319201--8/7/2008--KLA_TENCOR

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{operation, international, foreign}

{operation, natural, condition}

{system, service, information}

{regulation, change, law}

{control, financial, internal}

{product, market, service}

{property, intellectual, protect}

{competitive, industry, competition}

{loan, real, estate}

{acquisition, growth, future}

{personnel, key, retain}

{debt, indebtedness, cash}

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{tax, income, asset}

{condition, economic, financial}

Risks Associated with Our Industry and Market Conditions The semiconductor equipment industry is highly cyclical. The purchasing decisions of our customers are highly dependent on the economies of both the local markets in which they are located and the semiconductor industry worldwide. If we fail to respond to industry cycles, our business could be seriously harmed. Our business is ultimately driven by the global demand for electronic devices by consumers and businesses. The vast majority of our annual revenue is derived from outside the United States, and we expect that international revenue will continue to represent a substantial percentage of our revenue. A protracted global economic slowdown may adversely affect our business and results of operations. Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. Risks Related to Our Business If we do not develop and introduce new products and technologies in a timely manner in response to changing market conditions or customer requirements, our business could be seriously harmed. Our business would be harmed if we do not receive sufficient parts to meet our production requirements in a timely and cost-effective manner. Disruption of our manufacturing facilities due to earthquake, flood, other natural catastrophic events or terrorism could result in cancellation of orders or loss of customers and could seriously harm our business. We outsource a number of services to third-party service providers, which decreases our control over the performance of these functions. Disruptions or delays at our third-party service providers could adversely impact our operations. Our success is dependent in part on our technology and other proprietary rights. If we are unable to maintain our lead or protect our proprietary technology, we may lose valuable assets and market share. We might be involved in intellectual property disputes or other intellectual property infringement claims that may be costly to resolve, prevent us from selling or using the challenged technology and seriously harm our operating results and financial condition. We depend on key personnel to manage our business effectively, and if we are unable to attract, retain and motivate our key employees, our sales and product development could be harmed. Acquisitions are an important element of our strategy but, because of the uncertainties involved, we may not find suitable acquisition candidates and we may not be able to successfully integrate and manage acquired businesses. Compliance with federal securities laws, rules and regulations, as well as NASDAQ requirements, is becoming increasingly complex, and the significant attention and expense we must devote to those areas may have an adverse impact on our business. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war. If international political instability continues or increases, our business and results of operation could be harmed. We self insure certain risks including earthquake risk. If one or more of the uninsured events occurs, we could suffer major financial loss. A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect reporting of transactions completed before the change is effective. A change in the effective tax rate can have a significant adverse impact on our business. We are exposed to various risks related to the regulatory environments where we perform our operations and conduct our business. We are exposed to foreign currency exchange rate fluctuations; although we hedge certain currency risks, we may still be adversely affected by changes in foreign currency exchange rates or declining economic conditions in these countries. There are risks associated with our outstanding indebtedness. We are exposed to fluctuations in the market values of our portfolio investments and in interest rates; impairment of our investments could harm our earnings. We rely upon certain critical information systems for our daily business operation. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operation. We may experience difficulties with our new customer relationship management ( CRM ) system or existing enterprise resource planning ( ERP ) system and other IT systems. System failure or malfunctioning may result in a disruption of operations or the inability to process transactions, and this could adversely affect our financial results Risks Related to the Restatement of Our Prior Financial Results Our efforts to correct past material weaknesses in our internal control over financial reporting may not have been sufficient, and we may discover additional material weaknesses in our internal controls. The Special Committee investigation of our historical stock option practices and the resulting restatements have been time consuming and expensive, and have had a material adverse effect on us. The ongoing government inquiry relating to our historical stock option practices, as well as any other inquiries that may be started by other governmental or regulatory agencies, may be time consuming and expensive and may have a material adverse effect on our financial condition, results of operations and cash flow. We have been named as a party to a number of shareholder derivative and class action lawsuits relating to our historical stock option practices, and we may be named in additional lawsuits in the future. This litigation could become time consuming and expensive and could result in the payment of significant judgments and settlements, which could have a material adverse effect on our financial condition and results of operations. We are subject to the risks of additional government actions, shareholder lawsuits and other legal proceedings related to our historical stock option practices, the resulting restatements, and the remedial measures we have taken. Failure to maintain effective internal controls may cause us to delay filing our periodic reports with the SEC, affect our NASDAQ listing, and adversely affect our stock price.

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319201--8/7/2008--KLA_TENCOR_CORP