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EXECUTION VERSION
 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
  July 27, 2007
  SALVADOR IMAGING, INC.,
 DAVID GARDNER,
 SALVADOR FOUNDATION CHARITABLE REMAINDER UNITRUST,
 JAMES R. LONG,
 PATRICIA LONG,
 KERRY RHEA,
 LISA J. RHEA,
 PHOTON DYNAMICS, INC.,
 SALVADOR ACQUISITION, INC.,
 SALVADOR ACQUISITION, LLC
 DAVID GARDNER, as Shareholders Representative




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TABLE OF CONTENTS
 PageARTICLE 1DefinitionsSection 1.01. Definitions
    
    
    2Section 1.02. Other Definitional and Interpretative Provisions
    
    
    6ARTICLE 2
The MergerSection 2.01. The Mergers
    
    
    7Section 2.02. Merger Consideration
    
    
    8Section 2.03. Conversion of Shares
    
    
    9Section 2.04. Conversion of Shares in the Second Merger
    
    
    9Section 2.05. Surrender and Payment
    
    
    10Section 2.06. Fractional Shares
    
    
    11Section 2.07. Withholding Rights
    
    
    11Section 2.08. Lost Certificates
    
    
    11ARTICLE 3
Initial Surviving Corporation; The Surviving EntitySection 3.01. Articles of Incorporation and Bylaws of the Initial Surviving Corporation
    
    
    12Section 3.02. Directors and Officers
    
    
    12Section 3.03. Certificate of Formation and Limited Liability Company
    
    
    12Section 3.04. Managers and Officers
    
    
    12ARTICLE 4
Representations and Warranties of the CompanySection 4.01. Corporate Existence and Power
    
    
    13Section 4.02. Corporate Authorization
    
    
    13Section 4.03. Capitalization
    
    
    13Section 4.04. Ownership of Shares; Stock Option Plan
    
    
    14Section 4.05. Subsidiaries
    
    
    14Section 4.06. Authorizations
    
    
    14Section 4.07. Governmental Authorization
    
    
    14Section 4.08. Non-contravention
    
    
    15Section 4.09. Financial Statements
    
    
    15Section 4.10. Absence of Certain Changes
    
    
    15Section 4.11. No Undisclosed Liabilities
    
    
    17Section 4.12. Agreements, Contracts and Commitments
    
    
    17Section 4.13. Validity of Contracts
    
    
    19Section 4.14. No Renegotiations
    
    
    20
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PageSection 4.15. Products and Services
    
    
    20Section 4.16. Intellectual Property
    
    
    20Section 4.17. Insurance Coverage
    
    
    24Section 4.18. Litigation
    
    
    24Section 4.19. Licenses and Permits
    
    
    24Section 4.20. Compliance with Laws and Court Orders
    
    
    25Section 4.21. Finders Fees
    
    
    25Section 4.22. Employee Benefit Plans
    
    
    25ARTICLE 5
Representations and Warranties of SellersSection 5.01. Private Placement Qualification
    
    
    26ARTICLE 6
Representations and Warranties of ParentSection 6.01. Corporate Existence and Power
    
    
    27Section 6.02. Corporate Authorization
    
    
    27Section 6.03. Governmental Authorization
    
    
    27Section 6.04. Non-contravention
    
    
    27Section 6.05. SEC Filings
    
    
    28Section 6.06. Parent Common Stock
    
    
    28ARTICLE 7
CovenantsSection 7.01. Obligations of the Merger Subsidiaries
    
    
    28Section 7.02. Parent Financial Covenant
    
    
    28Section 7.03. Employee Benefits
    
    
    28Section 7.04. Further Assurances
    
    
    29ARTICLE 8
Tax MattersSection 8.01. Tax Definitions
    
    
    29Section 8.02. Tax Representations
    
    
    30Section 8.03. Covenants
    
    
    31Section 8.04. Cooperation on Tax Matters
    
    
    32Section 8.05. Tax Indemnification
    
    
    33Section 8.06. Certain Disputes
    
    
    34Section 8.07. Purchase Price Adjustment
    
    
    35Section 8.08. Tax-Free Reorganization Treatment
    
    
    35Section 8.09. Survival
    
    
    35
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PageARTICLE 9
Survival of Representations and Warranties; IndemnificationSection 9.01. Survival of Representation and Warranties
    
    
    35Section 9.02. Indemnification
    
    
    36Section 9.03. Indemnification Notice
    
    
    38Section 9.04. Shareholders Representative
    
    
    38Section 9.05. No Claims for Disclosed Matters
    
    
    40ARTICLE 10
MiscellaneousSection 10.01. Notices
    
    
    40Section 10.02. Amendments and Waivers
    
    
    42Section 10.03. Expenses
    
    
    42Section 10.04. Successors and Assigns
    
    
    42Section 10.05. Governing Law
    
    
    42Section 10.06. Jurisdiction
    
    
    42Section 10.07. WAIVER OF JURY TRIAL
    
    
    43Section 10.08. Counterparts; Effectiveness
    
    
    43Section 10.09. Entire Agreement
    
    
    43Section 10.10. Captions
    
    
    43Section 10.11. Severability
    
    
    43Section 10.12. Specific Performance
    
    
    43
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INDEX TO ANNEXES
 Annex I
    
    Written Consent of the ShareholdersAnnex II
    
    Merger ConsiderationAnnex III
    
    Registration Rights AgreementAnnex IV
    
    David Gardner Employment AgreementAnnex V
    
    James R. Long Employment AgreementAnnex VI
    
    Kerry Rhea Employment AgreementAnnex VII
    
    Gardner Non-competition AgreementAnnex VIII
    
    Gardner Assignment AgreementAnnex IX
    
    Promissory Note
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AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
 Agreement Company Trust Sellers Parent Merger Subsidiary I Merger Subsidiary II Merger Subsidiaries Shareholders Representative
 First Merger Second Merger Mergers
 Code
  Written Consent




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Key Employee Employment Agreements Gardner Non-competition Agreement Gardner
Assignment Agreement
   Article 1  Definitions
 . Definitions.
 Affiliate
 Applicable Law
 Business Day
 Colorado Law
 Company Balance Sheet
 Company Balance Sheet Date
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Company Stock
 Delaware Law
 ERISA
 ERISA Affiliate
 GAAP
 Governmental Authority
 Intellectual Property Rights
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knowledge
 Licensed Intellectual Property Rights
 Lien
 LLC Act
 Material Adverse Effect
 1933 Act
 1934 Act
 Owned Intellectual Property Rights
 Parent Disclosure Schedule
 Parent SEC Documents
 Parent Stock
 Person
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SEC
 Shareholder
 Subsidiary
 Third Party
  Term
    
    SectionAccounting Referee
    
    
    8.06Agreement
    
    PreambleAverage Parent Stock Price
    
    
    2.02Certificates
    
    
    2.05Closing
    
    
    2.01Closing Cash Consideration
    
    
    2.02Closing Date
    
    
    2.01Code
    
    RecitalsCompany
    
    PreambleCompany Disclosure Schedules
    
    Article 4Company Securities
    
    
    4.03Cover
    
    
    7.02Damages
    
    
    9.02Diligence Binder
    
    Article 4Effective Time
    
    
    2.01Employees
    
    
    7.03Employee Plans
    
    
    4.22Exchange Agent
    
    
    2.05Indemnification Notice
    
    
    9.03Indemnified Party
    
    
    9.02Initial Surviving Corporation
    
    
    2.01Key Employee Employment Agreements
    
    RecitalsLate Payment
    
    
    2.02Loss
    
    
    8.05Material Contract
    
    
    4.12Merger
    
    
    2.01Merger Consideration
    
    
    2.02Merger Subsidiaries
    
    PreambleNote
    
    
    2.02Objection Notice
    
    
    9.03Parent
    
    Preamble
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Term
    
    SectionParent Indemnitee
    
    
    8.01Payment Event
    
    
    10.03Permits
    
    
    4.19Post-Closing Tax Period
    
    
    8.01Pre-Closing Tax Period
    
    
    8.01Registration Rights Agreement
    
    
    2.02Returns
    
    
    8.02Schedule
    
    Article 4Second Effective Time
    
    
    2.01Sellers
    
    PreambleShareholders Representative
    
    PreambleSurviving Entity
    
    
    2.01Returns
    
    
    8.02Tax
    
    
    8.01Taxing Authority
    
    
    8.01Threshold Amount
    
    
    9.02Total Cash Consideration
    
    
    2.02Total Stock Consideration
    
    
    2.02Written Consent
    
    Recitals
 Other Definitional and Interpretative Provisions. provided
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Article 2  The Merger
 The Mergers.
 Closing Closing Date Effective Time
 Initial
Surviving Corporation
  Second Effective Time
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Surviving Entity
   Merger Consideration. Merger Consideration
 Cash Consideration. Total Cash Consideration
  Note
    Late Payment
 8




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Stock Consideration. Total Stock
Consideration
 Stock Consideration Registration Rights. Registration Rights Agreement
 Conversion of Shares.
    Conversion of Shares in the Second Merger.
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Surrender and Payment. Exchange
Agent Certificates
 provided
    10




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Fractional Shares.
 Withholding Rights.
 Lost Certificates.
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Article 3  Initial Surviving Corporation; The Surviving Entity
 Articles of Incorporation and Bylaws of the Initial Surviving Corporation.
 Directors and Officers.
 Certificate of Formation and Limited Liability Company.
 Managers and Officers.
 Article 4  Representations and Warranties of the Company
 Disclosure Binder Schedule
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Company Disclosure Schedules
 Corporate Existence and Power.
 Corporate Authorization.
   Capitalization.
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Company Securities
  Ownership of Shares; Stock Option Plan.
 Subsidiaries.
 Authorizations.
 Governmental Authorization.
 14




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Non-contravention.
 Financial Statements.
 Absence of Certain Changes.
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No Undisclosed Liabilities.
   Agreements, Contracts and Commitments.
  17




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Validity of Contracts Material
Contract
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No Renegotiations
 Products and Services
 Intellectual Property.
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Registered Intellectual Property Rights
 23




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Insurance Coverage.
 Litigation.
 . Licenses and Permits. Permits
 24




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Compliance with Laws and Court Orders
 . Finders Fees.
 . Employee Benefit Plans. Employee Plans
   25




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Representations and Warranties of Sellers
 Private Placement Qualification.
 26




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Representations and Warranties of Parent
  Corporate Existence and Power.
 Corporate Authorization.
 . Governmental Authorization.
 . Non-contravention.
 27




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SEC Filings.
  Parent Common Stock.
 Covenants
 Obligations of the Merger Subsidiaries.
 Parent Financial Covenant. Cover
 Employee Benefits. Employees
 28




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Further Assurances.
  Tax Matters
 Tax Definitions.
 Parent Indemnitee
 Post-Closing Tax Period
 Pre-Closing Tax Period
 Tax
 29




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Taxing Authority
 Tax Asset
 Tax Representations.
 Filing and Payment Returns
 Financial Records
 Procedure and Compliance
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Taxing Jurisdictions
 S Corporation Status
 FIRPTA Certificate
 Covenants.
   31




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Cooperation on Tax Matters.
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Tax Indemnification.
       Loss
  33




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Certain Disputes. Accounting Referee
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Purchase Price Adjustment.
 Tax-Free Reorganization Treatment.
 Survival.
 Survival of Representations and Warranties; Indemnification
 Survival of Representation and Warranties. Survival Period provided
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Indemnification. Indemnifying Parties Indemnified
Parties Damages
  Threshold Amount
   36




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37




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Indemnification Notice. Indemnification Notice Objection Notice
  Shareholders Representative.
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Shareholders Representatives
Expenses
  39




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No Claims for Disclosed Matters.
 Miscellaneous
 . Notices.
  
 40




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41




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. Amendments and Waivers. provided
  . Expenses.
 Successors and Assigns provided provided
 . Governing Law.
 . Jurisdiction.
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. WAIVER OF JURY TRIAL
 . Counterparts; Effectiveness.
 . Entire Agreement.
 Captions.
 . Severability.
 . Specific Performance.
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44




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SALVADOR IMAGING, INC.By:
    /s/  DAVID GARDNERName:
    David GardnerTitle:
    President & CEODAVID GARDNER/s/  DAVID GARDNERSALVADOR FOUNDATION CHARITABLE REMAINDER UNITRUSTBy:
    /s/  DAVID GARDNERName:
    David GardnerTitle:
    TrusteeJAMES R. LONG/s/ JAMES R. LONGPATRICIA LONG/s/  PATRICIA LONGKERRY RHEA/s/  KERRY RHEALISA J. RHEA/s/ LISA J. RHEA [Signature Page to Agreement and Plan of Merger and Reorganization]
 Annex IX-1




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PHOTON DYNAMICS, INC.By:
    /s/  JEFFREY A. HAWTHORNEName:
    Jeffrey A. HawthorneTitle:
    President and Chief Executive OfficerSALVADOR ACQUISITION, INC.By:
    /s/  JEFFREY A. HAWTHORNEName:
    Jeffrey A. HawthorneTitle:
    Chief Executive OfficerSALVADOR ACQUISITION, LLCBy:
    /s/  JEFFREY A. HAWTHORNEName:
    Jeffrey A. HawthorneTitle:
    Chief Executive Officer [Signature Page to Agreement and Plan of Merger and Reorganization]
 2