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                                                                    Exhibit 10.3


                              EMPLOYMENT AGREEMENT


        This Employment Agreement (the "Agreement") is made effective as of June
30, 2000 between Cohu, Inc., a Delaware corporation (the "Company"), and Charles
A. Schwan ("Schwan"), with respect to the following facts:

        A. The Company desires to continue the services and employment of Schwan
for the period provided for in this Agreement and Schwan is willing to continue
employment by the Company on a part-time basis for such period and upon the
terms and conditions set forth below.

        Now, therefore, in consideration of the foregoing and the mutual
covenants contained herein, Schwan and the Company hereto agree as follows:

        1. Employment. Schwan has resigned as Chief Executive Officer of the
Company effective June 30, 2000. It is Schwan's current intention to continue to
serve as the Company's Chairman of the Board of Directors unless or until a
successor is appointed. The Company agrees to employ Schwan in a non-officer
capacity on a part-time basis for the three (3) year period from July 1, 2000
through June 30, 2003, upon the terms and conditions provided herein.

        2. Duties. During the period of this part-time employment pursuant to
this Agreement, Schwan will devote his best efforts and skills to the affairs of
the Company under and pursuant to the direction of the Executive Officers
("Senior Management") and the Board of the Company. Schwan may serve on the
board of directors of and hold any other offices or positions in companies or
organizations that will not present any conflict of interest with the Company or
any of its subsidiaries or divisions or materially affect the performance of
Schwan's duties under this Agreement. The Company will retain the full direction
and control of the means and methods by which Schwan performs the services under
this Agreement.

        3. Responsibilities. Subject to the conditions stated in section 2 above
and exclusive of his Board responsibilities, Schwan will devote a minimum of two
hundred (200) hours per annum to the business and affairs of the Company. Schwan
will provide the Company with regular reports on the services performed and the
results of his work and retain appropriate records of time incurred in
performing such services, all according to such guidelines as the Company may
reasonably establish from time to time.

        4. Compensation; Other Benefits; Expenses. Pursuant to this Agreement,
Schwan will receive an annual salary of $30,000, less applicable federal and
state taxes and withholding, payable in accordance with the normal payroll
practices of the Company. To the extent he remains as a director, Schwan will
not be compensated for his services as a member of the Company's Board. As the
services provided pursuant to this Agreement will be performed on a part-time
basis, Schwan will not participate in any incentive bonus program of the Company
for services performed after June 30, 2000. However, Schwan shall be entitled to
receive all other benefits of employment generally available to other employees
of the Company who perform services on a part-time basis. The Company shall pay
or reimburse Schwan for all reasonable expenses incurred in performing his
duties under this Agreement, provided Schwan submits appropriate supporting
documentation in accordance with Company policy. All stock options to


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purchase common stock of the Company held by Schwan at the date of this
Agreement shall continue to be subject to the terms and conditions contained in
the related Option Agreements.

        5. Termination.

           5.1 The Company may terminate this Agreement "for cause" immediately
at any time upon providing written notice to Schwan indicating the cause of
termination. If terminated for cause, the annual salary under this Agreement
shall be paid on a prorated basis to the date of termination. For purposes of
this Agreement, "for cause" shall mean the discharge resulting from a
determination by the Company that Schwan (a) has been convicted of a crime
involving moral turpitude, including fraud, theft or embezzlement, (b) has
failed or refused to follow the policies or directives established by the Board
or Senior Management of the Company, (c) has willfully and consistently failed
to attend to the material duties imposed on him pursuant to this Agreement.

           5.2 The Company may terminate the employment of Schwan without cause
at any time during the term of this Agreement; provided, however, that the
Company shall be obligated to pay Schwan an amount equal to the annual salary
under this Agreement from the date of termination through June 30, 2003, on the
condition that Schwan executes a full general release, releasing all claims
known or unknown that Schwan may have against the Company arising out of or in
any way related to Schwan's employment or termination of employment with the
Company. In addition, in the event of a termination by the Company without cause
the Company, by action of the Compensation Committee of the Board, shall
accelerate the vesting of all stock options to purchase common stock of the
Company held by Schwan that would have been exercisable by June 30, 2003.

           5.3 Schwan may terminate this agreement at any time. In so doing,
Schwan will be paid on a prorated basis to the date of termination and any stock
options to purchase common stock of the Company held by Schwan at that date will
be subject to the termination of option provisions contained in the related
Option Agreement.

           5.4 Schwan and the Company hereby acknowledge that, as a result of
his resignation as Chief Executive Officer of the Company, the Termination
Agreement dated May 10, 1985 between the Company and Schwan is nullified
effective June 30, 2000.

        6. Confidentiality. In the event Schwan obtains confidential and
proprietary information of the Company, he will protect such information to the
same extent and be subject to the same restrictions that were in effect as of
June 30, 2000.

        7. Indemnification. During the term of his employment under this
Agreement, Schwan will continue to be subject to the indemnification provisions
contained in Article VII of the Company's Bylaws.

        8. Arbitration. The Company and Schwan agree that any and all disputes
between the Company and Schwan arising out of or in any way related to the
employment relationship, including any disputes upon termination, shall be fully
and finally resolved by binding arbitration before a single neutral arbitrator
in San Diego, California. The arbitration will be conducted in accordance with
the then current rules for the arbitration of employment disputes of the



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American Arbitration Association ("AAA"). The parties are entitled to
representation by an attorney or other representative of their choosing. The
arbitrator shall have the power to enforce any award that could be entered by a
judge of a trial court of the State of California, and only such power, and
shall follow the law. In the event the arbitrator does not follow the law, the
arbitrator will have exceeded the scope of his or her authority and the parties
may, at their option, file a motion to vacate the award in court. The parties
agree to abide by and perform any award rendered by the arbitrator. Judgment on
the award may be entered in any court having jurisdiction thereof. By entering
into this agreement, both parties are giving up their constitutional right to
have any such dispute decided in a court of law before a jury, and instead, are
accepting the use of binding arbitration. Each party shall bear one half the
cost of the arbitration filing and hearing fees, and the cost of the arbitrator.

        9. General Provisions.

           9.1 Successors and Assigns. The rights and obligations of the Company
under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the Company. Schwan shall not be entitled to assign
any of his rights or obligations under this Agreement.

           9.2 Severability. In the event any provision of this Agreement is
found to be unenforceable by an arbitrator or a court of competent jurisdiction,
such provision shall be deemed modified to the extent necessary to allow
enforceability of the provision as so limited, it being intended that the
parties shall receive the benefit contemplated herein to the fullest extent
permitted by law. If a deemed modification is not satisfactory in the judgment
of such arbitrator or court, the unenforceable provision shall be deemed
deleted, and the validity and enforceability of the remaining provisions shall
not be affected thereby.

           9.3 Complete Agreement. This Agreement and the documents referred to
herein constitute the complete agreement between the parties with respect to the
subject matter hereof.

        IN WITNESS WHEREOF, Schwan and the Company have executed this Agreement
effective as of the date set forth above.

                                       COHU, INC.


/s/ Charles A. Schwan                   By: /s/ John H. Allen
-----------------------------------        -----------------------------------
Charles A. Schwan                           John H. Allen
                                            Vice President Finance &
                                            Chief Financial Officer, Secretary


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