KLA TENCOR CORP, DEF 14A, 1999-10-15

KLA TENCOR CORP
DEF 14A, 1999-10-15
OPTICAL INSTRUMENTS & LENSES

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<PAGE> 1

SCHEDULE 14A INFORMATION

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:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>

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):

[X] No fee required.

[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.

[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

KLA-TENCOR CORPORATION

----------------------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 16, 1999

To the Stockholders:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
KLA-Tencor Corporation (the "Company"), a Delaware corporation, will be held on
Tuesday, November 16, 1999 at 11:00 a.m, at the Company's offices located at One
Technology Drive, Milpitas, California 95035, for the following purposes:

1. To elect four Class I directors to serve for a three year term and until
their successors are elected.

2. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal year ending June 30, 2000.

3. To transact such other business as may properly come before the meeting
and any adjournments thereof.

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 20, 1999
are entitled to notice of and to vote at the meeting.

Sincerely,

Larry W. Sonsini
Secretary

San Jose, California
October 15, 1999

YOUR VOTE IS IMPORTANT

All stockholders are cordially invited to attend the meeting in person,
however, to assure your representation at the meeting, as promptly as possible,
please either sign and date the enclosed proxy card and return it in the
enclosed envelope or follow the instructions on the enclosed proxy card to vote
telephonically or via the Internet. Any stockholder attending the meeting may
vote in person even if he or she returned a proxy.
<PAGE> 3

KLA-TENCOR CORPORATION
------------------------

PROXY STATEMENT
------------------------

INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL

The enclosed Proxy is solicited on behalf of KLA-Tencor Corporation (the
"Company") for use at the Annual Meeting of Stockholders to be held on Tuesday,
November 16, 1999 at 11:00 a.m., Pacific Time, or at any adjournment(s) thereof
(the "Annual Meeting"), for the purposes set forth herein and in the
accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will
be held at the Company's offices at One Technology Drive, Milpitas, California
95035. The Company's principal executive offices are located at 160 Rio Robles,
San Jose, California 95134 and its telephone number is (408) 875-3000.

These proxy solicitation materials were mailed on or about October 15, 1999
to all stockholders entitled to vote.

RECORD DATE

Stockholders of record at the close of business on September 20, 1999 are
entitled to notice of and to vote at the Annual Meeting. As of the record date
89,491,136 shares of the Company's Common Stock, $0.001 par value, were issued
and outstanding.

REVOCABILITY OF PROXIES

Any Proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company a written
notice of revocation or a duly executed proxy bearing a later date or by
attending the meeting and voting in person.

QUORUM; ABSTENTIONS; BROKER NON-VOTES

The required quorum for the transaction of business at the Annual Meeting
is a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the record date. Shares that are voted "FOR,"
"AGAINST," "ABSTAIN" or "WITHHELD FROM" a matter are treated as being present at
the Annual Meeting for purposes of establishing a quorum and are also treated as
shares entitled to vote at the Annual Meeting (the "Votes Cast") with respect to
such matter.

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). Accordingly, abstentions will have the same effect as a vote
against the proposal.

Broker non-votes will be counted for purposes of determining the presence
or absence of a quorum for the transaction of business, but will not be counted
for purposes of determining the number of Votes Cast with respect to the
particular proposal on which the broker has expressly not voted. Accordingly,
broker non-votes will not affect the outcome of the voting on a proposal that
requires a majority of the Votes Cast.

VOTING AND SOLICITATION

On all matters to be voted upon, each share has one vote.

The cost of soliciting proxies will be borne by the Company. The Company
has retained the services of Skinner & Co. to aid in the solicitation of proxies
from brokers, bank nominees and other institutional owners. The Company
estimates that it will pay Skinner & Co. a fee not to exceed $5,000 for its
services and will reimburse it for certain out of pocket expenses estimated to
be $45,000. In addition, the Company may reimburse brokerage firms and other
persons representing beneficial owners of shares for their expenses in
<PAGE> 4

forwarding solicitation material to such beneficial owners. Proxies may be
solicited by certain of the Company's directors, officers and regular employees,
without additional compensation, personally or by telephone or telegram.

DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS

Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's annual meeting in 2000 must be received by
the Company no later than June 17, 2000 and otherwise be in compliance with
applicable laws and regulations in order that such proposals may be included in
the proxy statement and form of proxy relating to that meeting.

The attached proxy card grants the proxy holders discretionary authority to
vote on any matter raised at the Annual Meeting. If a stockholder intends to
submit a proposal at the Company's annual meeting in 2000, which is not eligible
for inclusion in the proxy statement and form of proxy relating to that meeting,
the stockholder must give appropriate notice no later than August 31, 2000. If
such stockholder fails to comply with the foregoing notice provision the Company
intends to draft the proxy so that the proxy holders will be allowed to use
their discretionary voting authority if the proposal is raised at the Company's
annual meeting in 2000.

SECURITY OWNERSHIP

PRINCIPAL STOCKHOLDERS

As of September 20, 1999, the following persons were known to the Company
to be beneficial owners of more than 5% of the Company's Common Stock:

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME AND ADDRESS SHARES OWNED TOTAL(1)
---------------- ------------ ----------
<S> <C> <C>
The Prudential Insurance Company of America(2).............. 7,171,847 8.01%
751 Broad Street
Newark, NJ 07102
Jennison Associates LLC(3).................................. 6,844,000 7.65%
466 Lexington Avenue
New York, NY 10017
Capital Guardian Trust Co.(4)............................... 5,971,900 6.67%
333 South Hope Street
Los Angeles, CA 90071
</TABLE>

- ---------------
(1) Based on 89,491,136 outstanding shares of Common Stock as of September 20,
1999.

(2) Based on information provided pursuant to Schedule 13G/A filed with the SEC
on January 29, 1999. Prudential presently holds 21,600 shares of Common
Stock of the Company for the benefit of its general account. In addition,
Prudential may have direct or indirect voting and/or investment discretion
over 7,150,247 shares, including 6,844,000 shares held by Jennison
Associates LLC, a wholly-owned subsidiary of Prudential (See Note 3 below).

(3) Formerly Jennison Associates Capital Corp. Based on information provided
pursuant to Schedule 13G/A filed with the SEC on February 11, 1999. Jennison
Associates LLC. ("Jennison") is an institutional investor and is considered
the beneficial owner only as a result of its position as manager of the
funds which own the shares of Common Stock of the Company. Jennison is an
autonomous, wholly-owned subsidiary of The Prudential Insurance Company of
America ("Prudential"). As such, the shares of Common Stock reported by
Jennison are also included in the shares of Common Stock reported by
Prudential in its reporting obligations with the SEC. (See Note 2 above.)

(4) Based on information provided pursuant to Schedule 13G filed with the
Securities and Exchange Commission (the "SEC") February 12, 1999. This share
amount includes 1,559,530 shares held by Capital International Limited;
1,101,160 shares held by Capital International S.A. and 220,600 shares held
by Capital International, Inc., affiliated entities of Capital Guardian
Trust Co. (the "Reporting

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<PAGE> 5

Entity"). Previously, The Capital Group Companies, Inc., the parent holding
company of the Reporting Entity and its listed affiliated entities, reported
the beneficial ownership of all such shares. On July 9, 1998 it filed a
Schedule 13G indicating that it retained no beneficial ownership of shares
held by its independent investment management affiliates.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth the beneficial ownership of Common Stock of
the Company as of September 20, 1999 (the most recent practicable date) by all
directors and nominees (naming them), each of the named executive officers set
forth in the Summary Compensation Table and by all directors and current
executive officers as a group:

<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT PERCENTAGE
NAME OWNED OWNED*
---- --------- -----------
<S> <C> <C>
Kenneth Levy(1)............................................. 1,823,644 2.04%
Kenneth L. Schroeder(2)..................................... 385,024 **
James W. Bagley(3).......................................... 25,936 **
Edward W. Barnholt(4)....................................... 11,798 **
Leo J. Chamberlain(5)....................................... 34,359 **
Richard J. Elkus, Jr.(6).................................... 56,457 **
Dean O. Morton(7)........................................... 20,936 **
Samuel Rubinovitz(8)........................................ 10,364 **
Jon D. Tompkins(9).......................................... 54,108 **
Dag Tellefsen(10)........................................... 21,498 **
Lida Urbanek(11)............................................ 672,752 **
Robert J. Boehlke(12)....................................... 34,757 **
Gary E. Dickerson(13)....................................... 43,848 **
Arthur P. Schnitzer(14)..................................... 163,328 **
All directors and executive officers as a group (22
persons)(15).............................................. 3,515,810 3.93%
</TABLE>

- ---------------
* Based on 89,491,136 outstanding shares of the Common Stock of the Company
as of September 20, 1999.

** Less than 1%.

(1) Includes 356,942 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 20, 1999 and 231,000
shares which are held in trust for the benefit of Mr. Levy's children.

(2) Includes 303,942 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 20, 1999.

(3) Includes 25,936 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(4) Includes 11,798 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(5) Includes 12,362 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(6) Includes 6,457 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(7) Includes 15,936 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(8) Includes 6,364 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

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<PAGE> 6

(9) Includes 43,517 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(10) Includes 20,399 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(11) Includes 9,133 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999, 646,907 shares
held in trust and 16,712 shares held by a family foundation.

(12) Includes 30,193 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(13) Includes 42,841 shares, options for which are presently exercisable or will
become exercisable within 60 days of September 20, 1999.

(14) Includes 157,797 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 20, 1999.

(15) Includes 1,188,198 shares, options for which are presently exercisable or
will become exercisable within 60 days of September 20, 1999.

PROPOSAL ONE

TO ELECT FOUR CLASS I DIRECTORS TO SERVE FOR A
THREE YEAR TERM AND UNTIL THEIR SUCCESSORS ARE ELECTED.

NOMINEES

The Company has a classified board of eleven directors consisting of four
Class I directors (Kenneth Levy, Samuel Rubinovitz, Jon D. Tompkins and Lida
Urbanek), three Class II directors (Leo J. Chamberlain, Richard J. Elkus, Jr.
and Dag Tellefsen) and four Class III directors (James W. Bagley, Edward W.
Barnholt, Dean O. Morton and Kenneth L. Schroeder). The Class II directors and
the Class III directors will serve until the annual meetings of stockholders to
be held in 2000 and 2001 respectively, or until their respective successors are
duly elected and qualified. At each annual meeting of stockholders, directors
are elected for a full term of three years to succeed those directors whose
terms expire at the annual meeting.

The terms of the Class I directors will expire on the date of the Annual
Meeting. Accordingly, all of the Class I directors of the Board of Directors are
to be elected at the Annual Meeting. The nominees for election by the
stockholders to these four positions are Kenneth Levy, Samuel Rubinovitz, Jon D.
Tompkins and Lida Urbanek. If elected, the nominees will serve as directors
until the Company's annual meeting of stockholders in 2002, or until their
successors are elected and qualified. If any of the nominees declines to serve
or becomes unavailable for any reason, or if a vacancy occurs before the
election, the proxies may be voted for such substitute nominees as management
may designate. The proxy holders also have been advised that in the event any of
the nominees shall not be available for election, a circumstance that is not
currently expected, they may vote for the election of substitute nominees in
accordance with their judgment. If additional persons are nominated for election
as directors, the proxy holders intend to vote all proxies received by them in
such a manner as will assure the election of as many of the nominees as possible
and, in such event, the specific nominees to be voted for will be determined by
the proxy holders.

If a quorum is present and voting, the four nominees for Class I directors
receiving the highest number of votes will be elected as Class I directors.
Abstentions and shares held by brokers that are not present, but not voted
because the brokers were prohibited from exercising discretionary authority,
i.e., "broker non-votes," will be counted as present in determining if a quorum
is present.

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<PAGE> 7

The following table sets forth certain information with respect to the
Company's Board of Directors.

<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE POSITION SINCE
---------------- --- -------- --------
<S> <C> <C> <C>
Kenneth Levy........................ 56 Chairman of the Board 1975
Kenneth L. Schroeder................ 53 President and Chief Executive Officer 1991
James W. Bagley..................... 60 Director 1997
Edward W. Barnholt.................. 56 Director 1995
Leo J. Chamberlain.................. 69 Director 1982
Richard J. Elkus, Jr................ 64 Director 1997
Dean O. Morton...................... 67 Director 1997
Samuel Rubinovitz................... 69 Director 1990
Dag Tellefsen....................... 57 Director 1978
Jon D. Tompkins..................... 59 Director 1997
Lida Urbanek........................ 56 Director 1997
</TABLE>

Kenneth Levy is a co-founder of KLA-Tencor and since July 1, 1999 has been
Chairman of the Board and a Director. From July 1, 1998 until June 30, 1999, he
was Chief Executive Officer and a Director. From April 30, 1997 until June 30,
1998 he was Chairman of the Board and a Director. From 1975 until April 30, 1997
he was Chairman of the Board, Chief Executive Officer and a Director. He
currently serves on the boards of directors of Ultratech Stepper, Inc.,
SpeedFam-IPEC, Inc. and is a Director Emeritus of SEMI, an industry trade
association.

Kenneth L. Schroeder has been President and Chief Executive Officer and a
Director of KLA-Tencor since July 1, 1999. From November 1991 until June 30,
1999, he was President and Chief Operating Officer and a Director. Mr. Schroeder
has been with the Company for 16 years and has held a variety of senior
management positions. He currently serves on the board of directors of GaSonics
International and SEMI.

James W. Bagley has been a Director of the Company since April 1997. He was
a Director of Tencor from June 1993 until April 1997. He has been Chief
Executive Officer and a Director of Lam Research Corporation since August 1997.
From May 1996 until August 1997 he was Chairman of the Board and Chief Executive
Officer of OnTrak Systems, Inc. until its merger with Lam Research Corporation
in August 1997. From January 1994 until October 1995 he was Vice Chairman and
Chief Operating Officer of Applied Materials, Inc., and Vice Chairman from
November 1995 until May 1996. From December 1987 until December 1993, Mr. Bagley
was President and Chief Operating Officer of Applied Materials, Inc. Mr. Bagley
currently serves on the boards of directors of Teradyne, Inc., Kulicke & Soffa
Industries, Inc., Micron Technology, Inc., and SEMI/SEMATECH.

Edward W. Barnholt has been a Director of the Company since 1995. Mr.
Barnholt joined the Hewlett Packard Company in December 1966. From 1990 to 1997,
he was the General Manager of the Test and Measurement Organization and from
February 1998 to March 1999 he was the General Manager of the Measurement
Organization. Mr. Barnholt was elected a Vice President of the Hewlett Packard
Company in July 1988, a Senior Vice President in November 1993 and an Executive
Vice President in November 1996. Since May 1999, Mr. Barnholt has been President
and Chief Executive Officer of Agilent Technologies, Inc.

Leo J. Chamberlain has been a Director of the Company since 1982. He is a
private investor.

Richard J. Elkus, Jr. has been a Director of the Company since April 1997.
He was Executive Vice President and Vice Chairman of the board of directors of
Tencor from February 1994 until April 1997. He currently serves on the boards of
directors of Voyan Technology, SOPRA, Barcelona Design and Lam Research
Corporation.

Dean O. Morton has been a Director of the Company since April 1997. From
June 1993 until April 1997 he was a Director of Tencor. In October 1992, Mr.
Morton retired as Executive Vice President, Chief Operating Officer and a
Director of the Hewlett-Packard Company, where he held various positions from
1960 until his retirement. Mr. Morton currently serves as Chairman of the Board
of Centigram Communications

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<PAGE> 8

Corporation and as a member of the boards of directors of ALZA Corporation, The
Clorox Company and BEA Systems Inc. Mr. Morton is also a trustee of the
Metropolitan Series Fund and State Street Research Funds Group and Portfolios
Inc.

Samuel Rubinovitz has been a Director of the Company since 1990. He
previously served as a Director from October 1979 to January 1989. He currently
serves as Chairman of the Board of LTX Corporation and also serves on the boards
of directors of Richardson Electronics, Ltd. and Kronos, Inc.

Dag Tellefsen has been a Director of the Company since 1978. He is the
general partner and President and Managing Director of Glenwood Ventures I and
II, venture capital funds and the general partner and Managing Director of
Vision Capital. He currently serves on the boards of directors of Iwerks
Entertainment Corporation and Metorex International.

Jon D. Tompkins has been a Director since April 1997. He was Chairman of
the Board from July 1998 to June 30, 1999, when he retired his position as
Chairman of the Board. Mr. Tompkins has continued to serve as a Director on the
Board. From April 1997 until July 1998 he was Chief Executive Officer and a
Director of KLA-Tencor. From April 1991 until April 1997 he was President and
Chief Executive Officer of Tencor prior to its merger with KLA. He was a
Director of Tencor from 1991 until April 1997 and was appointed Chairman of the
board of directors of Tencor in November 1993. He currently serves on the boards
of directors of Cymer, Electro Scientific Industries, Credence Systems,
Levelite, Logic Vision, and the Community Foundation of Silicon Valley.

Lida Urbanek has been a Director of KLA-Tencor since April 30, 1997. She is
a private investor. She was a Director of Tencor from August 1991 until April
30, 1997.

There are no family relationships between or among any directors or
executive officers of the Company.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held six meetings during the fiscal
year ended June 30, 1999. The Board of Directors has an Audit Committee, a
Compensation Committee and a Nominating Committee.

The Audit Committee, which consists of Mr. Elkus, Mr. Rubinovitz and Mr.
Tellefsen, held three meetings during the last fiscal year. The Audit Committee
recommends engagement of the Company's independent accountants, and is primarily
responsible for approving the services performed by the Company's independent
accountants, and for reviewing and evaluating the Company's accounting
principles and its system of internal accounting controls. The Compensation
Committee, which consists of Mr. Bagley, Mr. Chamberlain and Mrs. Urbanek, held
three meetings during the last fiscal year. The Compensation Committee reviews
and approves the Company's executive compensation policy and makes
recommendations concerning the Company's employee benefit plans. The Nominating
Committee, which consists of Mr. Barnholt, Mr. Levy and Mr. Morton did not hold
a meeting during the last fiscal year. A unanimous group of the disinterested
members of the board of directors nominated the four Class I directors for
election. The Nominating Committee is primarily responsible for identifying and
evaluating the qualifications of all candidates for election to the Board of
Directors. The Nominating Committee will consider nominations recommended by
stockholders. Stockholders wishing to submit nominations must notify the Company
of their intent to do so and provide the Company with certain information set
forth in the Company's bylaws on or before the date on which stockholder
proposals must be received by the Company to be included in the proxy statement
for the annual meeting.

During the fiscal year ended June 30, 1999, all incumbent Directors
attended at least 75% of the meetings of the Board of Directors and meetings of
the committees of the Board on which they served.

COMPENSATION OF DIRECTORS

Members of the Board of Directors who are not employees of the Company
receive benefits under the 1998 Outside Director Plan ("1998 Director Plan"),
which was approved by the stockholders at the 1998 Annual Meeting of
Stockholders. Under this plan each non-employee Director ("Outside Director")
receives

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<PAGE> 9

an annual fee of $15,000 and $1,000 for each meeting they attend ($500 if
participation is by telephone), plus expenses. Committee members receive $500
per committee meeting they attend ($250 if participation is by telephone). Each
Outside Director also receives a nonstatutory option to purchase 10,000 shares
of Common Stock as of the date on which such director first becomes an Outside
Director (the "First Option"). Accordingly, none of the existing directors will
be granted a First Option. In addition, each Outside Director is automatically
granted a nonstatutory option to purchase an additional 5,000 shares of Common
Stock on the date of the subsequent annual meetings on which he or she remains
an Outside Director (the "Subsequent Option"). The term of options granted under
the 1998 Director Plan may not exceed 10 years. The 1998 Director Plan provides
that the exercise price shall be equal to the fair market value of the Common
Stock on the date of grant of the option. Options granted under the 1998
Director Plan become exercisable immediately upon the date of grant.

REQUIRED VOTE

Directors shall be elected by a plurality of the votes of the shares of the
Company's Common Stock entitled to vote and represented in person or by proxy at
the Annual Meeting. Votes against, votes withheld and broker non-votes have no
legal effect on the election of directors because such elections are by a
plurality.

MANAGEMENT RECOMMENDS A VOTE FOR EACH OF THE CLASS I
NOMINEES LISTED ABOVE.

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<PAGE> 10

PROPOSAL TWO

TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT
ACCOUNTANTS OF THE COMPANY FOR THE FISCAL YEAR ENDING JUNE 30, 2000.

The Board of Directors has selected PricewaterhouseCoopers LLP, independent
accountants, to audit the consolidated financial statements of the Company for
its 2000 fiscal year and recommends that the stockholders vote for ratification
of such appointment. If there is a negative vote on such ratification, the Board
of Directors will reconsider its selection. Representatives of
PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting with
the opportunity to make a statement if they desire to do so, and are expected to
be available to respond to appropriate questions.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT
OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT ACCOUNTANTS OF THE COMPANY FOR
THE FISCAL YEAR ENDING JUNE 30, 2000.

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<PAGE> 11

EXECUTIVE COMPENSATION

The following table shows, as to the person who served as Chief Executive
Officer during the fiscal year ended June 30, 1999 and each of the five other
most highly compensated executive officers whose salary plus bonus exceeded
$100,000, information concerning all reportable compensation awarded to, earned
by or paid to each for services to the Company in all capacities during the
fiscal year ended June 30, 1999, as well as such compensation for each such
individual for the Company's previous two fiscal years.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ ---------- -------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION AS COMPENSATION AWARD(S) OPTIONS/SARS LTIP
OF SEPTEMBER 20, 1999 YEAR SALARY($) BONUS ($)(1) ($)(2) (#)(3) PAYOUTS($)(4)
- ------------------------------ ---- --------- -------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth Levy(6)... 1999 $456,097 $429,597 $ N/A -0- 102,136 -0-
Chairman of the Board 1998 $467,769 $262,314 $ N/A -0- 62,500 -0-
1997 $402,122 $334,277 $ N/A -0- 162,500 -0-
Kenneth L. Schroeder(7)... 1999 $445,723 $420,492 $ N/A -0- 102,136 -0-
President and 1998 $455,992 $256,757 $ N/A -0- 62,500 -0-
Chief Executive Officer 1997 $384,231 $332,800 $ N/A -0- 162,500 -0-
Jon D. Tompkins(8)... 1999 $291,478 $214,797 $ N/A -0- 50,809 -0-
Director 1998 $467,769 $262,314 $ N/A -0- -0- -0-
1997 $389,589 $396,462 $ N/A -0- 100,000 -0-
Gary E. Dickerson(9)... 1999 $304,387 $189,587 $ N/A -0- 62,882 -0-
Chief Operating Officer 1998 $312,115 $161,364 $ N/A -0- 42,500 -0-
1997 $260,631 $129,441 $ N/A -0- 82,500 -0-
Robert J. Boehlke... 1999 $289,892 $191,133 $ N/A -0- 54,435 -0-
Executive Vice President 1998 $297,115 $116,708 $ N/A -0- 33,500 -0-
and Chief Financial Officer 1997 $257,908 $143,587 $ N/A -0- 73,500 -0-
Arthur P. Schnitzer... 1999 $294,443 $214,414 $ N/A -0- 54,435 -0-
Executive Vice President, 1998 $285,500 $129,902 $ N/A -0- 33,500 -0-
Customer Group 1997 $256,616 $133,697 $ N/A -0- 73,500 -0-

ALL OTHER
NAME AND PRINCIPAL POSITION AS COMPENSATION
OF SEPTEMBER 20, 1999 ($)(5)
- ------------------------------ ------------
<S> <C>
Kenneth Levy(6)... $10,005
Chairman of the Board $44,430
$72,158
Kenneth L. Schroeder(7)... $ 9,804
President and $43,545
Chief Executive Officer $71,452
Jon D. Tompkins(8)... $ 5,977
Director $44,430
$ 1,500
Gary E. Dickerson(9)... $ 6,844
Chief Operating Officer $29,984
$50,197
Robert J. Boehlke... $ 6,541
Executive Vice President $28,604
and Chief Financial Officer $49,911
Arthur P. Schnitzer... $ 6,761
Executive Vice President, $26,494
Customer Group $47,842
</TABLE>

- ---------------
(1) The amounts paid during the fiscal year to the named executive officers were
less than the lesser of (a) $50,000 or (b) 10% of the executive officers
total reported salary and bonus.

(2) The Company has not granted any restricted stock rights.

(3) The Company has not granted any stock appreciation rights. Fiscal 1999 Stock
Option Grants do not reflect the October 1999 Stock Option Repricing. See
"Option/SAR Grants" table.

(4) The Company does not have any Long Term Incentive Plans as that term is
defined in the regulations.

(5) "All Other Compensation" is itemized as follows:

- For fiscal 1999, Mr. Levy received $7,129 in cash profit sharing; $475 in
profit sharing was contributed by the Company to the 401(k) Plan; $1,901
was contributed by the Company to the Excess Profit Stock Plan; $500 was
contributed by the Company as a matching contribution to the 401(k) Plan.

- For fiscal 1999, Mr. Schroeder received $6,978 in cash profit sharing;
$475 in profit sharing was contributed by the Company to the 401(k) Plan;
$1,851 was contributed by the Company to the Excess Profit Stock Plan;
$500 was contributed by the Company as a matching contribution to the
401(k) Plan.

- For fiscal 1999, Mr. Tompkins received $4,108 in cash profit sharing;
$475 in profit sharing was contributed by the Company to the 401(k) Plan;
$894 was contributed by the Company to the Excess Profit Stock Plan; $500
was contributed by the Company as a matching contribution to the 401(k)
Plan.

- For fiscal 1999, Mr. Dickerson received $4,758 in cash profit sharing;
$494 in profit sharing was contributed by the Company to the 401(k) Plan;
$1,092 was contributed by the Company to the

9
<PAGE> 12

Excess Profit Stock Plan; $500 was contributed by the Company as a
matching contribution to the 401(k) Plan.

- For fiscal 1999, Mr. Boehlke received $4,531 in cash profit sharing; $519
in profit sharing was contributed by the Company to the 401(k) Plan; $991
was contributed by the Company to the Excess Profit Stock Plan; $500 was
contributed by the Company as a matching contribution to the 401(k) Plan.

- For fiscal 1999, Mr. Schnitzer received $4,696 in cash profit sharing;
$518 in profit sharing was contributed by the Company to the 401(k) Plan;
$1,047 was contributed by the Company to the Excess Profit Stock Plan;
$500 was contributed by the Company as a matching contribution to the
401(k) Plan.

(6) Mr. Levy was named Chairman of the Board effective July 1, 1999. From July
1, 1998 until July 1, 1999, Mr. Levy was Chief Executive Officer. During
fiscal 1997, Mr. Levy was Chief Executive Officer until April 30, 1997 when,
as a result of the merger of Tencor Instruments ("Tencor") into a
wholly-owned subsidiary of the Company (the "Merger"), he became Chairman of
the Board of Directors and remained in that position until July 1, 1998.

(7) Mr. Schroeder was named President and Chief Executive Officer effective July
1, 1999. From 1991 until June 30, 1999, he served as President and Chief
Operating Officer.

(8) Mr. Tompkins retired from his position as Chairman of the Board effective
July 1, 1999. He was previously President and Chief Executive Officer of
Tencor until April 1997. As a result of the Merger he became Chief Executive
Officer of the Company effective April 30, 1997 and remained in that
position until July 1, 1998, when he became Chairman of the Board. The
compensation described in this Summary Compensation Table reflects certain
amounts that were paid during the period prior to the Merger when Tencor was
an independent, publicly traded company. Tencor reported its results on a
calendar year basis, while the Company reports its results based on a June
30 year end.

(9) Mr. Dickerson was named Chief Operating Officer effective July 1, 1999. From
1997 until July 1, 1999, Mr. Dickerson served as Executive Vice President of
the Customer Group.

10
<PAGE> 13

STOCK OPTION GRANTS AND EXERCISES

The following tables set forth the stock options granted to the named
executive officers under the Company's stock option plans and the options
exercised by such named executive officers during the fiscal year ended June 30,
1999.

The Option/SAR Grant Table sets forth hypothetical gains or "option
spreads" for the options at the end of their respective ten-year terms, as
calculated in accordance with the rules of the Securities and Exchange
Commission. Each gain is based on an arbitrarily assumed annualized rate of
compound appreciation of the market price at the date of grant of 5% and 10%
from the date the option was granted to the end of the option term. Actual
gains, if any, on option exercises are dependent on the future performance of
the Company's Common Stock and overall market conditions.

OPTION/SAR(1) GRANTS IN LAST FISCAL YEAR

KLA-TENCOR CORPORATION 1982 STOCK OPTION PLAN(2)

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
------------------------------------------------------ -----------------------------
PERCENT OF
TOTAL
OPTIONS/
SARS
GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ------------ ------------ ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Levy............ 102,136 1.34% $21.2500 8/31/2008 $1,364,947 $3,459,042
110,364 1.45% $33.9375 10/23/2008 $2,355,511 $5,969,328
Kenneth L. Schroeder.... 102,136 1.34% $21.2500 8/31/2008 $1,364,947 $3,459,042
110,364 1.45% $33.9375 10/23/2008 $2,355,511 $5,969,328
Jon D. Tompkins......... 50,809 0.67% $21.2500 8/31/2008 $ 679,012 $1,720,750
74,191 0.97% $33.9375 10/23/2008 $1,583,467 $4,012,816
Gary E. Dickerson....... 62,882 0.82% $21.2500 8/31/2008 $ 840,355 $2,129,627
69,618 0.92% $33.9375 10/23/2008 $1,485,864 $3,765,473
Robert J. Boehlke....... 54,435 0.71% $21.2500 8/31/2008 $ 727,470 $1,843,552
49,065 0.64% $33.9375 10/23/2008 $1,047,200 $2,653,810
Arthur P. Schnitzer..... 54,435 0.71% $21.2500 8/31/2008 $ 727,470 $1,843,552
49,065 0.64% $33.9375 10/23/2008 $1,047,200 $2,653,810
</TABLE>

- ---------------
(1) The Company has not granted any stock appreciation rights.

(2) The material terms of the grants (other than those set forth in the table)
are: (a) The exercise price of the options is the fair market value of
Common Stock as of the date of grant; (b) The options vest on a four year
schedule with 25% after one year and the remaining option shares vesting
1/36 per month for the remainder of the vesting term; (c) To the extent
unexercised, the options lapse after ten years; (d) The options are
non-transferrable and are only exercisable during the period of employment
of the optionee and for 30 days following termination of employment, subject
to limited exceptions in the cases of certain terminations, death or
permanent disability of the optionee.

11
<PAGE> 14

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUE(1)

KLA-TENCOR CORPORATION 1982 STOCK OPTION PLAN

<TABLE>
<CAPTION>
TOTAL VALUE(2) OF
TOTAL NUMBER OF UNEXERCISED, IN-THE-MONEY
UNEXERCISED OPTIONS HELD OPTIONS HELD AT FISCAL
NUMBER OF SHARES AT FISCAL YEAR END YEAR END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Levy......... 40,000 $2,012,500 304,833 258,167 $16,552,652 $9,857,167
Kenneth L.
Schroeder.......... 20,000 $1,121,250 296,833 258,167 $16,029,152 $9,857,167
Jon D. Tompkins...... -0- -0- -0- 125,000 -0- $4,511,827
Gary E. Dickerson.... -0- -0- 64,532 166,168 $ 2,961,776 $6,349,717
Robert J. Boehlke.... 40,000 $1,832,239 46,311 128,501 $ 2,108,386 $4,981,969
Arthur P.
Schnitzer.......... -0- -0- 183,915 128,501 $ 9,887,300 $5,039,642
</TABLE>

- ---------------
(1) The Company has not granted any stock appreciation rights.

(2) Total value of vested options based on fair market value of Company's Common
Stock of $64.88 per share as of June 30, 1999.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUE(1)

TENCOR INSTRUMENTS 1993 EQUITY INCENTIVE PLAN

<TABLE>
<CAPTION>
TOTAL VALUE(2) OF
TOTAL NUMBER OF UNEXERCISED, IN-THE-MONEY
UNEXERCISED OPTIONS HELD OPTIONS HELD AT FISCAL
NUMBER OF AT FISCAL YEAR END YEAR END
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Levy........... -0- -0- -0- -0- -0- -0-
Kenneth L. Schroeder... -0- -0- -0- -0- -0- -0-
Jon D. Tompkins........ 75,368 $2,399,548 38,581 18,001 $1,822,952 $850,547
Gary E. Dickerson...... -0- -0- -0- -0- -0- -0-
Robert J. Boehlke...... -0- -0- -0- -0- -0- -0-
Arthur P. Schnitzer.... -0- -0- -0- -0- -0- -0-
</TABLE>

- ---------------
(1) The Company has not granted any stock appreciation rights.

(2) Total value of vested options based on fair market value of Company's Common
Stock of $64.88 per share as of June 30, 1999.

(3) Messrs. Levy, Schroeder, Boehlke, Dickerson and Schnitzer have been
executive officers of the Company and accordingly have never received
options under the Tencor Instruments 1993 Equity Incentive Plan.
Accordingly, the information under this table is inapplicable to them.

12
<PAGE> 15

TEN-YEAR OPTION REPRICINGS TABLE

On August 31, 1998, employees of the Company, excluding certain executive
officers, holding options with exercise prices of $28.00 or higher were granted
the opportunity to surrender those options and receive new options having an
exercise price of $21.25, the fair market value of the Company's stock on that
date, and begin a new vesting schedule. In addition, on October 31, 1998,
certain executive officers were granted the opportunity to surrender options and
receive a reduced number of options having an exercise price of $33.94, the
market price on that date, and begin a new vesting schedule. The following table
provides certain information regarding the repricing of options held by any
person who served as an executive officer of the Company during the last 10
completed fiscal years.

<TABLE>
<CAPTION>
WEIGHTED
LENGTH OF
NUMBER OF MARKET ORIGINAL OPTION
SECURITIES PRICE TERM
UNDERLYING OF STOCK WEIGHTED REMAINING AT
NAME AND POSITION, OPTIONS AT TIME OF EXERCISE PRICE NEW DATE OF
EXECUTIVE OFFICERS DURING REPRICED OR REPRICING AT TIME OF EXERCISE REPRICING OR
FISCAL YEAR 1999 DATE AMENDED ($) REPRICING PRICE AMENDMENT
------------------------- ---------- ----------- ---------- -------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Levy...................... 10/26/1990 228,700 $ 3.5000 $ 5.8667 $ 3.5000 7 years 51 days
Chairman of the Board 10/23/1998 110,364 $33.9375 $51.8672 $33.9375 8 years 231 days
Kenneth L. Schroeder.............. 8/14/1992 300,000 $ 3.7500 $ 4.8125 $ 3.7500 9 years 82 days
President and 10/23/1998 110,364 $33.9375 $50.6779 $33.9375 8 years 224 days
Chief Executive Officer
Gary E. Dickerson................. 10/23/1998 69,618 $33.9375 $50.7698 $33.9375 8 years 102 days
Chief Operating Officer
Jon D. Tompkins................... 10/23/1998 74,191 $33.9375 $44.5000 $33.9375 8 years 189 days
Director
Robert J. Boehlke................. 8/2/1989 66,306 $ 5.1250 $ 5.8824 $ 5.1250 8 years 290 days
Executive Vice President and 10/26/1990 195,406 $ 3.5000 $ 6.0025 $ 3.5000 3 years 300 days
Chief Financial Officer 10/23/1998 49,065 $33.9375 $51.8210 $33.9375 8 years 231 days
Arthur P. Schnitzer............... 10/26/1990 44,490 $ 3.5000 $ 5.5268 $ 3.5000 7 years 139 days
Executive Vice President, 10/23/1998 49,065 $33.9375 $51.8210 $33.9375 8 years 231 days
Customer Group
Edward C. Grady................... 10/23/1998 26,745 $33.9375 $43.8914 $33.9375 8 years 178 days
Executive Vice President, Wafer
Inspection Group
Samuel A. Harrell................. 10/23/1998 57,338 $33.9375 $44.9110 $33.9375 8 years 178 days
Senior Vice President, Strategic
Business Development
Neil Richardson................... 10/23/1998 46,184 $33.9375 $50.6779 $33.9375 8 years 224 days
Executive Vice President, E-Beam
Inspection and Metrology Group
Frederick A. Ball................. 8/31/1998 20,000 $21.2500 $44.5000 $21.2500 8 years 242 days
Vice President,
Mergers and Acquisitions
FORMER EXECUTIVE OFFICERS
Robert Anderson................... 10/26/1990 5,904 $ 3.5000 $ 5.6250 $ 3.5000 8 years 266 days
Former Chairman of the Board
Patrick H. Lamey, Jr.............. 8/2/1989 48,084 $ 5.1250 $ 8.1768 $ 5.1250 8 years 255 days
Former Vice President, General 10/26/1990 99,784 $ 3.5000 $ 5.4498 $ 3.5000 8 years 42 days
Manager KLASIC Division
Dannie K. Martz................... 8/2/1989 26,400 $ 5.1250 $ 5.9394 $ 5.1250 9 years 13 days
Former Vice President, 10/26/1990 56,800 $ 3.5000 $ 5.3955 $ 3.5000 8 years 255 days
General Manager ATS Division
John W. Mathews................... 10/26/1990 116,506 $ 3.5000 $ 5.8244 $ 3.5000 6 years 273 days
Former Vice President,
General Manager Technology
Division
Michael D. McCarver............... 10/26/1990 94,000 $ 3.5000 $ 5.8999 $ 3.5000 7 years 147 days
Former Vice President,
General Manager RAPID Division
</TABLE>

13
<PAGE> 16

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

Compensation Committee

The Committee is comprised of three independent, non-employee members of
the Board of Directors, none of whom have interlocking relationships as defined
by the Securities and Exchange Commission. The Committee sets and administers
the policies governing annual compensation of executive officers, considers
their performance and makes recommendations regarding their cash compensation
and stock options to the full Board of Directors. The Committee periodically
reviews its approach to executive compensation and makes changes as appropriate.

Compensation Philosophy

The Committee of the Board of Directors establishes the overall executive
compensation strategies of the Company and approves compensation elements for
the Chairman of the Board, the Chief Executive Officer and other executive
officers. The goals of the Company's compensation policy are to attract, retain
and reward executive officers who contribute to the overall success of the
Company by offering compensation that is competitive in the industry, to
motivate executive officers to achieve the Company's business objectives and to
align the interests of executive officers with the long term interests of
stockholders. The Company currently uses salary, management incentive plans and
stock options to meet these goals.

The compensation philosophy of the Committee is to provide a comprehensive
compensation package for each executive officer that is well suited to support
accomplishment of the Company's business strategies, objectives and initiatives.
For incentive-based compensation, the Committee considers the desirability of
structuring such compensation arrangements so as to qualify for deductibility
under Section 162(m) of the Internal Revenue Code. As the Committee applies this
compensation philosophy in determining appropriate executive compensation levels
and other compensation factors, the Committee reaches its decisions with a view
towards the Company's overall financial performance.

Executive Officer Compensation

The Committee's approach is based upon its belief that a substantial
portion of aggregate annual compensation for executive officers should be
contingent upon the Company's performance and an individual's contribution to
the Company's success. In addition, the Committee strives to align the interests
of the Company's executive officers with the long-term interests of stockholders
through stock option grants that can result in ownership of the Company's Common
Stock. The Committee endeavors to structure each executive officer's overall
compensation package to be consistent with this approach and to enable the
Company to attract, retain and reward personnel who contribute to the success of
the Company.

The Company provides its executive officers with a compensation package
consisting of base salary, variable incentive pay and participation in benefit
plans generally available to other employees. The Committee considers market
information from published survey data provided to the Committee by the

14
<PAGE> 17

Company's human resources staff. 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 Committee to be peers in the
Company's industry.

For the Company's previous fiscal year, the Committee reviewed and
recommended a compensation structure which had as an important component the
substantial economic and business challenges in the semiconductor and
semiconductor capital equipment industries worldwide.

Base Salary. Salaries for executive officers are set with reference to
salaries for comparable positions among other companies in the Company's
industry or in industries that employ individuals of similar education and
background to the executive officers based on data provided by the Company's
human resources staff.

Management Incentive Plan. Each year since fiscal 1979, the Company has
adopted a management incentive plan (the "Incentive Plan") which provides for
payments to officers and key employees based on the financial performance of the
Company or the relevant business unit, and on the achievement of the person's
individual performance objectives. The Incentive Plan is approved by the
Committee and submitted to the Board of Directors for ratification. The
Incentive Plan sets goals for profitability, achievement of measurable
objectives aimed at strategic corporate goals and achievement of objectives
relating to managing the ratio of assets to sales.

Outstanding Corporate Performance Executive Bonus Plan. The Company
continued to utilize its incentive plan (the "Outstanding Corporate Performance
Plan") which allows for an additional bonus in years when the Company achieves
certain levels of profitability and growth. For those executive officers who do
not manage operating divisions, the matrix is based on the Company's pre-tax
margin and the growth of the Company compared to a peer group. The target
percentage for the Outstanding Corporate Performance Plan is the same target
percentage as utilized in determining the Incentive Plan bonus. For those
executive officers who manage operating divisions, the matrix is based on
certain specified growth objectives for that division, the Company's net
operating margin and a comparison of the Company's aggregate revenues over the
prior 36 months against a target group of public U.S. companies over the same
period.

Half of each annual amount under the Outstanding Corporate Performance Plan
is payable at the end the fiscal year. The other of half of each annual amount
payable under the plan is contributed by the Company to the Executive Deferred
Savings Plan (the "EDSP") that vests over a one year period. At the end of the
one year period, the executive officer has the choice of taking a cash payment
or leaving the contribution in the EDSP. If the executive officer leaves during
that one year period, the contribution by the Company is forfeited. Although the
executive officer is eligible to participate in both the Company's profit
sharing plan and the Outstanding Corporate Performance Plan, any amounts
contributed by the Company pursuant to the Outstanding Corporate Performance
Plan will be reduced by the amount of profit sharing paid during the fiscal
year.

Process Module Control Solutions Program (the "PMCS Program"). The Company
has initiated a new incentive program for fiscal year 2000. The PMCS Program is
intended to encourage teamwork throughout the Company. Each participant in the
PMCS Program shall receive a stock option upon the achievement of certain
revenue goals from customers set forth on a list of potential capital equipment
investment opportunities in the semiconductor industry. The percentage of
achievement of the revenue goal determines the number of stock options received,
which in turn is dependent upon the salary and performance level of the
participant. The stock option grants are made at the end of the fiscal year,
after the determination of the level of goal achieved.

Long-term Incentives. Longer term incentives are provided through the Stock
Option Plan and the Excess Profit Stock Plan, each of which reward executive
officers through the growth in value of the Company's Common Stock. The
Committee believes that employee equity ownership is highly motivating, provides
a major incentive for employees to build stockholder value and aligns the
interests of employees with those of stockholders.

15
<PAGE> 18

Grants of stock options to executive officers are based upon each executive
officer's responsibilities, historical and expected contributions to the
Company, and the executive officer's existing stock ownership and previous
option grants, with primary weight given to the executive officer's relative
rank and responsibilities. Stock options are granted at market price on the date
of grant and provide value to the executive officers only when the price of the
Company's Common Stock increases over the exercise price.

In August, 1998, following a sharp, sustained drop in the price of the
Company's Common Stock, the Committee became concerned about the retention and
continued motivation of employees holding "under-water" stock options, with
exercise prices higher and, in many cases, significantly higher than market
levels. After reviewing the matter, the Committee unanimously recommended to the
Board of Directors that the Company reprice stock options on August 31, 1998.
Employees of the Company, excluding certain executive officers, holding options
with exercise prices of $28.00 or higher were offered the opportunity to
surrender those options and receive new options having an exercise price of
$21.25, the fair market value of the Company's stock on that date, with a new
vesting schedule from the date of grant. In addition, the Committee also
realized that the Company was at a competitive disadvantage for retention of
certain of its executive officers holding options with exercise prices in excess
of the then-current market levels and on October 31, 1998, those executive
officers were offered the opportunity to surrender options and receive a reduced
number of options having an exercise price of $33.94, the market price on that
date. These repriced options began a new vesting schedule from the date of
grant. All independent members of the Board of Directors approved the repricing
offers. Kenneth Levy, the Company's Chief Executive Officer, Kenneth Schroeder,
the Company's President and Chief Operating Officer, and Jon Tompkins, the
Company's Chairman of the Board, abstained from the vote. The offer to reprice
stock options was not made to the Company's non-employee directors, all of whom
hold stock options under the Company's Outside Director Plan. A table showing
the options held by executive officers who elected to accept the repricing offer
is set forth under "Executive Compensation and Other Matters -- Ten-Year Option
Repricings Table."

In recommending the option repricing, the Committee and the Board of
Directors were primarily motivated by a desire to preserve the Company's
talented employee base in a highly competitive employment environment during a
period when falling stock prices had substantially eliminated the retention
value of the Company's equity incentives. Recognizing the variety of alternative
opportunities and intense competition for employees and executives from both
established companies and emerging high-technology companies, the Board of
Directors concluded that repricing under-water options was in the best interest
of the Company.

Approval of Fiscal Year 2000 Bonus Plan, Outstanding Corporate Performance
Plan and the PMCS Program

The Committee approved a fiscal year 2000 bonus plan incentive formula
which is based on two components of equal weight. The first component is
performance against specified financial objectives and the second is achievement
of non-financial strategic objectives. The bonuses for the Chairman of the
Board, the Chief Executive Officer, the Chief Operating Officer and the Chief
Financial Officer are based on the performance of the managers reporting to the
executive officers. The Committee also approved the fiscal year Outstanding
Corporate Performance Plan which is based on a matrix of the Company's net
operating margin and certain growth objectives. The Plan does not require any
contributions by the Company until the Company achieves a Pre-Tax Margin Factor
of 14%. The Pre-Tax Margin Factor is calculated by taking the pre-tax,
pre-profit sharing income, excluding non-recurring charges, and dividing it by
total revenue. Under the PMCS Program, certain of the stock options which would
be granted under Stock Option Plan will be dependent upon the achievement of
certain revenue targets from specified customers.

Chief Executive Officer Compensation

For fiscal year 1999, Kenneth Levy served as Chief Executive Officer. In
setting Mr. Levy's compensation for fiscal year 1999, the Committee considered
the Company's revenue and profit in the prior fiscal year, the Company's market
capitalization and data from comparable companies supplied by the Company's
compensation consultants. During fiscal year 1999, due to the downturn in the
semiconductor industry, the executive officers of the Company, including Mr.
Levy, voluntarily decreased their base salaries by 10% for six
16
<PAGE> 19

months. As a result of this decrease, Mr. Levy was paid $456,097 in salary for
fiscal 1999. Mr. Levy's target bonus for fiscal 1999 was 100% of his annual base
salary. The Company's results during this industry downturn, coupled with the
formula approved by the Committee and the Board, resulted in a bonus to Mr. Levy
of $429,597, or 94% of his reduced salary.

MEMBERS OF THE
COMPENSATION COMMITTEE

James W. Bagley
Leo J. Chamberlain
Lida Urbanek

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee are set forth in the preceding
section. There are no members of the Compensation Committee who were officers or
employees of the Company or any of its subsidiaries during the fiscal year,
formerly officers of the Company, or had any relationship otherwise requiring
disclosure hereunder.

17
<PAGE> 20

PERFORMANCE GRAPH

The stock price performance shown on the following graph is not necessarily
indicative of future price performance.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG KLA-TENCOR
CORPORATION, THE NASDAQ -- US INDEX AND THE HAMBRECHT & QUIST
PERFORMANCE GRAPH TECHNOLOGY INDEX*

<TABLE>
<CAPTION>
HAMBRECHT & QUIST
KLA-TENCOR CORPORATION THE NASDAQ-US INDEX TECHNOLOGY INDEX
---------------------- ------------------- -----------------
<S> <C> <C> <C>
1994 100.00 100.00 100.00
1995 206.00 133.48 176.90
1996 124.00 171.38 206.74
1997 260.00 208.42 270.00
1998 147.67 274.43 342.02
1999 346.00 392.51 553.56
</TABLE>

- ---------------
* Assumes $100 invested on June 30, 1994. The Company's fiscal year end is June
30.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the merger between KLA Instruments Corporation and
Tencor Instruments (effective April 30, 1997) the Company entered into identical
employment arrangements, subsequently amended, with Kenneth Levy, Jon D.
Tompkins and Kenneth L. Schroeder, all executive officers of the Company. The
arrangements, as amended, provide that certain benefits would be paid if certain
events took place after April 30, 1997. The purpose of these arrangements is to
retain the services of Messrs. Levy, Tompkins and Schroeder to ensure the
continued smooth transition associated with the Merger. The terms of those
arrangements provide that if an individual were to leave the Company after April
30, 1998, subject to releasing the Company from all claims, and in connection
with working part-time for 36 months, he will receive (i) his base salary for
the first 24 months of part-time employment, (ii) a mutually agreeable level of
compensation per month for the final 12 months of part-time employment, (iii) an
annual bonus (based on an achievement of 100% of bonus objectives) in the fiscal
year of his transition to part-time employment, (iv) a bonus paid in the fiscal
year following the payment of the annual bonus above, (based on achievement of
100% of his individual bonus objectives) and (v) a pro-rated bonus for the
fiscal year in which part-time employment ended. During the periods of part-time
employment, all options to exercise stock of the Company, which were granted
more than 12 months prior to the termination of full-time employment will
continue to vest. The same

18
<PAGE> 21

benefits shall be payable in the event the Company terminates his employment
without cause. If he is terminated for cause (defined as (i) gross negligence or
willful misconduct in connection with the performance of duties, (ii) conviction
of or plea of nolo contendere to any felony, or (iii) the embezzlement or
misappropriation of Company property) then he will receive a lump-sum payment
equal to 25% of his base salary.

During the last fiscal year, the Company entered into a Separation
Agreement (the "Agreement") with Graham J. Siddall, an executive officer of the
Company at the time the Agreement was executed. Mr. Siddall is no longer an
executive officer of the Company. Pursuant to the Agreement, Mr. Siddall shall
be a part-time employee of the Company until June 30, 2001 and is entitled to
receive bonuses as long as he does not work with another corporation. In
addition, Mr. Siddall's options granted prior to April 30, 1997 will continue to
vest during the part-time employment period provided that he does not work for
one or more of a defined set of competitors of the Company.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Exchange Act requires the Company's executive
officers, directors, and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors and greater
than ten percent stockholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Frederick A. Ball, an
executive officer of the Company filed a Form 4 for the month ending November
10, 1998, three days after the due date.

OTHER MATTERS

The Company knows of no other matters to be submitted to the stockholders
at the Annual Meeting. If any other matters properly come before the Annual
Meeting, it is the intention of the persons named in the enclosed form of Proxy
to vote the shares they represent as the Board of Directors may recommend.

THE BOARD OF DIRECTORS
October 15, 1999

19
<PAGE> 22

729-PS-99
<PAGE> 23
DETACH HERE

PROXY

KLA-TENCOR CORPORATION

PROXY FOR 1999 ANNUAL MEETING OF STOCKHOLDERS

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned, revoking all prior proxies, hereby appoints Kenneth Levy and
Robert J. Boehlke, and each of them, as Proxies with full power of
substitution, to represent and vote as designated in this proxy any and all
shares of the common stock of KLA-Tencor Corporation (the "Company"), held or
owned by or standing in the name of the undersigned on the Company's books on
September 20, 1999, at the Annual Meeting of Stockholders of the Company to be
held at the Company's offices at One Technology Drive, Milpitas, California
95035, at 11:00 a.m. local time on Tuesday, November 16, 1999, and any
continuation or adjournment thereof, with all powers the undersigned would
possess if personally present at the meeting.

The undersigned hereby directs and authorizes said Proxies and each of them, or
their substitute or substitutes, to vote as specified with respect to the
proposals listed on the reverse side, or, if no specification is made, to vote
in favor thereof.

The undersigned hereby further confers upon said Proxies, and each of them, or
their substitute or substitutes, discretionary authority to vote with respect
to all other matters that may properly come before the meeting or any
continuation or adjournment thereof.

The undersigned hereby acknowledges receipt of: (a) Notice of Annual Meeting of
Stockholders of the Company, (b) accompanying Proxy Statement, and (c) Annual
Report to Stockholders for the year ending June 30, 1999.

SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
<PAGE> 24

VOTE BY TELEPHONE VOTE BY INTERNET

Call Toll-Free on a Touch-Tone Phone
1-877-PRX-VOTE (1-877-779-8683).

Follow these four easy steps: Follow these four easy steps:

1. Read the accompanying Proxy 1. Read the accompanying Proxy
Statement/Prospectus and Statement/Prospectus and
Proxy Card Proxy Card

2. Call the toll-free number 2. Call the toll-free number
1-877-PRX VOTE (1-877-779-8683). http://www.eproxyvote.com/klac
For shareholders residing outside
the United States call collect on 3. Enter your 14-digit Voter Control
a touch tone phone 1-201-536-8073 Number located on your Proxy Card
above your name.
3. Enter your 14-digit Voter Control
Number located on your Proxy Card 4. Follow the instructions provided.
above your name.

4. Follow the recorded instructions.

YOUR VOTE IS IMPORTANT! YOUR VOTE IS IMPORTANT!
Call 1-877-PRX-VOTE anytime! Go to http://www.eproxyvote.com/klac
anytime!

DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET

DETACH HERE

[X] Please mark
votes as in
this example.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY, THE
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR AND FOR
PROPOSAL 2.

1. To elect the Class I directors to serve for a three year term and until
their successors are elected.

NOMINEES: (01) Kenneth Levy, (02) Samuel Rubinovitz, (03) Jon D. Tompkins
and (04) Lida Urbanek

FOR WITHHELD
[ ] [ ]

[ ] _______________________________________
For all nominees except as noted above

2. To ratify the appointment of PricewaterhouseCoopers LLP as independent
accountants of the Company for the fiscal year ending June 30, 2000.

FOR AGAINST ABSTAIN
[ ] [ ] [ ]

In their discretion, the proxy holders are authorized to vote on all such other
matters as may properly come before the meeting or any adjournment thereof.

MARK HERE IF YOU PLAN TO ATTEND THE MEETING [ ]

MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]

Please sign exactly as your name appears on your stock certificate(s), date and
return this Proxy promptly in the reply envelope provided. Please correct your
address before returning this Proxy. Persons signing in a fiduciary capacity
should so indicate. If shares are held by joint tenants or as community
property, both should sign.

Signature: ___________ Date: __________ Signature: ___________ Date: __________