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Article by DailyStocks_admin    (12-02-08 03:48 AM)

The Daily Magic Formula Stock for 11/30/2008 is KLA-Tencor Corp. According to the Magic Formula Investing Web Site, the ebit yield is 20% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

The Company

KLA-Tencor Corporation (“KLA-Tencor” or the “Company” and also referred to as “we” or “our”) is the world’s leading supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. Our products are also used in a number of other industries, including light emitting diode (LED) and data storage manufacturing, and solar process development and control.

Within our primary area of focus, our comprehensive portfolio of products, services, software and expertise helps integrated circuit (“IC” or “chip”) manufacturers manage yield throughout the entire fabrication process—from research and development to final volume production. These products and solutions are designed to help customers accelerate their development and production ramp cycles, to achieve higher and more stable semiconductor die yields and to improve overall profitability.

KLA-Tencor’s products and services are used by the vast majority of wafer, IC, disk and reticle manufacturers in the world. These customers turn to us for inline wafer and IC defect monitoring, review and classification; reticle defect inspection; packaging and interconnect inspection; critical dimension (“CD”) metrology; pattern overlay metrology; film thickness, surface topography and composition measurements; measurement of in-chamber process conditions, wafer shape and stress metrology; computational lithography tools; and overall yield and fab-wide data management and analysis systems. Our advanced products, coupled with our unique yield management services, allow us to deliver the solutions our customers need to accelerate their yield learning rates and significantly reduce their risks and costs.

KLA-Tencor Corporation was formed in April 1997 through the merger of KLA Instruments Corporation and Tencor Instruments, two long-time leaders in the semiconductor equipment industry that had originally begun operations in 1975 and 1976, respectively.

Additional information about KLA-Tencor is available on our web site at www.kla-tencor.com. We make available free of charge on our web site our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission (“SEC”). Information contained on our web site is not part of this Annual Report on Form 10-K or our other filings with the SEC. Additionally, these filings may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549, by mailing a request to the United States Securities and Exchange Commission, Office of Investor Education and Advocacy, 100 F Street, NE, Washington, DC 20549-0213, by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-772-9295. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

Industry

General Background

The semiconductor or chip industry is KLA-Tencor’s core focus. The semiconductor fabrication process begins with a bare silicon wafer—a round disk that is six, eight or twelve inches in diameter, about as thick as a credit card and gray in color. The process of manufacturing wafers is itself highly sophisticated, involving the creation of large ingots of silicon by pulling them out of a vat of molten silicon. The ingots are then sliced into wafers and polished to a mirror finish.

The manufacturing cycle of an IC is grouped into three phases: design, fabrication and testing. IC design involves the architectural layout of the circuit, as well as design verification and reticle generation. The fabrication of a chip is accomplished by depositing a series of film layers that act as conductors, semiconductors or insulators. The deposition of these film layers is interspersed with numerous other process steps that create circuit patterns, remove portions of the film layers, and perform other functions such as heat treatment, measurement and inspection. Most advanced chip designs require hundreds of individual steps, many of which are performed multiple times. Most chips consist of two main structures: the lower structure, typically consisting of transistors or capacitors which perform the “smart” functions of the chip; and the upper “interconnect” structure, typically consisting of circuitry which connects the components in the lower structure. When all of the layers on the wafer have been fabricated, each die on the wafer is then tested for functionality.

Current Trends

Companies that anticipate future market demands by developing and refining new technologies and manufacturing processes are better positioned to lead in the semiconductor market. During past industry cycles, semiconductor manufacturers generally contended with a few key new technologies or market trend, such as a specific design rule shrink. In today’s market, driven by consumer demand for low-cost electronic goods from cell phones and MP3 players to laptops and portable devices, the leading semiconductor manufacturers are investing in bringing a multitude of new technologies into production at the same time, including new substrate and film materials and advanced lithography techniques.

While many of these technologies have been adopted at the development and pilot production stages, significant challenges and risks associated with each technology have affected their adoption into full-volume production. For example, as design rules decrease, yields become more sensitive to the size and density of defects, while device performance characteristics (namely speed or capacity) become more sensitive to such parameters as linewidth and film thickness variation. New process materials, such as high-k dielectrics, silicon-on-insulator (“SOI”) wafers and immersion lithography-capable photoresists require extensive characterization before they can be used in the manufacturing process. Moving several of these advanced technologies into production at once only adds to the risks that chipmakers face.

The continuing evolution of semiconductor devices to smaller geometries and more complex multi-level circuitry has significantly increased the cost and performance requirements of the capital equipment used to manufacture these devices. Construction of an advanced wafer fabrication facility today can cost over $5 billion, substantially more than previous generation facilities. As a result, chipmakers are demanding increased productivity and higher returns from their manufacturing equipment.

By developing new process control and yield management tools that help chipmakers accelerate the adoption of these new technologies into volume production, we enable our customers to better leverage these increasingly expensive facilities and significantly improve their return on investment (“ROI”). Once customers’ production lines are operating at high volume, our tools help ensure that yields are stable and process excursions are identified for quick resolution. In addition, the move to each new generation’s smaller design rules, coupled with new materials and device innovation has increased in-process variability which requires an increase in inspection and metrology sampling.

With our broad portfolio of application-focused technologies and our dedicated yield technology expertise, we are in position to be a key supplier of comprehensive yield management solutions for customers’ next-generation products, including those required for the 45nm chip generation and beyond.

Our Process Control and Yield Acceleration Solutions

Accelerating the yield ramp and maximizing production yields of high-performance devices are key goals of modern semiconductor manufacturing. Ramping to high-volume production ahead of competitors can dramatically increase the revenue an IC manufacturer realizes for a given product. KLA-Tencor systems not only analyze defectivity and metrology issues at critical points in the wafer, reticle and IC manufacturing processes, but also provide information to our customers so that they can identify and address the underlying process problems. The ability to locate the source of defects and resolve the underlying process issues enables our customers to improve control over their manufacturing processes, so they can increase their yield of high-performance parts—thus maximizing their profit.

Products

KLA-Tencor operates primarily in one segment for the design, manufacture and marketing of process control and yield management systems for the semiconductor and related microelectronics industry. We design, market, manufacture and sell our equipment—consisting of patterned and unpatterned wafer inspection, defect review and classification; reticle defect inspection; packaging and interconnect inspection; critical dimension metrology; pattern overlay metrology; film thickness, surface topography and composition measurement; measurement of in-chamber process conditions, wafer shape and stress metrology; computational lithography tools and overall yield and fab-wide data management and analysis. We also currently offer products that serve the wafer and reticle manufacturing, data storage, solar, and other industries.

In June 2008, KLA-Tencor completed its acquisition of ICOS Vision Systems Corporation NV (“ICOS”). Based in Leuven, Belgium, ICOS is a leading supplier of packaging and interconnect inspection solutions for the semiconductor industry, and also has a market leadership position in the inspection of photovoltaic solar technologies and LED wafers. ICOS and KLA-Tencor are highly complementary and there is virtually no product overlap. This acquisition enhances KLA-Tencor’s position in semiconductor inspection by expanding its capabilities to back-end markets. Additionally, this acquisition provides KLA-Tencor entry into the potentially high-growth solar market.

KLA-Tencor’s ICOS designs and manufactures three main product lines: (1) Component Inspection, which is used for inspection of semiconductor IC packaging; (2) Wafer Inspection systems that perform two-and three-dimensional (2D and 3D) inspection of semiconductor or LED wafers, both whole and diced; and (3) Solar Inspection, where KLA-Tencor’s ICOS is a leading provider of systems that inspect photovoltaic solar wafers and solar cells during solar PV cell manufacturing. These systems help solar wafer and solar cell makers accept or reject products, as well as improve production yield, drive down costs and improve cell efficiency.

Our offerings can be broadly categorized into four groups: Defect Inspection; Metrology; Product related services; and Software. For our customers manufacturing larger design-rule devices, we provide refurbished KLA-Tencor Certified tools along with service and support.

Defect Inspection

KLA-Tencor’s defect inspection tools allow our customers to detect, count, classify and characterize yield failures caused by particles, residues and other contaminants, as well as pattern defects, surface anomalies and electrical issues during all stages of the IC manufacturing process. Our portfolio of tools enables our customers to ramp their production lines faster by finding new defect types during development and ramp, and to maintain high and stable yields by monitoring defect count by type during production.

The number of yield-relevant defects increases as semiconductor process tolerances (“process windows”) become tighter, a result of smaller, more densely packed semiconductor circuit patterns. Also, new defect types and yield issues arise from the necessary introduction of innovative materials, device structures and lithography techniques. As a result, chip manufacturers need to inspect more wafers per lot, more process layers and more area on the wafer, at higher sensitivities. KLA-Tencor supplies a wide portfolio of high performance inspection, review, classification and analysis systems that enable our customers to solve their toughest yield issues.

Brightfield inspection systems provide benchmark sensitivity to small defects, and capture a large range of defect types, which becomes increasingly important as our customers move to 45nm and smaller production. Our 28xx brightfield inspection systems have been widely adopted at leading-edge memory, logic and foundry fabs worldwide, because they deliver the sensitivity and production-worthy performance that chipmakers need to produce market-leading devices. Key to the 28xx inspection system’s success is the full-spectrum broadband light source, spanning deep ultraviolet to visible wavelengths. With the ability to tune its wavelength and employ various optical modes and algorithms, the 28xx inspection systems provide sensitivity to a broad range of defect types throughout the chip manufacturing process.

High-Performance Darkfield Inspection

Darkfield inspection systems are used to cost effectively monitor process tools for defect yield excursions. Our widely-adopted Puma ™ 91xx darkfield imaging inspection systems leverage our patented Streak™ laser imaging technology to produce the high sensitivities at production throughputs. Combining advanced UV-laser illumination optics with a solid-state sensor to image the scattered light, Streak is scalable for multiple technology generations.

Electron-Beam Inspection

For advanced IC manufacturing, e-beam inspection is essential—not only during IC development, where the highest sensitivity is needed to discover defects, but also in production, where dedicated systems are required to monitor key process steps for defect excursions. E-beam technology is often used to find small physical defects that are not detected optically. In addition only e-beam inspection can detect the subtle electrical defects that plague our customers as they introduce new materials and device structures. In July 2008, we launched our latest e-beam inspection system, the eS35, featuring improved sensitivity and throughput, and on-board review and classification.

High Resolution Electron Beam Review and Classification

Once a defect has been identified, a chipmaker must be able to review and classify the defect in order to identify and address the cause of the defect. Our eDR-5200 defect review and classification system features a lens that delivers a significant improvement in resolution, meeting production and process development requirements for advanced design-rule semiconductor devices. Unique connectivity technology between the eDR™-5200 and our market-leading inspection systems provides additional benefits to our customers with respect to defect re-detection, classification and speed.

Reticle Inspection

Reticles are high-precision quartz plates that contain microscopic images of electronic circuits. Placed into steppers or scanners, reticles are used to transfer circuit patterns onto wafers to fabricate ICs. It is extremely important that these features are printed correctly on the reticles; very small variations in line width or placement, or defects within or adjacent to these structures, can cause devastating yield loss in the printed die.

TeraScanHR ™ reticle inspection system provides unique defect-detection and productivity features that facilitate the production of defect-free reticles. The system includes higher resolution optical imaging and several new inspection modes that enable the system to find all types of reticle defects. The TeraScanHR system’s high sensitivity, improved productivity, and flexible configurations make it a cost-effective solution that meets the needs of reticle manufacturers. In April 2008, we introduced our latest reticle inspection capability, Wafer Plane Inspection (“WPI”), on the TeraScanHR platform. This new capability, for the development of 32nm reticles, identifies critical defects that will print on the wafer.

In February 2008, we launched a new family of three reticle inspection systems, called TeraFab, based on the TeraScanHR platform. Targeting IC fabs, the TeraFab systems offer a variety of options to qualify incoming reticles and inspect production reticles for contaminants that reduce yield and increase production risk.

Unpatterned Wafer Surface Inspection

Having a defect-free wafer substrate is essential, since defects on the surface of the wafer can adversely affect subsequent semiconductor processes, and ultimately impact IC performance. The Surfscan SP2 XP inspection system has the speed and sensitivity of the Surfscan SP2, plus a new optical subsystem that allows the tool to distinguish between inherent defects in the silicon crystal—which can kill transistors and thus require scrapping the wafer—and other defect types that may be eliminated through cleaning or re-polishing the wafer. The Surfscan SP2 XP provides wafer manufacturers with the ability to scrap fewer wafers, enhancing their profitability.

For the qualification of new or recently serviced process tools, or for monitoring contamination from process tools already in production, chipmakers may prefer to use bare or blanket-film “monitor” wafers instead of patterned wafers. The Surfscan SP2 family provides benchmark inspection sensitivity on IC films or bare substrates. To add to the Surfscan SP2 family’s capability, an innovative module called SURFmonitor ™ was introduced in July 2007. SURFmonitor utilizes background scattering (haze) data from Surfscan ® SP2 family systems to monitor process drift and capture low-contrast defects, without affecting inspection throughput.

Macro Defect Inspection for Wafer Dispositioning

Advanced fabs require accurate and rapid disposition decision making during manufacturing, as well as quick assessment of tool and process module output. Our automated wafer and tool dispositioning system captures a broad range of defect types at very high throughput—enabling inspection of 100% of wafer lots.

Wafer Edge Inspection

As customers move to smaller design rules and new, more complex material stacks, the high stress wafer edge region has become a source of yield-limiting defects. Material at the edge of the wafer can flake off and fall onto the regions where the chips are being built, causing loss of yield. The recent introduction of immersion lithography adds to the potential for flakes to migrate and cause yield loss, since the flakes can be transported by the immersion fluid.

To help customers identify and fix these edge-related yield issues, KLA-Tencor offers the VisEdge ™ CV300 system. The tool’s unique optics design and advanced defect classification capabilities allow IC manufacturers to capture a wide range of wafer-edge defect types with high sensitivity.

Component Inspection

Our component inspection systems inspect various components that are handled in trays, most commonly semiconductor chips. They inspect for 3D planarity, evenness of contacts and 2D surface aspects, as well as identification marks and orientation. After inspection, the systems can sort the components and even tape them.

We manufacture a range of component inspection systems. The ICOS CI-T120 features the latest innovations in vision technology and component handling. The ICOS CI-T120S and ICOS CI-T130S systems offer 2D and 3D metrology and inspection for Flip-Chip packaging, combining bump inspection, substrate top and bottom surface inspection and substrate warpage inspection in one system. The ICOS CI-9x50 is a fully automatic system for the final inspection of tray-based semiconductor components; it moves the components to the inspection stations, sorts them and, if required, transfers them to tape. The ICOS CI-3050 is a component inspector for inspecting small lots and QA samples, performing 2D and 3D inspections.

Back-end wafer inspection is performed either before or after the chips are cut (diced) from the wafer. Two main versions of the wafer inspection systems are the ICOS WI-2200/2300, which perform 100% automated optical inspection and metrology of microelectronic devices on a variety of wafer substrates. This inspection system combines surface inspection and 2D bump inspection for semiconductor ICs, optoelectronics, advanced packaging, and MEMS. The ICOS WI-3200/3300 Wafer Inspector combines surface inspection and 2D/3D bump inspection in one high speed pass.

Solar Inspection Systems

Our solar inspection modules, manufactured through our ICOS subsidiary, are used in various stages of the solar cell production line, and monitor various stages of the production process including wafer contour integrity, wafer geometry and surface inspection. They are designed for high speed automated optical in-line inspection of the front- and backside of solar wafers and cells (mono-and polycrystalline) up to 8-inch. They provide fast, efficient and reliable optical classification of solar cells at the different stages of the production flow.

Transparent Film and Opaque Substrate Inspection

Understanding the optical surface properties of modern materials has become a critical part of manufacturing. With the increasing complexity of manufacturing processes and products comes the need for precise analysis and control of surface properties such as film thickness uniformity, contamination and defectivity, often in real time and online. The Candela ™ CS20 Optical Surface Analyzer automatically detects and classifies surface defects on optoelectronic and semiconductor wafers, including wafers made of transparent materials such as sapphire and glass. By simultaneously measuring reflectivity and topographic variations on the surface, these systems enable customers to inspect epitaxial layers and film coatings for uniformity issues and defects. In substrate and media manufacturing, the Candela 6100 and 6300 Series’ patented X-beam optical surface analyzers enable defect detection and characterization for magnetic disk media inspection.

Metrology

Metrology is a critical discipline in the production of high performance, reliable devices. Whether verifying that a design will be manufacturable, characterizing a new process, or monitoring high-volume manufacturing processes, our comprehensive set of metrology, analysis and process window optimization products gives IC manufacturers the ability to maintain tight control of their processes.

Optical Overlay Metrology

Decreasing linewidths, larger die sizes and increasing chip density all affect the tolerances for layer-to-layer alignment, or overlay . Mis-registration errors represent a crucial cause of yield loss. Today’s lithography scanners or steppers require precise monitoring to ensure layer-to-layer alignment is within-specifications. These advanced lithography systems also require regular maintenance and performance tests to ensure they are meeting process requirements. Overlay metrology systems verify scanner or stepper performance by measuring the pattern alignment between adjacent layers of the chip as it is built.

In June 2008, we introduced the Archer 200™ Overlay Control System, based on the industry-proven Archer ™ platform. Redesigned optics and performance improvements combine to deliver the high levels of overlay measurement performance and productivity needed for 32nm double-patterning lithography.

CD Metrology

The critical dimension is the smallest intended linewidth for a given device. While a useful measurement for previous-generation devices, traditional CD measurements no longer provide all the information that chipmakers need to accurately predict yield and transistor performance. Instead, complete profile information, including the width at the top and bottom of the feature, the sidewall angle and the height or depth of the feature, are needed. For this reason, CD control in the fab is increasingly changing from traditional CD-SEM (scanning electron microscope) measurements to optical CD.

The SpectraCD-XT™ is our fourth-generation of inline optical CD metrology systems for advanced patterning process control. The SpectraCD-XT is a non-destructive, dedicated CD and profile metrology system built on our high-throughput, production-proven Archer platform.

Film Measurement

Our film metrology systems measure a variety of optical and electrical properties of thin films deposited on a wafer. These systems are used to control a wide range of wafer fabrication steps, where both within-wafer and wafer-to-wafer process uniformity are critical to achieving high device performance at low cost. Our systems use a range of optical and electrical measurement technologies to monitor such critical parameters as film thickness, charge, composition, stress and electrical interface quality.

In December 2007, we introduced a significant advancement in films metrology with the Aleris™ product line, followed by the introduction of additional Aleris systems in January 2008. Our single-tool solution allows for production monitoring of critical gate applications at 45nm and beyond and is designed to meet tighter process tolerances for thickness, refractive index, and stress measurements over a broad range of applications, including diffusion, chemical vapor disposition (“CVD”), etch and others.

Implant Metrology

KLA-Tencor offers implant and anneal micro-uniformity monitoring with the Therma-Probe ® solution. Therma-Probe is the industry standard for implant dose metrology. With its advances in modulated optical reflectance, Therma-Probe provides dose measurements for in-line monitoring, including anneal and ultra-shallow junction depth profiling. The system contributes to higher yield by monitoring for process excursions.

Substrate & Surface Metrology

At the 45nm node and below, small deviations in wafer shape such as bow warp and edge roll-off can translate to intolerable errors in the IC’s critical dimensions and layer-to-layer alignment. WaferSight2 ™ is an optical interferometry-based metrology system that enables wafer suppliers and chipmakers to measure bare wafer dimensional parameters such as flatness, shape, edge roll-off and nanotopography in one system. With industry-leading flatness and nanotopography precision, plus improved tool-to-tool matching, WaferSight2 enables leading-edge production of next-generation wafers by wafer suppliers, and higher confidence of incoming wafer quality for IC makers.

Our stylus profilers measure the surface topography of films and etched surfaces, and are used in basic research and development as well as semiconductor production and quality control. In July 2007 we introduced a high-resolution surface profiler, the HRP ® -350, extending critical measurement capability to the 45nm semiconductor device generation. We also offer the P-16+ ™ benchtop contact stylus profiler, designed for automated step height, surface contour, waviness and roughness measurements, with detailed 2D and 3D topographic analysis of a variety of surfaces and materials.

SensorWafers

KLA-Tencor offers specialized, instrumented substrates that measure a wafer’s response to the conditions inside the process chamber, while the process is occurring. These wafer-level metrology tools measure the temperature variation of the process over time to optimize, troubleshoot and monitor complex processes, such as plasma etch and lithography. Other measurement parameters are also available, including plasma monitoring. To support the troubleshooting process, an advanced diagnostic module is also offered. Both chipmakers and process equipment manufacturers use these wafers to visualize, diagnose and control their processes and process tools in a wide variety of applications.

Services

KLA-Tencor enables customers to achieve their required productivity with a low overall cost for inspection and metrology systems over the lifecycle of the tools. We deliver yield management expertise spanning advanced technology nodes, and collaborate with customers to determine the best products and services to meet technology requirements and optimize cost of ownership. Our customers can achieve their production goals through a menu of K-T support services, unique expertise from local service engineers, worldwide spare parts depots, and round-the-clock tech support experts in our Online Support Centers. KLA-Tencor’s Technology Engagement Services (“TES”) collaborates with customers to use effective recipes to improve baseline performance and avoid costly process errors, as well as extend the life of their installed base and determine when new tools and upgrades would be beneficial.

Software and Other

Our productivity and analysis solutions translate inspection and metrology data into consolidated information that can reveal process problems and help semiconductor manufacturers develop long-term yield improvement strategies.

Klarity Solutions form a fab-wide yield acceleration solution that automatically reduces defect inspection, classification and review data to relevant root-cause and yield-analysis information. Using this information, manufacturers can take corrective action sooner and improve yield more quickly at a low cost-of-ownership.

K-T Analyzer ™ software provides critical post processing of overlay data into information which indicates appropriate corrective action for the relevant process tool. This function is increasing in importance with sub-65nm design rules, immersion lithography and double patterning lithography.

FabVision ™ is a real-time, fab-wide data management system that continuously monitors, reports and manages product quality information at wafer manufacturing facilities. Alerts on process excursions, daily reports and selected data are generated and sent automatically to better manage operations at the fab, process or customer level.

Our ProDATA ™ lithography data analysis tool, along with our PROLITH ™ lithography and etch optimization tool, helps manufacturers reduce their advanced lithography development time and cost, as well as optimize their design-for-manufacturing (“DFM”) efforts.

LithoWare ™ is a Linux-based lithography optimization tool that enables engineers to begin their Optical Proximity Correction (“OPC”)/reticle enhancement technique (“RET”) development without the need to wait for a mature silicon process. LithoWare also dramatically reduces the time and cost to develop RET and OPC recipes.

Process window qualification (“PWQ”) application enables device manufacturers to identify reticle design marginalities by examining the wafer for poorly printed features using their KLA-Tencor broadband brightfield wafer inspection systems.

Customers

To support our growing, global customer base, we maintain a significant presence throughout the United States, Europe, Asia-Pacific and Japan, staffed with local sales and applications engineers, customer and field service engineers and yield management consultants. We count among our largest customers the leading semiconductor manufacturers from each of these regions. In each of the fiscal years ended June 30, 2008, 2007 and 2006, no customer accounted for more than 10% of our total revenues.



CEO BACKGROUND

The Company has a classified Board of Directors with three classes. At each annual meeting, a class of Directors is elected for a full term of three years to succeed those Directors whose terms expire at the annual meeting. At this Annual Meeting, the terms of the Class I Directors are expiring. If there is a nominee for a class other than the class which is up for election, such nominee, upon election, is added to the designated class and serves out the remainder of the term for that class.

The three incumbent Class I Directors that are up for re-election at the Annual Meeting are Robert M. Calderoni, John T. Dickson and Kevin J. Kennedy. Director Lida Urbanek also serves as a Class I Director as of the date of this Proxy Statement and will continue to serve in such capacity until the date of the Annual Meeting. However, on September 13, 2008, Ms. Urbanek notified the Company of her decision not to stand for re-election at the Annual Meeting.

The four incumbent Class II Directors are Robert P. Akins, Robert T. Bond, Kiran M. Patel and David C. Wang. The Class II Directors will serve until the annual meeting of stockholders to be held in 2009 or until their respective successors are duly elected and qualified.

The three incumbent Class III Directors are Edward W. Barnholt, Stephen P. Kaufman and Richard P. Wallace. The Class III Directors will serve until the annual meeting of stockholders to be held in 2010 or until their respective successors are duly elected and qualified.



Nominees
The term of the three current Class I Directors that are up for re-election at the Annual Meeting will expire on the date of the Annual Meeting. The three Class I Directors are nominated for election at the Annual Meeting. The Nominating and Governance Committee, consisting solely of independent Directors as determined under the rules of The NASDAQ Stock Market, recommended the Class I Director nominees, each of whom is an incumbent Director, as set forth in this Proposal One. Based on that recommendation, the members of the Board of Directors unanimously resolved to nominate such individuals for election.

The three nominees for election as Class I Directors by the stockholders are:


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Robert M. Calderoni;


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John T. Dickson; and


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Kevin J. Kennedy.

If elected, the nominees for Class I Directors will serve as Directors until the Company’s annual meeting of stockholders in 2011, each until his successor is duly elected and qualified. If any nominee declines to serve or becomes unavailable for any reason, or a vacancy occurs before the election, the proxies may be voted for such substitute nominees as the Board of Directors may designate. As of the date of this Proxy Statement, the Board of Directors is not aware of any nominee who is unable or who will decline to serve as a Director.

Robert M. Calderoni

Robert M. Calderoni has been a Director of KLA-Tencor since March 2007. He has served as Chairman of the Board of Directors of Ariba, Inc. since July 2003 and as Chief Executive Officer and a Director of Ariba since 2001. From 2001 to 2004, Mr. Calderoni also served as Ariba’s President and, before that, as Ariba’s Executive Vice President and Chief Financial Officer. From 1997 to 2001, he served as Chief Financial Officer at Avery Dennison Corporation. He is also a member of the Board of Directors of Juniper Networks, Inc. 48

John T. Dickson
John T. Dickson has been a Director of KLA-Tencor since May 2007. Mr. Dickson is the former President and Chief Executive Officer of Agere Systems, Inc., a position he held from August 2000 until October 2005. Prior to that, he held positions as the Executive Vice President and Chief Executive Officer of Lucent’s Microelectronics and Communications Technologies Group; Vice President of AT&T Corporation’s integrated circuit business unit; Chairman and Chief Executive Officer of Shographics, Inc.; and President and Chief Executive Officer of Headland Technology Inc. Mr. Dickson is also a member of the Boards of Directors of National Semiconductor Corporation, Mettler-Toledo International Inc. and Frontier Silicon, Ltd. 62

Kevin J. Kennedy
Kevin J. Kennedy has been a Director of KLA-Tencor since May 2007. Mr. Kennedy has been the Chief Executive Officer of JDS Uniphase Corporation since September 2003 and has served as a member of the Board of Directors of JDS Uniphase since November 2001. From August 2001 to September 2003, Mr. Kennedy was the Chief Operating Officer of Openwave Systems, Inc. Prior to joining Openwave, Mr. Kennedy served seven years at Cisco Systems, Inc., most recently as Senior Vice President of the Service Provider Line of Business and Software Technologies Division, and 17 years at Bell Laboratories. Mr. Kennedy also serves on the Board of Directors of Polycom, Inc.



MANAGEMENT DISCUSSION FROM LATEST 10K


The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. (See “Special Note Regarding Forward-Looking Statements.”)

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We based these estimates and assumptions on historical experience, and evaluate them on an on-going basis to ensure that they remain reasonable under current conditions. Actual results could differ from those estimates. We discuss the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors on a quarterly basis, and the Audit Committee has reviewed the Company’s related disclosure in this Annual Report on Form 10-K. The items in our financial statements requiring significant estimates and judgments are as follows:

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectibility is reasonably assured. We derive revenue from three sources—system sales, spare part sales and service contracts. We typically recognize revenue for system sales upon acceptance by the customer that the system has been installed and is operating according to predetermined specifications. We also recognize revenue prior to written acceptance from the customer, as follows:


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When system sales to independent distributors have no installation requirement, contain no acceptance agreement, and 100% payment is due upon shipment, revenue is recognized upon shipment;


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When the installation of the system is deemed perfunctory, revenue is recognized upon shipment. The portion of revenue associated with installation is deferred based on estimated fair value, and that revenue is recognized upon completion of the installation;


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When the customer fab has already accepted the same tool, with the same specifications, and it can be objectively demonstrated that the tool meets all of the required acceptance criteria upon shipment, revenue is recognized upon shipment. The portion of revenue associated with installation is deferred based on estimated fair value, and that revenue is recognized upon completion of the installation;


•

When the customer withholds signature on our acceptance document due to issues unrelated to product performance, revenue is recognized when the system is performing as intended and meets all published and contractually agreed specifications;


•

When the system is damaged during transit and title has passed to the customer, revenue is recognized upon receipt of cash payment from the customer.

Total revenue recognized without a written acceptance from the customer was approximately 16%, 14% and 4% of total revenues for the fiscal years ended June 30, 2008, 2007 and 2006, respectively. The increase in revenue recognized without a written acceptance is primarily driven by increased shipments of tools that have already met the required acceptance criteria at those customer fabs as well as an increase in sales of systems with perfunctory installation, primarily with respect to sales of products of companies that we have acquired during the past two fiscal years. Shipping charges billed to customers are included in system revenue, and the related shipping costs are included in costs of revenues.

Trade-in rights are occasionally granted to customers to trade in tools in connection with subsequent purchases. We estimate the value of the trade-in right and reduce the revenue of the initial sale. This amount is recognized at the earlier of the exercise of the trade-in right or the expiration of the trade-in right.

Spare parts revenue is recognized when the product has been shipped, risk of loss has passed to the customer, and collection of the resulting receivable is probable.

Service and maintenance revenue is recognized ratably over the term of the maintenance contract. Consulting and training revenue is recognized when the related services are performed.

The deferred system profit balance equals the amount of deferred system revenue that was invoiced and due on shipment less applicable product and warranty costs.

We also defer the fair value of non-standard warranty bundled with equipment sales as unearned revenue. Non-standard warranty includes services incremental to the standard 40-hour per week coverage for twelve months. Non-standard warranty is recognized ratably as revenue when the applicable warranty term period commences.

Software is incidental to our products as determined in accordance with AICPA Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition and Emerging Issues Task Force (“EITF”) Issue No. 03-05, Applicability of SOP 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software . We periodically review the software element of our systems in accordance with SOP No. 97-2 and EITF Issue No. 03-05.

Inventories. Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Demonstration units are stated at their manufacturing cost, and reserves are recorded to state the demonstration units at their net realizable value. We review the adequacy of our inventory reserves on a quarterly basis.

We review and set standard costs semi-annually at current manufacturing costs in order to approximate actual costs. Our manufacturing overhead standards for product costs are calculated assuming full absorption of forecasted spending over projected volumes, adjusted for excess capacity. Abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are recognized as current period charges.

We write down inventory based on forecasted demand and technological obsolescence. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values.

Warranty. We provide standard warranty coverage on our systems for 40 hours per week for twelve months, providing labor and parts necessary to repair the systems during the warranty period. We account for the estimated warranty cost as a charge to costs of revenues when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. Utilizing actual service records, we calculate the average service hours and parts expense per system and apply the actual labor and overhead rates to determine the estimated warranty charge. We update these estimated charges on a quarterly basis. The actual product performance and/or field expense profiles may differ, and in those cases we adjust our warranty reserves accordingly. The difference between the estimated and actual warranty costs tends to be larger for new product introductions as there is limited historical product performance to estimate warranty expense; more mature products with longer product performance histories tend to be more stable in our warranty charge estimates. See Note 12, “Commitments and Contingencies” to the Consolidated Financial Statements for a detailed description.

Allowance for Doubtful Accounts. A majority of our trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the world. In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers’ financial condition. An allowance for doubtful accounts is maintained for probable credit losses based upon our assessment of the expected collectibility of all accounts receivable. The allowance for doubtful accounts is reviewed on a quarterly basis to assess the adequacy of the allowance. We take into consideration (1) any circumstances of which we are aware of a customer’s inability to meet its financial obligations; and (2) our judgments as to prevailing economic conditions in the industry and their impact on our customers. If circumstances change, and the financial condition of our customers are adversely affected and they are unable to meet their financial obligations to us, we may need to take additional allowances, which would result in a reduction of our net income.

Stock-Based Compensation. Effective July 1, 2005, we adopted the modified prospective transition method as provided by provisions of SFAS No. 123(R), Share-Based Payment . SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, the fair value of stock-based awards is measured at the grant date and is recognized as expense over the employee’s requisite service period. The fair value is determined using a Black-Scholes valuation model for stock options and for purchase rights under our Employee Stock Purchase Plan and using the closing price of our common stock on the grant date for restricted stock units. The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the option’s expected life and the expected price volatility of the underlying stock. The expected stock price volatility assumption is based on the market-based implied volatility from traded options of our common stock. We believe that the implied volatility is reflective of market conditions. Prior to July 1, 2005, we applied Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and its related Interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation .

Contingencies and Litigation. We are subject to the possibility of losses from various contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We accrue a liability and charge operations for the estimated settlement costs expected to be incurred over the next twelve months of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date. See Item 3, “Legal Proceedings” and Note 12, “Commitments and Contingencies” to the Consolidated Financial Statements for a detailed description.

Goodwill and Intangible Assets. As required by SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but is subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. Purchased technology, patents, trademarks and other intangible assets are presented at cost, net of accumulated amortization. Intangible assets are amortized on a straight line basis which approximates their estimated useful lives and assessed for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . See Note 5, “Goodwill and Other Intangible Assets” to the Consolidated Financial Statements for a detailed description. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. We completed our annual evaluation of goodwill by reporting unit during the quarter ended December 31, 2007, which evaluation indicated that there was no such impairment. There have been no significant events or circumstances affecting the valuation of goodwill subsequent to the impairment test performed in the second quarter of the fiscal year ended June 30, 2008.

Income Taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes , which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. We have determined that our future taxable income will be sufficient to recover all of our deferred tax assets. However, should there be a change in our ability to recover our deferred tax assets, we could be required to record a valuation allowance against our deferred tax assets. This would result in an increase to our tax provision in the period in which we determined that the recovery was not probable.

On a quarterly basis, we provide for income taxes based upon an estimated annual effective income tax rate. The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of our tax planning strategies. We carefully monitor the changes in many factors and adjust our effective income tax rate on a timely basis. If actual results differ from these estimates, this could have a material effect on our financial condition and results of operations.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

We adopted FIN 48 on July 1, 2007. See Note 11, “Income Taxes” to the Condensed Consolidated Financial Statements for a detailed description.

Valuation of Marketable Securities. Our investments in available-for-sale securities are reported at fair value. Unrealized gains related to increases in the fair value of investments and unrealized losses related to decreases in the fair value are included in accumulated other comprehensive income, net of tax, as reported on our Consolidated Statements of Stockholders’ Equity. However, changes in the fair value of investments impact our net income only when such investments are sold or impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of the security’s cost basis. We periodically review our investment portfolio to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of an investment is less than its cost, the credit rating and any changes in credit rating for the investment, and our ability and intent to hold the investment until the earlier of market price recovery or maturity. Our assessment that an investment is not other-than-temporarily impaired could change in the future due to new developments or changes in our strategies or assumption related to any particular investment.

Effects of Recent Accounting Pronouncements.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles . This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. We do not expect that this Statement will result in a change in any of our current accounting practices.

In April 2008, the FASB adopted FASB Staff Position SFAS No. 142-3, Determination of the Useful Life of Intangible Assets , amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets . This FASB Staff Position is effective for intangible assets acquired on or after July 1, 2009. We are currently evaluating the impact of the implementation of FASB Staff Position SFAS No. 142-3 on our consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of SFAS No. 133. This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 will require us to provide enhanced disclosures about (a) how and why we use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. SFAS No. 161 is effective for our interim period beginning January 1, 2009. The adoption of SFAS No. 161 is not expected to have an effect on our consolidated financial position, results of operations or cash flows.

In February 2008, the FASB adopted FASB Staff Position SFAS No. 157-2, Effective Date of FASB Statement No. 157, delaying the effective date of SFAS No. 157 for one year for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of the implementation of SFAS No. 157 on our consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations . SFAS No. 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. In addition, SFAS No. 141(R) requires expensing of acquisition-related and restructure-related costs, remeasurement of earn-out provisions at fair value, measurement of equity securities issued for purchase at the date of close of the transaction and non-expensing of in-process research and development related intangibles. SFAS No. 141(R) is effective for our business combinations for which the acquisition date is on or after July 1, 2009, except that resolution of certain tax contingencies and adjustments to valuation allowances related to business combinations, which previously were adjusted to goodwill, will be adjusted to income tax expense for all such adjustments after July 1, 2009, regardless of the date of the original business combination. We are currently evaluating the impact of the implementation of SFAS No. 141(R) on our consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 . This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. This Statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. SFAS No. 160 is effective for our fiscal year beginning July 1, 2009. We are currently evaluating the impact of the implementation of SFAS No. 160 on our consolidated financial position, results of operations and cash flows.

In June 2007, the FASB ratified EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities . This issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. EITF Issue No. 07-3 is effective for our fiscal year beginning July 1, 2008. The adoption of EITF Issue No. 07-3 is not expected to have a material impact on our consolidated financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 , which is effective for our fiscal year beginning July 1, 2008. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The adoption of SFAS No. 159 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for our fiscal year beginning July 1, 2008. We are currently evaluating the impact of the implementation of SFAS No. 157 on our consolidated financial position, results of operations and cash flows.

EXECUTIVE SUMMARY

KLA-Tencor Corporation is the world’s leading supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. Within our primary area of focus, our comprehensive portfolio of products, services, software and expertise helps integrated circuit (“IC” or “chip”) manufacturers manage yield throughout the entire fabrication process – from research and development to final volume production. Our products are also used in a number of other industries, including light emitting diode, data storage, and solar cell and wafer production.

Our products and services are used by the vast majority of wafer, IC, disk and reticle manufacturers in the world. Our revenues are driven largely by capital spending by our customers that operate in one or more of several key markets, including the memory, foundry and logic markets. Over the past few years, customers in the memory market have made significant increases in capital spending and, as a consequence, contributed an increased share of our revenues. These customers, however, have been adversely impacted by a challenging pricing environment in fiscal 2008 for their products, and consequently have scaled back their investments in new production capacity. Our customers purchase our products to either ramp up production in response to the need to drive advances in process technologies or to satisfy demand from industries such as communication, data processing, consumer electronics, automotive, and aerospace. Our customers today are investing in advanced technologies and new materials to enable smaller design rules and higher density applications, as well as reduced cost, which in turn are driving increased adoption of process control to reduce defectivity. While demand from various industries continues to steadily rise, the demand for our products is affected by profitability of our customers which is driven by capacity and market supply for their products as well as the global macroeconomic environment. Our revenues have declined sequentially over the past four quarters and reflect slowing worldwide demand for semiconductor equipment. Industry analysts expect demand for capital equipment to decline in calendar year 2008 compared to calendar year 2007. Such a decline would affect our revenue levels in future quarters. While capacity driven purchases by our customers are adversely impacted in environments such as the one we are currently in, the demand for technology driven purchases are less susceptible to business cycles.

As a supplier to the global semiconductor and semiconductor-related industries, we are subject to business cycles, the timing, length and volatility of which can be difficult to predict. The industries we serve have historically been cyclical due to sudden changes in demand and manufacturing capacity. We expect our customers’ capital spending on process control to constitute a higher portion of their capital spending over time. We believe that this increase in process control spending will be driven by the demand for more precise diagnostics capabilities to address multiple new defects as a result of further shrinking of device feature sizes, the transition to new materials, new devices and circuit architecture, new lithography challenges and fab process innovation. We anticipate that these factors will drive increased demand for our products and services such as ours over the coming years. The key drivers in the semiconductor equipment industry today are the competitive pressures for our customers to improve yields, lower their costs and get products to market more quickly in order to benefit from the increased demand for products from the consumer electronics, computing and communication industries.


MANAGEMENT DISCUSSION FOR LATEST QUARTER


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “relies,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “thinks,” “seeks,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Such forward-looking statements include, among others, forecasts of the future results of our operations; the percentage of spending that our customers allocate to process control; orders for our products and capital equipment generally; sales of semiconductors; the allocation of capital spending by our customers; growth of revenue in the semiconductor industry, the semiconductor capital equipment industry and our business; technological trends in the semiconductor industry; future developments or trends in the global capital and financial markets; the availability of the offer to repurchase our auction rate securities by the securities firm from which we purchased such securities; the future impact of the restatement of our historical financial statements, shareholder litigation and related matters arising from the discovery that we had retroactively priced stock options (primarily from July 1, 1997 to June 30, 2002) and had not accounted for them correctly; our future product offerings and product features; the success and market acceptance of new products; timing of shipment of backlog; the future of our product shipments and our product and service revenues; our future gross margins; our future selling, general and administrative expenses; international sales and operations; our ability to maintain or improve our existing competitive position; success of our product offerings; creation and funding of programs for research and development; attraction and retention of employees; results of our investment in leading edge technologies; the effects of hedging transactions; the effect of the sale of trade receivables and promissory notes from customers; our future income tax rate; dividends; the completion of any acquisitions of third parties, or the technology or assets thereof; benefits received from any acquisitions and development of acquired technologies; sufficiency of our existing cash balance, investments and cash generated from operations to meet our operating and working capital requirements; and the adoption of new accounting pronouncements.

Our actual results may differ significantly from those projected in the forward-looking statements in this report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A, “Risk Factors” in this report as well as in Item 1, “Business” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2008, filed with the Securities and Exchange Commission on August 7, 2008. You should carefully review these risks and also review the risks described in this document and the other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q that we will file during the remainder of the fiscal year ending June 30, 2009. You are cautioned not to place undue reliance on these forward-looking statements, and we expressly assume no obligation to update the forward-looking statements in this report after the date hereof.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. We based these estimates and assumptions on historical experience, and evaluate them on an on-going basis to ensure that they remain reasonable under current conditions. Actual results could differ from those estimates. We discuss the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors on a quarterly basis, and the Audit Committee has reviewed the Company’s related disclosure in this Quarterly Report on Form 10-Q. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:


• Revenue Recognition

• Inventories

• Warranty

• Allowance for Doubtful Accounts

• Stock-Based Compensation

• Contingencies and Litigation

• Goodwill and Intangible Assets

• Income Taxes

System revenues recognized without a written acceptance from the customer were approximately 14%, 21% and 14% of total revenues for the three months ended September 30, 2008, June 30, 2008 and September 30, 2007, respectively. The decrease in revenue recognized without a written acceptance from three months ended June 30, 2008 compared to three months ended September 30, 2008 is primarily driven by a decrease in the proportion of shipments where the shipped tools have previously met the required acceptance criteria at those customer fabs, which is offset by an increase in sales of systems with perfunctory installation. Shipping charges billed to customers are included in system revenues, and the related shipping costs are included in costs of revenues.

With the exception of the below paragraph that discusses the impact of Statement of Financial Accounting Standards (“SFAS”) No. 157 on our critical accounting estimates and policies for fair value measurements, during the three months ended September 30, 2008 there were no significant changes in our critical accounting estimates and policies. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended June 30, 2008 for a more complete discussion of our critical accounting policies and estimates.

We adopted SFAS No. 157 as of the beginning of fiscal year 2009. In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) SFAS No. 157-2, which allows companies to elect a one-year delay in applying SFAS No. 157 to certain fair value measurements, primarily related to nonfinancial instruments. The Company elected the delayed adoption date for the portions of SFAS No. 157 impacted by FSP SFAS No. 157-2. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The adoption of this statement did not have a material impact on our consolidated results of operations and financial condition. See Note 2, “Fair Value Measurements,” to the Condensed Consolidated Financial Statements.

We adopted SFAS No. 159, which permits entities to elect, at specified election dates, to measure eligible financial instruments at fair value. As of September 30, 2008, we did not elect the fair value option for any financial assets and liabilities that were not previously measured at fair value. See Note 2, “Fair Value Measurements,” to the Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements. On August 27, 2008, the U.S. Securities and Exchange Commission (“SEC”) announced that they will issue for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed roadmap, we could be required in fiscal 2014 to prepare financial statements in accordance with IFRS, and the SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements, and we will continue to monitor the development of the potential implementation of IFRS.

In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. FSP SFAS No. 157-3 clarifies the application of SFAS No. 157, which we adopted as of July 1, 2008, in situations where the market is not active. We have considered the guidance provided by FSP SFAS No. 157-3 in our determination of estimated fair values as of September 30, 2008, and the impact was not material.

EXECUTIVE SUMMARY

KLA-Tencor Corporation is the world’s leading supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Within our primary area of focus, our comprehensive portfolio of products, services, software and expertise helps integrated circuit manufacturers manage yield throughout the entire wafer fabrication process – from research and development to final volume production.

Our products and services are used by virtually every major wafer, IC and photomask manufacturer in the world. Our revenues are driven largely by capital spending by our customers who operate in one or more of several key markets, including the memory, foundry and logic markets. Our customers purchase our products to either ramp up production in response to the need to drive advances in process technologies or to satisfy demand from industries such as communication,

data processing, consumer electronics, automotive and aerospace. We believe that our customers will continue to invest in advanced technologies and new materials to enable smaller design rules and higher density applications, as well as reduced cost, which in turn will drive increased adoption of process control to reduce defectivity. The demand for our products is affected by the profitability of our customers, which is driven by capacity and market supply for their products. Industry analysts expect demand for semiconductor capital equipment to continue to remain weak until macroeconomic conditions improve. Such a decline would affect our revenue levels in future quarters. While semiconductor content demand from communication, data processing, consumer electronics, automotive and aerospace products continues to rise, the global economic weakness has adversely impacted the operating results of our customers that operate in those industries. In addition, the demand for our products has been adversely affected by lower profitability of our customers, especially in the memory market (which had constituted an increased share of our revenues for the past several years), as well as the weak macroeconomic and credit environment and its overall impact on capital spending. Our revenues have declined sequentially over the past five quarters and reflect slowing worldwide demand for semiconductor equipment.

As a supplier to the global semiconductor and semiconductor-related industries, we are subject to business cycles, the timing, length and volatility of which can be difficult to predict. The industries we serve have historically been cyclical due to sudden changes in demand and manufacturing capacity. We expect our customers’ capital spending on process control to increase over the long term. We believe that this increase in process control spending will be driven by the demand for more precise diagnostics capabilities to address multiple new defects as a result of further shrinking of device feature sizes, the transition to new materials, new devices and circuit architecture, new lithography challenges and fab process innovation. We anticipate that these factors will drive increased demand for our products and services over the coming years. The key drivers in the semiconductor equipment industry today are the ramping up at the 65nm design nodes and increasing adoption of 45nm technology. These drivers are fueled by competitive pressures for our customers to improve yields, lower their costs and get products to market more quickly in order to benefit from the increased demand for products from the consumer electronics, computing and communication industries.

We continue to see uncertain market conditions in the United States as well as other geographies. In addition, we have seen a slowdown in capital expenditures by many of our customers and believe that it is part of a broad slowdown in the global semiconductor and semiconductor-related markets. Our operating results would be adversely affected if such adverse market conditions persist. However, we believe that our strategy and our ability to innovate and execute may enable us to improve our relative competitive position in difficult business conditions, and may continue to provide us with long-term growth opportunities.


CONF CALL

Richard P. Wallace - Chief Executive Officer

Thank you Ed, good afternoon everyone and thank your for joining us for our Q1 earnings call. Today I will discuss highlight of our performance in the September quarter, give an update on the current market environment and provide guidance for the December quarter. In Q1 KLA-Tencor maintained our market share leadership, while at the same time leading our financials target for the quarter on the phase of the pervasive industry write-down and announcing global economic uncertainty. We expect the oversupply and device inventories, reduced consumer demand and limited access of financing will continue to constrain our customer capital investments for the foreseeable future. So we even with low order levels across the board today and with visibility very limited our customer continue to invest in technology development of leading edge devices which benefit KLA-Tencor. Our strategic focus in these challenging is the strength in KLA-Tencor competitive position and laid the foundation for superior growth once industry growth resume.

Our market share leadership, the exceptional value of our technology and our strong balance sheet provide the resources to continue to invest in growth, to invest in advancing our technology roadmap and to maintain a high level of customer focus while others are scaling back. We also provide the flexibility to manage the business to breakeven profitability road better and in spite of the weak demand environment and the great degree of uncertainty as to the duration of this downturn that persist in the market today.

Now turning to more detail on the September quarter results. Starting with the numbers, revenue in Q1’09 was $533 million and net income of $55 million or $0.32 per diluted share excluding onetime charges. We generated approximately $81 million in cash flow from operations in the period, and $1.3 billion in cash and investments as of September 30th.

New bookings in the quarter were $325 million, down approximately 33% from June and below the range of guidance. Q1 bookings reflects seasonality we typically experience in our first fiscal quarter in terms supply by increasing inability our customers to deploy capital in the phase of the unfavorable economic environment which resulted in weak demand across all sectors and geographies in the quarter with exception of logic. In the month of September we saw further push out for memory and foundry orders with customers these projects into 2009. Although we think demand has reached minimum levels necessary to sustain our customers advanced development investment, this ability remains weak, and we expect the general reluctant among our customers to invest will persist for the foreseeable future.

Looking at the Q1 demand texture in the individual end market, where I think orders were strong once again coming in at 77% of the total as Logic continue to push investment and leading edge development. Memory was approximately 16% than the orders in Q1. The memory industry continues to grab a little prolonged inventory oversupply condition with result in pressure on pricing and margins significantly impacting economics in this market. This coupled with concern that weakening global economy will further dampen consumer demand has led to a significant pullback in capacity investment and memory, with memory customers scaling down CapEx budgets and delaying previously plan program well onto 2009.

Additionally, we would expect that recent consolidation trend and the memory market to continue as the industry works to rationalize capacity. In the interim, we expect market leaders to remain focused on the device strength and increasing yield to improve margin, which we believe will benefit KLA Tencor.

Foundry bookings were down sequentially in the September quarter at 6% of orders. Foundry capacity utilization is expected to trend down in the near term in conjunction with declining demand for both mainstream and leading edge products impacting equipment demand in this market.

Overall, despite of the poor visibility we are experiencing today across our industry, process control remain key success factor to our customers, as they advanced their technology roadmaps with the leading edge.

Although investment levels are low today, we are maintaining pricing discipline in our market leadership and our indispensability to our customers remained a powerful competitive differentiator for KLA-Tencor.

Looking ahead to the rest of calendar year 2008 and into the first half of 2009, we see real evidence today of the meaningful near term improvement in the demand environment. Taking this into account we are taking actions to manage through this uncertain economic time and then capitalize on opportunities for KLA Tencor to sustain and grow our market leadership in this downturn, and position the company even more strongly in the future.

I would like take you through some of the key areas as focused as we manage through this period. Number one, we are focused on our core businesses in this period of compressed capital budget. Leveraging our strong balance sheet, our market leadership, the breadth of our global field support infrastructure and our product portfolio to support our customers’ investment and advance technology development while also addressing the high numbers on cost. This will further strengthen our position for the next phase of capacity investment on our industry when it again materializes. Number two; we will continue our high phase of investment in R&D, while the declining demand environment is putting pressure on the R&D budgets elsewhere in our industry. We intend to maintain our relatively high levels of the investment technology of the same time in proving efficiency in our R&D effort, advancing our technology leadership, and pushing a product roadmap that addresses our customer requirement in end cost to and beyond.

These investments are targeted not only advancing KLA Tencor’s leadership and our core market but also focus on supporting technology development and integration activities among our recently acquired businesses which are key components for our long term growth strategy.

We acknowledge that the decision to invest for growth in this environment while the trade off in terms of near term earning power, but we think over the long term these actions will help to further strengthen our competitive position and provide a catalyst for accelerated growth in this next investment cycle.

Third, we intend to continue to focus on advancing on our diversification's strategy. Our end market profile has change significantly since the last major down turn in 2009, then we have addressed five or six primary segment focused on wafer inspection, reticle wafer and metrology market, and these businesses accounted for about 80% of total revenue. Today we have 10 primary engines for growth at KLA Tencor, and we diversified into adjusted market such a wafer metrology, mass metrology, back end packaging, solar and high brightness LED.

Our strategy to broaden our footprint opens up access to market to an attractive growth and profitability characteristics to drive our future performance. While these new growth engines have also been subject to the current economy downturn, they should help reduce our exposure to the volatility of the wafer front end market when more normal demand conditions resume.

The final success factor for KLA Tencor in this environment was our strong balance sheet and operating model. As I mentioned we are investing today across our portfolio to support our long term strategic growth objectives. In addition, we are also committed to managing the business to deliver breakeven profitability or better. To that end we are currently in the process of implementing additional cost reduction action in support of that objective.

In conclusion, no doubt times are tough today, and visibility into a sustainable recovering demand is still very limited. But we believe KLA Tencor is operating from a position of strength, and have a right strategy in place to weather this storm.

More importantly, in challenging environment presents unique opportunities for KLA Tencor to capitalize on our competitive advantage in terms of technology, market leadership and financial strength, position us for success in the future when a healthy demand environment resumes.

Now discuss our outlook for the December quarter. We were in guarded on our outlook as we expect the demand environment to remain unpredictable for the foreseeable future with CapEx limited to technology investment programs, and longer term visibility virtually non existence. In terms of guidance, new orders in the current quarter are expected to be flat compared with September, plus or minus 10%. Revenues are expected to be between $410 million and $430 million. A non-GAAP EPS at break even plus or minus $0.02 excluding onetime charges.

Now I would like to introduce Mark Dentinger. As many of you know Mark joined KLA Tencor in September as CFO and in the past two months he is already making an impact and helping to navigate through these challenging time. I would like to once again to welcome Mark to the team. Mark.

Mark Dentinger – Chief Financial Officer

Thanks Rick. Revenue for the quarter was $533 million slightly above the guidance range we provided in July of 510 to 525 million and fully diluted GAAP EPS was $0.11. Non-GAAP EPS was $0.32 at the low end of our guidance, but was impacted by circumstances that drove our tax rate up on to almost 37%, a 7 point higher than the 30% range we got it in July. A higher than anticipated tax-rate reduced EPS by $0.03 in Q1. Absent this issue non-GAAP EPS would be in $0.35. We will discuss tax issue in more detail later in the call. The differences between Q1 GAAP and non-GAAP numbers are acquisition related charges are $40.3 million or $0.17 per share after tax. Stock-option restatement related charges are $3.8 million or $0.02 per share after tax. In this stocks revenue severance charges of $4 million or $0.02 share after tax.

In our press release you will find a GAAP to non-GAAP reconciliation which address at the adjustments I've just mentioned in more detail. The remainder of my comments will be on the non-GAAP results which exclude the adjustments I just mentioned, but improved stock-based compensation. We continued the acquisition of Vistec's MIE business unit, here after refer to as MIE at the end of September. So the MIE results have a negligible impact on our income statement in Q1, other balance sheet includes the MIE assets and liabilities as of quarter end.

In terms of financial performance we made our target for Q1 in a difficult environment. Our market position in all products and businesses was consistent with the last several quarters. Despite of the tough environment we view downturns as an opportunity to strengthen our position; it will have a strong set of products for next generation production notes. While the economic instability which began impacting our business several quarters ago continued in Q1 and grow with an unprecedented level of caution by our customers in making capital investment decisions. The number of fab expansion projects that had appeared solid for Q1 back in July pushed out of the quarter driving lower than expected new order level this quarter. In this environment customers are only investing in advanced technology node development, while we expect most of these order wins will lead to future capacity business of KLA Tencor as these nodes ramp to production, they are small today and resulted in new order of $325 million in Q1, down 33% from the June quarter and below our guided range of a decrease between 5 and 25%.

Additionally we scrub our backlog quarterly to reflect only orders with the leadership in the next full of month. We do this -- decided the company properly, both in manufacturing and operating expenses and to send clear demand signals to our supply chain. In Q1 we initiated $60 million of backlog reduction largely to reflect shipment delays from certain customers. We expect the majority of these orders to reenter our backlog over the next six months as new delivery dates firm.

We ended the quarter with $811 million in total backlog after adjusting for customer initiated delays, acquisition related adjustments, and foreign exchange impact. The $811 million in backlog at September 30 include $250 million of revenue backlog for product that have been shift in voice but have not yet been signed off by customers, and $561 million in a orders that had not yet shift to customers.

We expect the majority of the unshipped backlog to ship over the next six to nine months. The approximate regional distribution if new orders the quarter, quarter change in regional distribution was as follows. US is 45% in Q1 up from 33% in the June quarter. Europe was 4%, down from 6% in Q4 of ’08, Japan was 21% up from 15%, Korea was 13% flat versus last quarter, Taiwan was 6% also flat as last quarter and the rest of Asia was 10% down from 16% in the June quarter. The approximate distribution in new orders in Q1 by market vise, based on inspection with 30% down from 45% last quarter, reticle inspection with 10% flat versus last quarter, metrology was 14% down from 20% in the prior quarter, and storage, solar high brightness LED and other non-semi was approximately 9% up from 2% last quarter. Service was 31% in Q1 up from 23% last quarter.

45 nanometer and below development and pilot activity was roughly 85% of the semiconductor system orders received in the quarter. This order was roughly 75% in our June quarter. As we move forward, visibility into a meaningful turn in the business is well and we do not anticipate significant improvement in new order in Q2. We will continue to manage the company inline with these business levels until and up during the gathering.

Looking at our income statement, revenue for the quarter was $533 million; this is down 10% from last quarter and down 32% from Q1 of last year. Non-GAAP gross margin was 54.9%, down 170 basis points from the June quarter. The gross margin decline is due to a higher percentage of service revenue, condition from recent acquisition, and lower manufacturing capacity utilization. In the December quarter we expect gross margins to decline further due to the three factors. One, the revenue mix was shipped earlier as we expect product revenue will decline a $100 to a $120 million while service revenue will be roughly flat. Two, we will include the MIE results for the fourth quarter and we will transition MIE to our customer acceptance driven revenue recognition policy both of which will be margin dilutive. And three, lower manufacturing capacity utilization will also create a margin pressure. As anticipated in the July conference call, operating expenses were $209 million up $16 million from the June quarter as we absorb the full quarter in Q1. R&D was a $104.5 million in Q1 offsetting $0.3 million from June due to ICOS, as well as continued investment in key researching development and application for next generation technology. SG&A for the quarter was a $104.4 million, up $9.1 million from last quarter.

In Q2 we anticipate that operating expenses will decrease by $5 million as we begin to see the benefit of synergies with recent M&A activities. In addition, we will initiate a number of cost cutting measures design to reduce operating expenses in the next few quarter. In total the acquisitions of ICOS last quarter and MIE in September will lookout for about $24 million of our operating expenses in the December quarter. Other income for the quarter was $4.2 million, impart due to an $8.5 million onetime recover of VAT taxes which was anticipated when we issued guidance last July. In Q2 we expect other income in expense to decline approximately $10 million resulting in a net chare of $6 million as the interest expense on our long term that exceed the expected deals on our marketable securities.

The non-GAAP tax rate was 36.7% in the quarter, almost seven points higher than the 30% range we discussed in the call last quarter. This unanticipated increase the roles because of investment declines and our deferred compensation program which are not deductible for income tax purposes but are included in pretax income. Investment balances in this program are formerly, fairly stable and historically the effective changes in the investment portfolio have impacted our tax rate by less than one percentage point. Presuming a recent volatility in equity market size we would expect this tax rate effect to return to prior level.

Looking forward to Q2 more pretax profit combined with the impact of recently US legislation renewing the R&D tax credit will increase volatility and our tax rate which will make it more difficult to forecast. In the December quarter our projected tax rate will be between 0 and 10%, in the long run we expect our non-GAAP tax rate to return into 30% range. Non-GAAP net income was $35 million and $0.32 per share in Q1. These numbers include stock-based compensation of almost $28 million. In the December quarter we expect expenses for stock based compensation to be approximately $25 million.

Turning to the balance sheet, cash and investments ended the quarter at $1.3 billion, a decrease of $273 million quarter-to-quarter. Cash flow from operations was $81 million in Q1 versus a $188 million in Q4 of ’08. During Q1 we repurchased a $177 million of stock, we paid a cash dividend of $26 million, and we used a $127 million in net cash to acquire MIE. Accounts receivable ended the quarter at $370 million down $122 million from the third quarter. MIE added $15 million to the quarter end balance, MDA sellers were 80 days versus 83 days at the end of June.

Inventory increased by $44 million in the last quarter, including $36 million from the MIE acquisition and ended the quarter at $504 million. Net capital expenditures were $10 million, $7 million within core business and the remainder to the MIE acquisition. Fully diluted shares in Q1 were just over a 174 million, versus a 178 million shares in Q4. In the December quarter fully diluted share are expected to be about 172 million. Total headcount ended the quarter 6306 and increase of 246 from June acquisition. The MIE acquisition added 344 people and this is partially offset by a 98 reduction in the rest of KLA during Q1. Funding our visibility demand for semiconductor based product is limited. At this point we don’ not expect any meaningful capacity related spending to occur for the remainder calendar year and into early 2009. KLA’s non-fundamentals are compelling and we are confident in our new product pipeline for KLA Tencor and acquired businesses.

We remain cautious in the near term outlook given the uncertainties surrounding the next few quarter and we expect new orders in the December quarter will be technology focused consumer to the level we experienced in Q1. We are adjusting our near term revenue expectations downward, and we will continue to run a company later design to maintain sufficient backlog in key research and development investment. For the same, we are undertaking a number of measures which aim low a clearly operating expense run rate to the 165 to $170 million range over the next nine months. These measures will be broadbased and focused on acquisition synergies, administrative support, sales and channel efficiency, operation and non-core engineering activities.

Due to the timing of these actions as well as other legal and contractual factors, there will not be significant cost reduction in the December quarter. However, we do expect to see progress in these efforts beginning in the March quarter.

In summary, our guidance for Q2 hits. New orders are expected to be flat plus or minus 10% versus Q1. Total revenue between $410 and $430 million and non-GAAP EPS which include stock based compensation that excludes onetime charges in the amortization will be approximately breakeven plus or minus $0.2. This concludes our prepared remarks on the quarter, and we will now turn the call back over to Ed to begin the Q&A.

Ed Lockwood - Senior Director of Investor Relations

Okay, thank you. At this point we would like to open up the call to Q&A and we ask once again to please request that you limit yourself one question given the limited time we have today. Please feel to re-queue for your followup and we will do our best to get everyone on todays call. Operator we are ready for our first question.

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