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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 3, 2010

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 3, 2010 at 12:00 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 14, 2010 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 23, 2010.

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KLA-TENCOR CORPORATION

2010 ANNUAL MEETING OF STOCKHOLDERS – PROXY STATEMENT

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ANNUAL MEETING OF STOCKHOLDERS

OF

KLA-TENCOR CORPORATION

To be held on November 3, 2010

PROXY STATEMENT

QUESTIONS AND ANSWERS REGARDING PROXY MATERIALS

These proxy solicitation materials, together with our Annual Report for fiscal year 2010, were first made available on or about September 23, 2010 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 REGARDING 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

If, however, your shares are registered directly in your name with our transfer agent, you are considered, with respect to those shares, the stockholder of record, and these proxy materials are being sent directly to you. You may vote in the following ways:

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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) and FOR Proposal Two (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 and as the proxy holders may determine in their discretion with respect to any other matters that properly come before the meeting.

If you are the beneficial owner of shares held in street name, you should contact the broker, bank or other nominee that holds your shares for instructions regarding how to change your vote.

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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

                                                 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 stockholders’ meeting is moved more than 30 days before or 60 days after November 3, 2011, 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 stockholders’ meeting. To nominate a director, the stockholder

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To nominate an individual for election at an annual stockholders’ 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 6, 2011 and the close of business on August 5, 2011, unless the annual meeting is moved by more than 30 days before or 60 days after November 3, 2011, in which case the deadline will be as described in Question 20 above.

As noted above, rules recently adopted by the SEC provide certain stockholders with the right to nominate candidates to our Board of Directors in our proxy materials. Under those rules (which will be in effect next year for our 2011 annual meeting of stockholders), for a director nominee to be considered for inclusion in our proxy statement for the 2011 annual meeting, the nominating stockholder must file a Schedule 14N with the SEC (and provide a copy to us) no earlier than April 26, 2011 and no later than May 26, 2011.

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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. The Class II Directors will serve until the annual meeting of stockholders to be held in 2012 or until their respective successors are duly elected and qualified.

The three incumbent Class III Directors are Edward W. Barnholt, Stephen P. Kaufman and Richard P. Wallace. They are up for re-election at the Annual Meeting. Emiko Higashi, who is not an incumbent Director, has also been nominated by the Board for election at the Annual Meeting to serve as a Class III Director.

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

If elected, the nominees for Class III Directors will serve as Directors until our annual meeting of stockholders in 2013, each until his or her 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 may designate. As of the date of this Proxy Statement, the Board 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 UNANIMOUSLY RECOMMEND A VOTE “FOR” EACH OF THE CLASS III DIRECTOR NOMINEES, WITH THE DIRECTORS WHO ARE NOMINEES ABSTAINING.

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INFORMATION 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 has three standing committees: the Audit Committee; the Compensation Committee; and the Nominating and Governance Committee. The Board 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, all of which are available on our website at http://ir.kla-tencor.com. The Board and each Committee regularly review the Committee charters. In addition, at each quarterly Board meeting, a member of each Committee reports on any significant matters addressed by the Committee.

During the fiscal year ended June 30, 2010, each of the incumbent Directors attended at least 85% of the aggregate of (a) the total number of meetings of the Board 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 such Director served).

Although we do not have a formal policy mandating attendance by members of the Board at our annual meetings of stockholders, we do have a formal policy encouraging their attendance at our annual stockholders’ meetings. Nine of the ten members of our Board attended our annual stockholders’ meeting held on November 4, 2009.

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.

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Separating the positions of Chief Executive Officer and Chairman of the Board allows our Chief Executive Officer to focus on our day-to-day business, while allowing the Chairman of the Board to lead the Board in its fundamental role of providing advice to and independent oversight of management. The Board believes that having an independent Director serve as Chairman of the Board is the appropriate leadership structure for the Company at this time.

However, our Corporate Governance Standards permit the roles of the Chairman of the Board and the Chief Executive Officer to be filled by the same or different individuals. This provides the Board with flexibility to determine whether the two roles should be combined in the future based on KLA-Tencor’s needs and the Board’s assessment of the Company’s leadership from time to time. Our Corporate Governance Standards provide that, in the event that the Chairman of the Board is not an independent Director, the independent members of the Board will designate a “lead independent director.”

While our Board is ultimately responsible for risk oversight at KLA-Tencor, our Board has delegated to the Audit Committee the primary responsibility for the active oversight of our enterprise risk management activities. Our Audit Committee is not only responsible for overseeing risk management of financial matters, the adequacy of our risk-related internal controls, financial reporting and internal investigations, but its charter also provides that the Committee will discuss at least annually KLA-Tencor’s risk assessment, enterprise risk management processes and our major financial exposures, as well as the steps our management has taken to monitor and control those exposures. Our Audit Committee reports its findings and activities to the Board at each quarterly Board meeting.

In addition, our other Board committees each oversee certain aspects of risk management. Our Compensation Committee oversees risks related to our compensation policies and practices, and our Nominating and Governance Committee oversees governance related risks, such as Board independence and conflicts of interest, as well as management and director succession planning. The Committees report their findings and activities to the Board at each quarterly Board meeting.

While the Board is responsible for risk oversight, management is responsible for risk management. KLA-Tencor maintains an effective internal controls

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environment and has processes to identify and manage risk, including an Executive Risk Council comprised of representatives from our legal, human resources, finance, internal audit, compliance and operational teams. This council reports to our Chief Executive Officer and has oversight of the various risk assessment, monitoring and controls processes across the Company.

The Board has determined that, of the current members of the Audit Committee, Messrs. Calderoni and Patel are both “audit committee financial experts” within the meaning of the rules and regulations promulgated by the SEC.

The Audit Committee is responsible for appointing and overseeing the work of our independent registered public accounting firm, approving the services 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 seven meetings during the fiscal year ended June 30, 2010.

The Board 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 (depending upon the compensation plan and the executive involved) our executive compensation policy and administers our employee equity award plans. The Compensation Committee also reviews and, except with respect to our Chief Executive Officer and Chairman of the Board, has the authority to approve the cash and equity compensation for our executive officers and for members of the Board. See “Compensation Discussion and Analysis – Compensation Approval Procedures” for more information

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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, 2010.

Risk Considerations in Our Compensation Programs

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The Nominating and Governance Committee is primarily responsible for identifying and evaluating the qualifications of all candidates for election to the Board, as well as reviewing corporate governance policies and procedures. The Nominating and Governance Committee held four meetings during the fiscal year ended June 30, 2010.

The Nominating and Governance Committee assesses the appropriate size and composition of the Board, the effectiveness of its leadership structure, 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, professional search firms, management, stockholders or other persons. In evaluating properly submitted stockholder recommendations, the Nominating and Governance Committee uses the evaluation standards discussed in further detail below and seeks to achieve a balance of knowledge, experience and capability on the Board.

It is the Nominating and Governance Committee’s policy to consider candidates for the Board 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 state that they have an intent to continue as a substantial stockholder for the long term. Stockholders wishing to nominate candidates for the Board 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 addition, beginning in 2011, stockholders that satisfy applicable ownership requirements and wish to nominate candidates for the Board for inclusion in our proxy materials must file a Schedule 14N with the SEC (and provide a copy to us) containing the information, and within the timeframe, required by the SEC.

Several years ago, we instituted a governance policy applicable to uncontested Director elections, which policy currently remains in effect. 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, subject to acceptance, after certification of the election results. The Nominating and Governance Committee will make a recommendation to the Board 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 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 regarding his or her resignation.

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Director Qualifications and Diversity

The Board believes that the skill set, backgrounds and qualifications of our Directors, considered as a group, should provide a significant composite mix of diversity in experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. In addition, the Board believes that there are certain attributes that every Director should possess, such as demonstrated business or academic achievements, the highest ethical standards and a strong sense of professionalism. Accordingly, the Board and the Nominating and Governance Committee consider the qualifications of Directors and Director candidates individually and in the broader context of the Board’s overall composition and KLA-Tencor’s current and future needs.

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

In addition, the Nominating and Governance Committee annually reviews with the Board the appropriate skills and characteristics required of Directors in the context of the current composition of the Board. In seeking a diversity of background, the Nominating and Governance Committee seeks a variety of occupational and personal backgrounds on the Board in order to obtain a range of viewpoints and perspectives. This annual assessment enables the Board to update the skills and experience it seeks in the Board as a whole, and in individual Directors, as KLA-Tencor’s needs evolve and change over time.

In evaluating Director candidates, and considering incumbent Directors for renomination to the Board, the Nominating and Governance Committee has considered all of the criteria described above and, for incumbent Directors, past performance on the Board. Among other things, the Nominating and Governance Committee has determined that it is important to have individuals with the following skills and experiences on the Board:

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INFORMATION ABOUT THE DIRECTORS AND THE NOMINEES

Our Board and its Nominating and Governance Committee believe that all of the Directors and nominees listed below are highly qualified and have the skills and experience required for service on our Board. The following table sets forth certain information with respect to our Directors and nominees as of the date of this Proxy Statement, including biographies that reflect their significant experiences, qualifications and skills:

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PROPOSAL TWO:

RATIFICATION OF APPOINTMENT OF

PRICEWATERHOUSECOOPERS LLP AS OUR

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

FOR THE FISCAL YEAR ENDING JUNE 30, 2011

The Board, 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 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 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, 2011.

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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 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 and on an anonymous basis.

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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 2011.

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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 2010 who served on our Board during the year.

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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

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EXECUTIVE COMPENSATION AND OTHER MATTERS

COMPENSATION DISCUSSION AND ANALYSIS

As we disclosed last year in our Proxy Statement, our fiscal year 2009 executive compensation program was significantly impacted by the decline in our industry during that year. The program 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 during that year, resulting in no bonus payouts or performance shares being earned by the executive team. These results did not reflect the fact that our employees, led by the executive team, performed very well during fiscal year 2009, generating positive operating cash flow, continuing with key product development efforts and rigorously managing our cost structure.

Similarly, our executive compensation program for fiscal year 2010 was affected by the unexpected and dramatic shifts in our industry during the year. In July and August 2009, when our fiscal year 2010 executive compensation program was being established, we were coming off a nine-month period (October 2008 to June 2009) of some of the lowest new order totals in the Company’s history. Consistent with our compensation philosophy, our fiscal year 2010 executive compensation structure featured significant performance-based components, both with respect to cash and equity compensation, tied to financial performance objectives that were considered very challenging to achieve at the time they were established. At that time, neither the Compensation Committee nor the Board of Directors anticipated that the industry would recover as quickly and dramatically during fiscal year 2010 as it eventually did.

KLA-Tencor performed extremely well during fiscal year 2010. To some extent, that success was a function of the overall industry’s rapid recovery. However, to a greater extent, the Company’s financial and operational success was a direct result of our ability to continue developing industry-leading products that meet our customers’ ever-increasing demands and our success in maintaining the cost structure and discipline that we instituted during the fiscal year 2009 downturn, even as the industry recovered. This is evidenced by a number of Company-specific accomplishments, including:

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These results serve as confirmation that, while we and our competitors certainly benefited from the dramatic recovery experienced in the semiconductor industry during fiscal year 2010, our success was largely attributable to our executive team’s ability to ensure that, by focusing our product development efforts on our most strategic projects and intelligently managing our business and expenses throughout the downturn, we remained well-positioned to take advantage of the recent recovery.

However, the Company’s stock performance over the same period has not reflected the Company’s strong absolute and relative performance, and as a result the relative shareholder return of KLA-Tencor’s common stock (stock price appreciation and dividends paid) has underperformed other companies in our industry notwithstanding our superior relative operating performance. In an effort to improve the correlation between our total shareholder return and our actual performance, we recently announced a significant increase in our quarterly dividend level (from $0.15 to $0.25 per share), which took effect in August 2010.

The payouts under our fiscal year 2010 compensation program are the result of the outstanding performance of the Company and our management team over the past several years. The named executive officers’ performance share awards granted during fiscal year 2010 were fully earned as a result of the Company’s operating margin performance, which generated an operating margin percentage equal to more than five (5) times the Company’s target percentage that was established at the start of the fiscal year. In addition, due to that operating margin percentage and the Company’s overall performance, our fiscal year 2010 cash bonus plan, which was structured to only pay out 40% of the executives’ target bonus amounts at the Company’s target level of operating margin (because the fiscal year 2010 outlook for the semiconductor industry at the start of the year was so bleak that the Company’s target operating margin would not support full bonus payouts), paid bonuses of 297% of target bonus amounts, just short of the maximum amount payable under the plan.

The past two years serve as an example of how cyclical and, at times, unpredictable the semiconductor industry can be. However, the Compensation

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Committee and the independent members of our Board (the “Independent Board Members,” which refers to all of the members of our Board other than our Chief Executive Officer and is the group that makes all determinations regarding our Chief Executive Officer’s compensation) believe that, notwithstanding that industry volatility, the Company’s executive compensation program is structured in a way that is designed to ensure that, over the long term, the compensation for our executive officers is market competitive and will fairly reflect the Company’s performance over that time.

Our executive compensation structure for fiscal year 2011, as described in more detail below, has again 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, we have not implemented salary increases for fiscal year 2011 for any of the named executive officers, as existing salary levels (which were increased in fiscal year 2010 for the first time in two years) were determined to be competitive. The fiscal year 2011 cash bonus plan has returned to a more typical plan construct, structured so that the Company’s achievement of target operating goals will result in a payment of 100% of the executives’ target bonus amounts. Similar to the fiscal year 2010 bonus plan, bonus payments under the fiscal year 2011 bonus plan will be determined by a combination of the Company’s operating margin percentage and its performance against a balanced scorecard of key corporate goals.

With regard to long-term compensation, the equity awards for fiscal year 2011 to the named executive officers consist of an annual equity grant of restricted stock units. Half of that annual grant is a performance share award with goals that may be fully achieved over a period of two years (but, unlike the prior year’s grants, are not earnable after one year), and the other half of the annual grant is in the form of restricted stock units with only service-based vesting requirements. Consistent with past practices, all equity awards granted to the named executive officers (including the performance shares, to the extent earned) vest over a period of four years. No supplemental restricted stock units have been awarded for fiscal year 2011.

The fiscal year 2011 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 (and, with respect to the compensation of our Chief Executive Officer, the Independent Board Members) will evaluate the environment and will implement the appropriate structural elements and features for the compensation programs warranted at such time.

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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 2010, 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 2010 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 2011 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

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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 compensation packages for the executive officers 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 executive officers’ 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 executive officers 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, determined with reference to the median of the

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In fiscal year 2010, the Compensation Committee (and the Independent Board Members, with respect to our Chief Executive Officer) implemented salary increases for the executive officers, which increases had been initially approved during fiscal year 2009 but, at the recommendation of management, had not been given effect due to the challenging market conditions that arose shortly after that initial approval.

The salary raises that were approved in fiscal year 2009 (but not implemented until fiscal year 2010) had been intended to address two significant developments within the Company. First, the fiscal year 2009 compensation program had been structured to be more competitive with the market by increasing fixed compensation as a percentage of each executive’s total cash compensation opportunity. The salary raises approved in fiscal year 2009, paired with the simultaneous lowering of bonus opportunities (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 approved salary increases for certain executives were intended to reflect their increased roles and responsibilities as a result of organizational changes at that time. Of our executive officers, the increase in role and responsibility most directly affected Mr. Wallace, who assumed the role of President and, with it, a number of additional organizational responsibilities. Accordingly, the Independent Board Members approved a fiscal year 2009 salary increase for Mr. Wallace of 14.3%, which exceeded the percentage increase approved for any of the other named executive officers. The conditions that had initially prompted the raises (the reduced bonus plan structure and expanded roles and responsibilities) remained in effect in early fiscal year 2010, and, accordingly, the deferred salary increases were implemented at that time.

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In August 2010, in reviewing and determining the overall executive compensation packages for fiscal year 2011, the Compensation Committee (and, with respect to our Chief Executive Officer, the Independent Board Members) determined that the existing base salaries of the named executive officers were competitive with the marketplace for equivalent positions at other companies. Accordingly, no base salary increases were approved for any of the named executive officers for fiscal year 2011. The following table presents the base salaries of our named executive officers for fiscal years 2010 and 2011:

Annual Bonus Plan:

i. Fiscal Year 2010 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 named executive officers 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.

In August 2009, the Compensation Committee and, with respect to our Chief Executive Officer, the Independent Board Members 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 2010 under the Bonus Plan. In establishing the officers’ target awards for fiscal year 2010, the Compensation Committee (and, with respect to deliberations regarding our Chief Executive Officer, the Independent Board Members) 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 2010 Bonus Plan. The

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officers’ target bonus percentages are established at levels that generate total target cash compensation opportunities that the Compensation Committee and, as applicable, the Independent Board Members determine are competitive with the market for comparable positions at other companies.

Under the fiscal year 2010 Bonus Plan, the Company was required to achieve a threshold level of operating margin¹ in order for the plan to be funded.² Upon achievement of that threshold level of operating margin, a participant’s actual bonus amount would then be determined based upon the Company’s operating margin percentage and the assessment by the Compensation Committee and the Independent Board Members of the Company’s performance as measured against a defined “balanced scorecard.” Though the balanced scorecard has been used within the Company for many years as a tool for assessing the Company’s performance across a broad range of key areas, fiscal year 2010 represented the first time that the scorecard was formally incorporated into our executive compensation program. The balanced scorecard takes into account our strategic objectives of growth, customer focus, operational excellence and talent (each of which is addressed in more detail below), and applies scores for the Company’s performance against a variety of specific goals within each of those variables. The scorecard is tracked throughout the year and is reviewed every quarter, then formally presented to the Compensation Committee and the Independent Board Members following the conclusion of the fiscal year for assessment as to the Company’s success in achieving the pre-established annual goals. For fiscal year 2010, the pre-established quantitative goals and objectives were set at levels that, based on a number of factors including the Company’s prior year performance and the then-prevailing macro-economic conditions, the Compensation Committee, the Independent Board Members and the Company believed would be very challenging to achieve at the time the plan was adopted. While many of the metrics are quantitative in nature, some are qualitative and therefore introduce an enhanced degree of discretion and subjective judgment into the bonus determination process. 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.

Specifically, the fiscal year 2010 Bonus Plan was structured as follows:

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In addition, the Compensation Committee had the discretion to adjust the actual bonus amount otherwise payable to an executive based on their assessment of the executive’s performance for fiscal year 2010. With respect to our Chief Executive Officer, the Independent Board Members had similar discretion to adjust his actual bonus amount, based on the Company’s achievement of pre-determined performance objectives.

The fiscal year 2010 performance goals, both with regard to operating margin percentage and the balanced scorecard objectives, were set at levels that would require very strong operational performance and were considered difficult to achieve at the time they were established, given anticipated market conditions. However, over the course of fiscal year 2010, the semiconductor industry experienced a dramatic and unexpectedly accelerated recovery. That rapid recovery, combined with outstanding management that enabled us to continue developing industry-leading products to meet our customers’ ever-increasing demands and maintain the cost structure and discipline that we had instituted during the fiscal year 2009 downturn, resulted in outstanding operating results for the Company in fiscal year 2010.

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Following the completion of fiscal year 2010, the Compensation Committee and the Independent Board Members reviewed the Company’s performance against the primary strategic objectives set forth in the fiscal year 2010 balanced scorecard, which were assessed as follows:

Growth

Customer Focus

Operational Excellence

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Talent

As a result of the Company’s financial success (generating an operating margin percentage for fiscal year 2010 equal to 20.9%) and strategic success (a determination by the Compensation Committee and the Independent Board Members that, based on the factors above, the Company had fully achieved its strategic goals in the fiscal year 2010 balanced scorecard), the payouts under the fiscal year 2010 Bonus Plan were equal to 297% of the participants’ target bonus amounts, just short of the maximum amount payable under the plan.

The Compensation Committee and Independent Board Members established the individual multiplier for each of the named executive officers at 1.0 (that is, there was no reduction or increase of the bonus amount payable to any named executive officer based on individual performance), as the performance reviews of each of the named executive officers indicated that they had all performed well in their respective areas of responsibility.

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The following table sets forth, for each named executive officer, the officer’s target bonus (as a percentage of base salary and in dollars, based on actual salary paid during the year), the bonus percentage that would have been paid to the officer if the Company had generated target operating margin (assuming full satisfaction of the balanced scorecard goals), and the actual bonus amount paid to the officer:

ii. Fiscal Year 2011 Performance Bonus Plan:

In August 2010, the Compensation Committee and, with respect to our Chief Executive Officer, the Independent Board Members established the executive officers’ target bonus payout (stated as a percentage of the executive officer’s base salary) and the Company performance targets and bonus potentials (at threshold, target and maximum payout levels) in effect for fiscal year 2011 under the Bonus Plan. As with prior years, the initial threshold performance target, which is necessary to fund the fiscal year 2011 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 2011 Bonus Plan maintains a similar structure to the one employed for fiscal year 2010 for determining the actual bonus amount, if any, that will be payable to the participants under the plan.

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Under the fiscal year 2011 Bonus Plan, a participant’s bonus amount will again be determined by a combination of the Company’s operating margin percentage and its performance against the balanced scorecard goals established for the year. In fiscal year 2011, however, unlike in the prior year, these two components (operating margin percentage and the numeric score based on achievement of the Company’s balanced scorecard goals) have been integrated into a two-axis matrix that will determine the participants’ bonus payout percentage, so that these two comprehensive indicators of Company performance will be co-dependent at all levels of performance.

Because the anticipated market conditions for fiscal year 2011 are currently expected to be more consistent with typical years in our industry (as compared to the extremely volatile market conditions experienced over the prior two years), the fiscal year 2011 Bonus Plan provides for payment of 100% of the participants’ target bonuses upon the Company’s achievement of target operating results. This differs from the atypical structures employed in the past two years, when anticipated adverse market conditions led the Compensation Committee and the Independent Board Members to structure the fiscal year 2009 and 2010 Bonus Plans to only pay out 70% and 40%, respectively, of participants’ target bonus amounts for Company performance at the applicable fiscal year’s target.

Another feature of the fiscal year 2011 Bonus Plan is the flattening of the slope of the bonus payout curve. The appropriate threshold amount (that is, the minimum amount of operating margin that must be achieved before bonuses will become payable under the year’s bonus plan) and the slope of the payout curve are determined each year based upon the expected operating performance for the year. In any event, the threshold amount will be set at a level that is considered realistic as of the date it is established. In years where the Company’s operating results are projected to generate low levels of operating income, as was the case at the start of fiscal year 2010, the threshold will typically be set at the point where the Company will actually be generating sufficient income to pay bonus amounts for the year (which level may not be far below the target performance level for the year), and the slope of the payout curve will in that case be relatively steep, as each increment of improved performance represents a significant percentage increase in results. However, in years where more typical operating results are expected, the threshold may be set considerably below the Company’s target performance level for the year, and the slope of the payout curve will typically be flatter, representing the belief that strong performance should be fairly compensated without incentivizing employees to take inappropriate or excessive risks to achieve unrealistic results.

As in prior years, the Compensation Committee will have the discretion to adjust the actual bonus amount otherwise payable to the executive officers based on their assessment of the officer’s performance for fiscal year 2011, compared against the individual performance objectives established for the officer early in the year. With respect to our Chief Executive Officer, the Independent Board Members will have similar discretion to adjust his actual bonus amount, based on the Company’s achievement of pre-determined performance objectives.

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The following named executive officers will participate in our fiscal year 2011 Bonus Plan, with bonus potentials at the following payout levels (assuming, in each case, that the executive officer’s base salary remains unchanged for the duration of fiscal year 2011):

The actual bonus award (if any) will depend upon the actual level at which the performance targets for fiscal year 2011 are attained. No executive officer will receive a bonus award under the fiscal year 2011 Bonus Plan in excess of three (3) times his target bonus amount, and no executive officer will receive any bonus award under such plan if the threshold level of Company performance (tied to operating margin) is not attained.

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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.

Since the beginning of fiscal year 2007, the long-term incentive 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 may vary from year to year, as appropriate depending on the facts and circumstances in existence for the applicable year. These factors include the executive officers’ 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 comprehensive measures of Company performance are an appropriate way to provide incentives to executive officers and reward success. 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.

i. Annual Equity Grants for Fiscal Year 2010:

The “annual equity” component of our executive compensation program refers to the executive officer equity grants that represent the target equity value that the Compensation Committee aims to deliver to each executive officer as part of his annual compensation. The size of each annual grant is established with reference to the officer’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

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of the equity program – reward achievement of key performance objectives and enhance our ability to retain our key employees.

Each officer’s fiscal year 2010 annual award was divided into two equally sized grants: one of which was a performance share award, and the other of which was a restricted stock unit award with vesting tied solely to continued service with us. The shares covered by the performance share award were earnable over the course of one to three fiscal years, based on the Company’s operating margin percentage over those periods. The performance goals that the Compensation Committee and Independent Board Members set for the fiscal year 2010 performance share 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. Shares subject to the performance share awards were able to be fully earned in the first year following grant if the Company were to achieve an operating margin percentage at or above the target level established for fiscal year 2010. To the extent the performance shares were not earned following that first year, the officers would have had additional opportunities to earn those shares in the two subsequent years if the Company were to achieve pre-established levels of weighted average operating margin percentage (which increased over time).

As a result of the unexpectedly rapid industry recovery and the Company’s outstanding operational performance and financial results during fiscal year 2010, the Company’s operating margin percentage for the year significantly exceeded the pre-established target of four percent (4%), which was the performance level required to fully earn the performance shares in the first year of the three-year performance period. Therefore, the fiscal year 2010 performance share awards have been fully earned.

All of the executive officers’ fiscal year 2010 annual equity awards (the restricted stock unit awards and the earned performance share awards) are subject to a four-year service-based vesting period. Fifty percent (50%) of the shares subject to these 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.

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The following table sets forth the minimum and target/maximum shares achievable by each named executive officer, as well as the actual number of shares awarded to the officer, with respect to such officer’s annual equity award for fiscal year 2010:

ii. Supplemental Equity Grants for Fiscal Year 2010:

In addition to the annual equity awards granted to the named executive officers for fiscal year 2010, the Compensation Committee and the Independent Board Members also awarded supplemental equity grants to each of our named executive officers, as well as other senior members of management throughout the Company.

On a regular basis, the Compensation Committee (and, with respect to our Chief Executive Officer, the Independent Board Members) reviews the retentive power of the unvested equity grants held by each executive. These equity holdings are intended to provide a certain amount of potential future value at all times as an incentive for continued service and strong performance. The Compensation Committee and Independent Board Members determined, as part of their evaluation in early fiscal year 2010, that it was appropriate to grant supplemental service-based equity awards as a result of that evaluation, primarily based on equity award levels in prior years, the elimination of the executives’ fiscal year 2009 annual equity awards (which were structured as entirely performance-based awards, none of which were earned due to the unexpected downturn during fiscal year 2009) and market reviews of equity positions of other companies’ similarly situated executives (taking into consideration increases in roles and responsibilities of Company executives during fiscal year 2009). The number of shares subject to each fiscal year 2010 supplemental award was determined based on the market value of the executives’ unvested equity holdings as compared to the market data for other companies’ executives, the market price of the Company’s Common Stock at the time of grant and issues of internal equity among the executive officers.

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Each of the executive officers’ supplemental grants will vest based solely on the officer’s continued service with us, with fifty percent (50%) of the shares vesting two years from the date of the award, and the remaining fifty percent (50%) vesting four years from the date of the award, in each case subject to the executive’s continued employment with us on the applicable vesting date.

The following table sets forth the number of shares subject to each named executive officer’s supplemental equity award for fiscal year 2010:

iii. Annual Equity Grants for Fiscal Year 2011:

In August 2010, the Compensation Committee and, with respect to grants to our Chief Executive Officer, the Independent Board Members approved fiscal year 2011 annual equity awards for our executive officers, including the minimum, target and maximum potential opportunities under such awards. The blend of equity granted with respect to fiscal year 2011 (which includes both performance shares and service-based awards) is designed to strike an appropriate balance between the two objectives of the equity program – rewarding strong performance and strengthening retention.

Supplemental awards have not been included as a component of our executive compensation program in fiscal year 2011, and we do not currently anticipate that supplemental equity awards will be a regular part of our executive compensation program going forward.

The aggregate number of shares subject to each executive officer’s annual equity award is intended to represent a long-term incentive component of the officer’s overall compensation package that is competitive with the market. As in prior years, the total size of each officer’s fiscal year 2011 annual award was established based upon individual performance and market data regarding the dollar value of annual grants to other companies’ executives, targeting the grants between the median and 75^th percentile of annual equity compensation and applying the average closing price of our Common Stock over a recent period of time. Each officer’s fiscal year 2011 annual award has been divided into two equally sized grants: one of which is a performance share award, and the other of which is a restricted stock unit award with vesting tied solely to continued service with us. The Compensation Committee will evaluate the allocation between performance-based and service-based awards, as well as

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the continued usefulness of the particular percentile range as a reference point, and may use different allocations, percentile reference points or other features in future periods based on Company performance and other market factors.

The shares covered by the fiscal year 2011 performance share awards are not earnable following year one but instead are earnable based solely on the Company’s two-year weighted average operating margin percentage over fiscal years 2011 and 2012. This marks a change from the fiscal year 2010 performance shares, which were capable of being earned (and were fully earned) after the first year of a multi-year performance period. The Compensation Committee is continuously evaluating different ways to structure long-term incentives in a manner that will properly account for the cyclical nature of our primary industries. Under the current circumstances, the Compensation Committee and Independent Board Members have determined that it is desirable to use a longer term metric and performance period with respect to the Company’s fiscal year 2011 performance share awards.

Each of the executive officers’ annual equity grants (the service-based restricted stock units and, to the extent earned, the performance share awards) require continued service with us in order to vest, with fifty percent (50%) of the shares vesting two years from the date of the award, and the remaining fifty percent (50%) vesting four years from the date of the award, in each case subject to the executive’s continued employment with us on the applicable vesting date.

The size and vesting terms of the equity awards to the executive officers are determined by the Compensation Committee (or, with respect to our Chief Executive Officer, the Independent Board Members) after reviewing external market data to ensure that our compensation packages are competitive, while also taking into account retention issues and the portion of each officer’s equity position that remains unvested. The minimum and target/maximum numbers of shares potentially issuable to each of the named executive officers under the annual awards made for fiscal year 2011, as approved by the Compensation Committee and the Independent Board Members in August 2010, are as follows:

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In structuring the fiscal year 2010 compensation packages for all of the named executive officers (other than our Chief Executive Officer), the Compensation Committee received comprehensive industry compensation data and analysis from the Independent Consultant and initial recommendations regarding such packages from our Chief Executive Officer and our Senior Vice President of Human Resources based upon internal performance reviews and the external compensation data described under the section entitled “Compensation Committee Decision Making–Process Overview and Market Data” above. With regard to our Bonus Plan and performance-based equity program, the proposed financial metrics and payout percentages were developed by our Chief Executive Officer, Chief Financial Officer and Senior Vice President of Human Resources, with the assistance of the Independent Consultant. The Compensation Committee reviewed the data provided by the Independent Consultant and the Company’s recommendations and engaged in detailed discussions over the course of multiple meetings, in closed sessions as well as with the Chief Executive Officer, to determine the final compensation packages for the executives for fiscal year 2010. Following these discussions, the Chief Executive Officer presented final recommendations regarding the fiscal year 2010 compensation packages for the named executive officers that reflected these discussions, which recommendations were adopted by the Compensation Committee and the Independent Board Members in August 2009.

In the case of our Chief Executive Officer’s compensation, the Compensation Committee developed a proposed compensation package for fiscal year 2010 using the process described above (except that Mr. Wallace was not involved in the process) and recommended it to the Independent Board Members. The Independent Board Members then discussed and, in August 2009, approved the Compensation Committee’s recommendation with respect to the fiscal year 2010 compensation for our Chief Executive Officer, who was not present and did not participate in the discussion.

In each case, when establishing each element of compensation and the overall packages for the officers, the Compensation Committee and the Independent Board Members exercised their discretion and judgment based upon the data provided, and no specific formula was applied to determine the weight of each data point.

The executive officers’ fiscal year 2011 compensation levels, including base salary, performance targets, target bonus amounts and equity awards, were determined in August 2010. The Compensation Committee grants equity awards for new hires and promotions on a quarterly basis and usually makes equity award grants to the executive officers one time per year, typically in August. All equity awards to our employees, including the named executive officers, and to our directors have been granted and reflected in our consolidated financial statements, based upon the applicable accounting guidance.

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The Independent Consultant generally attends all meetings of the Compensation Committee in which evaluations of the effectiveness of overall executive compensation programs are conducted or in which compensation for executive officers is analyzed or approved. During fiscal year 2010, the Independent Consultant’s duties included providing the Compensation Committee with relevant market and industry data and analysis, reviewing all materials and participating in the meetings in which the Compensation Committee made decisions regarding changes to executive compensation for fiscal year 2010. In fulfilling these duties, the Independent Consultant met, as needed and with the knowledge of the Chairman of the Compensation Committee, with our Chief Executive Officer, Senior Vice President of Human Resources and General Counsel.

In addition, our executive officers are eligible to participate in our 401(k) plan (including a Company match on employee 401(k) plan contributions) and the other employee benefit plans sponsored by us on the same terms and conditions that apply to all other employees.

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Unexercised options and unearned performance shares or units do not count for purposes of measuring compliance with the ownership guidelines. The value of unvested restricted stock or stock units is included in measuring compliance. The recommended time period for reaching the guidelines is the later of (a) November 13, 2012 or (b) the fourth anniversary from when the individual becomes subject to these guidelines. With respect to our Chief Executive Officer, the Compensation Committee will conduct an annual review to assess compliance with the guidelines, once they become effective. Vice Presidents’ compliance will be evaluated by the Chief Executive Officer. We believe that each of our executives subject to these ownership guidelines is on schedule to be in compliance with the guidelines by the applicable deadline.

Under our Policy on Insider Trading and Unauthorized Disclosures, our Directors and employees (including our named executive officers) are not permitted to engage in short sales of the Company’s securities or any hedging or derivative securities transactions relating to the Company’s securities.

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Our annual Performance Bonus Plan is a cash bonus plan structured in a manner that will allow us to qualify all or part of the compensation earned under that plan as performance-based compensation. As a result, it is anticipated that a substantial portion of any incentive compensation earned by the executive officers under that plan for fiscal year 2011 should qualify as performance-based compensation and should therefore not be subject to the $1 million limitation.

The Compensation Committee continues to consider steps that might be in our best interests to comply with Section 162(m). However, in establishing the cash and equity incentive compensation programs for the executive officers, the Compensation Committee believes that the potential deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration, and not the sole or primary factor. The Compensation Committee believes that cash and equity incentive compensation must be maintained at the requisite level to attract and retain the executive officers essential to the Company’s financial success, even if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation.

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COMPENSATION COMMITTEE REPORT

The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that KLA-Tencor specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis. Based on that review and its discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

Kevin J. Kennedy, Chairman

Robert P. Akins

Edward W. Barnholt

Robert T. Bond

John T. Dickson

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EXECUTIVE COMPENSATION TABLES

Summary Compensation Table

The following table sets forth certain summary information concerning the compensation earned for services rendered in all capacities to the Company and its subsidiaries for the fiscal years ended June 30, 2010, 2009 and 2008 by our Chief Executive Officer, our Chief Financial Officer and each of the other executive officers whose total compensation for that fiscal year exceeded $100,000 and who were serving as executive officers as of June 30, 2010. No other executive officers who would have otherwise been includable in such table on the basis of their compensation for the fiscal year ended June 30, 2010 have been excluded by reason of their termination of employment or change in executive status during that year. The individuals named in the table below will be referred to as the “named executive officers.”