QUESTIONS AND ANSWERS REGARDING PROXY SOLICITATION AND VOTING

The Board of Directors of KLA-Tencor Corporation (“KLA-Tencor,” the “Company” or “we”) is providing these proxy materials to you in connection with KLA-Tencor’s Annual Meeting of Stockholders to be held on Thursday, November 15, 2007 at 1:00 P.M. local time. As a stockholder of record, you are invited to attend the Annual Meeting, which will be held in Multipurpose Rooms East and West in Building Three of the Company’s Milpitas facility, located at Three Technology Drive, Milpitas, California 95035. The purposes of the Annual Meeting are set forth in the accompanying Notice of Annual Meeting of Stockholders and this Proxy Statement.

These proxy solicitation materials, together with the Company’s Annual Report for fiscal year 2007, were first mailed on or about October 11, 2007 to all stockholders entitled to vote at the Annual Meeting. KLA-Tencor’s principal executive offices are located at One Technology Drive, Milpitas, California 95035, and our telephone number is (408) 875-3000.

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

You may vote if our records showed that you owned shares of KLA-Tencor Common Stock as of October 2, 2007 (the “Record Date”). At the close of business on that date, we had a total of 182,147,118 shares of Common Stock issued and outstanding, which were held of record by approximately 752 stockholders. As of the Record Date, we had no shares of Preferred Stock outstanding. You are entitled to one vote for each share that you own.

The Annual Meeting will be held if a majority of the outstanding Common Stock entitled to vote is represented at the Annual Meeting. If you have returned valid proxy instructions or attend the Annual Meeting in person, your Common Stock will be counted for the purpose of determining whether there is a quorum, even if you wish to abstain from voting on some or all matters at the Annual Meeting.

In addition to such other business as may properly come before the Annual Meeting or any adjournment thereof, the following three proposals will be presented at the Annual Meeting:

1.      Election of three Class III Directors to each serve for a three-year term;

2.      Approval of an amendment to the Company’s 2004 Equity Incentive Plan (the “2004 Equity Plan”) to (a) increase the number of shares reserved for issuance under the 2004 Equity Plan by 8,500,000 shares, (b) expand and reapprove the list of corporate performance goals to which the vesting of certain awards made under the plan may be tied in order to qualify those awards as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code of 1986, and (c) effect a series of technical revisions to the plan in order to address recent tax and accounting developments affecting the administration of the plan; and

3.      Ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending June 30, 2008.

If your shares are registered directly in your name with our transfer agent, you are considered, with respect to those shares, the stockholder of record, and these proxy materials are being sent directly to you. You may vote in accordance with the instructions described below. If you hold your shares in your own name as a holder of record, you may instruct the proxy holders how to vote your shares in the following ways:

1.      By Telephone: Use the toll-free telephone number provided on the proxy card prior to 11:59 P.M. EST on November 14, 2007 (specific instructions for using the telephone voting system are on the proxy card);

2.      By Internet: Use the Internet voting site listed on the proxy card prior to 11:59 P.M. EST on November 14, 2007 (specific instructions for using the Internet voting system are on the proxy card);

3.      By Mail: Complete, sign, date and mail the proxy card in the postage paid envelope that we have provided, for delivery to the Company prior to 11:59 P.M. EST on November 14, 2007 (specific instructions for mailing are on the proxy card); or

4.      In Person: Attend the Annual Meeting and vote your shares in person.

Whichever of these methods you select to transmit your instructions, the proxy holders will vote your shares in accordance with those instructions.

If you vote by mail, telephone or Internet without giving specific voting instructions, your shares will be voted FOR Proposal One (the election of the nominees listed herein for the Board of Directors), FOR Proposal Two (the approval of an increase to the number of shares reserved under the Company’s 2004 Equity Incentive Plan), and FOR Proposal Three (the ratification of our independent registered public accounting firm). When proxies are properly dated, executed and returned (whether by returned proxy card, telephone or Internet), the shares represented by such proxies will be voted at the Annual Meeting in accordance with the instructions of the stockholder. However, if no specific instructions are given, the shares will be voted in accordance with the recommendations of our Board of Directors and as the proxy holders may determine in their discretion with respect to any other matters that properly come before the meeting.

You may change your vote at any time prior to the vote at the Annual Meeting. To change your proxy instructions if you are a stockholder of record, you must:

•     Advise our General Counsel in writing at our principal executive office, before the proxy holders vote your shares, that you wish to revoke your proxy instructions; or

•     Deliver proxy instructions dated after your earlier proxy instructions as follows:

a.      By Phone: Use the toll-free telephone number provided on the proxy card to vote again prior to 11:59 P.M. EST on November 14, 2007 (specific instructions for using the telephone voting system are on the proxy card);

b.      By Internet: Use the Internet voting site listed on the proxy card to vote again prior to 11:59 P.M. EST on November 14, 2007 (specific instructions for using the Internet voting system are on the proxy card);

c.      By Mail: Complete, sign and date another proxy card bearing a later date and deliver such proxy card prior to 11:59 P.M. EST on November 14, 2007 (specific instructions for mailing are on the proxy card); or

d.      In Person: Attend the Annual Meeting and vote your shares in person.

Shares that are voted “FOR,” “AGAINST,” “WITHHELD” or “ABSTAIN” are treated as being present for purposes of determining the presence of a quorum and are also treated as shares entitled to vote at the Annual Meeting (“Votes Cast”).

Since abstentions will be counted for purposes of determining both (i) the presence or absence of a quorum for the transaction of business and (ii) the total number of Votes Cast with respect to a proposal (other than the election of Directors), abstentions will have the same effect as a vote against the proposal (other than the election of Directors).

Shares that are subject to a broker non-vote are counted for purposes of determining whether a quorum exists but not for purposes of determining whether a proposal has passed.

The Board of Directors recommends that stockholders vote as follows:

1.      “FOR” the election of the three nominated Class III Directors to the Board of Directors: Edward W. Barnholt, Stephen P. Kaufman and Richard P. Wallace, the Company’s Chief Executive Officer;

2.      “FOR” the approval of an amendment to the 2004 Equity Plan to (a) increase the number of shares reserved for issuance under the 2004 Equity Plan by 8,500,000 shares, (b) expand and reapprove the list of corporate performance goals to which the vesting of certain awards made under the plan may be tied in order to qualify those awards as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code of 1986, and (c) effect a series of technical revisions to the plan in order to address recent tax and accounting developments affecting the administration of the plan; and

3.      “FOR” ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending June 30, 2007.

As a result of our discovery that we had retroactively priced stock options (primarily from July 1, 1997 to June 30, 2002) and had not accounted for them correctly, we restated our historical financial statements to correct our past accounting for retroactively priced stock options. Due to the restatements, the filing of our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 was delayed until January 29, 2007. As a result, because we could not schedule our annual meeting until that filing was completed and available for mailing to our stockholders, we had to delay the annual meeting that would typically have been held in November 2006 until March 29, 2007.

The Annual Meeting that is the subject of this Proxy Statement is the Company’s regularly scheduled annual meeting for the fiscal year ended June 30, 2007.

The stockholder’s notice must set forth, as to each proposed matter, the following:

1.      A brief description of the proposed matter and reasons for conducting such business at the meeting;

2.      Name and address of the stockholder, as they appear on KLA-Tencor’s books;

3.      The class and number of shares of KLA-Tencor that are beneficially owned by the stockholder;

4.      Any material interest of the stockholder in such business; and

5.      Any other information that is required to be provided by such stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

Stockholders may present proposals for action at a future meeting only if they comply with the requirements of the proxy rules established by the SEC and the provisions of our bylaws. We must receive stockholder proposals that are intended to be presented by such stockholders at our next Annual Meeting of Stockholders (related to our fiscal year ending June 30, 2008) no later than June 13, 2008 to be considered for inclusion in the Proxy Statement and form of Proxy relating to that meeting.

Stockholder proposals that are not intended to be included in our proxy materials for such meeting, but that are to be presented by the stockholder from the floor are subject to the advance notice provisions set forth above under “Can I present other business to be transacted at the Annual Meeting?” and other requirements set forth in the proxy rules established by the SEC and the provisions of our bylaws.

PROPOSAL ONE:

ELECTION OF DIRECTORS

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 III 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 four incumbent Class I Directors are Robert M. Calderoni, John T. Dickson, Kevin J. Kennedy and Lida Urbanek. The Class I Directors will serve until the annual meeting of stockholders to be held in 2008 or until their respective successors are duly elected and qualified.

The three incumbent Class II Directors are H. Raymond Bingham, Robert T. Bond 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. They are up for re-election at the Annual Meeting.

The term of the three current Class III Directors will expire on the date of the Annual Meeting. The three Class III 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 III 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 III Directors by the stockholders are:

•     Edward W. Barnholt;

•     Stephen P. Kaufman; and

•     Richard P. Wallace.

If elected, the nominees for Class III Directors will serve as Directors until the Company’s annual meeting of stockholders in 2010, 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.

INFORMATION ABOUT THE DIRECTORS AND THE NOMINEES

Principal Occupation of Board Members

During the Past Five Years

Nominees for Election as

Class III Directors

Principal Occupation of Board Members

During the Past Five Years

Nominees for Election as

Class III Directors

Principal Occupation of Board Members

During the Past Five Years

Principal Occupation of Board Members

During the Past Five Years

PROPOSAL TWO:

APPROVAL OF AN AMENDMENT TO THE 2004 EQUITY INCENTIVE PLAN

Our stockholders are being asked to approve an amendment to our 2004 Equity Incentive Plan (the “2004 Equity Plan”) that will (i) increase the maximum number of shares of our Common Stock authorized for issuance over the term of the plan by an additional 8,500,000 shares from 12,500,000 to 21,000,000 shares, (ii) expand and reapprove the list of corporate performance goals to which the vesting of certain awards made under the plan may be tied in order to qualify those awards as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and (iii) effect a series of technical revisions to the plan in order to address recent tax and accounting developments affecting the administration of the plan.

We rely significantly on equity incentives to attract and retain key employees and other personnel essential to our long-term growth and future success and believe that such incentives are necessary for us to remain competitive in the marketplace for executive talent and other key employees. The proposed share increase will assure that a sufficient reserve of Common Stock remains available under the 2004 Equity Plan to allow us to continue to provide equity incentives to our key personnel on a competitive level.

The expansion and reapproval of the performance goals under the plan will allow us to continue to award equity incentives with meaningful performance milestones that will qualify as performance-based compensation, under Section 162(m) of the Code. Awards which so qualify will not be subject to the $1 million per person limitation on the income tax deductibility of compensation paid to certain executive officers that would otherwise be imposed under Section 162(m) of the Code.

The 2004 Equity Plan was approved by our stockholders on October 18, 2004 and became effective on such date. The 2004 Equity Plan replaced our 1982 Stock Option Plan and 2000 Nonstatutory Stock Option Plan (collectively, the “Replaced Plans”) and supplemented our 1998 Outside Director Option Plan. The share reserve of the 2004 Equity Plan includes approximately 1,500,000 shares transferred to the plan upon the expiration or forfeiture of options that were previously outstanding under the Replaced Plans. Our Board of Directors has approved the amendment to the 2004 Equity Plan that is the subject of this Proposal Two, subject to the approval of the Company’s stockholders at the Annual Meeting.

As of September 30, 2007, options to purchase 16,888,399 shares of common stock were outstanding, in the aggregate, under all Company plans, with a weighted-average exercise price of $42.70 and a weighted-average remaining term of 5.29 years. Also, as of September 30, 2007, 3,542,750 shares of unvested restricted stock and stock units were outstanding, in the aggregate, under all Company plans. As of September 30, 2007, 1,643,959 shares remained available for grant under the 2004 Equity Plan, and 1,472,299 shares remained available for grant under the Company’s 1998 Outside Director Option Plan. If the proposed amendments are approved, the 2004 Equity Plan will have an estimated 10,143,959 shares remaining available for grant.

SUMMARY OF THE 2004 EQUITY INCENTIVE PLAN

Shares subject to any outstanding awards under the plan that expire or otherwise terminate before those shares are issued will be available for subsequent awards. Unvested shares issued under the plan that either are forfeited by the participants or repurchased by us (at not more than the original exercise or issue price paid per share) pursuant to our repurchase rights under the plan will be added back to the number of shares reserved for issuance under the plan and will accordingly be available for subsequent issuance.

Should the exercise price of an option or other stock purchase right under the plan be paid with shares of our Common Stock, then the authorized reserve under the plan will be reduced only by the net number of new shares issued under the award. Upon the exercise of any SAR granted under the plan, the share reserve will only be reduced by the net number of shares actually issued upon such exercise, and not by the gross number of shares as to which such SAR is exercised.

Should shares of Common Stock otherwise issuable under the plan be withheld by us in satisfaction of the withholding taxes incurred in connection with the issuance, exercise or settlement of an award under the plan, then the number of shares of Common Stock available for issuance under the plan will be reduced only by the net number of shares actually issued after such share withholding.

As of August 31, 2007, 3,689,799 shares of our Common Stock were subject to outstanding options under the 2004 Equity Plan, 3,581,216 shares were subject to outstanding RSU or performance share awards, 828,053 had been issued, and 10,035,959 shares remained available for future award under the 2004 Equity Plan, after taking into account the 8,500,000-share increase for which stockholder approval is sought as part of this Proposal.

At the Administrator’s discretion, one or more of the following performance goals may be utilized for purposes of such performance vesting: (i) total stockholder return; (ii) earnings or net income per share; (iii) net income or operating income; (iv) earnings before interest, taxes, depreciation, amortization and/or stock-based compensation costs, or operating income before depreciation and amortization; (v) sales or annual revenue targets; (vi) return on assets, equity or sales; (vii) cash flow, operating cash flow or cash position; (viii) market share; (ix) cost reduction goals; (x) budget comparisons; (xi) operating margin; (xii) implementation or completion of projects or processes strategic or critical to our business operations; (xiii) measures of customer satisfaction; (xiv) any combination of, or a specified increase in, any of the foregoing; (xv) economic value added; and (xvi) the formation of joint ventures, research and development collaborations, marketing or customer service collaborations, or the completion of other corporate transactions intended to enhance our revenue or profitability or expand our customer base. The performance goals set forth in item (iv) and in items (viii) through (xvi) may only be used for purposes of structuring performance-based awards under Section 162(m) of the Code if this Proposal Two is approved by the stockholders at the Annual Meeting.

Each applicable performance goal may include a minimum threshold level of performance below which no award will be earned, levels of performance at which specified portions of an award will be earned and a maximum level of performance at which an award will be fully earned. Each applicable performance goal may be structured at the time of the award to provide for appropriate adjustment for one or more of the following items: (A) asset impairments or write-downs; (B) litigation judgments or claim settlements; (C) the effect of changes in tax laws, accounting principles or other laws or regulations affecting reported results; (D) accruals for reorganization and restructuring programs; (E) any extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of financial condition and results of operations appearing in our annual report to stockholders for the applicable year; (F) the operations of any business we acquire; (G) divestiture of one or more business operations or the assets thereof; and (H) any other adjustment consistent with the operation of the plan.

Shareholder approval of this proposal will also constitute approval of the foregoing list of performance goals for purposes of Section 162(m) of the Code. Accordingly, any deductions to which we would otherwise be entitled with respect to any restricted stock unit, performance share, performance unit or deferred stock unit awards with vesting tied to the attainment of one or more of those approved performance goals will not be subject to the $1.0 million limitation on the income tax deductibility of compensation paid per covered executive officer that would otherwise be imposed under Section 162(m).

No vesting requirements tied to the attainment of performance objectives may be waived or accelerated with respect to awards that are intended at the time of issuance to qualify as performance-based compensation under Code Section 162(m), except in the event of certain involuntary terminations or changes in control or ownership.

a.      Exercise Price. The exercise price may not be less than the fair market value of our Common Stock on the grant date of the option.

b.      Form of Consideration. The exercise price may be paid in cash or by check or with other shares of our Common Stock owned by the optionee or through a special sale and remittance procedure pursuant to which the optionee makes an immediate sale of the purchased shares and remits a portion of the sale proceeds to us in payment of the exercise price and any applicable withholding taxes.

c.      Exercise of the Option. Each stock option agreement will specify the term of the option and the date or dates when the option is to become exercisable. However, in no event will an option granted under the 2004 Equity Plan have a term in excess of 10 years.

d.      Termination of Employment. If an optionee’s employment terminates for any reason (other than death or permanent disability), all options held by such optionee under the 2004 Equity Plan will expire upon the earlier of (i) the expiration of the limited post-employment exercise period set forth in his or her option agreement or (ii) the expiration date of the option term. The optionee may, at any time before the applicable expiration date, exercise the option for all or any part of the shares for which that option was exercisable at the time of his or her termination of employment.

e.      Permanent Disability. If an optionee is unable to continue employment with us as a result of permanent and total disability (as defined in the Code), all options held by such optionee under the 2004 Equity Plan will expire upon the earlier of (i) 12 months after the termination date of the optionee’s employment or (ii) the expiration date of the option term. The optionee may, at any time before the applicable expiration date, exercise the option for all or any part of the shares for which that option was exercisable at the time of his or her termination of employment.

f.       Death. If an optionee dies while employed by us, his or her options will expire upon the earlier of (i) 12 months after the date of his or her death or (ii) the expiration date of the option term. The executor or other legal representative of the optionee may, at any time before the applicable expiration date, exercise the option for all or any part of the option shares.

g.      Extension. If at any time during the applicable post-employment exercise period, the exercise of an option or the sale of the underlying shares cannot be effected in compliance with applicable securities laws or regulations, then such exercise period shall be extended by the period of time for which such exercise or sale was precluded, but in no event beyond the expiration date of the maximum option term.

h.      ISO Limitation. If the aggregate fair market value of all shares of Common Stock for which an optionee’s incentive stock options first become exercisable during any calendar year exceeds $100,000, then the excess will be treated and taxed as nonstatutory options.

i.       Other Provisions. The stock option agreement may contain terms, provisions and conditions that are not inconsistent with the 2004 Equity Plan as determined by the Administrator.

The 2004 Equity Plan prohibits the reduction of the exercise price of an outstanding option or SAR, including a repricing by way of an exchange for another award under the plan, unless stockholder approval of the repricing is obtained.

We have not engaged in any repricing programs which have resulted in a reduction to the exercise price of outstanding options or SARs under the plan. However, during the 2007 fiscal year, we completed an investigation of our past equity award practices and concluded that certain stock options awarded under the 2004 Equity Plan were retroactively priced in that the exercise price of each such option was based on the fair market value of our Common Stock on a date earlier than the actual measurement date determined for that option for financial accounting purposes. As a result, the affected options were determined to have been granted with below-market exercise prices, which could potentially subject the portion of each such option that was not vested as of December 31, 2004 to adverse income taxation under Section 409A of the Code.

To provide our employees holding those options with an opportunity to avoid such adverse taxation, we commenced two tender offers, one on February 27, 2007 and another on May 16, 2007. The tender offers allowed those employees to tender options that were potentially subject to Section 409A for amendment or replacement. Following the completion of the offer, each tendered option was amended to increase the exercise price to the lower of (i) the closing selling price per share of our Common Stock on the revised measurement date determined for that option for financial accounting purposes or (ii) the closing selling price per share of our Common Stock on the amendment date. In addition, each employee whose tendered options were so amended is entitled to a cash bonus in January 2008 equal to the total increase to the exercise price in effect for his or her amended options.

If the adjusted exercise price for any tendered option (as determined in accordance with the above formula) would have been the same or lower than the current exercise price in effect for that option, then that option was not amended. Instead, that option was cancelled immediately following the close of the offer and replaced with a new option for the same number of shares and with the same exercise price per share, expiration date and vesting schedule as the cancelled option, but with a new grant date. Such cancellation and regrant was necessary to evidence the remedial action required under Section 409A for a tendered option for which the exercise price was not increased. No cash bonus will be paid with respect to any such cancelled and regranted options.

Pursuant to the February 27, 2007 tender offer, we amended options covering approximately 5,068,200 shares of our Common Stock to increase the exercise price of each such option to the lower of (i) the fair market value per share of our Common Stock on the revised measurement date for that option or (ii) $53.35, the closing selling price per share of our Common Stock on the March 28, 2007 amendment date. In addition, the participants whose options were so amended are now eligible for special cash bonuses in the aggregate amount of approximately $20,173,800. In addition, we canceled tendered options covering approximately 27,200 shares of our Common Stock because the adjusted exercise price would have been the same or lower than the exercise price in effect for those options prior to the amendment and granted a new option that is exactly the same in replacement.

Pursuant to the May 16, 2007 tender offer, we amended options covering approximately 283,900 shares of our Common Stock to increase the exercise price of each such option to the lower of (i) the fair market value per share of our Common Stock on the revised measurement date for that option or (ii) $56.12, the closing selling price per share of our Common Stock on the June 15, 2007 amendment date. In addition, the participants whose options were so amended are now eligible for special cash bonuses in the aggregate amount of approximately $361,596.

During the three-day period from December 26, 2006 to December 28, 2006, the exercise prices of certain options held by some individuals then serving as executive officers were increased to the fair market value per share of our Common Stock on the revised measurement date determined for each such option in order to avoid adverse tax consequences to such executive officers under Section 409A of the Code. Each such executive officer is entitled to receive a cash bonus from us in January 2008 equal to the total increase to the exercise price in effect for his amended options. The only current executive officer who participated in that program was Richard P. Wallace, our Chief Executive Officer, who had the exercise price for options to purchase 24,376 shares of our Common Stock increased by an aggregate amount of $368,618, and who will receive a cash bonus in the amount of that increase in January 2008.

OPTION TRANSACTIONS

The table below shows, as to each of the Named Executive Officers and the various other indicated individuals and groups, the number of shares of Common Stock subject to options granted under the 2004 Equity Plan during the period July 1, 2006 through August 31, 2007, together with the weighted average exercise price payable per share.

Name and Position

Richard P. Wallace

Chief Executive Officer

Jeffrey L. Hall

Senior Vice President & Chief Financial Officer

John H. Kispert

President & Chief Operating Officer

Jorge Luis Titinger

Senior Vice President, Global Operations

and Corporate Support Groups

Bin-ming Benjamin Tsai

Executive Vice President & Chief Technology Officer

All current executive officers as a group (5 persons)

Edward W. Barnholt

Chairman of the Board of Directors; Nominee for

re-election to the Board of Directors at the Annual

Meeting

Stephen P. Kaufman

Director; Nominee for re-election to the Board of

Directors at the Annual Meeting

All current directors (other than executive officers) as

a group (9 persons) (1)

All current employees, including current officers who

are not executive officers, as a group (143 persons)

(1)      All stock options granted to the non-employee members of the Company’s Board of Directors during this time were granted from the Company’s 1998 Outside Director Option Plan.

STOCK AWARDS

Name And Position

Richard P. Wallace

Chief Executive Officer

Jeffrey L. Hall

Senior Vice President & Chief Financial Officer

John H. Kispert

President & Chief Operating Officer

Jorge Luis Titinger

Senior Vice President, Global Operations and

Corporate Support Groups

Bin-ming Benjamin Tsai

Executive Vice President & Chief Technology Officer

All current executive officers as a group (5 persons)

Edward W. Barnholt

Chairman of the Board of Directors; Nominee for

re-election to the Board of Directors at the Annual

Meeting

Stephen P. Kaufman

Director; Nominee for re-election to the Board of

Directors at the Annual Meeting

All current directors (other than executive officers) as a group (9 persons)

All current employees, including current officers who are not executive officers, as a group (3,854 persons)

(1)      Includes (a) 62,500 shares that have been earned and are now only subject to service vesting requirements and (b) an additional 87,500 shares representing the maximum number of shares that may be earned if certain performance goals are attained by the Company for fiscal year 2008 and the named executive officer completes the additional service-vesting component applicable to such award.

(2)      Includes (a) 18,750 shares that have been earned and are now only subject to service vesting requirements and (b) an additional 18,750 shares representing the maximum number of shares that may be earned if certain performance goals are attained by the Company for fiscal year 2008 and the named executive officer completes the additional service-vesting component applicable to such award.

(3)      Includes (a) 25,000 shares that have been earned and are now only subject to service vesting requirements and (b) an additional 18,750 shares representing the maximum number of shares that may be earned if certain performance goals are attained by the Company for fiscal year 2008 and the named executive officer completes the additional service-vesting component applicable to such award.

(4)      Includes (a) 50,000 shares that have been granted as a new hire award that are only subject to service vesting requirements and (b) an additional 18,750 shares representing the maximum number of shares that may be earned if certain performance goals are attained by the Company for fiscal year 2008 and the named executive officer completes the additional service-vesting component applicable to such award.

FEDERAL TAX INFORMATION

Options granted under the 2004 Equity Plan may be either incentive stock options which satisfy the requirements of Section 422 of the Code or non-statutory options which are not intended to meet such requirements. The Federal income tax treatment for the two types of options differs as described below:

Incentive Stock Options. No taxable income is recognized by the optionee at the time of the option grant, and no taxable income is generally recognized at the time the option is exercised, although taxable income may arise at that time for alternative minimum tax purposes. The optionee will, however, recognize taxable income in the year in which the purchased shares are sold or otherwise made the subject of certain dispositions.

For Federal income tax purposes, dispositions are divided into two categories: (i) qualifying and (ii) disqualifying. The optionee will make a qualifying disposition of the purchased shares if the sale or other disposition of such shares is made more than two (2) years after the date the option for the shares involved in such sale or disposition was granted and more than one (1) year after the date the option was exercised for those shares. If the sale or disposition occurs before these two requirements are satisfied, then a disqualifying disposition will result.

Upon a qualifying disposition, the optionee will recognize long-term capital gain in an amount equal to the excess of (i) the amount realized upon the sale or other disposition of the purchased shares over (ii) the exercise price paid for the shares. If there is a disqualifying disposition of the shares, then the excess of (i) the fair market value of those shares on the exercise date over (ii) the exercise price paid for the shares will be taxable as ordinary income to the optionee. Any additional gain recognized upon the disposition will be taxable as a capital gain.

If the optionee makes a disqualifying disposition of the purchased shares, then we will be entitled to an income tax deduction, for the taxable year in which such disposition occurs, equal to the excess of (i) the fair market value of such shares on the option exercise date over (ii) the exercise price paid for the shares. In no other instance will we be allowed a deduction with respect to the optionee’s disposition of the purchased shares.

Non-Statutory Options. No taxable income is recognized by an optionee upon the grant of a non-statutory option. The optionee will in general recognize ordinary income, in the year in which the option is exercised, equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares, and we must collect the withholding taxes applicable to such income.

We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the optionee with respect to the exercised non-statutory option. The deduction will in general be allowed for the taxable year in which such ordinary income is recognized by the optionee.

A participant will generally be subject to employment taxes (e.g., Social Security and Medicare taxes) on the vesting date of a deferred stock award equal to the value of the vested shares received minus any amount paid for the shares. A participant will generally recognize taxable income upon receipt of the shares subject to the deferred stock award, and that taxable income will be equal in an amount to the value of the issued shares minus any amount paid for the shares. We must collect the withholding taxes applicable to such income.

We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the participant at the time the shares are issued. The deduction will in general be allowed for our taxable year in which such ordinary income is recognized by the participant.

No taxable income is recognized by the participant upon receipt of such an award. The participant will recognize ordinary income in the year in which the shares subject to the award are actually issued to him or her. The amount of that income will be equal to the fair market value of the shares on the date of issuance, and we must collect the withholding taxes applicable to such income.

We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the participant at the time the shares are issued. The deduction will in general be allowed for our taxable year in which such ordinary income is recognized by the participant.

Accordingly, the compensation deemed paid with respect to options granted with an exercise price equal to the fair market value of our Common Stock on the grant date will remain deductible by us without limitation under Section 162(m). However, during the 2007 fiscal year, we determined that certain stock option grants had been retroactively priced and, therefore, had exercise prices below the fair market value of the underlying shares on the respective grant dates of those options. Because such retroactively priced options may not qualify as performance-based compensation, the compensation deemed paid when those options are exercised may be subject to the Section 162(m) limitation.

Any compensation deemed paid by us in connection with shares issued pursuant to a restricted stock unit, performance share or performance unit award under the 2004 Equity Plan will be subject to the $1 million limitation on income tax deductibility except to the extent the vesting of that award is based on the attainment of one or more of the performance milestones specified above in the section entitled “Code Section 162(m) Performance Goals.”

ACCOUNTING TREATMENT

Pursuant to the accounting standards established by Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”), we are required to recognize all share-based payments, including grants of stock options, stock appreciation rights, restricted stock units and performance shares, in our financial statements effective July 1, 2005. Accordingly, stock options or stock appreciation rights that are granted to our employees and non-employee Board members are valued at fair value as of the grant date under an appropriate valuation model, and that value is charged as stock-based compensation expense in our GAAP earnings over the designated vesting period of the award. Similar option expensing is required for any unvested options or stock appreciation rights outstanding on July 1, 2005, with the grant date fair value of those unvested options or stock appreciation rights to be expensed in our GAAP earnings over the remaining vesting period. For shares issuable upon the vesting of restricted stock unit or performance share awards under the 2004 Equity Plan, we record as compensation expense over the vesting period the fair value of the underlying shares on the date of the award. If any other shares are unvested at the time of their direct issuance, the fair market value of those shares at that time is expensed in our GAAP earnings ratably over the vesting period. Such accounting treatment for restricted stock units, performance shares and other direct stock issuances is applicable whether vesting is tied to service periods or performance goals.

Stock options and stock appreciation rights granted to non-employee consultants result in an expense to our GAAP earnings based on the fair value of the grant measured on the vesting date of each installment of the underlying shares. Accordingly, such charge takes into account the appreciation in the fair value of the grant over the period between the grant date and the vesting date of each installment comprising that grant.

PROPOSAL THREE:
RATIFICATION OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING JUNE 30, 2008.

The Audit Committee has the sole authority to retain or dismiss our independent auditors. The Audit Committee has selected PricewaterhouseCoopers LLP, an independent registered public accounting firm, to audit the consolidated financial statements of the Company for its fiscal year ending June 30, 2008. Before making its determination, the Audit Committee carefully considered that firm’s qualifications as independent auditors.

The Board of Directors, following the Audit Committee’s determination, unanimously recommends that the stockholders vote for ratification of such appointment.

Although ratification by stockholders is not required by law, the Board of Directors has determined that it is desirable to request approval of this selection by the stockholders. If the stockholders do not ratify the appointment of PricewaterhouseCoopers LLP, the Audit Committee may reconsider its selection.

Services Rendered/Fees

Audit Fees (1)

Audit-Related Fees (2)

Total Audit and Audit-Related Fees

Tax Compliance

Tax Planning and Consulting

Total Tax Fees (3)

All Other Fees (4)

(1)    For professional services rendered for the audits of annual financial statements set forth in KLA-Tencor’s Annual Reports on Form 10-K for fiscal years 2007 and 2006, the review of quarterly financial statements included in KLA-Tencor’s Quarterly Reports on Form 10-Q for fiscal years 2007 and 2006, and fees for services related to statutory and regulatory filings or engagements. Fees for fiscal year 2007 include fees of $3.3 million for services rendered in connection with the restatement of previously filed financial statements to correct past accounting for stock options.

(2)    For fiscal years 2007 and 2006, assurance and related services related to accounting consultations and for services rendered in connection with acquisition due diligence.

(3)    For fiscal years 2007 and 2006, tax services for U.S. and foreign tax compliance, planning and consulting.

(4)    For fiscal years 2007 and 2006, fees for services other than those described above.

The Audit Committee has adopted a policy regarding non-audit services
provided by PricewaterhouseCoopers LLP, our independent registered public
accounting firm. First, the policy ensures the independence of our auditors by
expressly naming all services that the auditors may not perform and
reinforcing the principle of independence regardless of the type of service.
Second, certain non-audit services such as tax-related services and acquisition
advisory services are permitted but limited in proportion to the audit fees paid.
Third, the Chair of the Audit Committee pre-approves non-audit services not
specifically permitted under this policy and the Audit Committee reviews the
annual plan and any subsequent engagements. Thus, all of the services
described above under audit-related fees, tax fees and all other fees were
approved by the Audit Committee pursuant to its pre-approval policies and
procedures.

On a quarterly basis, management provides written updates to the Audit
Committee with regard to audit and non-audit services, the amount of audit
and non-audit service fees incurred to date, and the estimated cost to complete
such services.

OUR CORPORATE GOVERNANCE PRACTICES

ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES

The Board of Directors of the Company held a total of 11 meetings during the fiscal year ended June 30, 2007.

All Directors other than Mr. Wallace meet the definition of independence within the meaning of The Nasdaq Stock Market director independence standards. None of the Company’s Directors falls outside of the SEC’s 10% ownership safe harbor.

The Board of Directors has three standing committees: the Audit Committee; the Compensation Committee; and the Nominating and Governance Committee. The Board of Directors has determined that each of the members of each of the Committees has no material relationship with the Company (including any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment as a Director) and is independent within the meaning of The Nasdaq Stock Market director independence standards, including in the case of the Audit Committee, the heightened “independence” standard required for such Committee members.

Each Committee meets regularly and has a written charter approved by the Board of Directors, all of which were amended in September 2007 and are available via our website at http://ir.kla-tencor.com. In addition, at each regularly scheduled Board of Directors’ meeting, a member of each Committee reports on any significant matters addressed by the Committee. In 2002, after reviewing the Sarbanes-Oxley Act of 2002 and the proposed rules of the SEC and the Nasdaq Stock Market, the Board of Directors revised all of its Committee charters to implement voluntarily the proposed standards and to expand the responsibilities of each Committee as well as establish independence and self-assessment requirements. The Board of Directors and each Committee regularly reviews the Committee charters.

During the fiscal year ended June 30, 2007, all incumbent Directors attended at least 80% of the total number of meetings of the Board of Directors and each Director attended at least 80% of the aggregate of the total number of meetings held by all Committees of the Board on which each such Director served (during the periods that each such Director served).

Although we do not have a formal policy mandating attendance by members of the Board of Directors at our annual meetings of stockholders, we do have a formal policy encouraging their attendance at annual meetings of KLA-Tencor stockholders. All of the then-current members of the Board of Directors other than Messrs. Bingham and Wang attended our annual stockholder meeting held on March 29, 2007.

For more information regarding the responsibilities of our Board Committees, please refer to the various charters which can be found on our corporate governance website located at http://ir.kla-tencor.com.

During fiscal year 2007, the Audit Committee consisted of Messrs. Bingham, Bond, Calderoni (beginning March 29, 2007) and Kaufman, with Mr. Wang having observer status and Mr. Bingham serving as the Chairman of the Committee. On August 8, 2007, following the conclusion of fiscal year 2007, Mr. Wang was appointed as a member of the Audit Committee, replacing Mr. Bond. Effective November 15, 2007, subject to the election of such Directors at the Annual Meeting, Mr. Calderoni will be appointed as the Chairman of the Audit Committee, and the Committee will consist of Messrs. Bingham, Calderoni, Kaufman and Wang. The Board of Directors has determined that both Mr. Bingham and Mr. Calderoni are “audit committee financial experts” within the meaning of the rules and regulations promulgated by the SEC. The Audit Committee is responsible for appointing and overseeing the work of the Company’s independent auditors, approving the services performed by the Company’s independent auditors, and reviewing and evaluating the Company’s accounting principles and system of internal accounting controls. The Audit Committee held 13 meetings during the fiscal year ended June 30, 2007.

The Board of Directors has determined that each of the members of the Audit Committee: (1) meets the definition of independence within the meaning of Nasdaq’s director independence standards, (2) meets the definition of audit committee member independence within the meaning of Rule 10A-3 under the Securities Exchange Act of 1934 and (3) has no material relationship with the Company (including any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment as a Director).

Since the beginning of fiscal year 2007, through the date of this Proxy Statement, the Nominating and Governance Committee has consisted of Messrs. Barnholt, Bingham and Kaufman, with Mr. Barnholt serving as the Chairman of the Committee. The Nominating and Governance Committee is primarily responsible for identifying and evaluating the qualifications of all candidates for election to the Board of Directors, as well as reviewing corporate governance policies and procedures. The Nominating and Governance Committee held eight meetings during the fiscal year ended June 30, 2007.

It is the Nominating and Governance Committee’s policy to consider candidates for the Board of Directors recommended by, among other persons, the Company’s stockholders. Stockholders wishing to submit recommendations must notify the Company’s General Counsel in writing of their intent to do so and provide the Company with certain information set forth in Article II, Section 11 of our bylaws and all other information regarding nominees that is required to be provided pursuant to Regulation 14A of the Securities Exchange Act of 1934, or as otherwise requested by the Nominating and Governance Committee. In addition, stockholders may nominate candidates for the Board of Directors pursuant to the provisions of Article II, Section 11 of our bylaws and in conformance with the requirements of Regulation 14A of the Securities Exchange Act of 1934.

In considering candidates for Director nomination, including evaluating any recommendations from stockholders as set forth above, the Nominating and Governance Committee considers only candidates who have demonstrated executive experience, have experience in an applicable industry, or have significant high level experience in accounting, legal or a technical field applicable to the Company. In addition, in evaluating Director candidates, the Nominating and Governance Committee considers all factors it considers appropriate, which may include strength of character, mature judgment, career specialization, relevant technical skills, diversity of experience and the extent to which the candidate would fill a present need on the Board of Directors.

On August 3, 2006, the Board of Directors approved a recommendation by the Nominating and Governance Committee to adopt a new governance policy. Under this policy, anyone who is elected as a Director in any uncontested election by a plurality and not a majority of votes cast will promptly tender his or her resignation to the Board of Directors, subject to acceptance, after certification of the election results. The Nominating and Governance Committee will make a recommendation to the Board of Directors whether to accept or reject the resignation or take some other appropriate action, taking into account any stated reasons why stockholders withheld votes and any other factors which the Nominating and Governance Committee determines in its sole discretion are relevant to such decision. The Board of Directors will in its sole discretion act on the recommendation of the Nominating and Governance Committee within 90 days after the date of certification of the election results. The Director who tenders his or her resignation will not participate in the decisions of the Nominating and Governance Committee or the Board of Directors regarding his or her resignation.

DIRECTOR COMPENSATION

In accordance with the Company’s option grant program for Outside Directors, each Outside Director received a series of non-statutory stock options for fiscal year 2007 covering an aggregate of 5,000 shares of Common Stock (the “Annual Option Grant”). The Annual Option Grant for each Outside Director is typically provided through a 1,250-share option grant each quarter, approximately two business days following the Company’s earnings release for the prior fiscal quarter. However, two such quarterly grants for fiscal year 2007, which would have normally been made following the release of the Company’s earnings for the quarters ended September 30, 2006 and December 31, 2006, were not made at those times due to the delayed filing of certain of the Company’s SEC reports. Those two grants were consolidated into a single 2,500-share grant approved by the Board of Directors and issued on February 14, 2007, the date of the first regular Board meeting after such delayed reports were filed.

In addition, on the date of each Annual Meeting of Stockholders, the Chairman of the Audit Committee for the prior fiscal year receives an additional non-statutory stock option grant to purchase another 2,500 shares of Common Stock. Accordingly, Mr. Bingham received an additional option grant for 2,500 shares at the March 29, 2007 Annual Meeting of Stockholders for his services during fiscal year 2006, and he will receive another 2,500-share option grant at the time of the Annual Meeting with respect to his services during fiscal year 2007.

The options granted to the Outside Directors during fiscal year 2007 have a maximum term of ten years, subject to earlier termination following the cessation of Board service, and have an exercise price per share equal to the fair market value of the Common Stock on the grant date. Each option was fully vested and immediately exercisable upon grant.

The Board has determined that, effective November 15, 2007, Outside Directors will no longer receive stock options as a component of their compensation. Therefore, the Annual Option Grant program and the additional option grants for the Chairman of the Audit Committee will not be in effect for the remainder of fiscal year 2008.

In accordance with the Company’s prior practice, each Outside Director was awarded restricted stock units at the March 29, 2007 Annual Meeting of Stockholders covering shares of the Company’s Common Stock with an aggregate fair market value of $50,000 based on the market price of the Company’s Common Stock at the time of the award ($53.47 per share). Accordingly, each Outside Director at that time received a restricted stock unit award covering 935 shares of Common Stock. The restricted stock units awarded to the Outside Directors at the March 29, 2007 Annual Meeting of Stockholders were made with respect to their Board service for fiscal year 2007, but, though the annual awards are typically made earlier during the year of service, the fiscal year 2007 awards were delayed as a result of the delayed filing of certain of the Company’s SEC reports. The restricted stock units will vest upon completion of one year of Board service measured from the date of the award, but the shares of Common Stock underlying the vested units will not be delivered until the earlier of three years after the date of grant or the Outside Director’s cessation of Board service.

Beginning with the Annual Meeting, the Board has determined that, at each annual stockholders meeting, each Outside Director will be awarded restricted stock units covering shares of the Company’s Common Stock with an aggregate fair market value of $100,000 based on the market price of the Company’s Common Stock at the time of the award. The restricted stock units will vest upon completion of one year of Board service measured from the date of grant, and the underlying shares will be issued immediately at that time. This policy will be in effect with respect to the Annual Meeting.

If a new Outside Director joins the Board after the date of an annual stockholders meeting, his or her first restricted stock unit award will be granted promptly after he or she joins the Board and will be prorated to take into account the period of time from the last annual stockholders meeting to the date the new Outside Director joined the Board.

For fiscal year 2007, each Outside Director received an annual fee of $40,000, paid quarterly, and meeting fees of $2,500 for each Board meeting attended in person, $1,250 for each Board meeting attended by telephone conference call, $1,500 for each Committee meeting attended, and $750 for each Committee meeting attended by telephone conference call. Each Committee Chair received an additional annual retainer of $10,000.

For fiscal year 2008, effective November 15, 2007, the annual cash retainer fee paid to each Outside Director will be increased to $75,000, paid quarterly. Meeting fees will remain unchanged at $2,500 for each Board meeting attended in person, $1,250 for each Board meeting attended by telephone conference call, $1,500 for each Committee meeting attended, and $750 for each Committee meeting attended by telephone conference call. Effective November 15, 2007, the additional annual retainer paid to the Chairman of the Audit Committee will be increased to $30,000, the additional annual retainer paid to the Chairman of the Compensation Committee will be increased to $20,000, and the additional annual retainer paid to the Chairman of the Nominating and Governance Committee will remain unchanged at $10,000.

Outside Directors also are reimbursed for their reasonable expenses incurred in attending Board and Committee meetings.

Name

Edward W. Barnholt

H. Raymond Bingham

Robert T. Bond

Robert M. Calderoni

John T. Dickson

Stephen P. Kaufman

Kevin J. Kennedy

Lida Urbanek

David C. Wang

Jon D. Tompkins (5)

Name

Board

Meeting
Fees ($)

Non-Executive
Chairman of
the Board—

Additional
Retainer ($)

Committee
Chairperson—

Additional
Retainer ($)

Edward W. Barnholt

H. Raymond Bingham

Robert T. Bond

Robert M. Calderoni

John T. Dickson

Stephen P. Kaufman

Kevin J. Kennedy

Lida Urbanek

David C. Wang

Jon D. Tompkins

The amounts shown are the compensation costs recognized in our financial statements for the 2007 fiscal year related to RSUs awarded to each Outside Director in the 2007 and prior fiscal years, to the extent we recognized compensation cost in the 2007 fiscal year for such awards in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (revised

2004), Share-Based Payment, referred to in this Proxy Statement as FAS 123R (except that the compensation expense amounts set forth below have not been reduced by the Company’s estimated forfeiture rate). The FAS123R grant date fair value of each RSU award was calculated based on the fair market value of our Common Stock on the award date. The following table shows (a) for each RSU award for which compensation cost was recognized in our financial statements for the 2007 fiscal year, the RSU award date, the portion of the overall amount of the compensation cost in 2007 attributable to that RSU award, and the grant date fair value of that award (as calculated in accordance with FAS 123R) and (b) for each Outside Director, the aggregate number of unvested shares of our Common Stock underlying all outstanding RSUs held by that Outside Director as of June 30, 2007:

Name

Edward W. Barnholt

H. Raymond Bingham

Robert T. Bond

Robert M. Calderoni

John T. Dickson

Stephen P. Kaufman

Kevin J. Kennedy

Lida Urbanek

David C. Wang

Name

Edward W. Barnholt

H. Raymond Bingham

Name

Robert T. Bond

Robert M. Calderoni

Stephen P. Kaufman

Lida Urbanek

David C. Wang

Jon D. Tompkins

INFORMATION ABOUT EXECUTIVE OFFICERS

Name and Position

Principal Occupation of the Executive Officers

During the Past Five Years

Richard P. Wallace

Chief Executive Officer

John H. Kispert

President & Chief

Operating Officer

Jeffrey L. Hall

Senior Vice President &

Chief Financial Officer

Bin-ming Benjamin Tsai

Executive Vice President & Chief Technology Officer

Name and Position

Principal Occupation of the Executive Officers

During the Past Five Years

Brian M. Martin

Senior Vice President & General Counsel

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Name and Address

Capital Group International, Inc. (2)

11100 Santa Monica Blvd.

Los Angeles, CA 90025

Capital Guardian Trust Company (2)

11100 Santa Monica Blvd.

Los Angeles, CA 90025

Capital Research & Management Co. (2)

333 South Hope Street

Los Angeles, CA 90071

The Growth Fund of America, Inc. (2)

333 South Hope Street

Los Angeles, CA 90071

(1)    Based on 185,807,376 outstanding shares of Common Stock as of August 31, 2007.

(2)    Based on information provided pursuant to Schedules 13D and 13G filed with the Securities and Exchange Commission.

Name of Beneficial Owner

Richard P. Wallace (2)(16)

Edward W. Barnholt (3)(17)

H. Raymond Bingham (4)(17)

Robert T. Bond (5)(17)

Robert M. Calderoni (6)(17)

John T. Dickson (7)(17)

Stephen P. Kaufman (8)(17)

Kevin J. Kennedy (9)(17)

Lida Urbanek (10)(17)

David C. Wang (11)(17)

John H. Kispert (12)(16)

Jeffrey L. Hall (13)(16)

Jorge L. Titinger (14)(16)

Name of Beneficial Owner

Bin-ming Benjamin Tsai (16)

All Directors and current executive officers as a group
(14 persons) (15)

   *    Less than 1%.

  (1)    Based on 185,807,376 outstanding shares of the Common Stock of the Company as of August 31, 2007. In addition, shares of our Common Stock subject to options that are presently exercisable or will become exercisable within 60 days after August 31, 2007 are deemed to be outstanding for the purpose of computing the percentage ownership of a person or entity in this table, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity.

  (2)    Includes 277,792 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

  (3)    Includes 77,707 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

  (4)    Includes 56,250 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

  (5)    Includes 60,000 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

  (6)    Includes 2,500 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

  (7)    Includes 1,250 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

  (8)    Includes 40,000 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

  (9)    Includes 1,250 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

(10)    Includes 81,666 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007. Of the 1,389,581 shares reflected as beneficially owned by Ms. Urbanek in the table above, 1,271,414 shares are held in trust for the benefit of Ms. Urbanek’s family, and 29,555 shares are held by the Urbanek Family Foundation.

(11)    Includes 5,000 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

(12)    Includes 200,698 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007 and 7,840 shares which are held in trust for the benefit of Mr. Kispert’s family.

(13)    Includes 98,025 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

(14)    Includes 34,207 shares subject to options which are presently exercisable or will become exercisable within 60 days after August 31, 2007.

(15)    Includes options to purchase an aggregate of 902,138 shares of Common Stock of the Company held by the current officers and Directors which are presently exercisable or will become exercisable within 60 days of August 31, 2007.

(16)    As of August 31, 2007, the named executive officers listed below each held unvested restricted stock units (which units are not included in the beneficial ownership table above). Each restricted stock unit will entitle that officer to one share of the Company’s Common Stock upon satisfaction of the applicable service or performance vesting requirement in effect for that unit.

Name

Number of Shares

Subject to Restricted

Stock Units

Richard P. Wallace

John H. Kispert

Jeffrey L. Hall

Jorge Titinger

Bin-ming Benjamin Tsai

(17)    As of August 31, 2007, the non-employee Directors listed below each held restricted stock units that were either unvested or were vested but not deliverable until a future date. These units are not included in the beneficial ownership table above. Each restricted stock unit will entitle that Director to one share of the Company’s Common Stock at a designated time following satisfaction of the applicable service vesting requirement in effect for that unit.

Name

Number of Shares

Subject to Unvested
Restricted

Stock Units

Number of Shares

Subject to Vested
Restricted

Stock Units Not
Yet Deliverable

Edward W. Barnholt

H. Raymond Bingham

Robert T. Bond

Robert M. Calderoni

John T. Dickson

Stephen P. Kaufman

Kevin J. Kennedy

Lida Urbanek

David C. Wang

Section 16(a) Beneficial Ownership Reporting Compliance

COMPENSATION DISCUSSION AND ANALYSIS

The philosophy of the Compensation Committee on executive compensation is that it should be designed to:

•     Attract, retain, and reward executive officers and other key employees (“Executives”) who contribute to the overall success of the Company;

•     Support accomplishment of the Company’s business strategies, objectives and initiatives;

•     Have a substantial portion of annual compensation be contingent upon the Company’s financial performance and an individual’s contribution to the Company’s success; and

•     Align the interests of Executives with the long-term interests of stockholders.

The Compensation Committee, with ratification and approval by the independent members of the Board of Directors, structures each Executive’s overall compensation package to be consistent with this approach. In doing so, the Compensation Committee takes into account a number of data sources and factors, including the highly cyclical nature of the industries in which the Company operates, and engages in extensive deliberation every year to set target performance levels appropriate for that particular year. The Compensation Committee applies this philosophy in determining appropriate executive compensation levels and other compensation factors, and reaches its decisions with a view towards the Company’s overall financial performance.

Within the philosophy described above, the Compensation Committee’s objectives are to provide a comprehensive compensation package that is:

•     Effective at attracting, retaining and rewarding Executives, taking into account numerous factors, including opportunities that may be available to them in the semiconductor capital equipment industry or with other employers with which KLA-Tencor competes for executives of similar education and experience;

•     Driven by financial and strategic performance, through annual incentive programs that make up a substantial component of annual pay opportunity; and

•     Aligned with shareholder interests, through grants of equity-based, long-term incentives.

The Compensation Committee structures each executive officer’s compensation opportunity so that a substantial portion is in the form of variable, performance-based bonus payments and equity awards, where the amounts payable under those awards are determined by achievement of company and individual goals with no minimum guaranteed reward amounts. In addition, the equity awards are subject to significant vesting restrictions designed to encourage and reward long-term employment relationships with the Company. For example, under the vesting schedule in effect for the performance shares awarded to the Executives for fiscal year 2007, 50% of the shares earned under the award will vest two years from the award date, and the remaining 50% will vest four years from the award date, subject in each case to the Executive’s continued employment with the Company on the applicable vesting date.

The Compensation Committee is responsible for setting and administering the compensation programs applicable to the Executives, based on their performance and the performance of the Company. The executive officers listed in the “Summary Compensation Table” that follows this description of the Company’s compensation programs are (a) Richard P. Wallace, the Company’s principal executive officer; (b) Jeffrey L. Hall, the Company’s principal financial officer; and (c) John H. Kispert, Jorge Luis Titinger and Bin-ming Benjamin Tsai, the Company’s three other most highly compensated executive officers for fiscal year 2007. These individuals listed in the “Summary Compensation Table” are referred to in this section as the “named executive officers.” Please note that, effective prior to the end of the second quarter of fiscal year 2008, Mr. Titinger will no longer be an employee of the Company.

The Compensation Committee is comprised of independent, non-employee members of the Board of Directors, none of whom has interlocking relationships as defined by the Securities and Exchange Commission and all of whom meet current standards of independence requirements of The Nasdaq Stock Market. The Compensation Committee operates under a written charter adopted by the Board of Directors, a copy of which is available at http://ir.kla-tencor.com.

The Compensation Committee periodically reviews its approach to executive compensation and makes changes as appropriate. The Compensation Committee meets regularly without employees present to discuss executive compensation matters.

In the case of the Chief Executive Officer’s compensation, the Compensation Committee developed his compensation package for fiscal year 2007 and recommended it to the Board of Directors. The independent members of the Board then discussed and approved the Chief Executive Officer’s compensation, without his presence or participation in the discussion. These same procedures were also utilized in the determination of compensation levels, including base salary, performance targets and target bonus amounts, to be in effect for the named executive officers for fiscal year 2008.

Although the approval procedures in place for fiscal year 2007 compensation gave the Compensation Committee the discretion to modify the compensation elements recommended by the Company’s Chief Executive Officer and gave the Board the discretion to modify the compensation elements recommended by the Compensation Committee, neither the Compensation Committee nor the Board exercised such discretion with respect to the compensation for the named executive officers for the fiscal year ended June 30, 2007.

In September 2007, the Board of Directors amended the charter of the Compensation Committee to grant the Committee the authority to approve the compensation packages for the Company’s named executive officers, other than the Company’s Chief Executive Officer, without submitting them to the Board of Directors. With respect to the Chief Executive Officer’s compensation, the Compensation Committee will continue to make recommendations to the independent members of the Board of Directors, and those independent Board members will retain the authority to approve the Chief Executive Officer’s compensation.

The Company’s ability to continue to attract and retain outstanding contributors, including its core executive team, is essential to the Company’s continuing success. In addition to considering the executive officers’ compensation relative to one another as a key factor in determining executive compensation, the Compensation Committee reviews several forms of market data to ensure that the Company is offering compensation packages that are competitive with those offered by other employers seeking to attract the same talented individuals. The Compensation Committee does not target specific percentile guidelines based on such market data or set pre-determined allocations between annual and long-term compensation. Rather, the Compensation Committee’s emphasis is on establishing compensation packages for the Executives in which each element of the compensation package, in the Committee’s judgment, is structured to achieve the goals described under “Compensation Philosophy” above. In making its determinations and recommendations with respect to executive compensation, the Compensation Committee refers to a number of different data sources, as traditional peer analysis yields a small number of companies of similar size and industry and, therefore, a limited number of meaningful data points.

For the fiscal year ended June 30, 2007, the Compensation Committee used, in addition to the data described in the last two paragraphs of this section on Market Data, a two-tiered list of peer group companies to track industry trends and practices related to compensation. The Company’s primary peer group was comprised of three global companies competing in the semiconductor manufacturing industry—Applied Materials, Inc., Lam Research Corporation and Novellus Systems, Inc. The Company’s secondary peer group consisted of Credence Systems Corporation, FEI Company, Teradyne, Inc., Thermo Electron Corporation (which subsequently merged

with another entity to form Thermo Fisher Scientific Inc.) and Veeco Instruments Inc. The companies in the primary and secondary peer groups were selected based upon their industry focus, size and the frequency with which they compete with the Company for the same employee candidates. Because the Compensation Committee looks to multiple data sources beyond a traditional peer group analysis or general market surveys, the Company’s actual percentile results, whether as compared to the peer groups or any other survey, do not reflect the Committee’s decision-making process or compensation targets and are therefore not considered meaningful data points.

The Compensation Committee reviewed the compensation programs and practices of the primary and secondary peer group companies to obtain additional information to identify compensation trends and practices. Because the companies in the primary peer group most closely resemble the Company in terms of industry focus and global reach and scale, the Compensation Committee, when referring to these peer companies, placed greater emphasis on the data obtained from companies in the Company’s primary peer group than on the data obtained from those in the secondary peer group.

The Compensation Committee obtains data regarding these peer group companies through searches of publicly available information, such as the proxy filings of the relevant companies. The market data consists primarily of base salary and total cash compensation rates, as well as incentive bonus and stock programs of other companies considered by the Compensation Committee to be peers in the Company’s industry. In addition, the Company subscribes to the Radford Executive Survey (with a focus on high technology companies with revenue between $1 billion to $3 billion, as well as certain other selected companies within the Company’s relevant industries) and the Computer and High Performance Systems (CHiPS) Executive Survey to obtain additional data concerning target cash compensation levels.

The Compensation Committee retains an independent compensation consultant to provide the Committee with independent, objective analysis and professional opinions on executive compensation matters. This consultant, Semler Brossy Consulting Group, LLC (the “Consultant”), reports directly to the Chair of the Compensation Committee and performs no other work for the Company.

The Consultant generally attends all meetings of the Compensation Committee in which evaluations of the effectiveness of overall executive compensation programs are conducted or in which compensation for executive officers is analyzed or approved. The Consultant’s duties include providing the Compensation Committee with relevant market and industry data and analysis, reviewing all materials and participating in the meetings in which the Compensation Committee made decisions regarding changes to executive compensation for the fiscal year ended June 30, 2007. In fulfilling these duties, the Consultant met, as needed and with the knowledge of the Chairman of the Compensation Committee, with the Chief Executive Officer, the Chief Operating Officer, the Vice President of Human Resources, the General Counsel, the Chief Financial Officer, and various members of the Company’s Human Resources and Legal staff.

Base Salary:

The Compensation Committee engages in annual reviews of the base salaries of the Executives.

The process for establishing the fiscal year 2007 base salaries for the named executive officers (other than the Chief Executive Officer) began in early fiscal year 2007, at which time the Company’s human resources department provided Mr. Wallace with a wide range of relevant market compensation information, which included data from the Radford Executive Survey and the CHiPS Executive Survey, as well as materials provided to the Company by the Consultant. Mr. Wallace and representatives of the Company’s human resources team then took into account a number of other factors, such as each Executive’s past performance and anticipated contribution to the Company. Following an extensive review of the compensation materials and individual Executive performance data and with the assistance of the Company’s human resources department, Mr. Wallace made recommendations to the Compensation Committee regarding the base salaries for each of the named executive officers (other than his own salary) for fiscal year 2007. Following review of Mr. Wallace’s recommendations and its own analysis, the Compensation Committee then made recommendations regarding the fiscal year 2007 base salaries for each of the named executive officers to the independent members of the Board of Directors for approval.

The process for establishing the fiscal year 2007 base salary for the Chief Executive Officer was similar to the process described above, except that it began with the Consultant and the Company’s human resources department directly providing the Compensation Committee with information and materials comparable to those described in the preceding paragraph, including survey data and materials provided by the Consultant. Taking into account the factors described in the preceding paragraph, the Compensation Committee, following an extensive review of the compensation materials and the Chief Executive Officer’s performance data, then made recommendations regarding the fiscal year 2007 base salary for the Chief Executive Officer to the independent members of the Board of Directors for approval.

The information referred to by both Mr. Wallace and the Compensation Committee in developing their recommendations for fiscal year 2007 base salaries included salary information for comparable positions at other companies in the Company’s primary and secondary peer groups (as described above), as those peer group companies typically seek to recruit individuals of similar education and experience to the Executives for those comparable positions. Mr. Wallace and the Compensation Committee aim to structure each Executive’s compensation so that each element of the compensation is designed to achieve the goals described under “Compensation Philosophy” above.

With respect to base salary determinations for fiscal year 2007, in each case, the Compensation Committee and the independent members of the Board of Directors approved the recommendations made to them without modification.

The factors that were considered in making the base salary recommendations for fiscal year 2007 included: the individual’s job responsibilities, level of experience and short-term and long-term performance and contribution to the Company’s business, as well as data from the Company’s Human Resources department and guidance provided by the Compensation Committee’s compensation consultants. The Compensation Committee exercised its discretion and judgment based upon these factors, and no specific formula was applied to determine the weight of each factor.

Base salaries for the Executives for the fiscal year ended June 30, 2007 were determined in August of 2006. For the fiscal year ended June 30, 2007, the base salaries of all the named executive officers (other than Dr. Tsai, who rejoined the Company in October 2006 and had not been employed by the Company during the prior fiscal year) were increased over the applicable salary for the prior fiscal year as follows:

Name and Principal Position

Richard P. Wallace

Chief Executive Officer

Jeffrey L. Hall

Senior Vice President & Chief Financial Officer

John H. Kispert

President & Chief Operating Officer

Jorge Luis Titinger

Senior Vice President, Global Operations and Corporate Support Groups

(1)    These base salaries reflect the adjustments to the base salaries of Messrs. Wallace and Hall approved in connection with their respective promotions during fiscal year 2006.

(2)    Mr. Titinger’s base salary reflects the adjustments to his base salary in August 2006 in connection with his promotion at that time.

In August 2007, applying the review process and criteria described above, the Compensation Committee recommended, and the Board of Directors approved, an increase to Mr. Wallace’s annual base salary for fiscal year 2008 to $700,000 (an increase of 4.6% over Mr. Wallace’s annual base salary rate as of June 30, 2007) and approved a salary increase for each of the other named executive officers by an average of 3.6%. Factors such as role, scope of responsibilities and complexity of the position, as well as market data for similar positions at comparator companies, were used to determine the percentage increase to each named executive officer’s base salary.

Cash Incentive Bonuses:

Executive Incentive Plan (EIP):

As in past fiscal years, the Company implemented an executive incentive plan (the “EIP”) for fiscal year 2007 under which Executives could earn a cash bonus based on the Company’s achievement of key financial and strategic Company goals. For fiscal year 2007, the Compensation Committee reviewed the EIP as to Executives and then made a recommendation to the Board of Directors and submitted the EIP to the Board for approval. This process was also in place with respect to the approval of the EIP for fiscal year 2008, but, as noted above, in September 2007, the Company’s Board of Directors amended the charter of the Compensation Committee to grant the Committee authority to establish all elements of executive officer compensation (other than Chief Executive Officer compensation), including approval of the annual EIP and target and actual payments thereunder, without requiring Board approval or ratification.

All of the named executive officers participated in the EIP for fiscal year 2007. The initial determination under the EIP is the establishment of a target award for each participating Executive, which the Compensation Committee set as a percentage of the Executive’s base salary. For fiscal year 2007, the target awards under the EIP for the named executive officers were as follows:

Name and Principal Position

Target Bonus Award Under EIP

(as a Percentage of Base Salary

Paid During FY07)

Richard P. Wallace

Chief Executive Officer

Jeffrey L. Hall

Senior Vice President & Chief Financial Officer

John H. Kispert

President & Chief Operating Officer

Jorge Luis Titinger

Senior Vice President, Global Operations and Corporate Support Groups

Bin-ming Benjamin Tsai

Executive Vice President & Chief Technology Officer

The actual bonuses paid under the EIP are dependent upon the financial and strategic performance of the Company and the contributions by the participating Executive. Funding of the EIP is contingent upon the Company’s attainment of a pre-determined threshold amount of pre-tax profitability. However, actual payments are based 50% on the financial performance of the Company (or, with respect to certain Executives other than the named executive officers, the relevant business unit), and 50% on the achievement of key strategic business objectives, each of which are described more fully in the following paragraphs. The financial targets and the weighting between components under the EIP for fiscal year 2007 were designed to reflect the Company’s emphasis on achieving a balance between financial and strategic success, and to tie the interests of the executive officers to financial metrics that most accurately reflect the officers’ contributions and closely align their interests with those of our shareholders.

Historically, when establishing the EIP for a particular fiscal year, including the fiscal year 2007 EIP, the Compensation Committee initially determines a range of potential pre-tax profitability results for the upcoming fiscal year and then attaches a strategic

For the financial performance component of the program, the maximum payout is 150% of the target for that component, depending upon the Company’s achievement of the compensation targets established by the Compensation Committee at the beginning of the fiscal year. The Compensation Committee structured the fiscal year 2007 EIP so that the financial performance component of the EIP would:

•     Not pay out at all unless the Company’s operating income for that fiscal year exceeded $520 million;

•     Only pay out at 100% of the target for such component if the Company achieved operating income of $740 million (a level that would have exceeded the next highest year’s total by more than 25%); and

•     Only pay out at the maximum level of 150% of the component’s target if the Company’s operating income for fiscal year 2007 exceeded $850 million.

For fiscal year 2007, the Compensation Committee excluded certain expenses from the applicable calculation of operating income for purposes of the EIP, including expenses related to stock-based compensation, expenses related to mergers and acquisitions activity, and extraordinary expenses related to the Company’s restatement of its historical financials and related litigation and investigations.

For the strategic component of the program, the maximum payout is 100% of the target for that component. For our named executive officers, the strategic component of the EIP for fiscal year 2007 consisted of a revenue-weighted average of the success of the Company’s material divisions in achieving division-specific strategic objectives established by the Company’s executive team (including the Chief Executive Officer and the applicable division managers) at the beginning of the fiscal year. Following the conclusion of fiscal year 2007, the Compensation Committee reviewed and approved the weighted scores, and the resulting compensation amounts, for the named executive officers.

The Compensation Committee and the independent members of the Board of Directors then approved the bonus amount payable under the EIP to the named executive officers for fiscal year 2007 in August 2007, applying the following formula:

[Base Salary x Target Bonus Award Percentage]

x

[(50% x Financial Performance Component % Score)

+

(50% x Strategic Component % Score x Strategic Component Multiplier)]

As a result of the Company’s strong financial performance for fiscal year 2007, which resulted in pre-tax profitability of 35.6% and record operating income of $856 million (as calculated for purposes of the fiscal year 2007 EIP), the payout amounts under the fiscal year 2007 EIP exceeded the target amounts established at the beginning of the

Outstanding Corporate Performance Executive Bonus Plan (OCPB):

The Outstanding Corporate Performance Executive Bonus Plan (“OCPB”) program provides a bonus to participants in years when the Company achieves certain levels of profitability and growth above the Company’s budgeted targets. Over 100 of the Company’s key employees, including the named executive officers, participate in the OCPB. For fiscal year 2007, the performance factors for purposes of the OCPB were tied to the Company’s profit from operations (excluding stock-based compensation charges) and incremental operating margin.

In prior years, payouts under the OCPB were made in three annual installments. For payments with respect to fiscal year 2007, however, payouts from the OCPB were paid in a lump sum. This change was put into effect in an effort to simplify the structure of the OCPB, since the deferral feature did not provide any significant retention value, and to more closely align the timing of the payouts under the OCPB with the Company’s cash flow giving rise to such payments.

All of the named executive officers, as well as a number of other Executives, participated in the OCPB for the fiscal year ended June 30, 2007. The OCPB program had the potential each year, including fiscal year 2007, to yield payments anywhere from 0 to 200% of the individual’s total target opportunity under the EIP for the corresponding fiscal year. As in past years, the OCPB was structured for fiscal year 2007 to pay out at amounts greater than the EIP in the event of exceptional financial performance by the Company. The financial metrics and payout percentages for the OCPB for fiscal year 2007 were developed by the Company’s Chief Executive Officer, Chief Financial Officer and Chief Administrative Officer, with the assistance of the Company’s human resources department, and were subsequently submitted as recommendations to the Compensation Committee and then to the independent members of the Board of Directors for approval.

For fiscal year 2007, the Company posted record results, generating profit from operations in the amount of $856 million (as compared to $525 million for the previous fiscal year) and an incremental operating margin of 61.0% for the fiscal year. Therefore, the Company’s strong financial performance for fiscal year 2007 resulted in a payout pursuant to the OCPB equal to 200% of target.

Individual Bonus Payout Amounts for Fiscal Year 2007:

As a result of the Company’s outstanding financial performance during fiscal year 2007, the EIP and OCPB paid out at or near the maximum amounts payable under the respective plans. Please see Note 5 to the Summary Compensation Table for the payout amounts to each named executive officer under the EIP, the OCPB and the total bonus amount paid with respect to their performance during fiscal year 2007.

Changes in the Company’s Bonus Plan Structure for Fiscal Year 2008:

In August 2007, in an effort to simplify the operation of the Company’s annual bonus structure, the Board of Directors eliminated the two separate bonus plan structure and established the Company performance targets in effect for fiscal year 2008 under the Company’s Performance Bonus Plan (the “Bonus Plan”), an incentive bonus plan administered in conformity with Section 162(m) of the Internal Revenue Code. The performance targets for fiscal year 2008 are tied to the Company’s profit from operations and relative revenue growth (relative to an index of the revenue growth of 30 companies in related industries, measured over the same period), with targets set at levels that the independent members of the Board of Directors, the Compensation Committee and the Company believe will be very challenging to achieve. Bonus potentials were established for each of the Company’s executive officers at threshold, target and maximum levels of Company performance for fiscal year 2008. Following the close of fiscal year 2008, the Compensation Committee (or, in the case of the Company’s Chief Executive Officer, the independent members of the Board of Directors) will determine the actual bonus amount for each executive officer participating in the Bonus Plan based on the actual levels at which the performance targets for that year are attained. The Compensation Committee or the independent Board members (as applicable) will have the discretion to adjust the actual bonus amount that would otherwise be due upon the attainment of the performance targets, based on their assessment of the officer’s performance for fiscal year 2008. The actual bonus amounts (if any) will be paid within ninety days after the close of the fiscal year.

Award Level

Name and Principal Position

Minimum ($)

Richard P. Wallace

Chief Executive Officer

Jeffrey L. Hall

Senior Vice President & Chief Financial Officer

John H. Kispert

President & Chief Operating Officer

Jorge Luis Titinger (1)

Senior Vice President, Global Operations and Corporate Support Groups

Bin-ming Benjamin Tsai

Executive Vice President & Chief Technology Officer

(1)    Please note that, effective prior to the end of the second quarter of fiscal year 2008, Mr. Titinger will no longer be an employee of the Company.

Equity Awards:

The Company’s 2004 Equity Incentive Plan permits various types of equity awards, including grants of stock options, performance shares and restricted stock units. Stock options have historically been the primary form of equity award issued by the Company. However, beginning with the fiscal year 2006 equity awards, the Company began to transition its equity award program away from stock options and more toward grants of restricted stock units and performance shares. In 2006, the Compensation Committee granted a mix of stock options and restricted stock units, and the equity awards to the Company’s executive officers for fiscal year 2007 were comprised entirely of performance shares.

Several factors have contributed to this transition. The adoption by the Company of FAS 123R in 2006 gave rise to a change in the accounting treatment for stock options, which made them less attractive from an accounting point of view. Also, the Compensation Committee believes that restricted stock units and performance shares provide greater retention value than do stock options, due to the more certain value provided by such awards. Furthermore, the Compensation Committee believes that

compensation plans tied to Company performance, as opposed to stock price performance, are a more appropriate way to provide incentives to Executives and reward success. Executives and other employees are more able, through their positive contributions to the Company, to directly impact the Company’s performance than the Company’s stock price, and Company success will positively impact the Company’s stock price over time. Therefore, the Compensation Committee believes that equity awards, primarily in the form of performance shares, are highly motivating, provide a major incentive for employees to build stockholder value and serve to align the interests of employees with those of stockholders.

The Compensation Committee used performance share awards as the primary form of equity compensation for the executive officers for fiscal year 2007. Other than new hire or promotion grants, the Compensation Committee grants performance shares to the executive officers one time per year, typically in August. The initial determination under the performance share program is the establishment, at the beginning of each fiscal year, of target award ranges for each participating Executive and target performance metrics (operating income, in the case of fiscal 2007) for the Company. These target award ranges are established with reference to the Executive’s role and responsibilities within the Company, as well as compensation data from the Radford Executive Survey and Semler Brossy Consulting Group LLC for similar positions at peer companies.

The actual payout amount of each named executive officer’s equity award (that is, the actual number of shares to be issued pursuant to the officer’s performance share award based on Company performance) was determined at the conclusion of fiscal year 2007. The Company’s operating income, as compared to the target level of operating income established at the beginning of the fiscal year, determined the percentage of the executive’s target award that would actually be issued. Achieving 50% of target operating income (excluding stock-based compensation charges and other extraordinary charges) would trigger the issuance of 50% of the target number of shares, and achieving 100% or more of target operating income would trigger the issuance of 125% of the target number of shares. Any result in between 50% and 100% of target operating income would be mapped linearly between the 50% and 125% award amounts. If less than 50% of target operating income were achieved, then no shares would be issued under the performance share awards for that fiscal year. The Compensation Committee reviewed the Company’s performance for fiscal year 2007 to determine the appropriate number of shares to be issued to each participant for fiscal year 2007 and made recommendations to the Board of Directors. The independent members of the Board of Directors then reviewed and approved the recommendations made by the Compensation Committee with respect to the number of shares to be issued to each named executive officer.

Name and Principal Position(1)

Richard P. Wallace

Chief Executive Officer

Jeffrey L. Hall

Senior Vice President & Chief Financial Officer

John H. Kispert

President & Chief Operating Officer

Jorge Luis Titinger

Senior Vice President, Global Operations and Corporate Support Groups

(1)    Dr. Tsai was not employed by the Company at the time of the performance share grants in early fiscal year 2007. Dr. Tsai received a new hire grant of restricted stock, with vesting terms tied solely to his continued service with the Company, upon rejoining the Company in October 2006. For further information regarding the terms of this grant, please see Note 6 to the table entitled “Grants of Plan-Based Awards.”

The shares issued in accordance with the foregoing table also have a significant service vesting component. Fifty percent of the issued shares will vest two years from the date of the award, and the remaining fifty percent will vest four years from the date of the award, in each case subject to the executive’s continued employment with the Company on the applicable vesting date.

Establishment of Target Performance Share Grants for Fiscal Year 2008:

In August 2007, the Compensation Committee and Board of Directors approved minimum, target and maximum levels of performance share awards for the named executive officers for target performance for fiscal year 2008. The approved awards included base grants for each officer, as well as what are expected to be one-time additional supplemental grants for Messrs. Wallace and Kispert. As with the grants for fiscal year 2007 performance, the number of shares to be issued pursuant to the base performance share awards for fiscal year 2008 will be determined in relation to the Company’s attainment of a pre-determined level of operating income, with potential upside (in excess of target) for superior Company performance. The supplemental awards, which were not a component of the prior year’s compensation

Name and Principal Position

Type of

Grant

Target

Shares

Maximum

Shares

Richard P. Wallace

Chief Executive Officer

0

25,000

25,000

Jeffrey L. Hall

Senior Vice President & Chief Financial Officer

John H. Kispert

President & Chief Operating Officer

Base Grant

Supp. Grant

0

25,000

25,000

Jorge Luis Titinger (1)

Senior Vice President, Global Operations and Corporate Support Groups

Bin-ming Benjamin Tsai

Executive Vice President & Chief Technology Officer

(1)    Please note that, effective prior to the end of the second quarter of fiscal year 2008, Mr. Titinger will no longer be an employee of the Company.