Mario Ruscev – CEO Jean Vernet – SVP, CFO Michael Magaro – IR

Patrick Ho – Stifel Nicolaus Mark Delaney – Goldman Sachs Gary Hsueh – Oppenheimer & Co. Timothy Arcuri – Citigroup

Thank you and hello everyone. Our fourth quarter results concluded one of the most challenging periods of the company’s history, although the past two years we have seen what we call a triple whammy of events.

Certain internal manufacturing challenges, overcapacity in DRAM that turned into broader economic downturn within the semiconductor industry and a global financial crisis. During this period, we have seen specific regions that were historically significant memory producers go into hibernation.

Billion dollar chip companies filed for bankruptcy on an industry consolidation, resulting in a meaningfully different and smaller customer landscape than in the past many years. The industry has had to adjust accordingly.

This adjustment for FormFactor has manifested itself in many ways from restructuring our operating model to our regionalizing manufacturing capability, to increase investments in new products. We will continue to focus on strengthening FormFactor into a more diversified global technology leader in test efficiency.

Our efforts in manufacturing and product development have resulted in a more flexible cost structure with an eye on building our regional presence. It has been and will continue to be an important initiative for the company due to a positive impact it has on our customer relationship as we are more able to meet local market requirement.

Currently we are incurring some duplicative cost in California and Singapore as we get our facilities up and running without disrupting any potential volume opportunity. Therefore, short term, our costs have been higher than we would like, but we will begin to see the long-term impact of the back-end manufacturing move to Asia by our fourth quarter 2010.

While our current set of products continued to be recognized as best-in-class, it is our investment in new platforms on technologies that are gaining momentum into the marketplace. Our recently announced new full-wafer contact product architecture that was released in both DRAM called SmartMatrix and in flash called TouchMatrix are being well received by customer as the probe cards moved through qualification into volume products and use.

Both our SmartMatrix products for the DRAM market and our TouchMatrix product serving the flash market are in evaluation or are being adopted by all top tier manufacturers. This breakthrough new product technology extends customer technology roadmap, lower cost of test, improves reliability, decreases lead time and provides significant time-to-market advantage to our customers.

Continuing with technology, our proprietary advance theory for tester results enhancement solution was introduced to market in volume in early 2009, and we are from now shipped over 125 wafer probe cards incorporating this technology. This enabling technology allows customers to extend their use of already invested aging [ph] capital equipment well beyond the time it has being originally designed for resulting in as much as 30% cost reduction in test.

As test capacity becomes tight, the interest level in this capability increases. Our investments in technology are not being limited to only the memory market.

We have also invested in our SoC products. We have had significant advancement that will expand our overall industry footprint and further enable our SoC market growth.

The key advancement is the introduction of new breakthrough multi-tier spring technology that's targeted to the smaller pitch part layouts to the high-end of that market. We believe this new spring technology will enhance our competitiveness and expand our addressable market opportunities.

As we exited 2009, we believe we can look back and see a lot of progress towards positioning the company to gain share and extend customer roadmaps as a recovery against (inaudible). For example, during our fourth quarter, we improved our original mix by increasing business in Taiwan and Korea and gained share through the memory sector.

Unfortunately at the same time, we have experienced weakness in Japan. So progress has been made but there is more to follow.

As we move into 2010, we see a number of positive drivers for business. The DRAM design activity in our fourth quarter was at the highest level since early 2008, up 40% from our third quarter.

We are seeing a significant shift toward full-wafer contact probe cards, driven by Korea and Taiwan. The DDR3 cycle with a transition to 5X and 4X nanometers nodes, as well as a transition from 1-Gig to 2-Gig devices.

Industry experts expect a strong bid growth of 45% to 50%. And a strong memory price results in positive cash flow in the memory space which would lead to continued investment in strength and efficiency.

In closing, we are delivering breakthrough in our product offering and expanding our share and customer reach. Our recently launched new architecture products are critical to our ability to meet reduced lead times and enable the company to expand into markets it has not been able to fully address in the past like MEM and SoC.

Also the timing of volume ramps for our customers is still uncertain. We remain confident that we will return to strong growth in 2010 and our investment over the past few years will bear fruits.

With that, let me turn the call over to Jean for more details on the financials.

Thank you, Mario. I will begin with the summary of our fourth quarter results.

Total revenue was $33 million, down 25% from our third quarter and down17% year over year. As we indicated in our pre-announcement, the weakness was due primarily to a delay in the timing of customer technology transitions, to lead cycles and volume plans.

Fourth quarter revenue for DRAM was $23.6 million, down 35% from our third quarter and down 24% versus the fourth quarter a year ago. The weakness in DRAM was due to a drop in DDR3 activity as customers prepare to the next tooling cycle of 5X and 4X-nanometer in volume.

The results of this (inaudible) in DDR3 activity was a slight increase in DDR2 revenue as customers opportunistically consumed more DDR2 to maximize cash flow. The Flash business grew sequentially in the fourth quarter.

Flash revenues for the quarter were $2.7 million, up 29% sequentially, and resulting in growth of 22% from the fourth quarter a year ago. The improvement in revenue was due to an increase in NOR demand.

Revenue in the SoC business was up 28% sequentially to $6.7 million due to improved traction in the wire-bond market. The SoC business rose 2% when compared to the fourth quarter a year ago.

For the fourth quarter, GAAP gross margin was minus 8.5%. On a non-GAAP basis, gross margin was minus 5.9%.

The gross margin was impacted negatively compared to the last quarter due to the lower-than-expected revenue level, the product mix and an increase in new first article design request that carry higher initial material cost. As these new designs lead to volume orders, we will see a positive impact on the gross margin line.

Moving to operating expenses; on a GAAP basis, operating expenses totaled $33 million. These GAAP operating expenses were higher by approximately $2 million from the third quarter.

Higher GAAP operating expenses were due to $1.9 million increase in R&D spending; the increase was primarily due to a further investment in new product of approximately $600,000 and an increase of $800,000 related to employees who joined FormFactor after the asset purchase of Electroglas during the fourth quarter. On a non-GAAP basis, operating expenses were $28.7 million, up approximately $1 million from the third quarter and in line with our plan.

Our tax rate was 19.5% for the fourth quarter, resulting in a benefit of $6.8 million to net income. This tax benefit was primarily related to a recent tax law change allowing for longer carry back period.

To reiterate what we said from last quarter, we expect the tax rate to remain near 0% until we prove the sustainability of a profitable quarterly trend. Therefore, the tax rate is likely to stay at or near 0% throughout 2010.

During our fourth quarter, we had solid cash management and strong cash collections, which resulted in an improved DSO of 103 days versus 116 days last quarter and lower-than-expected cash usage. Total cash investments comprised of cash and short-term investments ended the quarter at $449.2 million, approximately $13.4 million lower than the previous quarter.

As we turn now to the outlook for the first quarter and fiscal 2010, and as we indicated in our preliminary revenue results, we expect our revenue for the first quarter to be approximately $40 million plus or minus 10%. We are still highly depending on timing of specific customer engagements, which could move revenues from one quarter to another.

For our fiscal-year 2010, we expect revenue growth of 60% plus or minus 10%. In the short term, key revenue drivers have more to do with the timing of specific customer ramps and no transitions than to general seasonality.

In the short term, we expect gross margin to remain under pressure for couple of reasons. First, our cost of goods sold will be impacted by our investment related to our Asia manufacturing operation resulting in approximately $3.5 million of additional cost during our first quarter, with a similar or higher level of cost expected in the second and somehow third quarter.

Second, we are transitioning from a legacy product to our new product architecture in 2010. The improvement of our gross margin will be driven by the timing of customer qualification of our new products and corresponding volume ramp.

We expect to achieve the full benefits of the transition of our new product architecture and the ramp up of our backend manufacturing exiting our third quarter. Non-GAAP spending for R&D and SG&A in the first quarter will be slightly up compared to the fourth quarter.

The increase in operating expense from the fourth quarter is due to a seasonal increase in employee fringe benefit. For fiscal 2010, non-GAAP operating expenses will remain in a quarterly range between $28 million and $32 million as we start to normalize as a company and bring back some employee related benefits, such as 401(k) match and bonuses that were temporarily halted due to the economic climate.

While the environment remains uncertain and is full of varying outcomes over the near term, we believe we will attain profitability in the second half of the year with a non-GAAP P&L breakeven at $60 million run rate exiting the third quarter. With that, let’s open the call for Q&A.

Cynthia?

Thanks a lot. As your new products ramp up through the year, can you give us an idea of what your future business model on a high-level on a normalized basis will be?

What type of gross margins and what type of operating margins are you looking for as these new products begin to ramp?

So, what I can give you as data point is, and this incorporates the new products, at the end of the third quarter we expect to be at revenue breakeven of 60, which is approximately a gross margin of low 40%, between 40% and 45%. And then thereon – thereafter have a drop through incremental margin of at least 60% for every dollar of revenue.

Now we said in earlier calls our OpEx is intended to stay flat, if not going slightly down in a course of the year. So that drop through into the gross margin, we expect to go all the way down to operating income as well.

Okay, great. Now, with regards to some of the timing issues and the delays that your customers are experiencing in terms of transitioning from one node to the next, did they not backfill I guess with some of your legacy products in the interim because the DRAM market obviously picked up.

I guess the disconnect I still have is how come they didn’t backfill some of your older legacy products as they were transitioning to the next technology node.

Well, as they go to a new design, if they have any delay in a new design, they continue to run older design. Our probe cards are pretty robust and solid with the lifetime, but many times exceed in fact the normal cycles of it.

So we have seen during the last couple of quarters in fact – and it happens also even when people decide to just opportunistically prolongate to DDR2 because the price was so good. We have seen them just using a probe card that they already had in inventory if it was not the new design and just run on for quite a while.

Okay. Finally question from me is, Jean, what do you expect in terms of cash burn in the first quarter and maybe if you have any color on a going forward basis.

In the first quarter we are working at getting IRS refunds like we did last year. Taking that into account, we should be in the single-digit cash consumption in the first quarter.

After that our plan for the year is a sizable growth. And we will generate cash certainly in the second half.

Some of that may depend on the stiffness of the growth and the need of working capital financing. But I would say the first half is going to be depending on how steep that curve is going to be.

Okay, great. Thank you very much.

Thanks.

Hi, this is Mark Delaney calling for Jim. Just first question, when you think about your FSP [ph] business in context of your 60% growth for next year, do you think the FSP business grows above that or below, or any color you can provide there?

Hi, this is Mark Delaney calling for Jim. Just first question, when you think about your FSP [ph] business in context of your 60% growth for next year, do you think the FSP business grows above that or below, or any color you can provide there?

Okay, great. Thank you.

And just one follow-up, when you think about the midpoint of your guidance of about 60% in 2010, obviously a lot of fluidity, but what type of capacity expansion do you think you need to see if any to get to the 60% growth?

Okay, great. Thank you.

And just one follow-up, when you think about the midpoint of your guidance of about 60% in 2010, obviously a lot of fluidity, but what type of capacity expansion do you think you need to see if any to get to the 60% growth?

We can be at this level basically. We are in a transition period, but basically with the capacity that we have into the plan we can take care of that.

Okay, great. Thank you.

Okay, great. Thank you.

Yes, hi, thanks. I just wanted to get a little bit more color and hopefully gets some quantification on the mix of business from a customer standpoint in going from Q3, Q4, just wondering if you could disclose or talk about greater than 10% customers.

I know throughout the year in 2009 it’s consistently been Elpida from your filings and around 40% or 50%. So I was wondering to what extend did they fall down in the December quarter and if there are other greater than 10% customers making them up in Q4.

Yes, in Q3, we have three customers above 10% and a couple more very close to it. So overall it’s five.

In terms of mix, I would more refer to a product mix and this is between standard configuration that addresses DDR2 or DDR market. This is commodity versus specialty DRAM.

And certainly when customers pause into their technology shrinks we have more of those standard products and standard products are more subject to competitive pressure. We see that’s being resolved as we go into the year and rollout our new technology, which will allow us to better compete on those more standard products.

Okay. If I could just follow up my first question, just to dig into this a little bit more.

You said five customers greater than 10% or close to it. Of the other four, how many are existing customers, how many are customers where you are really planting the seed for future market share gains?

Well, we always said that we planned – we do plan to grow much more in Korea. So obviously we are continuing our effort for Korea.

And we had also a very strong push because we believe that this will be a big player in 2010 in Taiwan when we have seeing very good results.

Okay, because I haven’t seen a Korean customer popup as a greater than 10% customer for some time, so that’s encouraging. Let me just ask another question here in terms of drivers or levers getting to the $60 million breakeven at the low 40% to 45% range, Jean, can you help me out with some of the levers because in order to get there I guess coming from the December quarter, I am going to have a few quarters here where I have to model incremental gross margin drop through of close to 100%.

Can you give me a physical basis of reality in terms of how some of those 100% drop through quarters occur?

There are essentially four elements you have to take into consideration. One is the effect we just talked about, the mix between standard products and more advanced products.

And these dynamics will be driven by the rollout of our new architecture. The second effect is the speed of adoption of the new technology from our leading-edge customers.

And thirdly, we have experienced even more swing in Q4 and will see some of that in Q1, a big uptick, a big surge in new design request. And every time we have a new design this comes with a very few cards attached to it because it’s by definition it’s the first article.

So some of that is, we believe, temporary as we go further in the year will be replaced by volume orders. And then finally we have an effect of our transition to Asia as well as there are few other initiatives we discussed last quarter which for the first half is going to lower the cost as I said to the tune of $3.5 million per quarter.

So as you factor all those elements and we go out of this transition this will lead us to the new economics.

Okay, great; perfect. Thank you.

Hi, couple of things. First of all, Jean, just on the margin commentary, it sounds like there is an extra $3 million to $3.5 million to COGS that’s going to hit in Q1 and Q2, so can I roughly take the gross margin in September when you were doing this same revenue range that you are going to do in March, can I roughly take that COGS and just add $3 million to it and that’s a general range that you will be in March?

Remember, what we said also. I am sorry.

It is Mario. What we also see now in Q4 and we will still see in Q1 is we have a lot of first order – first article orders, which usually comes with a cost, design cost etcetera which we don’t see in volume orders.

And we had less of that in September, so that’s probably one factor that you have to take into account also.

Okay. Well, then I am just playing with numbers here.

So –

And again, the large factor is when we ship a probe card sometime you ship more to more advanced application and sometime you ship more to what I like to call standard application when the pricing is not exactly the same and margin not the same. So these are two factors which will still be there in Q1 that you also should take into consideration.

Okay. So –

And maybe Jean you want to add something on that?

No I think –

Okay –

From September to now, if you just do that you might miss a couple of factors.

Okay. So then gross margin – your margin is going to be about zero, give or take?

For Q1, I would say the midpoint should be about zero. Yes.

Yes, okay. All right.

Second thing, can you give us some idea of what it would take for you to cut breakeven? We talked about breakeven many times and you are still losing lots of money, and I am just wondering can you maybe put a stake in the ground in terms of what it will take for you to cut breakeven.

So, i.e. if in Q2 you don’t see the company being profitable in Q3, is that what’s going to cause you to cut breakeven?

What is the decision tree?

You have two main factors that lead us to breakeven basically. First we think we try internal, which means that you know we bring in a new technology, we bring up new manufacturing sites.

And basically if we carry on these two practically this is what it will be. The other factor is all of our customers have put together plans.

You see the need to come, you see the transition to come and if this also goes according to plan, there's nothing crazily optimistic. It is just what you can see everywhere.

If these two things happen, then obviously – then basically we should – we will reach profitability in Q3.

I would like to add, Tim, that the combination of what we see from our customer is the macro trend and what we see in our design pipeline give us a lot of very tangible signs that the increase is coming. So the high level of cost that we have currently in the system not only in OpEx, but also in COGS is related to ramping up this technology and to work at lowering in a sustainable manner, our fixed costs.

So, Tim, to give you more ground on that, if I look at the technology introduction, by today we have shipped probably around 50 of these probe cards. We are pretty happy with the results.

So this is going pretty according to plan and pretty well in fact. And it is a very aggressive ramp-up, but up to now it has been going very well.

Our move on manufacturing is within our plans. We already moved all our offices to new building in Singapore where clean room is being manufactured and will soon be done.

So this is according, we start moving equipment. So this is also going according to plan.

When you look at the amount of design that we receive and one another factor that is impacting our gross margin, also the amount of first article that we are asked. For now – like, I always say in the past few quarters I did teach us to be careful about it, but for now the business seems to be and the activity seems to be coming also from what we expected; also we don’t really have interest (inaudible) quite a few times at the exact timing.

Okay, I guess just on that point time, can you give us an idea – and I believe what you are saying – but can you give us some credible evidence, maybe you can give us order numbers, some sort of design numbers, something that we can hang our hat on that, in fact, this long waited revenue ramp that we have been talking about is finally here. Is there some number that you can give us?

Just to give you an idea that's what I said in the call, our design activity in Q4 has increased by 40% from Q3 and our design activity up to date in Q1 has again a very large increase. So if you just take this, which is always until something dramatic happens to the plan of our customer, this is still the first – there is always the first time activity.

I am just thinking back to June and it was the same story in June. So I am just looking for some bookings numbers or something like that.

But last thing for me is can you give us some split on DDR2, DDR3 because I am still looking back on my notes, and it looks like you were revenuing about $10 million back in June in DDR3. So the markets moved quite a bit since then, obviously you had this customer issue this quarter, but I am wondering what your DDR3 revenue is now.

If you look at – I will let Jean exactly for the numbers of revenue in Q1, but all I can say is for the actual booking that we have in both Q4, in fact if you look at the booking that we have in Q1 and also start the booking that you have for Q2 of 2010, I would say the vast majority is DDR3, it was probably about 80%.

So I don’t remember were you got the $10 million from, Tim, but what I can say is that of our commodity DRAM revenue volume in Q3 more than 80% was DDR3 and in Q4 it was 50:50. So we clearly see a pause; however, this is not reflected in the booking.

In the booking, we still see in Q4 a large amount of DDR3 to the same tune of 80% plus of the total, actually more than 80% of the total bookings. So we see this arbitrage between DDR2 and DDR3 happening in Q4 as just what it is – an arbitrage.

And we see the bookings are going up. The designs are going up, but at an extremely steep slope.

And this validates what we know and we see externally from the gates that our customers are facing in terms of tooling cycles.

Right, okay. Thanks.

Now Tim, just to close, something that you had underlining the question earlier is we do see the fundamental of the business for 2010 still here now. And I want to tell that – to illustrate it by some delay is an understatement, but I mean we can all fill it, But it is also certain that if within the next few months we have a tendency to believe that these parameters are not there anymore, we will certainly then revise completely our plan.

Okay, thanks.

Great. Thank you.

We will now conclude the call. Thank you, everyone, for joining us and we look forward to speaking to you again soon.