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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

Filed by the Registrant x                            Filed by a Party other than the Registrant ¨

Check the appropriate box:

KLA-Tencor Corporation

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

November 4, 2009

To the Stockholders:

YOUR VOTE IS IMPORTANT

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of KLA-Tencor Corporation (“we” or the “Company”), a Delaware corporation, will be held on Wednesday, November 4, 2009 at 1:00 P.M., local time, in Multipurpose Rooms East and West in Building Three of our Milpitas facility, located at Three Technology Drive, Milpitas, California 95035, for the following purposes:

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

Only stockholders of record at the close of business on September 15, 2009 are entitled to notice of, and to vote at, the Annual Meeting and any adjournment or postponement thereof.

Sincerely,

Richard P. Wallace

President and Chief Executive Officer

Milpitas, California

This Notice of Annual Meeting of Stockholders, Proxy Statement and form of proxy are being distributed and made available on or about September 24, 2009.

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KLA-TENCOR CORPORATION

2009 ANNUAL MEETING OF STOCKHOLDERS – PROXY STATEMENT

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ANNUAL MEETING OF STOCKHOLDERS

OF

KLA-TENCOR CORPORATION

To be held on November 4, 2009

PROXY STATEMENT

QUESTIONS AND ANSWERS REGARDING PROXY MATERIALS

These proxy solicitation materials, together with our Annual Report for fiscal year 2009, were first made available on or about September 24, 2009 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.

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Our proxy materials are also available on our website at the following address: http://www.kla-tencor.com/annualmeeting.

Your notice of Internet availability of proxy materials, proxy card or voting instruction card will contain instructions on how you may request to access proxy materials electronically on an ongoing basis. Choosing to access your future proxy materials electronically will help us conserve natural resources and reduce the costs of printing and distributing our proxy materials. If you choose to access future proxy materials electronically, you will receive an e-mail with instructions containing a link to the website where those materials are available and a link to the proxy voting website. Your election to access proxy materials by e-mail will remain in effect until you terminate it.

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

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.

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QUESTIONS AND ANSWERS REGARDING PROXY SOLICITATION AND VOTING

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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 four nominees listed herein for the Board of Directors), FOR Proposal Two (the approval of the amendment and restatement of the 2004 Equity Plan to increase the number of shares reserved and the reapproval of the material terms of the plan, including the list of corporate performance goals permitted under such plan for purposes of Section 162(m)), FOR Proposal Three (the approval of the material terms of our Performance Bonus Plan for purposes of Section 162(m)), and FOR Proposal Four (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.

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The Securities and Exchange Commission recently approved a rule amendment that will eliminate your record holder’s discretion to vote your shares on the election of directors, in the absence of specific instructions from you (the beneficial owner). However, that rule amendment is effective for stockholder meetings held on or after January 1, 2010, so the existing rules regarding discretionary voting (as described in the preceding paragraph) will remain in effect for the Annual Meeting.

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.

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QUESTIONS AND ANSWERS REGARDING STOCKHOLDER PROPOSALS, DIRECTOR NOMINATIONS BY STOCKHOLDERS AND RELATED BYLAW PROVISIONS

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Corporate Secretary

KLA-Tencor Corporation

One Technology Drive

Milpitas, California 95035

Fax: (408) 875-4144

For a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8, the stockholder must provide the information required by our bylaws and give timely notice to our Corporate Secretary in accordance with our bylaws, which, in general, require that the notice be received by our Corporate Secretary:

If the date of the stockholder meeting is moved more than 30 days before or 60 days after November 4, 2010, then notice of a stockholder proposal that is not intended to be included in our proxy statement under Rule 14a-8 must be received no earlier than the close of business 120 days prior to the meeting and not later than the close of business on the later of the following two dates:

In addition, our bylaws permit stockholders to nominate directors for election at an annual stockholder meeting. To nominate a director, the stockholder must deliver the information required by our bylaws and a statement by the nominee acknowledging that he or she will owe a fiduciary obligation to KLA-Tencor and its stockholders.

To nominate an individual for election at an annual stockholder meeting, the stockholder must give timely notice to our Corporate Secretary in accordance with our bylaws, which, for our annual meeting next year, will generally require that the notice be received by our Corporate Secretary between the close of business on July 7, 2010 and the close of business on August 6, 2010, unless the annual meeting is moved by more than 30 days before or 60 days after November 4, 2010, in which case the deadline will be as described in Question 20.

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PROPOSAL ONE:

ELECTION OF DIRECTORS

The three incumbent Class I Directors are Robert M. Calderoni, John T. Dickson and Kevin J. Kennedy. The Class I Directors will serve until the annual meeting of stockholders to be held in 2011 or until their respective successors are duly elected and qualified.

The four incumbent Class II Directors are Robert P. Akins, Robert T. Bond, Kiran M. Patel and David C. Wang. They are up for re-election at the Annual Meeting.

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

The four candidates nominated by the Board of Directors for election as Class II Directors by the stockholders are:

If elected, the nominees for Class II Directors will serve as Directors until our annual meeting of stockholders in 2012, 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.

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THE MEMBERS OF THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND A VOTE “FOR” EACH OF THE CLASS II DIRECTOR NOMINEES, WITH THE DIRECTORS WHO ARE NOMINEES ABSTAINING.

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INFORMATION ABOUT THE DIRECTORS AND THE NOMINEES

The following table sets forth certain information with respect to our Board of Directors as of the date of this Proxy Statement:

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PROPOSAL TWO:

APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE 2004 EQUITY INCENTIVE PLAN

Our stockholders are being asked to approve the amendment and restatement of our 2004 Equity Incentive Plan (the “2004 Equity Plan”) that will increase the maximum number of shares of our Common Stock authorized for issuance over the term of the plan by an additional 11,000,000 shares from 21,000,000 to 32,000,000 shares and reapprove the material terms of the 2004 Equity Plan, including the list of corporate performance goals through which certain awards made under the plan may be earned 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”).

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 reapproval of the material terms of 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 that were transferred to the plan upon the expiration or forfeiture of options that were previously outstanding under the Replaced Plans. On November 15, 2007, our stockholders approved an amendment to the 2004 Equity Plan that, among other things, added 8,500,000 shares of our Common Stock to the maximum number of shares authorized for issuance under the terms of the plan. Our Board of Directors has approved the amendment and restatement of the 2004 Equity Plan that is the subject of this Proposal Two, subject to the approval of our stockholders at the Annual Meeting.

The following is a summary of the material terms and provisions of the 2004 Equity Plan, as amended. The summary, however, does not purport to be a complete description of all the provisions of the 2004 Equity Plan, and is subject to, and qualified in its entirety by, the provisions of the 2004 Equity Plan. A copy of the actual plan document is attached as Appendix A to this Proxy Statement.

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Summary of the 2004 Equity Plan

General

The purposes of the 2004 Equity Plan are to attract and retain the best available personnel for positions of substantial responsibility, provide additional incentive to our employees, Board members and consultants, and promote the success of our business.

Administration

The 2004 Equity Plan may be administered by our Board of Directors or by a committee of Board members appointed by our Board (the “Administrator”). Subject to the provisions of the 2004 Equity Plan, the Administrator has the authority to: (i) interpret the plan and apply its provisions; (ii) establish, amend or rescind rules and regulations relating to the 2004 Equity Plan; (iii) select the persons to whom awards are to be made; (iv) subject to individual fiscal year limits applicable to each type of award, determine the number of shares or equivalent units to be made the subject of each award; (v) determine when and to what extent awards are to be made; (vi) determine the terms and conditions applicable to awards generally and to each individual award (including the provisions of the award agreement to be entered into between the Company and the participant); (vii) amend any outstanding award subject to applicable legal restrictions (except that repricing of outstanding options or stock appreciation rights will generally require stockholder approval, as indicated below); (viii) approve the forms of agreement to evidence the awards made under the plan; (ix) allow participants to satisfy withholding tax obligations by electing to have us withhold from the shares otherwise issuable upon the exercise, vesting or settlement of an award that number of shares (or cash equivalent) with a fair market value equal to the minimum amount of taxes required to be withheld (rounded up to the nearest whole share); and (x) subject to certain limitations, take any other actions deemed necessary or advisable for the administration of the 2004 Equity Plan. All decisions, interpretations and other actions of the Administrator will be final and binding on all holders of awards under the 2004 Equity Plan and on all persons deriving their rights therefrom.

Types of Awards

The following types of awards may be made under the 2004 Equity Plan: incentive stock options under Section 422 of the Code, non-statutory stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), performance shares, performance units and deferred stock units. The principal features of each such award are described in more detail below.

Plan Reserve and Shares Counted Against Such Reserve

The maximum number of shares of Common Stock authorized for issuance over the term of the plan is limited to 32,000,000 shares, including the 11,000,000-share increase for which stockholder approval is sought as part of this Proposal. Such shares may be drawn from shares of our authorized but unissued shares or, with the approval of our Board of Directors, from shares reacquired by us, including shares repurchased on the open market. Any shares issued under the 2004 Equity Plan pursuant to a restricted stock unit,

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performance share or performance unit award will reduce the total number of shares available for issuance under the plan at the rate of 1.8 shares for every one share issued pursuant to such award, unless those shares are issued for a cash consideration per share equal to 100% of the fair market value of our Common Stock on the award date.

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 (as has been our practice, for example, in connection with the vesting of restricted stock units issued 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, 2009, 2,589,524 shares of our Common Stock were subject to outstanding options under the 2004 Equity Plan, 5,695,692 shares were subject to outstanding RSU or performance share awards, 1,793,388 shares had been issued, and 5,632,746 shares remained available for future award under the 2004 Equity Plan (which does not take into account the 11,000,000 share increase for which stockholder approval is sought as part of this Proposal).

Eligibility

Awards may be granted to our employees, consultants and members of our Board of Directors. Incentive stock options may only be granted to employees. As of August 31, 2009, all four of our executive officers, all nine of our non-employee members of the Board and approximately 5,037 other employees were eligible to participate in the 2004 Equity Plan.

Code Section 162(m) Performance Goals

To assure that the compensation attributable to one or more awards of restricted stock units, performance shares, performance units or deferred stock units made under the plan will qualify as performance-based compensation for purposes of Section 162(m) of the Code, the Administrator has the authority to

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structure one or more of those awards so that they are earned or eligible to be earned only if certain pre-established corporate performance goals are attained. Awards which qualify as such performance-based compensation will not be subject to the $1 million limitation on the income tax deductibility of the compensation paid per covered executive officer that is otherwise imposed under Section 162(m).

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.

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.

Stockholder approval of this Proposal Two will also constitute reapproval of the foregoing list of performance goals for purposes of Section 162(m) of the Code, which requires that such performance goals, along with certain other material terms of such plans, be reapproved at least every five years. 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 that may be earned (or eligible to be earned) subject to the attainment of one or more of those approved performance goals will not be subject to the $1 million limitation on the income tax deductibility of compensation paid per covered executive officer that would otherwise be imposed under Section 162(m) of the Code.

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Restricted Stock Unit and Performance Share 162(m) Share Limit

No participant may be granted in any one fiscal year restricted stock units or performance shares for more than 200,000 shares in the aggregate, except that in the fiscal year the participant commences service with us, he or she may receive such awards for up to 600,000 shares in the aggregate. Stockholder approval of this Proposal Two will also constitute reapproval of the 200,000 and 600,000 share limitations for purposes of Section 162(m) of the Code. Such share limitations will assure that any deductions to which we would otherwise be entitled with respect to any restricted stock unit or performance share awards with vesting tied to the attainment of one or more of the performance milestones specified above will not be subject to the $1 million limitation on the income tax deductibility of compensation paid per covered executive officer that would otherwise be imposed under Section 162(m) of the Code.

Grant of Restricted Stock Units

Subject to the terms and conditions of the 2004 Equity Plan, restricted stock units may be granted to our employees, consultants and Board members at any time and from time to time at the discretion of the Administrator. Subject to the Section 162(m) share limits set forth above, the Administrator will have complete discretion to determine (i) the number of shares subject to each restricted stock unit award and (ii) the vesting provisions in effect for that award, which will typically be based on continued service but may include a performance-based component. Until the shares are actually issued following the vesting of the award, no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the underlying shares.

Restricted Stock Unit Award Agreement

Each restricted stock unit award will be evidenced by an agreement that will specify the cash consideration (if any) payable per underlying share of Common Stock, the applicable vesting schedule and such other terms and conditions as the Administrator will determine.

Grant of Performance Shares

Subject to the terms and conditions of the 2004 Equity Plan, performance share awards may be made to our employees and consultants at any time and from time to time as will be determined at the discretion of the Administrator. Subject to the Section 162(m) share limits set forth above, the Administrator will have complete discretion to determine (i) the number of shares of our Common Stock subject to each performance share award and (ii) the vesting provisions in effect for that award, which will typically be based on achievement of performance milestones but may also include a service-based component.

Performance Share Award Agreement

Each performance share award will be evidenced by an agreement that will specify the cash consideration (if any) payable per underlying share of Common Stock, the applicable vesting schedule and such other terms and conditions as the Administrator will determine.

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Grant of Performance Units

Performance units are similar to performance shares, except that they will be settled in a cash amount equal to the fair market value of the underlying shares of our Common Stock as measured as of the vesting date. The shares available for issuance under the 2004 Equity Plan will not be diminished as a result of the cash settlement of performance unit awards.

Performance Unit Award Agreement

Each performance unit grant will be evidenced by an agreement that will specify the applicable vesting schedule and such other terms and conditions as the Administrator will determine. However, no participant will be granted a performance unit award in excess of $1 million in any fiscal year, except that an award of up to $3 million may be made to a participant in the fiscal year in which he or she commences service with us. Stockholder approval of this Proposal Two will also constitute reapproval of the $1 million and $3 million limitations for purposes of Section 162(m) of the Code. Such dollar limitations will assure that any deductions to which we would otherwise be entitled with respect to any performance unit awards with vesting tied to the attainment of one or more of the performance milestones specified above will not be subject to the $1 million limitation on the income tax deductibility of compensation paid per covered executive officer that would otherwise be imposed under Section 162(m) of the Code.

Deferred Stock Units

A deferred stock unit award will consist of a restricted stock unit, performance share or performance unit award that the Administrator, in its sole discretion, permits to be paid out in installments or on a deferred basis, in accordance with rules and procedures established by the Administrator in compliance with the applicable requirements of Section 409A of the Code. Deferred stock units are subject to the same individual annual limits that apply to each type of award.

Terms and Conditions of Options

Each option granted under the 2004 Equity Plan will be evidenced by a written stock option agreement between the optionee and us that is subject to the following terms and conditions:

i. 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.

ii. 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.

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iii. 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.

iv. 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.

v. 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.

vi. 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.

vii. 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.

viii. 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 non-statutory options.

ix. 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.

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Option and SAR 162(m) Share Limit

No participant may be granted stock options and SARs for more than 400,000 shares of our Common Stock in the aggregate in any fiscal year, except that options and SARs covering up to 1,200,000 shares in the aggregate may be granted to the participant in the fiscal year in which he or she commences service with us. Stockholder approval of this Proposal Two will also constitute reapproval of the 400,000 and 1,200,000 share limitations for purposes of Section 162(m) of the Code. Such share limitations will assure that any deductions to which we would otherwise be entitled upon the exercise of stock options or SARs granted under the plan will not be subject to the $1 million limitation on the income tax deductibility of compensation paid per covered executive officer that would otherwise be imposed under Section 162(m).

Exercise Price and Other Terms of Stock Appreciation Rights

The exercise price of SARs may not be less than the fair market value of the Common Stock on the grant date. The Administrator, subject to the provisions of the 2004 Equity Plan (including the Section 162(m) share limits referred to above and the exercise price restrictions), will have complete discretion to determine the terms and conditions of SARs granted under the 2004 Equity Plan.

Payment of Stock Appreciation Right Amount

Upon exercise of a SAR, the participant will be entitled to receive a payment in an amount equal to the product of (X) the amount by which the fair market value per share of our Common Stock on the exercise date exceeds the exercise price per share for that SAR and (Y) the number of shares as to which the SAR is exercised.

Payment upon Exercise of Stock Appreciation Right

At the discretion of the Administrator, the payment due upon the exercise of the SAR may be made in cash, shares of our Common Stock or a combination thereof. To the extent that a SAR is settled in cash, the shares available for issuance under the 2004 Equity Plan will not be diminished as a result of the cash settlement.

Stock Appreciation Right Agreement

Each SAR grant will be evidenced by an agreement that will specify the exercise price, the term of the SAR, the vesting schedule and such other terms and conditions as the Administrator may, in its sole discretion, determine.

Expiration of Stock Appreciation Rights

SARs granted under the 2004 Equity Plan expire as determined by the Administrator, but in no event later than ten (10) years from the date of grant. No SAR may be exercised by any person after its expiration date.

Valuation

Our Common Stock is listed on the NASDAQ Global Select Market. Accordingly, the fair market value of our Common Stock on any relevant date

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will be deemed to be equal to the closing selling price per share of our Common Stock (or the closing bid if no sales were reported) on that date. On August 31, 2009, the fair market value of our Common Stock determined on such basis was $31.20 per share.

No Repricing

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.

Non-Transferability of Awards

Unless determined otherwise by the Administrator, an award granted under the 2004 Equity Plan may not be sold, pledged, assigned, transferred or otherwise disposed of in any manner other than by will or by the laws of inheritance following the participant’s death and may be exercised, during the participant’s lifetime, only by such participant. If the Administrator makes an award granted under the 2004 Equity Plan transferable, such award will contain such additional terms and conditions as the Administrator deems appropriate.

Leave of Absence

In the event a participant goes on a leave of absence, the vesting of each of his or her outstanding awards will cease until he or she returns to work, except as otherwise required by law or as otherwise determined by the Administrator.

Part-Time Service

Under the terms of the 2004 Equity Plan, unless the Administrator provides otherwise or except as otherwise required by law, the vesting of any service-vesting awards (other than restricted stock units and performance share awards) made to a participant under the 2004 Equity Plan will be extended on a proportionate basis in the event the participant transitions from a full-time to a part-time work schedule, or if not on a full-time work schedule, to a schedule requiring fewer hours of service. Such vesting will be proportionately re-adjusted prospectively in the event that the participant subsequently becomes regularly scheduled to work additional hours of service.

Under the terms of the 2004 Equity Plan, unless the Administrator provides otherwise or except as otherwise required by law, the vesting of any restricted stock units and performance share awards (to the extent earned) will continue unchanged and unaffected (i.e., they will vest in accordance with their original vesting schedules), notwithstanding whether the participant is at a full-time or part-time work schedule.

Adjustment Upon Changes in Capitalization

In the event any change is made to our outstanding Common Stock by reason of any stock split, reverse stock split, stock dividend, combination or reclassification of our Common Stock, spin-off transaction or any other increase or decrease in the number of the outstanding shares of our Common Stock effected without receipt of consideration by us, or should the value of

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the outstanding shares of our Common Stock be substantially reduced as the result of a spin-off transaction or extraordinary dividend or distribution, equitable and proportional adjustments will be made to the number and class of securities issuable under the 2004 Equity Plan, the individual fiscal year limits applicable to restricted stock units, performance share awards, SARs and options, the number and class of securities subject to each outstanding award under the 2004 Equity Plan, the exercise price in effect for each outstanding option or SAR and the cash consideration (if any) payable per share with respect to the shares of our Common Stock underlying any other outstanding awards under the plan. Any such adjustment will be made by the Compensation Committee of our Board of Directors in such manner as it deems appropriate, and its determination will be conclusive.

Change of Control

In the event of a change of control, the successor corporation (or its parent or subsidiary) will assume each outstanding award under the 2004 Equity Plan or replace that award with a substantially equivalent award which preserves the economic value of the replaced award. To the extent the successor corporation refuses to assume the outstanding awards or to substitute equivalent awards, those awards will become 100% vested at the time of the change of control. The Administrator will also have the discretion to structure awards under the plan so that the awards will become 100% vested upon a change of control, regardless of whether or not the options are assumed or substituted, or upon the subsequent termination of the participant’s employment.

A change of control will be deemed to occur for purposes of the 2004 Equity Plan in the event (a) we are acquired by merger or asset sale, (b) there occurs any transaction or series of related transactions pursuant to which any person or group of related persons becomes directly or indirectly the beneficial owner of securities possessing (or convertible into or exercisable for securities possessing) fifty percent (50%) or more of the total combined voting power of our outstanding securities or (c) there is a change in the majority of our Board of Directors as a result of one or more contested elections for Board membership.

Amendment, Suspensions and Termination of the 2004 Equity Plan

Our Board of Directors may amend, suspend or terminate the 2004 Equity Plan at any time; provided, however, that stockholder approval will be required for any amendment to the extent such approval is necessary to comply with applicable laws or regulations. The 2004 Equity Plan will terminate in June 2014.

New Plan Benefits

As of September 15, 2009, no awards had been granted, and no shares had been issued, under the 2004 Equity Plan on the basis of the 11,000,000 share increase to the share reserve under the plan that forms part of this Proposal.

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Federal Tax Information

Options

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:

i. 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.

ii. 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.

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Deferred Stock Units

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 in an amount equal 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.

Restricted Stock Units and Performance Shares

No taxable income is recognized by the participant upon receipt of an award of restricted stock units or performance shares. 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.

Performance Units

No taxable income is recognized by the participant upon receipt of performance units. The participant will recognize ordinary income in the year in which the performance units are settled. The amount of that income will be equal to the cash received in settlement, and we collect the withholding taxes applicable to such income. We will be entitled to an income tax deduction equal to the amount of the ordinary income recognized by the participant at the time the performance units are settled. That deduction will be allowed for the taxable year in which such ordinary income is recognized by the participant.

Stock Appreciation Rights

A participant who is granted a stock appreciation right will recognize ordinary income in the year of exercise equal to the amount of the appreciation distribution. We will be entitled to an income tax deduction equal to the appreciation distribution for the taxable year in which the ordinary income is recognized by the participant.

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Deductibility of Executive Compensation

We anticipate that any compensation deemed paid by us in connection with the disqualifying disposition of incentive stock option shares and the exercise of non-statutory options or stock appreciation rights with exercise prices not less than the fair market value per share of the underlying shares of Common Stock on the grant date will qualify as performance-based compensation for purposes of Section 162(m) of the Code and will not have to be taken into account for purposes of the $1 million limitation per covered individual on the deductibility of the compensation paid to certain of our executive officers. 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) of the Code.

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.”

The foregoing is only a summary of the current effect of federal income taxation upon us and upon the participant, does not purport to be complete, and does not discuss the tax consequences of the participant’s death or the income tax laws of any municipality, state or foreign country in which a participant may reside.

THE MEMBERS OF THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND A VOTE “FOR” THE ADOPTION OF THE AMENDMENT AND RESTATEMENT OF THE KLA-TENCOR 2004 EQUITY INCENTIVE PLAN AND THE APPROVAL OF THE MATERIAL TERMS THEREOF.

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PROPOSAL THREE:

APPROVAL OF THE MATERIAL TERMS OF OUR INTERNAL REVENUE CODE 162(m) PERFORMANCE BONUS PLAN

Our stockholders are being asked to reapprove the material terms of our Internal Revenue Code 162(m) Performance Bonus Plan (the “Bonus Plan”), including an expansion of the corporate performance goals to which the payment of certain awards made under the Bonus Plan may be tied in order to qualify those awards as performance-based compensation for purposes of Section 162(m) of the Code.

Section 162(m) of the Code imposes an annual deduction limit of $1 million on the amount of compensation paid to each of the chief executive officer and the next three most highly compensated executive officers (excluding the principal financial officer). However, the $1 million deduction limit does not apply to “qualified performance-based compensation.” To be considered qualified performance-based compensation, bonus awards under the Bonus Plan must be subject to performance goals. The “material terms” of the Bonus Plan, including the performance criteria that may be used to establish performance goals that may qualify as “performance-based compensation,” must have been approved by stockholders within the five years preceding the award.

Our stockholders approved the Bonus Plan at our annual meeting of stockholders in November 2005. Because almost five years have passed since approval of the Bonus Plan, we are submitting this proposal to stockholders for reapproval of the material terms of the Bonus Plan. Reapproval of the material terms of the Bonus Plan will allow awards under the Bonus Plan to qualify as tax-deductible performance-based compensation under Section 162(m) of the Code.

For purposes of Section 162(m) of the Code, the material terms of the Bonus Plan include (i) the employees eligible to receive awards under the Bonus Plan, (ii) a description of the business criteria on which the performance goals may be based, and (iii) either the maximum amount of compensation that can be paid to a covered employee under the plan or the formula used to calculate the amount of compensation that could be paid if the applicable performance goals are satisfied. Each of these aspects of the Bonus Plan is discussed below and is followed by a description of the other material features of the Bonus Plan.

A copy of the Bonus Plan is included as Appendix B to this Proxy Statement. Capitalized terms used but not defined in this proposal have the same meaning as in the Bonus Plan.

The Compensation Committee of our Board of Directors (the “Committee”) selects the employees who will be eligible to receive awards under the Bonus

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Plan for each performance period. The actual number of employees who will be eligible to receive an award during any particular performance period cannot be determined in advance because the Committee has discretion to select the participants.

For the current Bonus Plan performance period (which will run for the duration of our 2010 fiscal year (July 1, 2009 through June 30, 2010)), approximately 26 employees have been designated for participation in the fiscal year 2010 performance period, including all of our executive officers. We currently expect that a similar number of employees will participate in future years and performance periods, but the actual number of employees participating may be higher or lower as determined by the Committee.

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. The Committee may choose to set goals (from the above list): (a) in absolute terms, (b) in relative terms (including, but not limited, the passage of time and/or against other companies or financial metrics), (c) on a per share and/or per capita basis, (d) against the performance of KLA-Tencor as a whole or against particular segments or products and/or (e) on a pre-tax or after-tax basis. 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

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operations or the assets thereof; and (H) any other adjustment consistent with the operation of the plan.

Stockholder approval of this Proposal Three 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 that may be earned (or eligible to be earned) subject to the attainment of one or more of those approved performance goals will not be subject to the $1 million limitation on the income tax deductibility of compensation paid per covered executive officer that would otherwise be imposed under Section 162(m) of the Code.

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 Section 162(m) of the Code, except in the event of certain involuntary terminations or changes in control or ownership.

The Committee has discretion to reduce or eliminate the actual award of any participant. Also, unless determined otherwise by the Committee, a participant will forfeit the bonus if a participant terminates employment before the bonus actually is paid.

Other Material Features of the Bonus Plan

General

The purpose of the Bonus Plan is to increase stockholder value and the success of KLA-Tencor by motivating key executives to perform to the best of their abilities and to achieve our corporate objectives. The Bonus Plan’s goals provide such executives with incentive awards only after they achieve specified performance goals.

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Administration

The Bonus Plan is administered by the Committee. The Committee may delegate specific administrative tasks to KLA-Tencor employees or others to assist with day-to-day administration of the Bonus Plan. To the extent such a delegation of authority has been made, the term “Committee” in this Proposal Three should be read as “Committee or its delegate.” The Committee shall consist of two or more members of the Board who are not our employees and who otherwise qualify as outside directors under Section 162(m) of the Code. Subject to the terms of the Bonus Plan, the Committee has sole discretion to:

Plan Operation

The duration of each performance period will be determined by the Committee in its discretion. To date, since the inception of the Bonus Plan, each of the performance periods that have been established by the Committee under the Bonus Plan has lasted for one fiscal year. However, the Committee may establish shorter or longer performance periods in the future (up to a maximum of three fiscal years). Also, as noted above, no participant may participate in more than three performance periods at any one time. For each performance period, the Committee will designate the employees eligible to participate in that performance period and for each participant also will establish a target award (expressed as a percentage of the participant’s base salary or a specific dollar amount) and the performance goal or goals that must be achieved before an award actually will be paid to the participant.

Actual awards are paid in cash following the end of the applicable performance period. The Committee has discretion to defer payment of part or all of any bonuses and/or to apply a vesting schedule to part or all of any bonuses, subject to compliance with Section 409A of the Code. No vesting schedule (that is, the period of time for which an employee must remain employed to actually receive the bonus) may be longer than four years.

The Committee also may pay bonuses to Bonus Plan participants outside of the Bonus Plan for the accomplishment of strategic or other individual goals. Any bonuses paid outside of the Bonus Plan will not qualify under Section 162(m) of the Code and therefore we might not receive a tax deduction for those bonuses (if any). However, the Bonus Plan has been designed to permit the payment of awards that qualify under Section 162(m) of the Code.

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Federal Income Tax Considerations

An actual award under the Bonus Plan generally will be compensation taxable as ordinary income (and subject to income tax withholding) when paid to the participant. We generally will be entitled to a corresponding deduction for federal income tax purposes, except as follows. Section 162(m) of the Code generally limits to $1 million the amount of compensation that we may deduct in any tax year with respect to our Chief Executive Officer or any of the next three most highly compensated executive officers (excluding our principal financial officer). However, if we pay compensation that is “performance-based” under Section 162(m) of the Code, we still may receive a federal income tax deduction for the compensation even if it is more than $1 million during a single year. The Bonus Plan is designed, and is intended to be administered, to allow us to pay incentive compensation that is performance-based and therefore fully tax deductible on our federal income tax return.

Amendment and Termination of the Bonus Plan

The Committee may amend or terminate the Bonus Plan at any time and for any reason. However, no amendment or termination may impair the rights of a participant with respect to payments made prior to such amendment or termination unless the Committee has determined that such amendment or termination is in the best interests of all persons to whom awards have been granted.

Our executive officers are eligible to receive awards under the Bonus Plan, and accordingly our executive officers have an interest in this proposal. However, as the Bonus Plan is currently effective and has been previously approved by our stockholders, our executive officers’ rights to receive the awards set forth below (if the applicable performance metrics are achieved) for fiscal year 2010 is not conditional on the approval of the material terms of the Bonus Plan by our stockholders at the Annual Meeting. Failure of our stockholders to approve the material terms of the performance goals under the Bonus Plan, however, will impact the deductibility (for purposes of Section 162(m) of the Code) of awards under the Bonus Plan for fiscal years following fiscal year 2010. The following table reflects the potential payouts

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(threshold, target and maximum) under the Bonus Plan to each of the individuals and groups listed below for the fiscal year ending June 30, 2010:

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There can be no assurance that any portion of the awards shown above actually will be paid. The actual award paid (if any) may be higher or lower than the recipient’s “target” payout level depending on actual performance compared to the targeted performance goals. In no event will any participant’s actual award for the fiscal year 2010 performance period under the Bonus Plan exceed the maximum award shown. In addition, the Committee has discretion to decrease (but not increase) the award otherwise indicated under the pre-established formula. The Committee also may choose to reduce the otherwise indicated awards for other reasons, in its discretion.

THE MEMBERS OF THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND A VOTE “FOR” THE APPROVAL OF THE MATERIAL TERMS OF THE KLA-TENCOR PERFORMANCE BONUS PLAN.

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PROPOSAL FOUR:

RATIFICATION OF APPOINTMENT OF

PRICEWATERHOUSECOOPERS LLP AS OUR

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR

THE FISCAL YEAR ENDING JUNE 30, 2010

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.

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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.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING JUNE 30, 2010.

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OUR CORPORATE GOVERNANCE PRACTICES

At KLA-Tencor, we believe that strong and effective corporate governance procedures and practices are an extremely important part of our corporate culture. In that spirit, we have summarized several of our corporate governance practices below.

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In addition, we have established a confidential hotline and website for use by employees, as well as third parties such as vendors and customers, to report actual or suspected wrongdoing and to answer questions about business conduct. The hotline and website are both operated by an independent third party, which provides tools to enable individuals to submit reports in a number of different languages.

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ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES

All Directors other than Mr. Wallace meet the definition of independence within the meaning of the NASDAQ Stock Market director independence standards.

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 are available on our website at http://ir.kla-tencor.com. The Board of Directors and each Committee regularly reviews the Committee charters. In addition, at each regularly scheduled Board of Directors’ meeting, a member of each Committee reports on any significant matters addressed by the Committee.

During the fiscal year ended June 30, 2009, each of the incumbent Directors attended at least 85% of the aggregate of (a) the total number of meetings of the Board of Directors held during the period for which such person served as a Director and (b) the total number of meetings held by all Committees of the Board on which 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 our annual stockholder meetings. Nine of the then-current eleven members of our Board of Directors attended our annual stockholder meeting held on November 13, 2008.

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.

The Audit Committee is responsible for appointing and overseeing the work of our independent registered public accounting firm, approving the services

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performed by our independent registered public accounting firm, and reviewing and evaluating our accounting principles and system of internal accounting controls. The Audit Committee held nine meetings during the fiscal year ended June 30, 2009.

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 KLA-Tencor (including any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment as a Director).

The Compensation Committee reviews and either approves or recommends to the full Board of Directors (depending upon the category of the compensation and the executive involved) our executive compensation policy and administers our employee equity award plans. The Compensation Committee also reviews and, in most cases, has the authority to approve the cash and equity compensation for our executive officers, as well as for members of the Board of Directors. See “Compensation Discussion and Analysis – Compensation Approval Procedures” for more information concerning the procedures and processes the Compensation Committee follows in setting such compensation and implementing the various cash and equity compensation programs in effect for such individuals, including the retention of an independent compensation consultant to provide relevant market data and advice. The Compensation Committee held eight meetings during the fiscal year ended June 30, 2009.

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 three meetings during the fiscal year ended June 30, 2009.

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It is the Nominating and Governance Committee’s policy to consider candidates for the Board of Directors recommended by, among other persons, stockholders who have owned one percent (1%) or more of our outstanding shares for at least one year and who have evidenced intent to continue as a substantial stockholder for the long term. Stockholders wishing to nominate candidates for the Board of Directors must notify our General Counsel in writing of their intent to do so and provide us 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 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 KLA-Tencor. 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. With respect to new Board members, it is the standard practice of the Nominating and Governance Committee to engage a third-party recruiting firm to identify a slate of individuals for consideration as Board candidates based on the above-mentioned criteria.

During fiscal year 2007, 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.

The Nominating and Governance Committee assesses the appropriate size and composition of the Board of Directors, and whether any vacancies on the Board are expected. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Governance Committee considers potential candidates that may come to its attention through current members of the Board of Directors, professional search firms, stockholders or other persons. In evaluating properly submitted stockholder recommendations, the Nominating and Governance Committee uses the evaluation standards discussed above and seeks to achieve a balance of knowledge, experience and capability on the Board of Directors.

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DIRECTOR COMPENSATION

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.

The cash compensation component of the Outside Director compensation program will continue to remain in effect unchanged for fiscal year 2010.

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Director Compensation Table

The following table sets forth certain information regarding the compensation earned by or awarded to each Outside Director during fiscal year 2009 who served on our Board of Directors during fiscal year 2009.

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INFORMATION ABOUT EXECUTIVE OFFICERS

Set forth below are the names, ages and positions of the executive officers of KLA-Tencor as of the date of this Proxy Statement.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Principal Stockholders

As of August 31, 2009, based on our review of filings made with the SEC, we are aware of the following entities being beneficial owners of more than 5% of our Common Stock:

(1) Based on information provided pursuant to Schedules 13D and 13G filed with the SEC.

(2) Based on 170,713,140 outstanding shares of our Common Stock as of August 31, 2009.

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applicable performance or service-vesting requirements that have not yet been satisfied are not included in the table but are indicated in footnotes 13 and 14 to such table:

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EXECUTIVE COMPENSATION AND OTHER MATTERS

COMPENSATION DISCUSSION AND ANALYSIS

In early fiscal year 2009, when our executive compensation program for the year was being established, neither the Compensation Committee nor the Board of Directors anticipated that the economic challenges faced by the Company and its industries would be as severe as they turned out to be. The fiscal year 2009 executive compensation structure was predominantly weighted toward performance-based compensation, both with respect to cash and equity compensation, tied to financial performance objectives that turned out to be unachievable due to global and industry economic conditions.

Despite those economic conditions, our employees, led by the executive team, performed very well, generating positive cash flow from operations for the year, continuing with key product development efforts and reducing our operating expenses to quickly align the business to the changed economic environment. Due to those efforts, we generally outperformed our industry peers on most key financial metrics during fiscal year 2009. Notwithstanding those efforts, however, the depressed global economic conditions drastically affected the Company’s financial results and prevented the Company from achieving the objectives to which the fiscal year 2009 performance-based compensation had been tied. As a result of the challenging economic conditions and their impact on the Company’s performance:

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For Mr. Wallace, our President and Chief Executive Officer, this outcome represented a 61% decrease in his year-over-year annual cash compensation (base salary and annual bonus), and the complete cancellation of all of his fiscal year 2009 equity grants. The only elements of the fiscal year 2009 compensation packages that were received by the executive officers and other direct reports of the Chief Executive Officer (“Senior Managers”) were their base salaries and, for certain Senior Managers, their supplemental service-based equity awards. Those supplemental equity awards had been granted to address a lack of long-term retention value in the unvested equity positions held by the Senior Managers in early fiscal year 2009, based on benchmarking data regarding the unvested positions of officers at peer companies, and anticipated increased responsibilities due to the departure of John Kispert, our former President, Chief Operating Officer and Chief Financial Officer, which was announced in August 2008.

While certain components of our fiscal year 2009 compensation program yielded appropriate results given the severity of the economic downturn (such as no payouts under our fiscal year 2009 cash bonus plan), the Compensation Committee and the independent members of the Board of Directors (the “Independent Directors”) believe that the fiscal year 2009 program overall, as a consequence of the unanticipated depth of the global recession, did not strike the desired balance between (a) encouraging individual and corporate achievement through performance-based compensation and (b) creating long-term opportunities that support our retention efforts. This is evidenced, for example, by the fact that no shares were earned under the Senior Managers’ annual RSU grants in fiscal year 2009, which entirely eliminated the retentive value of the annual grants. Because we are always competing with other companies (both in our primary industries and in other associated industries) to retain our key employees, the achievement of such balance is an important element of the Compensation Committee’s philosophy regarding executive compensation.

Our executive compensation structure for fiscal year 2010, as described in more detail below, has been structured to closely align with the Compensation Committee’s overall philosophy regarding the balance between performance-based compensation and retention, while also attempting to appropriately reflect the anticipated economic environment over the course of the upcoming fiscal year.

With regard to cash compensation, last year’s deferred salary increases have been implemented for the Senior Managers for fiscal year 2010 in an effort to align Company salaries (which had not been increased in two years) with the

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competitive market, and the fiscal year 2010 cash bonus plan has been modified so that the Company’s achievement of target operating goals will only result in a payment of up to 40% of the executives’ target bonus amounts (as compared to 100% payout of executives’ target bonuses at target Company performance, which would be a more typical plan construct under normal operating environments). Bonus payments above 40% of the executives’ target bonus amounts are tied to increases in our operating margin percentage. While these changes (lower bonus multiples at target Company performance and tying higher bonuses to incremental earnings by the Company) generally result in lower total target cash compensation for our Senior Managers as compared to the prior year, the Compensation Committee and the Independent Directors believe that outcome is appropriate in light of the current economic environment.

With regard to long-term compensation, the equity awards for fiscal year 2010 to the Senior Managers have been divided into two categories – an annual RSU grant (of which half of the RSUs are performance-based with goals that may be fully achieved over a period of one to three fiscal years, and the other half are service-based) and a supplemental service-based RSU grant, intended to address the potential long-term retention issues created by executives’ reduced levels of unvested equity holdings.

The fiscal year 2010 compensation structure has been designed to be consistent with our compensation philosophy and design principles and to address the specific circumstances that we currently face and anticipate in the coming fiscal year. Similarly, in future years, the Compensation Committee will evaluate the environment and will implement the appropriate structural elements and features for the compensation programs warranted at such time.

The Compensation Committee’s philosophy is reflected in the following executive compensation design principles:

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The Compensation Committee takes into account a number of data sources and factors, including a broad range of market data (as more fully described in the following paragraphs) and the cyclical nature of the industries in which we operate. In addition, the Compensation Committee conducts an individual analysis for each executive officer, which incorporates a review of internal performance reviews and individualized reports for each officer that state the dollar value of the officer’s base salary, annual and long-term compensation, vested and unvested equity awards (and future vesting schedule) and benefits. The Committee also considers the executive officers’ compensation relative to one another in determining executive compensation, in an effort to ensure internal alignment and equity.

Our ability to continue to attract and retain outstanding contributors, including our core executive team, is essential to our continuing success. Therefore, the Compensation Committee reviews a number of different data sources (including peer group and broader market data) to ensure that we are offering compensation packages that are competitive with those offered by other employers (both in our primary industries and in other associated industries) seeking to attract the same talented individuals. For fiscal year 2009, the Compensation Committee used, in addition to the data described below in this section, a single list of peer group companies, representing companies of comparable size and industry. Our fiscal year 2009 peer group was comprised of Applied Materials, Inc., ASML Holdings, Lam Research Corporation, Novellus Systems, Inc., Teradyne, Inc. and Varian Semiconductor Equipment, Inc., and this same list of peer group companies has been employed in establishing our fiscal year 2010 compensation program as well.

The Compensation Committee reviews the compensation programs and practices of its peer group companies to obtain compensation data and identify compensation trends and practices. Data regarding these peer group companies is primarily obtained 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 our industry. In addition, we subscribe 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 our relevant industries) and the Computer and High Performance Systems (CHiPS) Executive Survey to obtain additional data concerning target cash compensation levels.

Among the various types of market data considered by the Compensation Committee in its deliberations, the Compensation Committee reviews percentile data to understand the spectrum of compensation packages offered by other similarly situated companies. Though the Compensation Committee refers to such percentile data in its analysis, as well as allocations between annual and long-term compensation, the Compensation Committee does not employ specific equations for determining compensation amounts based on such data, as the appropriate percentile and allocation targets will vary, among participants and over time, for each officer based upon individual factors such as performance, experience and market demands for the officer’s skill set. Rather, the Compensation Committee’s emphasis is on establishing

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compensation packages for the Senior Managers that, in the Committee’s judgment, are structured to achieve the goals described under “Compensation Philosophy and Design Principles” above. The Compensation Committee references the data points that represent the median to 75th percentile, with an emphasis on the lower end of that range when reviewing base salary data, but structuring the Senior Managers’ packages so that total compensation can be at or above the higher end of that range in years of strong Company performance. The Compensation Committee will continue to evaluate these percentile ranges as a reference point and may use a different reference point in future periods based on Company performance and other market factors.

Base Salary:

The Compensation Committee engages in annual reviews of the base salaries of the Senior Managers as part of the overall review and determination of our executive compensation program for the relevant fiscal year. With respect to base salary, the Compensation Committee’s objective is to offer a level of fixed cash compensation, generally targeted at the median of the applicable market data, that will enable us to attract and retain top talent.

In early fiscal year 2009, the Compensation Committee (and the Independent Directors, with respect to our Chief Executive Officer) approved salary increases for the Senior Managers, but those salary raises were never implemented during the year. The fiscal year 2009 approved salary raises were intended to address two significant developments within the Company. First, the fiscal year 2009 compensation program was structured to be more competitive with the market by increasing fixed compensation as a percentage of each Senior Manager’s total cash compensation opportunity. The salary raises, paired with lower bonuses (compared to historic payouts, at each level of Company performance relative to applicable target performance), were intended to accomplish this result. Second, the fiscal year 2009 salary increases for certain Senior Managers were designed to ensure that base salaries would appropriately reflect their increased roles and responsibilities as a result of the departure of Mr. Kispert, our former President, Chief Operating Officer and Chief Financial Officer.

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Of our executive officers, the increase in role and responsibility described above most directly affected Mr. Wallace, our President and Chief Executive Officer, who assumed the role of President and, with it, a number of additional organizational responsibilities. Accordingly, the independent members of the Board of Directors approved a fiscal year 2009 salary increase for Mr. Wallace of 14.3%, which exceeded the percentage increase approved for any of the other executive officers.

Those fiscal year 2009 salary increases, however, were never implemented. Shortly after the fiscal year 2009 raises were approved, our management recommended that the Compensation Committee and Independent Directors indefinitely delay the implementation of the raises, as part of our efforts to reduce our operating costs in light of the challenging economic environment anticipated for fiscal year 2009, and the Compensation Committee and Independent Directors approved those recommendations in November 2008. As a result, though the cash bonus component of our compensation program was reduced in fiscal year 2009 to more closely align our overall program with the programs offered by other companies, the base salary component of our program was not increased as planned. In light of the global economic downturn experienced during fiscal year 2009, the Compensation Committee and Independent Directors believe that such an outcome was appropriate.

In August 2009, in reviewing and determining the overall executive compensation packages for fiscal year 2010, the Compensation Committee (and, with respect to our Chief Executive Officer, the Independent Directors) approved salary increases for the Senior Managers, effective August 31, 2009, equal to the raises that had been approved (but not implemented) during the prior fiscal year. These fiscal year 2010 raises were approved to ensure that our executive compensation packages, including the minimum levels of cash compensation offered by the packages, remain competitive in the marketplace and to account for the officers’ increased roles and responsibilities during the course of the prior year. The following table presents the base salaries of our named executive officers for fiscal years 2009 and 2010:

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Annual Bonus Plan:

i. Fiscal Year 2009 Performance Bonus Plan:

Our Performance Bonus Plan (the “Bonus Plan”), an incentive bonus plan administered in conformity with Section 162(m) of the Internal Revenue Code, provides the Senior Managers with an opportunity to earn performance-based cash compensation based on the Company’s achievement of key financial and strategic Company goals as well as individual performance. As a result of the challenging economic conditions experienced by the Company and the semiconductor industry as a whole during the fiscal year, no bonuses were paid under the fiscal year 2009 Bonus Plan.

In August 2008, the Compensation Committee and, with respect to our Chief Executive Officer, the Independent Directors established each officer’s target bonus payout (stated as a percentage of the officer’s base salary) as well as the Company performance targets and bonus potentials (including threshold, target and maximum payout levels) in effect for fiscal year 2009 under the Bonus Plan. In establishing the officers’ target awards for fiscal year 2009, the Compensation Committee and the Independent Directors considered a wide range of market data (described under “Compensation Committee Decision Making–Process Overview and Market Data” above), as well as the allocation of total compensation (both between base salary and variable bonus compensation, and between cash and non-cash compensation), competitive factors and the structure of our fiscal year 2009 Bonus Plan. The officers’ target bonus percentages are established at levels that generate total target cash compensation opportunities that the Compensation Committee and, as applicable, the Independent Directors determine are competitive with the market for comparable positions at other companies.

Under the fiscal year 2009 Bonus Plan, the Company was required to achieve a threshold level of operating margin² in order for the plan to be funded.³ Upon achievement of that threshold level of operating margin, a participant’s actual bonus amount would then be determined based upon the Company’s

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operating margin and relative revenue growth (relative to an index of the revenue growth of 27 semiconductor capital equipment manufacturers, measured over the same period), with each participant’s bonus amount subject to adjustment based on individual performance. The financial targets selected for use under the fiscal year 2009 Bonus Plan were designed to reward strong financial performance by the Company, measured in absolute terms, while also reflecting our continuing emphasis on outperforming our competitors and other similarly situated companies. The maximum potential bonus payout to any participant under the fiscal year 2009 Bonus Plan was three times the participant’s target bonus amount.

For fiscal year 2009, to reduce our compensation expenses in response to the challenging industry-wide business environment, the payout percentages under the Bonus Plan were significantly reduced, compared to the prior year at each level of Company performance relative to the applicable year’s target operating results. For example, the Company’s achievement of its target operating margin in fiscal year 2009 (assuming neutral revenue growth relative to our comparator group) would have resulted in a payout under the fiscal year 2009 Bonus Plan of only 70% of the Senior Managers’ target bonus amounts. As a result, total targeted cash compensation for fiscal year 2009 at each level of corporate performance relative to the applicable year’s target was lower year over year as compared to fiscal year 2008, an outcome that will again be true in fiscal year 2010 due to the structure of the fiscal year 2010 Bonus Plan (as further described below).

The fiscal year 2009 performance goals were set at levels that would require very strong operational performance and were considered difficult to achieve at the time, given anticipated market conditions. However, because of the unanticipated severity of the economic downturn during the fiscal year, the performance goals proved to be unobtainable notwithstanding the substantial efforts and contributions of the Senior Managers. As a result, the Company did not achieve the threshold performance level of $256 million in operating margin, and no bonuses were paid to the Senior Managers for fiscal year 2009.

The following table sets forth, for each named executive officer, the officer’s target bonus percentage, the bonus percentage that would have been paid to the officer if the Company had generated target operating margin (assuming neutral revenue growth relative to our comparator group), and the actual bonus amount paid to the officer:

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ii. Fiscal Year 2010 Performance Bonus Plan:

In August 2009, the Compensation Committee and, with respect to our Chief Executive Officer, the Independent Directors established each Senior Manager’s target bonus payout (stated as a percentage of the Senior Manager’s base salary) and the Company performance targets and bonus potentials (at threshold, target and maximum payout levels) in effect for fiscal year 2010 under the Bonus Plan. As with prior years, the initial threshold performance target, which is necessary to fund the fiscal year 2010 Bonus Plan, is tied to the Company’s achievement of a pre-determined level of operating margin. If that threshold level of operating margin is achieved, the fiscal year 2010 Bonus Plan introduces a different framework from the one

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employed for fiscal year 2009 for determining the actual bonus amount, if any, that will be payable to the Senior Managers participating in the plan.

Under the fiscal year 2010 Bonus Plan, if the Company achieves the threshold level of operating margin, a Senior Manager may be eligible for a bonus under the plan. A Senior Manager may be awarded up to 40% of his or her bonus payout percentage, with the award amount to be determined by the Compensation Committee or the Independent Directors (as applicable) in their discretion based upon their assessment of the Company’s performance as measured against a defined “balanced scorecard.” This balanced scorecard, which is a type of annual report card that measures the Company’s performance against a variety of pre-established goals and objectives, takes into account performance variables such as relative revenue growth, market share, operational excellence and retention of key talent. All of these pre-established goals and objectives are set at levels that the Compensation Committee, the Independent Directors and the Company believe will be very challenging to achieve. While many of these metrics are quantitative in nature, some are qualitative and will introduce an enhanced degree of discretion and subjective judgment into the process through which the Compensation Committee and, with respect to our Chief Executive Officer, the Independent Directors determine payouts under the fiscal year 2010 Bonus Plan. We believe that the use of the expanded measures of financial and strategic success, as represented by the balanced scorecard framework, serves to closely align the interests of our executive officers with those of our stockholders.

Under the fiscal year 2010 Bonus Plan, payouts in excess of 40% of the Senior Managers’ target bonus amounts will be earned based upon incremental improvements in the Company’s operating margin percentage (above the Company’s target percentage). This structure is intended to ensure that payment of bonuses in excess of 40% of a participant’s target amount will be conditioned on the Company having generated incremental earnings sufficient to fund those bonuses. Also, as in prior years, the Compensation Committee will have the discretion to adjust the actual bonus amount otherwise payable to a Senior Manager based on their assessment of the Senior Manager’s performance for fiscal year 2010, compared against the individual performance objectives established for the Senior Manager early in the year. With respect to our Chief Executive Officer, the Independent Directors will have similar discretion to adjust his actual bonus amount, based on the Company’s achievement of pre-determined performance objectives.

Another feature of the fiscal year 2010 Bonus Plan is that the payout percentages under the plan have again been significantly reduced, as compared to the prior year. Under normal market conditions, we expect that the annual Bonus Plan will provide for payment of 100% of the participants’ target bonuses upon the Company’s achievement of target operating results. The fiscal year 2009 Bonus Plan, however, only provided for payment of 70% target bonus amounts for Company performance at the fiscal year 2009 target, and the fiscal year 2010 Bonus Plan further reduces that percentage to 40% for achievement of fiscal year 2010 target performance. These structural changes are part of our efforts to limit compensation expenses due to the challenging

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business conditions currently facing the semiconductor capital equipment industry. As a result of these changes, the Senior Managers’ total target cash compensation in fiscal year 2010 is generally lower than the prior year for similar performance relative to the year’s target—an outcome that the Compensation Committee and independent members of the Board of Directors feel is reasonable in the current economic environment within our primary industries.

The following named executive officers will participate in our fiscal year 2010 Bonus Plan, with bonus potentials at the following payout levels:

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The actual bonus award (if any) will depend upon the actual level at which the performance targets for fiscal year 2010 are attained, but no executive officer will receive a bonus award under the fiscal year 2010 Performance Bonus Plan in excess of the maximum dollar award indicated for him above, and no executive officer will receive any bonus award under such plan if the Section 162(m) threshold level of Company performance (tied to operating margin) is not attained.

Long-Term Incentives:

The purpose of the long-term incentive component of our executive compensation program is to align long-term management and stockholder interests and strengthen retention through service-based and performance-based awards with four-year vesting provisions. The Compensation Committee believes that these long-term objectives serve as an effective means of building long-term stockholder value. The long-term incentives offered by the Company have historically been in the form of equity awards.

Our 2004 Equity Incentive Plan permits various types of equity awards, including grants of stock options, performance shares and restricted stock units. According to the Compensation Committee’s philosophy, the equity component of our executive compensation program should be designed to provide two forms of long-term compensation: (i) equity awards with vesting conditioned only upon continued service, which serve as an important element of our efforts to retain key employees, and (ii) additional performance-based equity awards, comprising a meaningful portion of the Senior Managers’ overall equity packages, which provide additional long-term compensation as a reward for achievement of corporate and individual goals and which, if earned, also include service-vesting requirements.

Since the beginning of fiscal year 2007, the equity awards to our executive officers have been comprised entirely of performance shares and restricted stock units (that is, no stock options have been granted to the officers). The mix between performance shares and restricted stock units will vary from year to year, as appropriate depending on the facts and circumstances in existence for the applicable year. These factors include the Senior Managers’ unvested equity positions, the vesting schedules of existing equity awards, the existence of unique strategic or financial goals for the particular performance period, and organizational or industry changes that could put at risk our efforts to attract and retain top talent.

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 that incorporate Company performance, as opposed to stock price performance, are a more appropriate way to provide incentives to Senior Managers and reward success. Senior Managers and other employees are more able, through their positive contributions to the Company, to directly impact the Company’s performance than our stock price. Therefore, the Compensation Committee believes that equity awards in the form of performance shares and restricted stock units are highly motivating, provide a major incentive for employees to build stockholder value and significantly strengthen our retention efforts.

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i. Annual Equity Grants for Fiscal Year 2009:

The “annual equity” component of our executive compensation program refers to the Senior Manager equity grants that represent the target equity value that the Compensation Committee aims to deliver to each Senior Manager as part of his or her annual compensation. The size of each annual grant is established with reference to the Senior Manager’s role and responsibilities within the Company, as well as market data from the Radford Executive Survey and the Independent Consultant regarding the dollar value of annual grants made to similarly situated executives. In establishing the number of shares subject to the annual grants, the Compensation Committee typically attempts to position the opportunity to fall between the median and 75^th percentile for annual equity compensation, though the Compensation Committee will continue to evaluate that particular percentile range as a reference point and may use a different reference point in future periods based on Company performance and other market factors. This annual equity component is distinguished from any “supplemental equity” awards that may be granted for a particular year based on the specific circumstances applicable to that year.

The Compensation Committee’s design objective with respect to the annual equity component is that it should be structured so as to accomplish both goals of the equity program – reward achievement of key performance objectives and enhance our ability to retain our key employees. Due to the unanticipated severity of the challenges faced in our industry (and the global economy as a whole) during fiscal year 2009, however, the annual grants for fiscal year 2009 failed to strike the essential balance between those goals.

The fiscal year 2009 annual grants to most of the Senior Managers (including all of the executive officers) were comprised entirely of performance shares. Under the fiscal year 2009 annual equity grants, the number of shares earned by the Senior Managers under the annual awards was to be determined solely based on the Company’s achieved level of operating margin. The Company was required to achieve a threshold level of operating margin in order for any shares to be earned under the annual awards.

The performance goals that the Compensation Committee set for the fiscal year 2009 annual equity awards were set at levels that would require very strong operational performance and were considered difficult to achieve at the time, given anticipated market conditions. However, because of the unanticipated severity of the economic downturn during fiscal year 2009, the Company did not achieve the threshold performance level of $183 million in operating margin, notwithstanding the substantial efforts and contributions of the Senior Managers. As a result, none of the shares subject to the annual awards were earned by the named executive officers (or any of the other Senior Managers whose annual awards were entirely comprised of performance-based awards) for fiscal year 2009.

Mr. Dentinger joined the Company as our Executive Vice President and Chief Financial Officer in September 2008 and therefore did not receive an annual equity award under our fiscal year 2009 equity plan. Mr. Dentinger received a new hire grant of service-based restricted stock units covering 40,000 shares of our common stock in connection with his employment, which the Compensation Committee, following its review of applicable market data, determined to be appropriate for Mr. Dentinger’s role and responsibilities.

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The following table sets forth the minimum and target/maximum shares achievable by each named executive officer (except as set forth below), as well as the actual number of shares awarded to the officer, with respect to such officer’s annual equity award for fiscal year 2009:

ii. Supplemental Equity Grants for Fiscal Year 2009:

In addition to the annual equity awards granted to the named executive officers for fiscal year 2009, the Compensation Committee and the Independent Directors also awarded supplemental equity grants to Messrs. Wallace, Martin and Kirloskar, as well as other Senior Managers throughout the Company. These supplemental awards were intended to address a lack of long-term retention value in the unvested equity positions held by the Senior Managers, based on benchmarking data regarding officers at peer companies, and anticipated increased responsibilities in light of the departure of Mr. Kispert, our former President, Chief Operating Officer and Chief Financial Officer, which was announced in August 2008.

For Mr. Wallace, his supplemental grant was structured as a performance share award. Under Mr. Wallace’s supplemental grants, the Company was required to achieve a threshold level of operating margin as a condition for any shares to be earned under the award. Upon achievement of that threshold level of operating margin, Mr. Wallace’s actual number of shares would then be determined based upon the Company’s achievement of certain pre-determined strategic objectives. Although Mr. Wallace made outstanding contributions to the Company during an intensely challenging period and played a significant role in the Company’s achievement of key strategic goals, the Company, due to the unanticipated severity of the economic downturn in fiscal year 2009, did not achieve the threshold performance level of $274.5 million in operating margin. As a result, Mr. Wallace was not awarded any of the shares subject to his fiscal 2009 supplemental equity award.

For Messrs. Martin and Kirloskar, along with the other Senior Managers who received supplemental awards, their supplemental grants were structured as restricted stock units subject only to continued service with us. Fifty percent

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(50%) of the shares subject to these service-based supplemental awards will vest two years from the date of the award, and the remaining fifty percent (50%) will vest four years from the date of the award, in each case subject to the individual’s continued employment with us on the applicable vesting date.

The following table sets forth the minimum and target/maximum shares achievable by each named executive officer (except as set forth below), as well as the actual number of shares issued to the officer, with respect to such officer’s supplemental equity award for fiscal year 2009: