Document:

<PAGE>

                                                                 EXHIBIT 10.22.1

NOTICE OF GRANT OF STOCK OPTIONS          PHOTON DYNAMICS, INC.
AND OPTION AGREEMENT                      ID: 943007502
                                          5970 Optical Ct.
                                          San Jose, CA 95138-1400

                                                     OPTION NUMBER:
                                                     PLAN:          2001
                                                     ID:

Effective [date] ("Date of Grant"), you have been granted a(n) Non-Qualified
Stock Option to buy [number] shares of Photon Dynamics, Inc. (the Company) stock
at $[exercise price] per share pursuant to the Company's 2001 Equity Incentive
Plan (the "Plan").

The total option price of the shares granted is $[amount].

Shares in each period will become fully vested on the date shown.

<TABLE>
<CAPTION>
Shares          Vest Type       Full Vest       Expiration
------          ---------       ---------       ----------
<S>             <C>             <C>             <C>

</TABLE>

By your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Plan, as amended, and the attached Option Agreement, all of which are
attached and made a part of this document. By your signature below, you
acknowledge receipt of, and understand and agree to, this Notice, the attached
Option Agreement and the Plan. You further acknowledge that as of the Date of
Grant, this Notice, the attached Option Agreement and the Plan set forth the
entire understanding between you and the Company regarding the acquisition of
stock in the Company and supersede all prior oral and written agreements on that
subject with the exception of (i) options previously granted and delivered to
you under the Plan, and (ii) the following agreements only:

        OTHER AGREEMENTS:
                                        ______________________________
                                        ______________________________

__________________________________________            __________________________
Photon Dynamics, Inc.                                 Date

__________________________________________            __________________________
                                                      Date

                                                            Date:
                                                            Time:
<PAGE>

                              PHOTON DYNAMICS, INC.
                           2001 EQUITY INCENTIVE PLAN

                             STOCK OPTION AGREEMENT
                          (NONSTATUTORY STOCK OPTIONS)

      Pursuant to your Notice of Grant of Stock Options ("Grant Notice") and
this Stock Option Agreement, Photon Dynamics, Inc. (the "Company") has granted
you an option under its 2001 EQUITY INCENTIVE PLAN (the "Plan") to purchase the
number of shares of the Company's Common Stock indicated in your Grant Notice at
the exercise price indicated in your Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.

      The details of your option are as follows:

      1. VESTING. Subject to the limitations contained herein, your option will
vest as provided in your Grant Notice, provided that vesting will cease upon the
termination of your Continuous Service.

      2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for capitalization
adjustments, as provided in Section 11(a) of the Plan.

      3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of the
exercise price either:

            (a) In cash or by check; or

            (b) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board that,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds; provided,
however, that in no event will the Company participate in any Regulation T
program if such participation would violate Section 13(k) of the Securities
Exchange Act of 1934 (prohibiting employer loans to officers and directors).

      4. WHOLE SHARES. You may exercise your option only for whole shares of
Common Stock.

      5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common

                                       1.
<PAGE>

Stock are not then so registered, the Company has determined that such exercise
and issuance would be exempt from the registration requirements of the
Securities Act. The exercise of your option also must comply with other
applicable laws and regulations governing your option, and you may not exercise
your option if the Company determines that such exercise would not be in
material compliance with such laws and regulations.

      6. TERM. You may not exercise your option before the commencement of its
term or after its term expires. The term of your option commences on the "Date
of Grant" indicated in your Grant Notice and expires upon the EARLIEST of the
following:

            (a) ninety (90) days after the termination of your continuous
service for any reason other than your disability or death, provided that if
during any part of such ninety (90) day period your option is not exercisable
solely because of the condition set forth in Section 5, your option shall not
expire until the earlier of the "Expiration Date" indicated in your Grant Notice
or until it shall have been exercisable for an aggregate period of ninety (90)
days after the termination of your continuous service;

            (b) three hundred sixty-five (365) days after the termination of
your continuous service due to your disability;

            (c) three hundred sixty-five (365) days after your death if you die
either during your continuous service or within ninety (90) days after your
continuous service terminates;

            (d) the Expiration Date indicated in your Grant Notice; or

            (e) the day before the tenth (10th) anniversary of the Date of
Grant.

      7. EXERCISE.

            (a) You may exercise the vested portion of your option (and the
unvested portion of your option if your Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.

            (b) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.

      8. TRANSFERABILITY. Your option is not transferable, except by will or by
the laws of descent and distribution, and is exercisable during your life only
by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company,

                                       2.
<PAGE>

you may designate a third party who, in the event of your death, shall
thereafter be entitled to exercise your option.

      9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, boards of directors, officers or
employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.

      10. WITHHOLDING OBLIGATIONS.

            (a) At the time you exercise your option, in whole or in part, or at
any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "broker-assisted
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with the exercise of your option.

            (b) Upon your request and subject to approval by the Company, in its
sole discretion, and compliance with any applicable legal conditions or
restrictions, the Company may withhold from fully vested shares of Common Stock
otherwise issuable to you upon the exercise of your option a number of whole
shares of Common Stock having a Fair Market Value, determined by the Company as
of the date of exercise, not in excess of the minimum amount of tax required to
be withheld by law (or such lower amount as may be necessary to avoid variable
award accounting). If the date of determination of any tax withholding
obligation is deferred to a date later than the date of exercise of your option,
share withholding pursuant to the preceding sentence shall not be permitted
unless you make a proper and timely election under Section 83(b) of the Code,
covering the aggregate number of shares of Common Stock acquired upon such
exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your option. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your option that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in connection
with such share withholding procedure shall be your sole responsibility.

            (c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no obligation to issue a certificate for such
shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein unless such obligations are satisfied.

      11. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by

                                       3.
<PAGE>

mail by the Company to you, five (5) days after deposit in the United States
mail, postage prepaid, addressed to you at the last address you provided to the
Company.

      12. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, and
is further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.

                                       4.<PAGE>

                                                                   EXHIBIT 10.38

April 27, 2004

Mark A. Merrill
940 South Wolfe
Sunnyvale, CA 94086

Dear Mark:

I am pleased to offer you the position of Vice President, Marketing reporting
directly to me. Your base salary will be $4,807.70 per week, which is equivalent
to $250,000 per year, less any applicable payroll taxes and voluntary
deductions.

You will be paid bi-weekly and you will be eligible for the standard Photon
Dynamics benefits package. Details about these benefits are provided in the
Company's Employee Handbook and Summary Plan Descriptions, which are available
for your review. The Company may modify your compensation and benefits from time
to time as it deems necessary.

In addition you will be eligible to participate in the "Photon Dynamics, Inc.
Fiscal Year 2004 Management Incentive Bonus Program". Your bonus will be based
on the evaluation of your performance against stated objectives (MBOs) and the
financial performance of the company. The financial pool available to fund FY'04
management bonuses, is subject to the approval of the Compensation Committee of
the Photon Dynamics, Inc. Board of Directors. In your position you are eligible
for a 50% bonus.

You will also be eligible for a quarterly bonus of $10,000. This bonus will be
paid out quarterly based upon performance against stated objectives. The total
annual potential of this payment is $40,000 less any applicable payroll taxes
and voluntary deductions.

As an additional incentive, subject to approval by the Board, the Company will
grant you an option to buy 80,000 shares of Photon Dynamics, Inc. Common Stock,
with an exercise price equal to the fair market value on the date of the grant
as determined by the Board (the "Option"). The Option will vest over a 50-month
period as follows: twelve percent (12%) of shares subject to the Option will
vest and become exercisable six (6) months after your employment date;
thereafter, the remaining shares will vest 2% per month over an additional
forty-four (44) months, so that the Option will be fully vested and exercisable
after you complete four (4) years and two (2) months of employment with the
Company. The actual terms and conditions of any option granted to you will be
governed in all respects by a written stock option agreement and the applicable
stock option plan, which will be provided to you.

Should you accept this offer of employment you will be eligible for a sign on
bonus of $200,000 to be paid as follows; $100,000 as an immediate sign on bonus,
$50,000 in September 2004 and $50,000 in January 2005 less any applicable
payroll taxes and voluntary deductions. This sign on bonus will be paid to you
as a separate check in accordance with our payroll cycle.

As an employee of Photon Dynamics, Inc., you will be expected to abide by
Company rules and policies, acknowledge in writing that you have read the
Company's Employee Handbook, and sign and comply with the enclosed Proprietary
Information and Invention Agreement, which (among other provisions) prohibits
unauthorized use or disclosure of Company proprietary information. As required
by law, this offer is subject to satisfactory proof of your legal right to work
in the United States.

In your work for the Company, you will be expected not to use or disclose any
confidential information, including trade secrets, of any former employer or
other person to whom you have an obligation of confidentiality. You will be
expected to use only that information which is generally known and used by
persons with training and experience comparable to your own, which is common
knowledge in the industry or otherwise legally in the public domain, or which is
otherwise provided or developed by the Company. By signing this letter, you
represent to the Company that you are able to perform your job duties within
these guidelines.

You agree that you will not bring onto Company premises any unpublished
documents or property belonging to any former employer or other person to whom
you have an obligation of confidentiality. You represent

                                       1
<PAGE>

that in performing your duties as an employee of the Company, you will not
breach any agreement with any former employer or third party.

As an exempt salaried employee, you will be expected to work additional hours as
required by the nature of your work assignments.

Your employment relationship with the Company is at-will. You may terminate your
employment with the Company at any time and for any reason whatsoever simply by
notifying the Company. Likewise, the Company may terminate your employment at
any time, with or without cause or advance notice. Any contrary representations
or agreements, which may have been made to you, are superseded by this offer.
The fact that the rate of your salary or other compensation is stated in units
of years or months and that your paid time off accrues annually or monthly does
not alter the at-will nature of the employment relationship, and does not mean
and should not be interpreted to mean that you are guaranteed employment to the
end of any period of time or for any period time.

This letter, together with your Proprietary Information and Inventions
Agreement, forms the complete and exclusive statement of your employment
agreement with the Company. It supersedes any other agreements, representations
or promises made to you by anyone, whether oral or written, and it can only be
modified in a written agreement signed by an officer of the Company.

Please sign and date this letter and the enclosed Proprietary Information and
Inventions Agreement, and return the signed documents to me by April 30, 2004 if
you wish to accept employment at Photon Dynamics under the terms described
above. A copy is enclosed for your personal records.

Again, I am extremely pleased to offer you this position and look forward to
your acceptance. My management team and I are confident you will find this role
both interesting and challenging. We look forward to working with you and know
you will contribute and share in Photon Dynamics' success.

If you have any questions, please do not hesitate to contact me.

Best regards,

/s/ Jeff Hawthorne
------------------
Jeff Hawthorne
President and Chief Executive Officer

                                              I accept this offer of employment:

                                             /s/ Mark Merrill
                                             ----------------

                                             Date signed: 4/29/04

                                             Planned start date: 6/21/04

Enclosure:  Proprietary Information and Inventions Agreement

                                       2

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00075-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00075-of-00352.parquet"}]]