could not be scaled back during the first half of fiscal 1995 in
proportion to the decline in revenues. Also, in the latter part of fiscal
1995, the Company encountered delays in receiving certain critical components
and sub-assemblies which caused the Company to incur higher levels of overtime
and to incur certain incremental costs to expedite deliveries of these parts in
order to meet customers' demand. It is anticipated that such component
availability issues will continue into fiscal 1996, and thus may result in
continuing costs associated with overtime, expedite fees and other related
incremental production costs. In addition, the Company expects to incur
certain costs associated with the production ramp of the Vega series logic
tester and the introduction of its next generation memory during fiscal 1996.
Accordingly, the Company expects its gross margin

12
14

in fiscal 1996 to continue to be below fiscal 1994 levels until the fourth
quarter of fiscal 1996, and for the year as a whole.

Engineering and Product Development Expense

The Company's engineering and product development expense increased
from $12.2 million in fiscal 1993 to $15.9 million in fiscal 1994 and to $20.2
million in fiscal 1995. Engineering and product development expense, net of
development revenues, increased from $11.6 million in fiscal 1993 to $15.0
million in fiscal 1994 and to $20.2 million in fiscal 1995. Such net expense,
which represents the Company's internally funded development efforts, reflects
the Company's commitment to maintaining a high level of engineering and product
development effort to enhance its competitive position. Engineering and
product development expense in fiscal 1995 includes approximately $2.2 million
related to the Voyager engineering organization in St. Paul, Minnesota. The low
sales volume achieved during the first two quarters of the year further
contributed to the percentage increase in engineering and product development
from 15.8% of revenue in fiscal 1994 to 20.7% in fiscal 1995. The Company
considered the slowdown in the first half of fiscal 1995 to be temporary and
thus did not scale back critical long-term resources in proportion with the
shortfall in incoming orders. The Company intends to continue to invest
significant resources in the development of next-generation products for both
memory and logic applications, and thus expects engineering and product
development expenses in fiscal 1996 to increase as compared to fiscal 1995.

Selling, General and Administrative Expense

Selling, general and administrative expense increased from $16.0
million in fiscal 1993 to $18.1 million in fiscal 1994 and to $21.4 million in
fiscal 1995. The increase is attributable primarily to an increase in
headcount from 148 at August 31, 1994 to 162 at August 31, 1995. In
particular, the Company expanded its hiring efforts in the sales, marketing and
service organizations in support of its continued emphasis on expanding its
customer base and in response to the higher sales levels achieved during the
second half of fiscal 1995. As a percentage of net revenues, selling, general
and administrative expenses declined from 20.4% of revenue in fiscal 1993 to
18.1% in 1994 and increased to 21.9% in 1995. The primary cause of the
percentage increase in fiscal 1995 was the low sales volume achieved during the
first two quarters of the year. The Company considered the slowdown in the
first half of fiscal 1995 to be temporary and thus did not scale back critical
long-term resources in proportion with the shortfall in incoming orders. The
Company expects selling, general and administrative expense to decline as a
percentage of net revenues in fiscal 1996.

Other Income and Expense

Net other expense consists primarily of interest expense on notes
payable and long-term obligations and the amortization of goodwill related to
the acquisition of the Voyager, offset by interest income from the investment
of the Company's cash balances. In fiscal 1993, funds from the Company's
initial public offering in May 1993 were used to repay debt. Interest income
was generated from the investment of the remaining funds and the proceeds of
the Company's second public offering in October 1993, resulting in net interest
income of $1.3 million in fiscal 1994. In fiscal 1995, net other expense
totaled $0.2 million as the Company's cash balances were utilized for the MCT
acquisition and to fund operations. In addition, the Company borrowed $22.4
million during fiscal 1995, resulting in additional interest expense.

Income Taxes

Effective September 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for
Income Taxes." FAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or income tax returns. In estimating future tax consequences, FAS
109 generally considers all expected future events other than enactments of
changes in the tax law or rates. Previously, the Company used the FAS 96 asset
and liability approach that gave no recognition to future events other than the
recovery of assets and settlement of liabilities at their carrying amounts.
The cumulative effect of adopting FAS 109 resulted in a one-time credit to
fiscal 1994 net income of $1.7 million or $0.24 per share.

13
15

The Company's effective tax rate for fiscal 1995 was 3% (benefit)
compared to 21% for fiscal 1994 and 11% for fiscal 1993. The low benefit rate
in fiscal 1995 was due primarily to losses incurred early in the year. A
substantial portion of the benefit has not been recognized due to the
uncertainty of its realization. The Company's tax rate in the third and fourth
quarters of fiscal 1995 was 22.5% as the Company returned to profitability.
The Company expects its tax rate to increase to approximately 25% in fiscal
1996, although the actual effective tax rate achieved will vary depending on
the level of profitability realized. The lower rates achieved in prior years
were due primarily to unrestricted utilization of net operating loss
carryforwards.

14
16

LIQUIDITY AND CAPITAL RESOURCES

Operating activities provided net cash of $5.3 million and $5.1
million in fiscal 1993 and 1994, respectively, and used cash of $13.1 million
in fiscal 1995. Cash flow from operations in fiscal 1993 was primarily
attributable to net income in that year. In fiscal 1994, cash generated by net
income was partially offset by the Company's investment in inventory for
certain strategic programs designed to bolster relationships with major
customers and an increase in accounts receivable caused by a disproportionate
percentage of shipments occurring late in the fiscal year. In fiscal 1995, net
cash used for operations was primarily attributable to the Company's net loss
and to further increases in inventories and accounts receivable, offset by a
non-cash write-off of acquired in-process technology and depreciation and
amortization and by increased accounts payable and accrued liabilities. The
increase in inventory in fiscal 1995 was primarily to facilitate anticipated
new product shipments, to meet expected shipment levels, and to increase
service and spares inventory to support the Company's growing installed base of
testers, while the increase in accounts receivable was related to a
disproportionate percentage of shipments occurring late in the fiscal year.

Investing activities, other than purchases of short-term investments,
consisted of property and equipment purchases and, in fiscal 1995, the purchase
of the Voyager product line from MCT. Investing activities used net cash of
$13.3 million, $16.7 million and $18.3 million in fiscal 1993, 1994 and 1995,
respectively. The purchase of securities pledged as collateral under the
Company's San Jose facility leases used $7.7 million of cash in fiscal 1994,
and the termination in fiscal 1995 of the leases (see below) provided $7.7
million in cash. Net purchases of short-term investments used $7.9 million and
$2.1 million of cash in fiscal 1993 and 1994, respectively, and net sales of
short-term investments provided $10.1 million in fiscal 1995. During 1995, the
Company purchased its general operating facilities and land for $8.6 million
and purchased evaluation and test equipment associated with new products
totalling approximately $6.2 million.

Financing activities provided net cash of $18.4 million, $13.7 million
and $23.6 million in fiscal 1993, 1994 and 1995, respectively. The Company's
initial public offering of its common stock in May 1993 provided $23.9 million
in fiscal 1993. The Company used $3.4 million from the proceeds of its initial
public offering to pay $1.6 million on its working capital lines of credit and
$1.8 million of equipment notes payable during fiscal 1993. A second public
offering of common stock in October 1994 provided $13.6 million in fiscal 1994.
The Company borrowed a total of $22.4 million during fiscal 1995 under its
working capital lines of credit, a new $5.5 million real estate mortgage and
$6.9 million in equipment financing.

At August 31, 1995, the Company's cash, cash equivalents and
short-term investments were $11.6 million, compared to $29.5 million at August
31, 1994. The decrease primarily reflects the cash used to acquire the Voyager
from MCT and to fund operations during fiscal 1995. The Company maintains a
$10.0 million bank line of credit which expires in January 1996. The agreement
provides for borrowings not to exceed 80% of eligible domestic accounts
receivable. The Company also maintains an additional $5.0 million line of
credit guaranteed by the Export-Import Bank of the United States to support
export sales. This agreement provides for borrowings not to exceed 90% of
eligible foreign accounts receivable plus 70% of eligible inventory to support
such receivables. Borrowings under these lines bear interest at prime (8.75%
at August 31, 1995) plus 1.0% and 0.5% for the domestic and export lines of
credit, respectively, and are collateralized by a security interest in
substantially all of the Company's previously unencumbered tangible and
intangible assets. The terms of the credit agreements require, among other
terms, quarterly profitability, minimum amounts of tangible net worth, a
minimum ratio of current assets to current liabilities, and a maximum ratio of
indebtedness to net worth. The credit agreements also preclude the Company
from taking certain actions without prior bank approval. Transactions subject
to such prohibition include the declaration of cash dividends, certain
significant asset acquisitions or dispositions, incurrence of certain
additional indebtedness, and changing the nature of the Company's business. At
August 31, 1995, the Company had borrowed $10.0 million under these lines of
credit.

During August, 1995, the Company entered into two agreements for
additional working capital. The Company entered into a four-year, $1.9 million
loan agreement to finance certain of the Company's testers used for customer
demonstrations. The loan bears interest at 8.4%. The Company also obtained a
four-year, $5.0 million loan secured by substantially all of the Company's
previously unencumbered fixed assets and bearing interest at approximately 9.5%
and payable in forty eight equal monthly installments. Each of these
agreements contains cross-default provisions with the Company's bank lines of
credit.

15
17
On August 25, 1995, the Company purchased its general operating
facilities and land in San Jose that was previously leased for $8.6 million.
As a result of the transaction, the Company removed certain restrictions on
$7.7 million of cash which was pledged as collateral under the first-loss
guarantee of the terminated operating lease. The Company used approximately
$3.3 million of the cash and a $5.5 million mortgage, secured by the property
to acquire the land and building and to pay associated transaction fees. The
mortgage loan bears interest at a rate of 8.125% per annum and is payable in 59
monthly installments of approximately $50,000 with a $4.6 million balloon
payment in the final month. sam

As of August 31, 1995, the Company had net working capital of
approximately $44.9 million, including $31.4 million of accounts receivable and
$38.1 million of inventories. The Company believes that because of the
relatively long manufacturing cycle of its testers, and due to lengthening
vendor lead times on certain critical components used in the manufacture of the
Company's products, the Company's investment in inventories will continue to
represent a significant portion of working capital.

The Company's principal sources of liquidity as of August 31, 1995
consisted of approximately $11.6 million of cash and cash equivalents and $5.0
million of borrowings available under its domestic line of credit. The
Company's liquidity is affected by many factors, including internal factors
associated with normal, on-going operations, and external factors related to
market dynamics and global economies. Although the Company's cash requirements
will fluctuate based on the nature, timing, and extent of these factors, the
Company believes that its cash flow from operations together with its cash,
cash equivalents and available credit will be sufficient to meet both working
capital and capital expenditure requirements throughout fiscal 1996.

16
18

FUTURE OPERATING RESULTS

The Company's future revenues and operating results could fluctuate
significantly from quarter to quarter due to a combination of factors,
including the mix between and configuration of memory and logic testers sold in
a particular quarter. Given the relatively large selling price of the
Company's testers, sales of a limited number of testers account for a
substantial portion of revenues in any particular quarter and a single
transaction could therefore have a significant impact on revenues and gross
margins for that quarter. The Company's backlog at the beginning of each
quarter generally does not include orders for all tester sales needed to
achieve the Company's objectives for that quarter. Consequently, the Company
depends on obtaining orders for shipment in the same quarter that the purchase
order is received. Furthermore, a substantial portion of the Company's net
revenues have historically been realized near the end of the quarter.
Accordingly, the failure to receive anticipated orders or delays in shipments,
particularly those related to Polaris or Vega logic testers, near the end of a
quarter, due, for example, to unanticipated customer delays or cancellations or
to manufacturing difficulties experienced by the Company or delays in
deliveries by suppliers, may cause quarterly net revenues to fall significantly
short of the Company's objectives, which would adversely affect the Company's
operating results.

The Company experienced significant quarterly fluctuations in its net
revenues in prior fiscal years. The Company believes that such fluctuations in
part reflect capital equipment buying patterns in the IC industry. In
particular, the Company experienced reduced order levels in the first five
months of fiscal 1995, which had an adverse effect on operating results in the
first half of fiscal 1995. There can be no assurance that such an order
weakness will not recur or that such a weakness will not materially and
adversely affect future revenues and operating results.

The markets served by the Company are characterized by rapid
technological change, intense competition, increasingly precise customer
specifications and global service requirements. The Company's future success
will depend in part on its ability to meet these inherent challenges and
maintain a competitive advantage in both the products and services it provides.
The need for continued investment in research and development, for capital
requirements and for extensive ongoing customer service and support capability
worldwide result in significant fixed costs which will be difficult to reduce
in the event that the Company does not meet its operating objectives, as was
the case in the first half of fiscal 1995. The Company's future results may be
affected by the actions of existing or future competitors, including the
development of new technologies, new product introductions and intensified
price-based competition. In addition, adverse changes in general economic
conditions (both foreign and domestic), the availability of needed components
and fluctuations in foreign exchange rates may also affect the Company's future
operating results.

The Company may in the future pursue acquisitions of complementary
product lines or businesses. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurring of
additional debt and amortization expenses related to goodwill and intangible
assets, which could adversely affect the Company's profitability. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired Company. In the event that
such an acquisition does occur, no assurance can be given as to the effect
thereof on the Company's business or operating results.

Based on the factors described above, recent operating results should
only be one input in evaluating the future financial performance of the
Company.

In March, 1995, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS 121), which is effective for financial statements for fiscal years
beginning after December 15, 1995. Management does not believe that adoption
of SFAS 121 will have a significant impact on the Company's financial position
or results of operations.

17
19

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

Report of Price Waterhouse LLP, Independent Accountants . . . . . . . . . . 19
Report of Deloitte & Touche LLP, Independent Auditors . . . . . . . . . . . 20
Consolidated Balance Sheets at August 31, 1995 and 1994 . . . . . . . . . . 21
Consolidated Statements of Operations for the years ended
August 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . 23
Consolidated Statements of Cash Flows for the years ended
August 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . 24
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 25

18
20

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Megatest Corporation:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Megatest Corporation and its subsidiaries at August 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective September 1, 1993.

PRICE WATERHOUSE LLP

San Jose, California
September 20, 1995

19
21

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of
Megatest Corporation:

We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Megatest Corporation and its
subsidiaries for the year ended August 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects the results of operations and cash flows of Megatest
Corporation and its subsidiaries for the year ended August 31, 1993 in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

San Jose, California
September 21, 1993

20
22

MEGATEST CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNT)

ASSETS

AUGUST 31,
-------------------------------
1995 1994
---- ----

Current assets:
Cash and cash equivalents $ 11,609 $ 19,404
Short-term investments -- 10,069
Accounts receivable, less allowances of $261 and $262 31,386 23,064
Inventories 38,116 23,531
Deferred taxes 3,852 3,532
Prepaid expenses and other current assets 1,618 668
--------- ---------
Total current assets 86,581 80,268
Property and equipment--net 28,882 12,122
Restricted investments -- 7,659
Other assets 3,395 1,034
--------- ---------
$ 118,858 $ 101,083
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Notes payable $ 10,000 $ --
Current portion of long-term obligations 1,657 66
Accounts payable and accrued liabilities 26,659 18,075
Income taxes payable 1,655 4,198
Customer advances and deferred revenues 1,751 2,083
--------- ---------
Total current liabilities 41,722 24,422
--------- ---------
Long-term obligations 11,728 414
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value: 5,000 shares authorized;
no shares outstanding -- --
Common stock, $0.001 par value: 20,000 shares authorized;
7,422 and 7,171 shares outstanding 7 7
Additional paid-in capital 82,007 80,656
Accumulated deficit (16,606) (4,416)
--------- ---------
Total stockholders' equity 65,408 76,247
--------- ---------
$ 118,858 $ 101,083
========= =========

The accompanying notes are an integral part of these financial statements.

21
23

MEGATEST CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

YEAR ENDED AUGUST 31,
------------------------------------------
1995 1994 1993
---- ---- ----

Product sales $ 97,459 $ 99,441 $ 77,818
Development revenues -- 850 587
-------- --------- ---------
Net revenues 97,459 100,291 78,405
-------- --------- ---------
Cost of sales 59,537 56,196 44,065
Engineering and product development 20,158 15,878 12,205
Selling, general and administrative 21,364 18,069 16,032
Write-off of acquired in-process technology 8,837 -- --
-------- --------- ---------
Total costs and expenses 109,896 90,143 72,302
-------- --------- ---------
Income (loss) from operations (12,437) 10,148 6,103
Interest income 578 1,433 225
Interest expense (571) (118) (364)
Other expense (174) -- --
-------- --------- ---------
Income (loss) before income taxes and cumulative effect
of accounting change (12,604) 11,463 5,964
(Provision) benefit for income taxes 414 (2,364) (685)
-------- --------- ---------
Income (loss) before cumulative effect of accounting change (12,190) 9,099 5,279
Cumulative effect of change in accounting for income taxes -- 1,700 --
-------- --------- ---------
Net income (loss) $(12,190) $ 10,799 $ 5,279
======== ========= =========
Per share data:
Income (loss) before cumulative effect of accounting change $ (1.69) $ 1.26 $ 1.11
Cumulative effect of change in accounting for income taxes -- 0.24 --
-------- --------- ---------
Net income (loss) $ (1.69) $ 1.50 $ 1.11
======== ========= =========

Average common and common equivalent shares outstanding 7,230 7,204 4,752
======== ========= =========

The accompanying notes are an integral part of these financial statements.

22
24

MEGATEST CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ---------- ----------- --------

Balances, September 1, 1992 4,631 $ 5 2,605 $ 3 $43,018 $(20,494) $ 22,532
Sale of common stock 2,216 2 23,914 23,916
Conversion of preferred stock into
common stock (4,631) (5) 1,211 1 4 --
Exercise of stock options 101 -- 86 86
Net income 5,279 5,279
------ ---- ----- --- ------- -------- --------
Balances, August 31, 1993 -- -- 6,133 6 67,022 (15,215) 51,813
Sale of common stock 983 1 13,574 13,575
Exercise of stock options and warrant 55 -- 60 60
Net income 10,799 10,799
------ ---- ----- --- ------- -------- --------
Balances, August 31, 1994 -- -- 7,171 7 80,656 (4,416) 76,247
Employee Stock Purchase Plan 93 -- 491 491
Exercise of stock options 158 -- 272 272
Income tax benefit from exercise of
stock options 588 588
Net loss (12,190) (12,190)
------ ---- ----- --- ------- -------- --------
Balances, August 31, 1995 -- $ -- 7,422 $ 7 $82,007 $(16,606) $ 65,408
====== ==== ===== === ======= ======== ========

The accompanying notes are an integral part of these financial statements.

23
25

MEGATEST CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED AUGUST 31,
--------------------------------------
1995 1994 1993
---- ---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(12,190) $ 10,799 $ 5,279
Reconciliation to net cash provided by (used for) operating
activities:
Depreciation and amortization 4,612 3,142 2,258
Cumulative effect of change in accounting for income taxes -- (1,700) --
Provision for deferred income taxes 223 (2,375) --
Provision for bad debts (1) 112 --
Write-off of acquired in-process technology 8,837 -- --
Changes in:
Accounts receivable (8,321) (4,885) (4,845)
Inventories (8,924) (8,368) (304)
Prepaid expenses and other current assets (950) (427) 52
Accounts payable and accrued liabilities 6,484 5,088 2,015
Income taxes payable (2,543) 3,570 392
Customer advances and deferred revenues (332) 679 367
Other -- (525) 110
-------- -------- --------
Net cash provided by (used for) operating activities (13,105) 5,110 5,324
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of tester product line and related technology (13,897) -- --
Property and equipment purchases (20,160) (6,750) (5,393)
(Purchases) sales of restricted investments 7,659 (7,659) --
Purchases of short-term investments -- (27,975) (7,942)
Proceeds from sale of short-term investments 10,069 25,848 --
Investment in equity securities (1,500) -- --
Other assets, net (456) (147) (1)
-------- -------- --------
Net cash used for investing activities (18,285) (16,683) (13,336)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of credit 10,000 -- (3,500)
Additions to long-term obligations 12,350 145 1,420
Reductions in long-term obligations -- (81) (3,509)
Sale of common stock 1,351 13,635 24,002
Debt issuance costs (106) -- --
-------- -------- --------
Net cash provided by financing activities 23,595 13,699 18,413
-------- -------- --------
Net increase in cash and cash equivalents (7,795) 2,126 10,401

CASH AND CASH EQUIVALENTS:
Beginning of period 19,404 17,278 6,877
-------- -------- --------
End of period $ 11,609 $ 19,404 $ 17,278
======== ======== ========

SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid during the year for:
Interest $ 474 $ 79 $ 405
Taxes 1,558 847 236

The accompanying notes are an integral part of these financial statements.

24
26

MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:

Line of business

Megatest designs, manufactures, markets and services automatic test
equipment for the integrated circuit ("IC") industry. Megatest currently
offers four product lines, one for testing memory ICs and three for testing
logic ICs.

Principles of consolidation

The consolidated financial statements include the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated.

Fiscal period

The Company uses a 52-53 week fiscal year ending on the last Saturday
in August. The Company's fiscal years in the accompanying financial statements
have been shown as ending on August 31. Fiscal years 1995, 1994 and 1993 each
include 52 weeks.

Cash equivalents and short-term investments

The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Short-term
investments at August 31, 1994 include commercial paper and T-bills purchased
with a maturity of twelve months or less.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or
market.

Property and equipment

Property and equipment are stated at cost. Depreciation on equipment,
furniture and fixtures is computed using the straight-line method over the
estimated useful lives of the assets, which is generally three to five years.
Leasehold improvements are amortized over the shorter of the useful life or the
lease term. The building is being depreciated over fifteen years.

Revenue recognition

Product sales are recognized upon shipment and are recorded net of
related trade discounts and estimated allowances. The Company provides for
installation and normal warranty costs at the time the sales are recognized
and, if applicable, for any significant cost to enhance the functionality and
reliability of the installed base when such need becomes known. Revenues from
development contracts are recognized over the term of the contracts based on
the relation of actual costs incurred to the total estimated cost for
completion. Revenues from service contracts are recognized ratably over the
service period.

25
27

MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Income taxes

Effective September 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for
Income Taxes." FAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or income tax returns. In estimating future tax consequences, FAS
109 generally considers all expected future events other than enactments of
changes in the tax law or rates. Previously, the Company used the FAS 96 asset
and liability approach that gave no recognition to future events other than the
recovery of assets and settlement of liabilities at their carrying amounts.
The cumulative effect of adopting FAS 109 resulted in a one-time credit to net
income of $1,700 or $0.24 per share and is reported separately in the
consolidated statement of operations.

Net income per share

Net income per share is computed using the weighted average number of
common shares plus common stock equivalent shares from dilutive stock options.

Translation of foreign currency

The Company's subsidiaries use the U.S. dollar as the functional
currency. Accordingly, assets and liabilities are translated at year-end
exchange rates, except for inventories and property and equipment, which are
translated at historical rates. Revenues and expenses are translated at
average exchange rates in effect during the year, except for costs related to
those balance sheet items which are translated at historical rates. Foreign
currency transaction gains and losses are included in income as they occur.

Concentration of credit risk

Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
equivalents and trade accounts receivable.

The Company invests in a variety of financial instruments such as
certificates of deposit, commercial paper, municipal debt and U.S. Government
agency debt. The Company, by policy, limits the amount of credit exposures to
any one financial institution or commercial issuer.

The Company sells its systems to semiconductor manufacturers and
manufacturers of computers and other electronic systems throughout the world.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company maintains an allowance for uncollectible accounts receivable based upon
expected collectibility of all accounts receivable.

NOTE 2. INVENTORIES:

AUGUST 31,
-------------------------
1995 1994
---- ----

Purchased parts $ 11,812 $ 5,705
Assemblies in process 13,888 8,285
Finished goods 12,416 9,541
-------- --------
$ 38,116 $ 23,531
======== ========

26
28

MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. PROPERTY AND EQUIPMENT:

AUGUST 31,
-------------------------
1995 1994
---- ----

Land and buildings $ 8,600 $ --
Computer and test equipment 26,966 18,064
Leasehold improvements 3,514 1,227
Furniture and fixtures 625 568
-------- --------
39,705 19,859
Accumulated depreciation and amortization (10,823) (7,737)
-------- --------
$ 28,882 $ 12,122
======== ========

NOTE 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

AUGUST 31,
-------------------------
1995 1994
---- ----

Accounts payable $ 17,077 $ 9,037
Accrued salaries and benefits 4,759 3,972
Accrued installation and warranty costs 3,023 2,900
Other accrued liabilities 1,800 2,166
-------- --------
$ 26,659 $ 18,075
======== ========

NOTE 5. PRODUCT LINE ACQUISITION:

On November 22, 1994, the Company acquired the 1149 Tester product
line and follow-on in-process technology (the "Voyager") of Micro Component
Technology, Inc. ("MCT"). The assets acquired include substantially all of the
equipment, inventory and intellectual property including the follow-on
in-process technology, and the assumption of certain liabilities associated
with the Voyager. Of the amount paid, $2,000 was placed in escrow (i) to
indemnify the Company in the event of a breach of any of the representations
and warranties made by MCT in the purchase agreement, (ii) to secure
performance of MCT's obligations under the purchase agreement, and (iii) to
insure against any shortfalls discovered in the equipment or inventory intended
to be acquired through the Company's post-closing audit of the assets acquired.

The acquisition of the Voyager has been accounted for as a purchase
and, accordingly, the results of operations and cash flows of the Voyager have
been included only from the date of acquisition. Excluding the one-time
write-off of in-process technology of $8,837, the results of operations for the
Voyager from the date of acquisition through August 31, 1995 increased
Megatest's loss from operations by approximately $2,400. The total purchase
price of the acquisition was as follows:

Cash paid to MCT $ 12,800
Other acquisition costs 1,097
---------
$ 13,897
=========

27
29

MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The allocation of the Company's purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed is based on an
independent appraisal. A final allocation of the purchase price will be
determined when matters relating to the escrow deposit are settled. The
preliminary purchase price allocation is summarized as follows:

Inventories $ 5,661
Property and equipment 1,038
In-process technology 8,837
Goodwill 461
--------
Assets acquired 15,997
--------
Accounts payable 1,903
Accrued warranty 197
--------
Liabilities assumed 2,100
--------
Net assets acquired $ 13,897
========

The in-process technology was charged to income during the quarter
ended November 30, 1994. Unaudited proforma combined net revenues of the
Company and the Voyager for the years ended August 31 1995 and 1994 were
$100,652 and $111,261, respectively. Proforma combined net income (loss) and
proforma combined net income (loss) per share were not materially different
from the amounts reported in the accompanying statement of operations. In
addition, the Company purchased 315,790 shares of MCT's nonvoting Series A
Preferred Stock at a price of $4.75 per share for a total of $1,500 cash on
November 23, 1994. The investment in equity securities is recorded at fair
market value, which approximates its cost, and is included in other assets at
August 31, 1995.

NOTE 6. NOTES PAYABLE:

The Company maintains a $10,000 domestic bank line of credit which
expires in January 1996. The line of credit agreement provides for borrowings
up to the lesser of 80% of eligible domestic accounts receivable or the $10,000
committed credit amount. In addition, the Company maintains an additional
$5,000 line of credit guaranteed by the Export-Import Bank of the United States
to support export sales. This agreement provides for borrowings up to the
lesser of 90% of eligible foreign accounts receivable plus 70% of eligible
inventory to support such receivables, or the $5,000 committed credit amount.
Borrowings under these lines bear interest at prime (8.75% at August 31, 1995)
plus 1.0% and 0.5% for the domestic and export lines of credit, respectively,
and are collateralized by a security interest in substantially all of the
Company's previously unencumbered tangible and intangible assets. The terms of
the credit agreements require, among other terms, quarterly profitability,
minimum amounts of tangible net worth, a minimum ratio of current assets to
current liabilities, and a maximum ratio of indebtedness to net worth. The
credit agreements preclude the Company from taking certain actions without
prior bank approval. Transactions subject to such prohibition include the
declaration of cash dividends, certain significant asset acquisitions or
dispositions, incurrence of certain additional indebtedness, and changing the
nature of the Company's business. At August 31, 1995, the Company had borrowed
$10,000 under these lines of credit.

28
30

MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. LONG-TERM OBLIGATIONS:

Long-term obligations at August 31, 1995 and 1994 are as follows:

August 31,
---------------------
1995 1994
--------- --------

Mortgage on land and building $ 5,450 --
Notes payable 6,900 --
Other 1,035 480
-------- --------
13,385 480
Less: current portion of long-term obligations (1,657) (66)
-------- --------
Long-term obligations $ 11,728 414
======== ========

In conjunction with the Company's purchase of general operating
facilities and land in San Jose, California in August 1995, the Company entered
into a $5,450 mortgage agreement. The mortgage loan is secured by the property
purchased. The mortgage loan bears interest at approximately 8.125% per annum
and is payable in 59 monthly installments of approximately $50 with a $4,550
balloon payment due on August 31, 2000, the maturity date of the loan.

During August 1995 the Company issued a $5,000 promissory note secured
by certain capital equipment of the Company. The note is payable in 48 monthly
installments including interest of approximately 9.5% per annum. In addition,
in August 1995 the Company entered into a four-year $1,900 loan agreement
secured by certain of the Company's testers used for customer demonstrations.
The agreement bears interest at approximately 8% per annum and is payable in
equal monthly installments of $39 and a $380 balloon payment due on the
maturity date of the loan.

In connection with the above-noted borrowing arrangements, the Company
must comply with certain financial covenants relating to profitability,
liquidity, leverage and tangible net worth.

Maturities of long-term obligations are as follows:

August 31,
----------

1996 $ 1,657
1997 1,765
1998 1,902
1999 2,049
2000 6,012
--------
Total $ 13,385
========

29
31

MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. INCOME TAXES:

Income before taxes and cumulative effect of accounting change has
been primarily generated in the United States. The components of the provision
for income taxes were as follows:

YEAR ENDED AUGUST 31,
----------------------------------
1995 1994 1993
---- ---- ----

Current:
U.S. $ (1,291) $ 3,956 $ 333
Foreign 408 84 120
State 246 699 232
-------- ------- -------
(637) 4,739 685
-------- ------- -------
Deferred:
U.S. 223 (2,308) --
Foreign -- -- --
State -- (67) --
-------- ------- -------
223 (2,375) --
-------- ------- -------
Provision for income taxes $ (414) $ 2,364 $ 685
======== ======= =======

The provision for income taxes differs from the amount computed by
applying the statutory U.S. federal income tax rate as follows:

YEAR ENDED AUGUST 31,
----------------------------------
1995 1994 1993
---- ---- ----

Tax provision at U.S. statutory rate $(4,285) $ 4,012 $ 2,028
State income taxes, net of federal benefit (267) 632 153
R&D credits (646) -- --
Increase in valuation allowance 4,671 -- --
Reduction in valuation allowance, including utilization of
net operating loss carryforwards of $1,596 -- (3,356) --
Utilization of net operating loss carryforwards -- -- (1,560)
Other 113 1,076 64
------- ------- -------

Provision for income taxes $ (414) $ 2,364 $ 685
======= ======= =======

The components of the net deferred income tax asset under FAS 109 are
as follows:

AUGUST 31, AUGUST 31,
1995 1994
---- ----

Inventory reserves $ 4,213 $ 2,950
Federal and state loss and credit carryforwards 5,074 4,840
In-process research and development 3,374 --
Other asset valuation reserves 264 214
Employee benefit accruals 455 389
Warranty and installation accruals 1,015 1,106
Other 322 422
-------- --------
Gross deferred tax assets 14,717 9,921
-------- --------
Depreciation (850) (713)
-------- --------
Deferred tax assets valuation allowance (10,015) (5,133)
-------- --------
$ 3,852 $ 4,075
======== ========

30
32
MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At August 31, 1995, the Company had net operating loss and credit
carryforwards for federal income tax purposes of approximately $7,262 and
$1,755, respectively, and net operating loss and credit carryforwards for state
income tax purposes of $3,950 and $604, respectively. These carryforwards, if
not utilized to offset future federal taxable income and income taxes payable,
will expire in the years 1999 through 2005.

In connection with adopting FAS 109, management fully reserved net
deferred tax assets that may be realized beyond one year after the date of
adoption because of the uncertainty regarding their realization. At the end of
each quarter of fiscal 1995 and 1994, management again fully reserved deferred
tax assets which may be realized beyond the ensuing twelve-month period because
of the uncertainty regarding their realization. The change in the valuation
allowance attributable to these quarterly reassessments regarding future
taxable income aggregated $1,070 in fiscal 1995 and $1,534 in fiscal 1994. The
deferred tax assets valuation allowance at August 31, 1995 and 1994 is
attributed to U.S. federal and state deferred tax assets. The Company had
$13,867 and $9,208 of net deferred tax assets in the U.S. at August 31, 1995
and 1994, respectively. Management believes sufficient uncertainty exists such
that a valuation allowance of $10,015 and $5,133 against those net deferred tax
assets is required at August 31, 1995 and 1994, respectively. When these
reserved deferred tax assets are recognized, they will reduce the Company's
federal and state tax provisions, except for approximately $1,135 related to
the tax benefit of stock options, which will be credited directly to additional
paid-in capital.

Under Section 382 of the Internal Revenue Code and the Regulations
issued thereunder, the Company's ability to use its net operating loss and tax
credit carryforwards are limited to approximately $3,000 per year as a result
of an "ownership change" in fiscal 1994.

31
33

NOTE 9. STOCKHOLDERS' EQUITY:

In May and June 1993, the Company sold 2,216 shares of common stock in
its initial public offering with proceeds to the Company of $23,916, net of
underwriting discounts and offering expenses of $2,681. In connection with
such offering, all shares of convertible preferred stock converted into 1,211
shares of common stock. In October 1993, the Company sold an additional 983
shares in a second public offering with proceeds to the Company of $13,575 net
of underwriting discounts and offering expenses of $1,409.

Under the Company's stock option plans, options may be granted to
employees, consultants and non-employee directors to purchase shares of common
stock at prices not less than the fair market value at the date of grant.
Options generally become exercisable as determined by the Board of Directors
and expire up to ten years after the grant date. At August 31, 1995, options
to purchase 126 shares of common stock were exercisable and 851 shares were
available for future option grants. Additional information with respect to
stock options follows:

NUMBER OF
SHARES PRICE PER
UNDER OPTIONS SHARE
------------- -----

Outstanding, September 1, 1992 356 $0.04 - $8.00

Granted 34 4.00 - 21.25
Exercised (101) 0.04 - 4.00
Canceled (9) 0.04 - 4.00
--------
Outstanding, August 31, 1993 280 0.04 - 21.25

Granted 351 13.25 - 21.75
Exercised (53) 1.00 - 10.00
Canceled (39) 1.00 - 21.25
--------
Outstanding, August 31, 1994 539 0.04 - 21.25

Granted 460 6.25 - 20.50
Exercised (158) 0.04 - 15.00
Canceled (146) 0.04 - 21.75
---------
Outstanding, August 31, 1995 695 1.00 - 21.75
=========

The Company has an employee stock purchase plan covering most U.S.
employees. Under the plan, employees may contribute up to 10% of their
compensation to purchase shares of the Company's common stock at 85% of the
stock's fair market value at the beginning or end of each six-month offering
period. During fiscal 1995, 93 shares were purchased under this plan.

At August 31, 1995, the Company had reserved shares of common stock
for issuance as follows:

Issuance under stock option plans 1,546
Issuance under stock purchase plan 407
-------
1,953
======

NOTE 10. EMPLOYEE BENEFIT PLAN:

Substantially all full-time employees are entitled to participate in
the Company's Retirement Savings Plan (401(k) Plan). The Company is not
required to contribute, nor has it contributed, to the Plan.

NOTE 11. COMMITMENTS AND CONTINGENCIES:

In August 1995, the Company terminated its leases for general operating
facilities and land in San Jose, CA. As a result, certain restrictions were
removed on $7,659 of investments which were previously used as collateral under
the first-loss clause of the terminated leases.

32
34

MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company leases certain facilities under operating leases for terms
of up to five years. Rent is expensed on a straight line basis over the term
of each lease. Future minimum commitments under all operating leases at August
31, 1995 are as follows:

Fiscal year ending August 31:

1996 $ 618
1997 508
1998 380
1999 344
2000 239
--------
Total $ 2,089
========

Rent expense was $960, $953 and $1,626 in fiscal 1995, 1994 and 1993,
respectively.

As is typical in its industry, the Company has at times been notified
of claims that it may be infringing patents issued to others. Historically,
the Company has been able to negotiate licenses on terms which it believes are
reasonable. No assurance can be given that infringement claims by third parties
in the future will not materially and adversely affect the Company's business
and operating results.

NOTE 12. REVENUE INFORMATION:

A significant portion of the Company's revenues are derived from sales
to a limited number of large IC manufacturers. Three customers accounted for
25%, 19% and 14% (aggregating to 58%) of net revenues in fiscal 1995, four
customers accounted for 34%, 15%, 11% and 11% (aggregating to 71%) of net
revenues in fiscal 1994 and four customers accounted for 27%, 20%, 10% and 10%
(aggregating to 67%) of net revenues in fiscal 1993. Accounts receivable from
the major customers at August 31, 1995 and 1994 represented 57% and 55% of the
total accounts receivable, respectively.

Export sales were 58%, 52% and 42% of net revenues in fiscal 1995,
1994 and 1993, respectively, including sales to Europe (3%, 5% and 5%) and to
the Far East (55%, 47% and 37%).

NOTE 13. DEVELOPMENT ARRANGEMENTS:

Beginning in fiscal 1988, the Company entered into a series of
development contracts, primarily with IBM, for partial funding related to the
development of the Company's Polaris logic tester and certain customer-specific
applications for this product. The Company recognized development revenues of
$850 and $587 in fiscal 1994 and 1993, respectively, under these contracts.
Related development costs were $185 and $197 in fiscal 1994 and 1993,
respectively. Such costs were included in engineering and product development
expense.

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35

MEGATEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14. SUBSEQUENT EVENT:

On September 5, 1995, the Company entered into an Agreement and Plan
of Merger and Reorganization (the "Merger Agreement") with Teradyne, Inc.
("Teradyne") and M Merger Corp., a Delaware corporation and wholly owned
subsidiary of Teradyne ("Merger Sub"). Pursuant to the Merger Agreement, and
upon the satisfaction of all closing conditions, Merger Sub will merge (the
"Merger") with and into Megatest, and Megatest will become a wholly-owned
subsidiary of Teradyne.

1
Exchange Ratio = ----------------------------------------
(Final Teradyne Stock Price x .02) + .38

The closing of the transaction is subject to certain conditions,
including clearance under the Hart-Scott-Rodino Antitrust Improvement Act of
1976, as amended, and approval by Megatest's stockholders. The transaction is
expected to be accounted for as a pooling-of-interests.

NOTE 15. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:

Fiscal Quarter
-------------------------------------------- Total
First Second Third Fourth Year
----- ------ ----- ------ -----

1995:
Net revenues $12,202 $18,247 $28,941 $38,069 $ 97,459
Gross Profit 4,089 5,324 12,165 16,344 37,922
Net income (loss) (12,466) (3,628) 792 3,112 (12,190)
Net income (loss) per share $(1.74) $ (0.51) $ 0.11 $ 0.41 $ (1.69)

1994:
Net revenues $22,447 $23,291 $27,009 $27,544 $100,291
Gross profit 10,402 10,471 11,090 12,132 44,095
Income before cumulative effect
of accounting change 1,778 2,091 2,531 2,699 9,099
Net income 3,478 2,091 2,531 2,699 10,799
Income before cumulative effect
of accounting change per share $ 0.26 $ 0.29 $ 0.34 $ 0.37 $ 1.26
Net income per share 0.51 0.29 0.34 0.37 1.50

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36
PART III

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) The directors of the Company, and their ages at October 20, 1995, are
as follows:

DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- -----

John E. Halter . . . . . . . 62 President, Chief Executive Officer and Chairman of the
Board of the Company 1990
James W. Bagley 56 Vice Chairman of Applied Materials, Inc. 1986
Stephen J. Bisset . . . . . . 44 Director, TouchPad Business for Logitech, Inc. 1975
Winston H. Chen, Ph.D. . . . 54 Chairman of the Paramitas Foundation 1994
David A. Hodges . . . . . . . 58 Professor and Dean of the College of Engineering at
University of California, Berkeley 1994
Steven J. Sharp . . . . . . . 54 President, Chief Executive Officer and Chairman of
the Board of TriQuint Semiconductor 1987

JOHN E. HALTER joined the Company in June 1990 as President, Chief
Executive Officer and Chairman of the Board. From 1987 to 1990, Mr. Halter
served as Senior Vice President of Operations for the technology industries
sector of General Signal Corporation. From 1985 to 1987, he served as group
executive of General Signal's semiconductor equipment group. Prior to joining
General Signal, Mr. Halter had spent over 20 years in the semiconductor
industry.

JAMES W. BAGLEY is Vice Chairman of Applied Materials, Inc., a
manufacturer of wafer fabrication systems, where he has been employed since
1981. Mr. Bagley also serves as a member of the Board of Directors of Tencor
Instruments, Kulicke & Soffa Industries, Inc. and Extraction Systems, Inc..

STEPHEN J. BISSET co-founded the Company in 1975 and served as its
President until 1990. Mr. Bisset has served as a director of the Company since
its inception. Prior to his association with the Company, Mr. Bisset worked at
Hewlett-Packard Company and Intel Corporation. From December 1990 to June
1993, Mr. Bisset served as a Senior Vice President of Synaptics, Inc., a
manufacturer and developer of neural networks. Mr. Bisset currently serves as
the Director, TouchPad Business for Logitech, Inc., a manufacturer of
computer peripheral products.

WINSTON H. CHEN, PH.D. has served as Chairman of the Paramitas
Foundation since April 1994. Dr. Chen served as Chairman of the Board of
Solectron Corporation ("Solectron"), an electronics manufacturing services
Company, from September 1990 to March 1994, and served as President of
Solectron from 1979 to 1990. Dr. Chen also serves as a member of the Board of
Directors of Solectron and Intel Corporation.

DAVID A. HODGES has served as Dean of the College of Engineering at
University of California, Berkeley since July 1990. Mr. Hodges is a professor
in the University's Department of Electrical Engineering and Computer Sciences
and has been a member of the University's College of Engineering staff 1970.
His current research emphasis is on semiconductor manufacturing. Mr. Hodges
has served as a consultant to a number of technology companies. Mr. Hodges
also serves as a member of the Board of Directors of the International Computer
Science Institute.

STEVEN J. SHARP has served as President and Chief Executive Officer of
TriQuint Semiconductor, Inc., a manufacturer and developer of gallium arsenide
integrated circuits, since September 1991. In May 1992, he became Chairman of
the Board of Directors of TriQuint. From 1987 to September 1991, Mr. Sharp was
an independent venture capitalist, and from 1985 to 1987, he was with Hambrecht
& Quist Venture Capital Fund. Mr. Sharp also serves on the Board of Directors
of a number of privately held companies.

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37

(b) The executive officers of the Company, and their ages at October 20,
1995, are as follows:

NAME AGE POSITION
---- --- --------

John E. Halter . . . . . . . . . . . 62 President, Chief Executive Officer and Chairman of the Board
Paul W. Emery II . . . . . . . . . . 54 Vice President, Finance and Chief Financial Officer
Fred Azad . . . . . . . . . . . . . . 49 Vice President of Engineering
Vickie K. Eckert . . . . . . . . . . 45 Vice President of Business Process Improvement
Craig Z. Foster . . . . . . . . . . . 43 Vice President of Service and Corporate Development
Richard C. Carmichael . . . . . . . . 46 Vice President of Marketing
Timothy F. Moriarty . . . . . . . . . 34 Vice President of Worldwide Sales
Mark L. Siegel . . . . . . . . . . . 57 Vice President of Operations

See Item 10(a) of this Annual Report on Form 10-K for information
regarding Mr. Halter.

PAUL W. EMERY, II joined the Company in February 1995 as Vice
President of Finance and Chief Financial Officer. From 1993 to 1995, Mr. Emery
served as a management consultant. From 1989 to 1993, he served as President
and Chief Executive Officer of System Industries, a supplier of mass storage
systems for the computer industry. Prior to rejoining System Industries in
1989, Mr. Emery was a senior vice president with the Santa Cruz Operation.
From 1984 to 1988, he served as Chief Operating Officer of System Industries.

FRED AZAD joined the Company in 1993 as Vice President of Engineering.
From 1991 to 1993, Mr. Azad served as Director of Engineering for the ATS
Division of KLA Instruments, a semiconductor equipment supplier. For five
years prior to joining KLA Instruments, he served as Director of Engineering
for the Switches and Editors business units of Ampex Corporation, an
electronics supplier.

VICKIE K. ECKERT joined the Company in 1990 as the Company's Director
of Quality Improvement, became Vice President of Quality Improvement and
Information Services in 1992, and Vice President of Business Process
Improvement in 1994. From 1989 to 1990, she served as Director of Quality
Improvement at Wyse Technology, a manufacturer of microcomputer products. For
11 years prior to 1989, she served as Quality Manager at Xerox Corporation.

CRAIG Z. FOSTER joined the Company in 1983 and became Vice President
of Service and Corporate Development in 1992. From 1986 to 1992, Mr. Foster
served as Vice President of Marketing and Service. He has also served as
Applications Manager and Product Marketing Manager with the Company. Prior to
joining Megatest, Mr. Foster held product engineering and management positions
at Intel Corporation.

RICHARD C. CARMICHAEL joined the Company in August 1995 and was
appointed Vice President of the Marketing in September 1995. From 1991 to
1995, he served as Sales Manager and Vice President of Marketing for Credence
Systems Corporation, a semiconductor automatic test equipment Company. Prior to
joining Credence Systems, Mr. Carmichael was a sales manager for Tektronix,
Inc.

TIMOTHY F. MORIARTY joined the Company in 1985 and held various sales
and sales management positions within the Company prior to his becoming Vice
President of Worldwide Sales in June 1995. Prior to joining Megatest, Mr.
Moriarty held various sales and marketing positions at Parallel Systems, Inc.

MARK L. SIEGEL joined the Company in 1991 as Vice President of
Operations. From 1988 to 1991, Mr. Siegel served as President of Semiconductor
Systems, a subsidiary of General Signal. Prior to joining Semiconductor
Systems, he held Vice President and Division General Manager positions at VLSI
Technology, Inc. and Signetics Corporation.

(d) Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership on Form 3 and
changes in ownership on Form 4 or 5 with the Securities Exchange Commission.
Such executive officers, directors and 10% stockholders are also required by
the Securities and Exchange Commission rules to furnish the Company with copies
of all Section 16(a) forms they file. Based solely upon its review of copies
of

36
38

such forms received by it, or written representations from certain reporting
persons that no filings were required for such persons, the Company believes
that during the year ended August 31, 1995, all Section 16(a) filing
requirements applicable to its executive officers and directors were complied
with.

ITEM 11. EXECUTIVE COMPENSATION

(a) The following table sets forth all compensation received for services
rendered to the Company in all capacities by the Chief Executive Officer and
the other most highly compensated executive officers (collectively, the "Named
Officers"), for the three fiscal years ended August 31, 1995:

Long-Term
Compensation
Awards
------------
Annual Compensation Number of
----------------------- Shares
Underlying All Other
Name and Principal Position Year Salary (1) Bonus Options Compensation (2)
--------------------------- ---- ---------- -------- ------------ ----------------

John E. Halter . . . . . . . . . . . 1995 $255,769 $120,000 -- --
President and Chief Executive 1994 255,400 167,500 125,000 $5,703
Officer 1993 254,824 150,000 -- 3,383

Mark L. Siegel . . . . . . . . . . . 1995 141,939 37,350 6,214 --
Vice President of Operations 1994 137,169 40,000 8,000 --
1993 131,169 85,000 -- --

Fred Azad (3) . . . . . . . . . . . . 1995 156,237 34,000 15,235 --
Vice President of Engineering 1994 130,154 50,000 25,000 --
1993 -- -- -- --

Timothy Moriarty (4) . . . . . . . . 1995 70,654 137,829 25,000 --
Vice President of Worldwide Sales 1994 70,000 105,587 -- --
1993 65,819 113,080 -- --

Craig Z. Foster . . . . . . . . . . 1995 125,091 33,750 6,188 --
Vice President of Worldwide Sales 1994 116,250 40,000 -- --
1993 109,843 50,000 -- --

Paul W. Emery, II . . . . . . . . . . 1995 86,154 39,150 40,000 --
Vice President of Finance and 1994 -- -- --
Chief Financial Officer(5) 1993 -- -- -- --

Donald R. May, III (6) . . . . . . . 1995 132,326 78,274 5,175 --
Former Vice President of 1994 73,192 49,178 25,000 --
Worldwide Sales 1993 -- -- -- --

_____________________

(1) Includes amounts deferred at the election of the executive officer pursuant
to the Company's 401(k) plan.
(2) Consists of premiums paid by the Company on term life insurance.
(3) Mr. Azad joined the Company in September 1993.
(4) Mr. Moriarty was named Vice President of Worldwide Sales in June 1995.
(5) Mr. Emery joined the Company in February 1995.
(6) Mr. May resigned from the Company in June 1995.

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39

(b) The following table sets forth certain information with respect to
stock options granted to each of the Named Officers during the fiscal year
ended August 31, 1995. In accordance with the rules of the Securities and
Exchange Commission, also shown below is the potential realizable value over
the term of the option (the period from the grant date to the expiration date)
based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These amounts are based on certain assumed rates of appreciation and
do not represent the Company's estimate of future stock price. Actual gains,
if any, on stock option exercises will be dependent on the future performance
of the Common Stock.

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SHARES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------ --------- ---------- ----------- ---------

John E. Halter . . . 385(1) 0.1% $ 6.25 01/03/00 $665 $1,469
Mark L. Siegel . . . 6,000(2) 1.3 10.75 03/30/05 40,564 102,796
214(1) 0.1 6.25 01/03/00 370 817
Fred Azad . . . . . 15,000(2) 3.2 10.75 03/30/05 101,409 256,991
235(1) 0.1 6.25 01/03/00 406 897
Timothy F. Moriarty 25,000(2) 5.4 14.38 06/22/05 226,088 572,950
Craig Z. Foster . . 6,000(2) 1.3 10.75 03/30/05 40,564 102,796
188(1) 0.0 6.25 01/03/00 325 717
Paul W. Emery, II . 40,000(1) 8.7 8.88 02/16/00 98,080 216,731
Donald R. May, III . 5,000(2) 1.1 10.75 03/30/05 33,803 85,664
175(1) 0.0 6.25 01/03/00 302 668

(1) Option has a five-year term and vests ratably over four years at the rate
of 1/16 of the shares subject to the option every three months.
(2) Option has a ten-year term and vests ratably over four years at the rate
of 1/16 of the shares subject to the option every three months.

(c) The following table provides information with respect to
option exercises in fiscal 1995 by the Named Officers and the value of such
officers' unexercised options at August 31, 1995:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR END (2)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ ----------- ------------- ----------- -------------

John E. Halter . . . 111,950 $1,469,903 46,875 78,510 $398,435 $558,597
Mark L. Siegel . . . 4,750 76,240 9,000 14,214 186,750 137,317
Fred Azad . . . . . -- -- 9,375 30,860 79,685 168,643
Timothy F. Moriarty 47 329 -- 25,000 -- 184,250
Craig Z. Foster . . 3,126 57,456 -- 17,751 -- 186,346
Paul W. Emery, II . -- -- 5,000 35,000 64,375 450,625
Donald R. May, III . 7,812 44,294 -- 22,363 -- 173,732

(1) Market value of underlying shares at the exercise date minus the exercise
price.
(2) Value of unexercised options is based on the price of the last reported
sales price of the Company's Common Stock on the Nasdaq National Market of
$21.75 per share on August 25, 1995 (the last trading day for fiscal 1995)
minus the exercise price.

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40

(d) The Company currently pays each nonemployee director: $1,000 for each
Board of Directors meeting attended in person; $500 for each Board of Directors
meeting attended by teleconference; and $500 for each meeting of a committee of
the Board of Directors.

Nonemployee directors are entitled to participate in the Director
Option Plan (the "Director Plan"). The Director Plan was adopted by the Board
of Directors in November 1992 and approved by the stockholders in December
1992. A total of 50,000 shares of Common stock have been reserved for issuance
under the Director Plan. The Director Plan provides for an automatic grant of
an option to purchase 5,000 shares of Common Stock to each new nonemployee
director on the date on which the person first becomes such a director. Each
such option shall have a term of ten years and vest at a rate of 1/16th of the
shares subject to the option at the end of each three months following the date
of grant. The exercise price of the option may not be less than 100% of the
fair market value of the Common Stock as determined by the closing price as
reported on the Nasdaq National Market on the last business day prior to the
date of grant. Options granted under the Director Plan must be exercised
within 60 days of the end of the optionee's tenure as a director of the
Company, or within 12 months after such director's termination by death or
disability. The Director Plan was adopted to provide options in compliance
with Rule 16b-3 promulgated under the Securities Exchange Act to the
nonemployee directors who administer the Company's stock plans.

(e) The Company's Compensation Committee currently consists of directors
James W. Bagley and Winston H. Chen, Ph.D. The Compensation Committee reviews
and approves, subject to approval by the Board of Directors with respect to the
Chief Executive Officer, the compensation of the Company's executive officers
and administers the Company's stock option and purchase plans. No executive
officer of the Company served on the compensation committee of another entity
or on any other committee of the board of directors of another entity
performing similar functions during the last fiscal year.

(f) In March 1994, the Board of Directors approved an amendment to the
option agreements held by the Company's executive officers, including each
Named Executive Officer, to accelerate the vesting of options held by such
officers under certain circumstances following a change-in-control. The
amendment provides that if, within twelve months following a change-in-control,
an executive officer is terminated other than for cause, or such officer
resigns voluntarily for good reason, then any and all options to purchase the
Common Stock held by such officer will become fully vested and exercisable
regardless of whether such options are then exercisable in accordance with
their terms. However, the amendment prohibits such acceleration if it prevents
the Company from accounting for a business combination as a "pooling of
interests" when such accounting is desired.

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41

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to the
Company with respect to beneficial ownership of the Company's Common Stock as
of October 17, 1995 by (i) each beneficial owner of more than 5% of the
Company's Common Stock, (ii) each Named Officer, (iii) each director of the
Company and (iv) all directors and executive officers of the Company as a
group. Except as otherwise indicated, each person has sole voting and
investment power with respect to all shares shown as beneficially owned,
subject to community property laws where applicable.

BENEFICIAL OWNER APPROXIMATE
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
OWNED OWNED

FMR Corp.(1) .................................................................. 832,900 11.2
Edward C. Johnson 3d(1)
82 Devonshire Street
Boston, MA 02109
John E. Halter(2) ............................................................. 200,834 2.7
Mark L. Siegel(3) ............................................................. 19,340 *
Fred Azad(4) .................................................................. 15,027 *
Timothy F. Moriarty(5) ........................................................ 1,562 *
Craig Z. Foster(6) ............................................................ 39,469 *
Paul W. Emery, II(7) .......................................................... 7,500 *
Donald R. May, III(8) ......................................................... 4,043 *
James W. Bagley(9) ............................................................ 8,124 *
Stephen J. Bisset(10) ......................................................... 82,636 1.1
Winston H. Chen, Ph.D.(11) .................................................... 81,562 1.1
David A. Hodges(12) ........................................................... 1,962 *
Steven J. Sharp(13) ........................................................... 13,375 *
All directors and executive officers as a group (13 persons)(14) .............. 489,556 6.6

* Less than one percent of the outstanding Common Stock.
1. As reported by FMR Corp. ("FMR") on October 18, 1995. Includes 832,900
shares beneficially owned by Fidelity Management & Research Company a
wholly-owned subsidiary of FMR. FMR has sole voting power with respect to
none of these shares and has sole investment power with respect to 832,900
shares. Edward C. Johnson 3d, Chairman of FMR, together with various
trusts for the benefit of Johnson family members, form a controlling group
with respect to FMR. Such controlling group has sole dispositive power
with respect to 832,900 shares.
2. Consists of 137,950 shares held by the trustee of the Halter Family Trust
U/D/T September 30, 1992 and 62,884 shares issuable under stock options
exercisable within 60 days of October 17, 1995.
3. Includes 17,964 shares issuable under stock options exercisable within 60
days of October 17, 1995.
4. Includes 15,027 shares issuable under stock options exercisable within 60
days of October 17, 1995.
5. Consists of 1,562 shares issuable under stock options exercisable within
60 days of October 17, 1995.
6. Includes 12,501 shares issuable under stock options exercisable within 60
days of October 17, 1995.
7. Consists of 7,500 shares issuable under stock options exercisable within
60 days of October 17, 1995.
8. Includes 175 shares issuable under stock options exercisable within 60
days of October 17, 1995.
9. Consists of 8,124 shares issuable under stock options exercisable within
60 days of October 17, 1995.
10. Includes 3,125 shares issuable under stock options exercisable within 60
days of October 17, 1995.
11. Includes 1,562 shares issuable under stock options exercisable within 60
days of October 17, 1995.
12. Includes 1,562 shares issuable under stock options exercisable within 60
days of October 17, 1995.
13. Includes 3,125 shares issuable under stock options exercisable within 60
days of October 17, 1995.
14. Includes 152,433 shares issuable under stock options exercisable within 60
days of October 17, 1995.

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42

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Dr. Chen, a director of the Company, served as a member of the Board
of Directors of Solectron during the Company's last fiscal year. The Company
subcontracts the procurement and manufacture of a substantial portion of its
products through Solectron. Under the terms of the Company's current agreement
with Solectron, the Company purchases products at prices determined in
accordance with Solectron's current price list. The Company is obligated to
purchase products from Solectron only to the extent it places purchase orders.
Either party may terminate the agreement upon providing 180 days prior written
notice to the other party. During fiscal 1995, the Company's purchases from
Solectron totaled approximately $17.1 million.

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43

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report:

(1) Consolidated Financial Statements. The Company's consolidated
financial statements and related notes are included in Item 8 of this Annual
Report on Form 10-K. An index to the information provided in Item 8 is
provided on page 19 of this Annual Report on Form 10-K.

(2) Consolidated Financial Statement Schedules. All consolidated
financial statement schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial statements or
notes thereto.

(3) Exhibits.

EXHIBIT
NO. DESCRIPTION OF EXHIBITS
--- -----------------------

2.1(1) Agreement and Plan of Merger between Registrant and Megatest Corporation, a California corporation,
effective March 12, 1993.

3.1(4) Restated Certificate of Incorporation of Registrant.

3.2(1) Bylaws of Registrant.

4.1(1) Form of Common Stock certificate.

10.1(1)* 1981 Incentive Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement thereunder.

10.2(1) Form of Indemnification Agreement entered into between the Registrant and its directors and officers.

10.3a(7)* 1990 Stock Option Plan, as amended January 12, 1995.

10.3b(1)* Forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement under the 1990 Stock
Option Plan.

10.4(4) Purchase Order Agreement dated as of March 3, 1994 between the Registrant and Solectron Corporation.

10.5(1)* Employee Stock Purchase Plan and form of Subscription Agreement.

10.6(1)* Director Option Plan and form of Option Agreement.

10.7(1)(2) Product Purchase Option Agreement dated February 11, 1993 between the Registrant and Texas Instruments
Incorporated.

10.8(3) Purchase and Sale Agreement between the Registrant and Great-West Life & Annuity Insurance Company dated
September 15, 1993.

10.9(5) Borrower Agreement between the Registrant and Bank of the West dated February 10, 1995.

10.10(6) Loan and Security Agreement between the Registrant and Bank of the West dated July 6, 1995.

42
44

10.11 Master Lease Agreement between the Registrant and General Electric Capital Corporation dated
August 10, 1995.

10.12 Loan and Security Agreement between the Registrant and the CIT Group/Equipment Financing, Inc.
dated August 14, 1995.

10.13 Deed of Trust, Financing Statement, Security Agreement and Fixture Filing between the Registrant
and the Sun Life Assurance Company of Canada (U.S.) dated August 25, 1995.

10.14 Agreement and Plan of Merger and Reorganization among the Registrant, Teradyne, Inc. and M Merger
Corp. dated September 5, 1995.

10.15* Form of Executive Officer Stock Option Agreement under the 1990 Stock Option Plan.

11.1 Statement Re Computation of Per Share Earnings.

21.1 Subsidiaries.

23.1 Consent of Price Waterhouse LLP, Independent Accountants.

23.2 Consent of Deloitte & Touche LLP, Independent Auditors.

24.1 Power of Attorney (see page 44).

27 Financial Data Schedule

____________
* The item listed is a compensatory plan.

(1) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-60686).

(2) Confidential treatment granted for certain portions.

(3) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-69164).

(4) Previously filed as an Exhibit to the Registrant's Form 10-K for
the year ended August 31, 1994.

(5) Previously filed as an Exhibit to the Registrant's Form 10-Q for
the quarter ended February 28, 1995.

(6) Previously filed as an Exhibit to the Registrant's Form 10-Q for
the quarter ended May 31, 1995.

(7) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-8 (No. 33-58809).

(b) Reports on Form 8-K: On its current report on Form 8-K dated September 5,
1995, the Company announced that it had entered into an Agreement and Plan of
Merger and Reorganization with Teradyne, Inc. and M Merger Corp., a wholly
owned subsidiary of Teradyne.

(d) Not applicable.

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45
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.

MEGATEST CORPORATION

By: /s/ JOHN E. HALTER
-------------------------------
John E. Halter
Chairman, President and
Chief Executive Officer

October 23, 1995

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints John E. Halter and Paul W. Emery
II, and each of them acting individually, as his attorneys-in-fact, each with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ JOHN E. HALTER Chairman, President and Chief Executive Officer October 23, 1995
-------------------------- (Principal Executive Officer)
(John E. Halter)

/s/ PAUL W. EMERY II Vice President, Finance and Chief Financial Officer October 23, 1995
--------------------------- (Principal Financial and Accounting Officer)
(Paul W. Emery II)

/s/ JAMES W. BAGLEY Director October 23, 1995
---------------------------
(James W. Bagley)

/s/ STEPHEN J. BISSET Director October 23, 1995
---------------------------
(Stephen J. Bisset)

/s/ WINSTON H. CHEN, Ph.D. Director October 23, 1995
---------------------------
(Winston H. Chen, Ph.D.)

/s/ DAVID A. HODGES Director October 23, 1995
---------------------------
(David A. Hodges)

/s/ STEVEN J. SHARP Director October 23, 1995
---------------------------
(Steven J. Sharp)

44
46

MEGATEST CORPORATION
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED AUGUST 31, 1995
INDEX TO EXHIBITS

Exhibit Number Title to Exhibit
----------------- -------------------------------------------------------------------------------------------

10.11 Master Lease Agreement between the Registrant and General Electric Capital Corporation dated
August 10, 1995.

10.12 Loan and Security Agreement between the Registrant and the CIT Group/Equipment Financing, Inc.
dated August 14, 1995.

10.13 Deed of Trust, Financing Statement, Security Agreement and Fixture Filing between the Registrant
and the Sun Life Assurance Company of Canada (U.S.) dated August 25, 1995.

10.14 Agreement and Plan of Merger and Reorganization among the Registrant, Teradyne, Inc. and
M Merger Corp. dated September 5, 1995.

10.15 Form of Executive Officer Stock Option Agreement under the 1990 Stock Option Plan.

11.1 Statement Re Computation of Per Share Earnings

21.1 Subsidiaries of the Company

23.1 Consent of Independent Accountants

23.2 Independent Auditors' Consent

24.1 Power of Attorney (see page 44)

27 Financial Data Schedule