Exhibit 10.27

NOTE: PORTIONS OF THIS EXHIBIT ARE THE SUBJECT OF A CONFIDENTIAL TREATMENT
REQUEST BY THE REGISTRANT TO THE SECURITIES AND EXCHANGE COMMISSION. SUCH
PORTIONS HAVE BEEN REDACTED AND ARE MARKED WITH A “[***]” IN PLACE OF THE
REDACTED LANGUAGE.

EXECUTION COPY

Merrill Lynch International

Merrill Lynch Financial Centre

2 King Edward Street

London EC1A 1HQ

February 22, 2007

KLA-Tencor Corporation 160 Rio Robles

San Jose, California 95134

Ladies and Gentlemen:

The purpose of this letter agreement (this “Confirmation”) is to confirm the
terms and conditions of the Transaction entered into between KLA-Tencor
Corporation, a Delaware corporation (the “Purchaser”), Merrill Lynch
International (the “Seller”) and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, solely in its capacity as agent for the Seller (as provided for
herein), on the Trade Date specified below (the “Transaction”). This
Confirmation constitutes a “Confirmation” as referred to in the Agreement (as
defined below).

This Confirmation evidences a complete and binding agreement between the Seller
and the Purchaser as to the terms of the Transaction to which this Confirmation
relates. This Confirmation shall supplement, form a part of, and be subject to
an agreement in the form of the 2002 ISDA Master Agreement (the “Agreement”) as
if the Seller and the Purchaser had executed an agreement in such form (but
without any Schedule except for the election of the laws of the State of New
York as the governing law) on the Trade Date. In the event of any inconsistency
between provisions of the Agreement and this Confirmation, this Confirmation
will prevail for the purpose of the Transaction to which this Confirmation
relates. The parties hereby agree that no Transaction other than the Transaction
to which this Confirmation relates shall be governed by the Agreement.

ARTICLE 1

DEFINITIONS

Section 1.01. Definitions. (a) As used in this Confirmation, the following terms
shall have the following meanings:

“10b-18 VWAP” means, (A) for any Trading Day described in clause (x) of the
definition of Trading Day hereunder, the volume-weighted average price at which
the Common Stock trades as reported in the composite transactions for the
principal United States securities exchange on which such Common Stock is then
listed (or, if applicable, the Successor Exchange on which the Common Stock has
been listed in accordance with Section 7.01(c)), on such Trading Day, excluding
(i) trades that do not settle regular way, (ii) opening (regular way) reported
trades in the consolidated system on such Trading Day, (iii) trades that occur
in the last ten minutes before the scheduled close of trading on the Exchange on
such Trading Day and ten minutes before the

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scheduled close of the primary trading in the market where the trade is
effected, and (iv) trades on such Trading Day that do not satisfy the
requirements of Rule 10b-18(b)(3), as determined in good faith by the
Calculation Agent, or (B) for any Trading Day that is described in clause (y) of
the definition of Trading Day hereunder, an amount determined in good faith by
the Calculation Agent as 10b-18 VWAP. The Purchaser acknowledges that the Seller
may refer to the Bloomberg Page “KLAC.UQ <Equity> AQR SEC” (or any successor
thereto), in its judgment, for such Trading Day to determine the 10b-18 VWAP.

“Additional Termination Event” has the meaning set forth in Section 7.01.

“Agent” means Merrill Lynch, Pierce, Fenner & Smith Incorporated.

“Agreement” has the meaning set forth in the second paragraph of this
Confirmation.

“Affected Party” has the meaning set forth in Section 14 of the Agreement.

“Affected Transaction” has the meaning set forth in Section 14 of the Agreement.

“Affiliated Purchaser” means any “affiliated purchaser” (as such term is defined
in Rule 10b-18) of the Purchaser.

“Alternative Termination Delivery Unit” means (i) in the case of a Termination
Event (other than a Merger Event or Nationalization) or Event of Default for
which the Purchaser is the Defaulting Party or sole Affected Party, one share of
Common Stock and (ii) in the case of a Merger Event or Nationalization, a unit
consisting of the number or amount of each type of property received by a holder
of one share of Common Stock in such Merger Event or Nationalization; provided
that if such Merger Event involves a choice of consideration to be received by
holders of the Common Stock, an Alternative Termination Delivery Unit shall be
deemed to include the amount of cash received by a holder who had elected to
receive the maximum possible amount of cash as consideration for his shares.

“Averaging Period” means the period of consecutive Trading Days from and
including the first Trading Day following the Hedging Completion Date to and
including the Valuation Completion Date.

“Bankruptcy Code” has the meaning set forth in Section 9.06.

“Business Day” means any day on which the Exchange is open for trading.

“Calculation Agent” means Merrill Lynch International.

“Common Stock” has the meaning set forth in Section 2.01.

“Communications Procedures” has the meaning set forth in Annex A hereto.

“Confirmation” has the meaning set forth in the first paragraph of this letter
agreement.

“Contract Period” means the period commencing on and including the Trade Date
and ending on and including the date all payments or deliveries of shares of
Common Stock pursuant to Article 3 or Section 7.03 have been made.

“Default Notice Day” has the meaning set forth in Section 7.02(a).

“Deliverable Shares” has the meaning set forth in Section 4.01(a).

“De-Listing” has the meaning set forth in Section 7.01(c).

“Early Termination Date” has the meaning set forth in Section 14 of the
Agreement.

 

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“Employee Stock Option Tender Offer” means the issuer tender offer proposed to
be conducted by the Purchaser for certain of its employee stock options, as
described in preliminary communications filed by the Purchaser with the SEC on
January 29, 2007.

“Event of Default” has the meaning set forth in Section 14 of the Agreement.

“Excess Ordinary Cash Dividend” has the meaning set forth in Section 7.01(f).

“Exchange” means the NASDAQ Global Select Market.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Extraordinary Cash Dividend” means the per share cash dividend or distribution,
or a portion thereof, declared by the Purchaser on shares of Common Stock that
is classified by the board of directors of the Purchaser as an “extraordinary”
dividend.

“Hedging Completion Date” means the Trading Day on which the Seller completes
the establishment of its initial hedge position with respect to this
Transaction.

“Hedging Price” means the volume weighted average of the per share prices at
which the Seller (or an affiliate of the Seller) purchases shares of Common
Stock during the Hedging Period to establish Seller’s initial hedge position
with respect to this Transaction.

“Hedging Period” has the meaning set forth in Section 2.03(a).

“Merger Event” has the meaning set forth in Section 7.01(d).

“Minimum Delivery Number” means the number of shares of Common Stock, rounded
down to the nearest integer, equal to (A) the Purchase Price divided by (B) the
Upside Threshold.

“Nationalization” has the meaning set forth in Section 7.01(e).

“Ordinary Cash Dividend” means a cash dividend by the Purchaser on shares of
Common Stock that is not an Extraordinary Cash Dividend.

“Purchase Price” has the meaning set forth in Section 2.01.

“Purchaser” has the meaning set forth in the first paragraph of this
Confirmation.

“Regulation M” means Regulation M under the Exchange Act.

“Rule 10b-18” means Rule 10b-18 promulgated under the Exchange Act (or any
successor rule thereto).

“SEC” means the Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended.

“Seller” has the meaning set forth in the first paragraph hereto.

“Seller Termination Share Purchase Period” has the meaning set forth in
Section 7.03.

“Settlement Number” means the number of shares of Common Stock equal to (i) the
Valuation Number minus (ii) 90% of the Minimum Delivery Number.

 

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“Share De-listing Event” has the meaning set forth in Section 7.01(c).

“Successor Exchange” has the meaning set forth in Section 7.01(c).

“Tender Offer Acceptance Date” has the meaning set forth in Section 4.02(b).

“Termination Amount” has the meaning set forth in Section 7.02(a).

“Termination Event” has the meaning set forth in Section 14 of the Agreement.

“Termination Price” means the value of an Alternative Termination Delivery Unit
to the Seller, as determined by the Calculation Agent.

“Trade Date” has the meaning set forth in Section 2.01.

“Trading Day” means (x) any day (i) other than a Saturday, a Sunday, a day on
which the Exchange is not open for business or the Tender Offer Acceptance Date,
(ii) during which trading of any securities of the Purchaser on any national
securities exchange has not been suspended, (iii) during which there has not
been, in the Seller’s reasonable judgment, a material limitation in the trading
of Common Stock or any options contract or futures contract related to the
Common Stock, and (iv) during which there has been no suspension pursuant to
Section 4.02 of this Confirmation, or (y) any day that, notwithstanding the
occurrence of events contemplated in clauses (ii), (iii) and (iv) of this
definition, the Calculation Agent determines to be a Trading Day.

“Transaction” has the meaning set forth in the first paragraph of this
Confirmation.

“Upside Threshold” means, subject to the proviso contained in Section 2.03(b),
***% of the Hedging Price.

“Valuation Completion Date” means the earlier of (x) the *** Trading Day
following the Hedging Completion Date and (y) such earlier Trading Day, but no
earlier than the *** Trading Day following the Hedging Completion Date, validly
elected by the Seller as the Valuation Completion Date by delivery of a notice
to the Purchaser of such election by no later than 5:00 P.M. (New York City
time) on the Business Day immediately following such elected Trading Day.

“Valuation Number” means the number of shares of Common Stock, rounded down to
the nearest integer, equal to the Purchase Price divided by the Valuation Price;
provided, however, that if such number of shares of Common Stock is less than
the Minimum Delivery Number, the Valuation Number shall be equal to such Minimum
Delivery Number.

“Valuation Price” means the average for all Trading Days in the Averaging Period
of the excess of (x) the 10b-18 VWAP for such Trading Day over (y) $***.

ARTICLE 2

PURCHASE OF THE STOCK

Section 2.01. Purchase of the Stock. Subject to the terms and conditions of this
Confirmation, the Purchaser agrees to purchase from the Seller, and the Seller
agrees to sell to the Purchaser, on February 22, 2007 or on such other Business
Day as the Purchaser and the Seller shall otherwise agree (the “Trade Date”), a
number of shares of the Purchaser’s common stock, par value $0.001 per share
(“Common Stock”), for a purchase price equal to $750,000,000 (the “Purchase
Price”). The number of shares of Common Stock purchased by the Purchaser
hereunder shall be determined in accordance with the terms of this Confirmation.

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*** Certain information on this page has been omitted and filed separately with
the Commission pursuant to a request for Confidential Treatment.

 

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Section 2.02. Initial Payment. On the Trade Date, the Purchaser shall deliver
the Purchase Price to the Seller. Payment pursuant to this Section 2.02 shall be
effected in accordance with the Seller’s customary procedures.

Section 2.03. Hedging Period. (a) On each Trading Day beginning on the third
Trading Day immediately following the Trade Date and ending on the Hedging
Completion Date, an affiliate of the Seller shall effect, for the account of the
Seller, purchases of shares of Common Stock to establish Seller’s initial
position to hedge the Seller’s price and market risk in connection with this
Transaction (the period of consecutive Trading Days on which such purchases for
this Transaction are effected being collectively referred to as the “Hedging
Period” for this Transaction). In no event shall the Hedging Period be more than
seven Trading Days.

(b) At the conclusion of the Hedging Period, based on the amounts and prices at
which an affiliate of the Seller effects purchases of shares of Common Stock
during the Hedging Period to establish Seller’s initial hedge position in
connection with this Transaction, the Calculation Agent shall determine the
Hedging Price, the Upside Threshold and the Minimum Delivery Number for this
Transaction.

(c) On the first Business Day following the Hedging Completion Date, in addition
to satisfying its obligations under Section 3.01(a), the Seller shall deliver to
the Purchaser a pricing supplement, substantially in the form of Exhibit A
attached hereto, setting forth the Hedging Price, the Upside Threshold, the
Minimum Delivery Number and the first day of the Averaging Period for this
Transaction.

ARTICLE 3

SHARE DELIVERIES

Section 3.01. Deliveries of Shares. (a) On the first business day immediately
following the Hedging Completion Date, the Seller shall deliver to the Purchaser
the number of shares of Common Stock equal to 90% of the Minimum Delivery
Number.

(b) On the third Business Day immediately following the Valuation Completion
Date, the Seller shall deliver to the Purchaser the number of shares of Common
Stock equal to the Settlement Number, if any.

(c) Delivery pursuant to this Article 3 shall be effected in accordance with the
Seller’s customary procedures.

ARTICLE 4

MARKET TRANSACTIONS

Section 4.01. Transactions by the Seller. (a) The parties agree and acknowledge
that:

(i) During the Hedging Period, the Averaging Period and any Seller Termination
Share Purchase Period, the Seller (or its agent or affiliate) may effect
transactions in shares of Common Stock in connection with this Confirmation. The
timing of such transactions by the Seller, the price paid or received per share
of Common Stock pursuant to such transactions and the manner in which such
transactions are made, including without limitation whether such transactions
are made on any securities exchange or privately, shall be within the sole
judgment of the Seller; provided that the Seller shall make all such purchases
of Common Stock during the Hedging Period and any Seller Termination Share
Purchase Period and all such purchases of Deliverable Shares during the
Averaging Period in a manner that would comply with the limitations set forth in
clauses (b)(2), (b)(3), (b)(4) and (c) of Rule 10b-18 as if such rule were
applicable to such purchases. “Deliverable Shares” shall mean shares of Common
Stock purchased by Seller for delivery to Buyer or for repayment of shares
borrowed by Seller for delivery to Buyer.

 

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(ii) In the event that any of the Purchaser or its Affiliated Purchasers
conducts any Rule 10b-18 purchases of blocks of Common Stock pursuant to the
once-a-week block exception set forth in Rule 10b-18(b)(4) during the four
calendar weeks preceding the first day of either the Hedging Period or the
Seller Termination Share Purchase Period, or during the calendar week in which
either such day occurs, the Purchaser shall provide written notice thereof
setting forth the total number of shares purchased. In the absence of such
notice, the Purchaser shall be deemed to have advised the Seller that no such
blocks were purchased by any of the Purchaser or its Affiliated Purchasers
during such periods. For purposes of this Section 4.01(a)(ii), the terms “Rule
10b-18 purchase” and “block” shall have the meanings given to them in Rule
10b-18.

(b) The Purchaser acknowledges and agrees that (i) all transactions effected
pursuant to Section 4.01 hereunder shall be made in the Seller’s sole judgment
and for the Seller’s own account and (ii) the Purchaser does not have, and shall
not attempt to exercise, any influence over how, when or whether to effect such
transactions, including, without limitation, the price paid or received per
share of Common Stock pursuant to such transactions whether such transactions
are made on any securities exchange or privately. It is the intent of the Seller
and the Purchaser that this Transaction comply with the requirements of Rule
10b5-1(c) of the Exchange Act and that this Confirmation shall be interpreted to
comply with the requirements of Rule 10b5-1(c)(1)(i)(B) and the Seller shall
take no action that results in the Transaction not so complying with such
requirements.

Section 4.02. Suspension of Transactions in Common Stock. (a) If the Seller, in
its reasonable judgment, determines that it is necessary with regard to any
legal, regulatory or self-regulatory requirements or related policies and
procedures (whether or not such requirements, policies or procedures are imposed
by law or have been voluntarily adopted by the Seller) for the Seller to refrain
from effecting transactions in Common Stock on any Business Day during the
Contract Period or to effect such transactions on such Business Day at a volume
lower than that otherwise effected by the Seller hereunder, the Seller (or its
agent or affiliate) shall not effect transactions in shares of Common Stock with
respect to this Transaction on such day or effect such transactions at a volume
determined by the Seller in its reasonable judgment; provided that if the Seller
decides to effect any transaction hereunder at such lower volume, the
Calculation Agent shall be entitled to make appropriate adjustments to the term
of this Transaction under Section 8.02 to reflect the effect of such diminished
volume. The Seller shall notify the Purchaser of the exercise of the Seller’s
rights pursuant to this Section 4.02(a) upon such exercise and shall
subsequently notify the Purchaser on the day the Seller believes that the Seller
may resume purchasing or selling or purchasing at the volume level anticipated
at the outset of this Transaction, as applicable, Common Stock. The Seller shall
not be obligated to communicate to the Purchaser the reason for the Seller’s
exercise of its rights pursuant to this Section 4.02(a).

(b) Seller agrees that neither it nor any of its agents or affiliates shall
effect transactions in Common Stock with respect to this Transaction on the date
on which securities tendered pursuant to the Employee Stock Option Tender Offer
are to be accepted (the “Tender Offer Acceptance Date”). Purchaser agrees to
provide written notice to Seller of the Tender Offer Acceptance Date no later
than five Trading Days prior to the Tender Offer Acceptance Date.

(c) The Purchaser agrees that, during the Contract Period, neither the Purchaser
nor any of its affiliates or agents shall make any distribution (as defined in
Regulation M) of Common Stock, or any security for which the Common Stock is a
reference security (as defined in Regulation M), or take any other action that
would preclude purchases by the Seller of the Common Stock, in each case such as
would cause Seller’s purchases of Common Stock to violate Regulation M;
provided, however, that notwithstanding the foregoing, nothing in this
Confirmation shall prohibit the Purchaser from making any distribution of Common
Stock or any security for which the Common Stock is a reference security (i) to
qualified institutional buyers in transactions pursuant to Rule 144A under the
Securities Act or (ii) in connection with the Employee Stock Option Tender
Offer.

 

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Section 4.03. Purchases of Common Stock by the Purchaser. Without the prior
written consent of the Seller, the Purchaser shall not, and shall cause its
affiliates and affiliated purchasers (each as defined in Rule 10b-18) not to,
directly or indirectly (including, without limitation, by means of a derivative
instrument) purchase, offer to purchase, place any bid or limit order that would
effect a purchase of, or commence any tender offer relating to, any shares of
Common Stock (or equivalent interest, including a unit of beneficial interest in
a trust or limited partnership or a depository share) or any security
convertible into or exchangeable for shares of Common Stock during the Contract
Period; provided, however, that notwithstanding the foregoing, nothing in this
Confirmation shall prohibit the Purchaser from purchasing or offering to
purchase any such securities in connection with the Employee Stock Option Tender
Offer.

ARTICLE 5

REPRESENTATIONS, WARRANTIES AND AGREEMENTS

Section 5.01. Repeated Representations, Warranties and Agreements of the
Purchaser. The Purchaser represents and warrants to, and agrees with, the
Seller, on the date hereof and on any date on which the Purchaser elects to
receive any delivery or payment pursuant to this Confirmation, that:

(a) Disclosure; Compliance with Laws. The reports and other documents filed by
the Purchaser with the SEC pursuant to the Exchange Act when considered as a
whole (with the more recent such reports and documents deemed to amend
inconsistent statements contained in any earlier such reports and documents), do
not contain any untrue statement of a material fact or any omission of a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances in which they were made, not
misleading. The Purchaser is not in possession of any material nonpublic
information regarding the Purchaser or the Common Stock.

(b) Rule 10b5-1. The Purchaser acknowledges that (i) the Purchaser does not
have, and shall not attempt to exercise, any influence over how, when or whether
to effect purchases of Common Stock by the Seller (or its agent or affiliate) in
connection with this Confirmation and (ii) the Purchaser is entering into the
Agreement and this Confirmation in good faith and not as part of a plan or
scheme to evade compliance with federal securities laws including, without
limitation, Rule 10b-5 promulgated under the Exchange Act. The Purchaser also
acknowledges and agrees that any amendment, modification, waiver or termination
of this Confirmation must be effected in accordance with the requirements for
the amendment or termination of a “plan” as defined in Rule 10b5-1(c) under the
Exchange Act. Without limiting the generality of the foregoing, any such
amendment, modification, waiver or termination shall be made in good faith and
not as part of a plan or scheme to evade the prohibitions of Rule 10b-5 under
the Exchange Act, and no amendment, modification or waiver shall be made at any
time at which the Purchaser or any officer or director of the Purchaser is aware
of any material nonpublic information regarding the Purchaser or the Common
Stock.

(c) No Facilitation of Distribution. The Purchaser is not entering into this
Confirmation to facilitate a distribution of the Common Stock (or any security
convertible into or exchangeable for Common Stock) or in connection with a
future issuance of securities.

(d) No Manipulation. The Purchaser is not entering into this Confirmation to
create actual or apparent trading activity in the Common Stock (or any security
convertible into or exchangeable for Common Stock) or to manipulate the price of
the Common Stock (or any security convertible into or exchangeable for Common
Stock).

(e) Regulation M. The Purchaser is not engaged in a distribution, as such term
is used in Regulation M, that would preclude purchases by the Purchaser or the
Seller of the Common Stock or cause the Seller to violate any law, rule or
regulation with respect to such purchases.

(f) Board Authorization. The Purchaser is entering into this Transaction in
connection with its share repurchase program, which was approved by its board of
directors and which will be publicly disclosed

 

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prior to the first day of the Hedging Period. There is no internal policy of the
Purchaser, whether written or oral, that would prohibit the Purchaser from
entering into any aspect of this Transaction, including, but not limited to, the
purchases of shares of Common Stock to be made pursuant hereto.

(g) Due Authorization and Good Standing. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. This Confirmation has been duly authorized, executed and delivered by
the Purchaser and (assuming due authorization, execution and delivery thereof by
the Seller) constitutes a valid and legally binding obligation of the Purchaser.
The Purchaser has all corporate power to enter into this Confirmation and to
consummate the transactions contemplated hereby and to purchase the Common Stock
in accordance with the terms hereof.

(h) Certain Transactions. There has not been any public announcement (as defined
in Rule 165(f) under the Securities Act) of any merger, acquisition, or similar
transaction involving a recapitalization relating to the Purchaser that would
fall within the scope of Rule 10b-18(a)(13)(iv).

Section 5.02. Initial Representations, Warranties and Agreements of the
Purchaser. The Purchaser represents and warrants to, and agrees with the Seller,
as of the date hereof, that:

(a) Solvency. The assets of the Purchaser at their fair valuation exceed the
liabilities of the Purchaser, including contingent liabilities; the capital of
the Purchaser is adequate to conduct the business of the Purchaser and the
Purchaser has the ability to pay its debts and obligations as such debts mature
and does not intend to, or does not believe that it will, incur debt beyond its
ability to pay as such debts mature.

(b) No Conflict. The execution and delivery by the Purchaser of, and the
performance by the Purchaser of its obligations under, this Confirmation and the
consummation of the transactions herein contemplated do not conflict with or
violate (i) any provision of the certificate of incorporation, by-laws or other
constitutive documents of the Purchaser, (ii) any statute or order, rule,
regulation or judgment of any court or governmental agency or body having
jurisdiction over the Purchaser or any of its subsidiaries or any of their
respective assets or (iii) any contractual restriction binding on or affecting
the Purchaser or any of its subsidiaries or any of its assets.

(c) Consents. All governmental and other consents that are required to have been
obtained by the Purchaser with respect to performance, execution and delivery of
this Confirmation have been obtained and are in full force and effect and all
conditions of any such consents have been complied with.

(d) Investment Company Act. The Purchaser is not and, after giving effect to the
transactions contemplated in this Confirmation, will not be required to register
as an “investment company” as such term is defined in the Investment Company Act
of 1940, as amended.

(e) Commodity Exchange Act. The Purchaser is an “eligible contract participant”,
as such term is defined in Section 1(a)(12) of the Commodity Exchange Act, as
amended.

Section 5.03. Additional Representations, Warranties and Agreements. The
Purchaser and the Seller represent and warrant to, and agree with, each other
that:

(a) Non-Reliance. Each party has entered into this Transaction solely in
reliance on its own judgment. Neither party has any fiduciary obligation to the
other party relating to this Transaction. In addition, neither party has held
itself out as advising, or has held out any of its employees or agents as having
the authority to advise, the other party as to whether or not the other party
should enter into this Transaction, any subsequent actions relating to this
Transaction or any other matters relating to this Transaction. Neither party
shall have any responsibility or liability whatsoever in respect of any advice
of this nature given, or views expressed, by it or any such persons to the other
party relating to this Transaction, whether or not such advice is given or such
views are expressed at the request of the other party. The Purchaser has
conducted its own analysis of the legal, accounting, tax and other implications
of this Transaction and consulted such advisors, accountants and counsel as it
has deemed necessary.

 

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(b) Agency. Merrill Lynch, Pierce, Fenner & Smith Incorporated shall act as
“agent” for Seller and Buyer within the meaning of Rule 15a-6 under the Exchange
Act. The Agent is not a principal to this Confirmation and shall have no
responsibility or liability to Seller or Buyer to pay or perform under this
Confirmation. Each of Seller and Buyer agrees to proceed solely against the
other to collect or recover any securities or money owing to it in connection
with or as a result of this Confirmation. The Agent shall otherwise have no
liability in respect of this Confirmation, except for its gross negligence or
willful misconduct in performing its duties as Agent hereunder. As a
broker-dealer registered with the Securities and Exchange Commission, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, in its capacity as Agent, will be
responsible for (i) effecting the Transaction, (ii) issuing all required
notices, confirmations and statements to Seller and Buyer and (iii) maintaining
books and records relating to this Confirmation.

(c) Tax Matters. (i) For the purpose of Section 3(e) of the Agreement, each
party represents to the other party that it is not required by any applicable
law, as modified by the practice of any relevant governmental revenue authority,
of any Relevant Jurisdiction to make any deduction or withholding for or on
account of any Tax from any payment (other than interest under Section 2(e),
6(d)(ii), or 6(e) of the Agreement, or under Section 8.01 of this Confirmation)
to be made by it to the other party under the Agreement. In making this
representation, each party may rely on (i) the accuracy of any representations
made by the other party pursuant to Section 3(f) of the Agreement, (ii) the
satisfaction of the agreement contained in Section 4(a)(i) or 4(a)(iii) of the
Agreement, and the accuracy and effectiveness of any document provided by the
other party pursuant to Section 4(a)(i) or 4(a)(iii) of the Agreement, and
(iii) the satisfaction of the agreement of the other party contained in
Section 4(d) of the Agreement; provided that it will not be a breach of this
representation where reliance is placed on clause (ii) above and the other party
does not deliver a form or document under Section 4(a)(iii) of the Agreement by
reason of material prejudice to its legal or commercial position.

(ii) For the purpose of Section 3(f) of the Agreement, (A) Seller represents
that it is a company organized under the laws of England and Wales and
(ii) Buyer represents that it is a corporation incorporated under the laws of
Delaware.

Section 5.04. Representations and Warranties of the Seller. The Seller
represents and warrants to the Purchaser that:

(a) Due Authorization. This Confirmation has been duly authorized, executed and
delivered by the Seller and (assuming due authorization, execution and delivery
thereof by the Purchaser) constitutes a valid and legally binding obligation of
the Seller. The Seller has all corporate power to enter into this Confirmation
and to consummate the transactions contemplated hereby and to deliver the Common
Stock in accordance with the terms hereof.

(b) Right to Transfer. The Seller will, as of each date on which it delivers
shares of Common Stock to the Purchaser pursuant to Article 3, transfer the
shares of Common Stock that it delivers free and clear of any security interest,
mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind.

ARTICLE 6

ADDITIONAL COVENANTS

Section 6.01. Purchaser’s Further Assurances. The Purchaser hereby agrees with
the Seller that the Purchaser shall cooperate with the Seller, and execute and
deliver, or use its reasonable efforts to cause to be executed and delivered,
all such other instruments, and to obtain all consents, approvals or
authorizations of any person, and take all such other actions as the Seller may
reasonably request from time to time, consistent with the terms of this
Confirmation, in order to effectuate the purposes of this Confirmation and the
Transaction contemplated hereby.

 

9

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Section 6.02 Purchaser’s Hedging Transactions. The Purchaser hereby agrees with
the Seller that the Purchaser shall not, during the Contract Period, enter into
or alter any corresponding or hedging transaction or position with respect to
the Common Stock (including, without limitation, with respect to any securities
convertible or exchangeable into the Common Stock) and agrees not to alter or
deviate from the terms of this Confirmation.

Section 6.03. No Communications. The Purchaser hereby agrees with the Seller
that the Purchaser shall not, directly or indirectly, communicate any
information relating to the Common Stock or this Transaction (including any
notices required by Section 6.04) to any employee of the Seller or Merrill
Lynch, Pierce, Fenner & Smith Incorporated, other than as set forth in the
Communications Procedures attached as Annex A hereto.

Section 6.04. Notice of Certain Transactions. If at any time during the Contract
Period, the Purchaser makes, or expects to be made, or has made, any public
announcement (as defined in Rule 165(f) under the Securities Act) of any merger,
acquisition, or similar transaction involving a recapitalization relating to the
Purchaser (other than any such transaction in which the consideration consists
solely of cash and there is no valuation period, or as to which the completion
of such transaction or the completion of the vote by target shareholders has
occurred), then the Purchaser shall (i) notify the Seller prior to the opening
of trading in the Common Stock on any day on which the Purchaser makes, or
expects to be made, or has made any such public announcement, (ii) notify the
Seller promptly following any such announcement (or, if later, prior to the
opening of trading in the Common Stock on the first day of any Seller
Termination Share Purchase Period) that such announcement has been made and
(iii) promptly deliver to the Seller following the making of any such
announcement (or, if later, prior to the opening of trading in the Common Stock
on the first day of any Seller Termination Share Purchase Period) a certificate
indicating (A) the Purchaser’s average daily Rule 10b-18 purchases (as defined
in Rule 10b-18) during the three full calendar months preceding the date of such
announcement and (B) the Purchaser’s block purchases (as defined in Rule 10b-18)
effected pursuant to paragraph (b)(4) of Rule 10b-18 during the three full
calendar months preceding the date of such announcement. In addition, the
Purchaser shall promptly notify the Seller of the earlier to occur of the
completion of such transaction and the completion of the vote by target
shareholders.

Section 6.05. Determinations by the Calculation Agent. All determinations made
by the Calculation Agent shall be made in good faith and in a reasonable manner.
Following any calculation by the Calculation Agent hereunder, at the request of
the Purchaser, the Calculation Agent shall provide to the Purchaser by
electronic mail a report (in a commonly used file format for the storage and
manipulation of financial data) setting forth in reasonable detail the basis for
such calculation.

ARTICLE 7

TERMINATION

Section 7.01. Additional Termination Events. (a) An Additional Termination Event
shall occur in respect of which the Purchaser is the sole Affected Party and
this Transaction is the sole Affected Transaction if, on any day, the Seller
determines, in its reasonable judgment, that it is unable to establish,
re-establish or maintain in an economically efficient manner any hedging
transactions reasonably necessary in the normal course of such party’s business
of hedging the price and market risk of entering into and performing under this
Transaction, due to market illiquidity, illegality, lack of availability of
hedging transaction market participants or any other factor.

(b) An Additional Termination Event shall occur in respect of which the
Purchaser is the sole Affected Party and this Transaction is the sole Affected
Transaction if (i) a Share De-listing Event occurs; (ii) a Merger Event occurs;
(iii) a Nationalization occurs, (iv) an Excess Ordinary Cash Dividend is
declared, (v) any event described in Section 8.02 occurs with respect to which,
the Calculation Agent determines in its reasonable judgment, that it is
impracticable to effect any adjustment contemplated by Section 8.02 in order to
preserve the fair value of the Transaction to the Seller or (vi) an event
described in paragraph III of Annex A occurs.

 

10

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(c) A “Share De-listing Event” means that at any time during the Contract
Period, the Common Stock ceases to be listed, traded or publicly quoted on the
Exchange for any reason (other than a Merger Event, a “De-Listing”) and are not
immediately re-listed, traded or quoted as of the date of such de-listing, on
another U.S. national securities exchange or a U.S. automated interdealer
quotation system (a “Successor Exchange”), provided that it shall not constitute
an Additional Termination Event if the Common Stock is immediately re-listed on
a Successor Exchange upon its De-Listing from the Exchange, and the Successor
Exchange shall be deemed to be the Exchange for all purposes. In addition, in
such event, the Seller shall make any commercially reasonable adjustments it
deems necessary to the terms of the Transaction.

(d) A “Merger Event” means the public announcement, including any public
announcement as defined in Rule 165(f) of the Securities Act (by the Purchaser
or otherwise) at any time during the Contract Period of any (i) planned
recapitalization, reclassification or change of the Common Stock that will, if
consummated, result in a transfer of more than 50% of the outstanding shares of
Common Stock, (ii) planned consolidation, amalgamation, merger or similar
transaction of the Purchaser with or into another entity (other than a
consolidation, amalgamation or merger in which the Purchaser will be the
continuing entity and which does not result in any such recapitalization,
reclassification or change of more than 50% of such shares outstanding),
(iii) other takeover offer for the shares of Common Stock that is aimed at
resulting in a transfer of more than 50% of such shares of Common Stock (other
than such shares owned or controlled by the offeror) or (iv) irrevocable
commitment to any of the foregoing.

(e) A “Nationalization” means that all or substantially all of the outstanding
shares of Common Stock or assets of the Purchaser are nationalized, expropriated
or are otherwise required to be transferred to any governmental agency,
authority or entity.

(f) An “Excess Ordinary Cash Dividend” means an Ordinary Cash Dividend that
(i) is not an Extraordinary Cash Dividend, (ii) has a record date during the
Contract Period and (iii) is in an amount that, together with all prior declared
Ordinary Cash Dividends that have a record date during the same regular dividend
period of the Purchaser, exceeds the amount set forth in this Section 7.01(f)
for such regular dividend period.

 

Ordinary Dividend Amount

  

Dividend Period

$0.12 per share of Common Stock    January 1, 2007 – March 31, 2007 $0.12 per
share of Common Stock    April 1, 2007 – June 30, 2007 $0.00 per share of Common
Stock    Any quarterly period after June 30, 2007

Section 7.02. Consequences of Additional Termination Events. (a) In the event of
the occurrence or effective designation of an Early Termination Date under the
Agreement, in lieu of payment of the amount payable in respect of this
Transaction pursuant to Section 6(d)(ii) of the Agreement (the “Termination
Amount”), the Seller shall be obligated to deliver to the Purchaser the
Alternative Termination Delivery Units pursuant to Section 7.03, unless the
Purchaser elects cash settlement (which election shall be binding), as set forth
in Section 7.02(b), and notifies the Seller of such election by delivery of
written notice to the Seller on the Business Day immediately following the
Purchaser’s receipt of a notice (as required by Section 6(d) of the Agreement
following the designation of an Early Termination Date in respect of this
Transaction or in respect of all transactions under the Agreement) setting forth
the amounts payable by the Seller with respect to such Early Termination Date
(the date of such delivery, the “Default Notice Day”); provided that the
Purchaser’s election to receive the Alternative Termination Delivery Units
pursuant to Section 7.03 shall not be valid and cash settlement shall apply if
the representations and warranties made by the Purchaser to the Seller in
Section 5.01 are not true and correct as of the date the Seller makes such
election, as if made on such date.

(b) If cash settlement applies in respect of an Early Termination Date,
Section 6 of the Agreement shall apply; provided, however, that notwithstanding
any cash settlement election by the

 

11

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Purchaser, upon such election the Seller’s obligation to deliver the Termination
Amount shall be satisfied by delivery to the Purchaser of (i) on or as early as
practicable following the applicable Early Termination Date, Alternative
Termination Delivery Units acquired by or on behalf of the Seller in connection
with its hedging activity under this Transaction (whose value shall be based on
the Termination Price) and (ii) cash for the remainder, if any, of the
Termination Amount.

Section 7.03. Alternative Termination Settlement. Subject to Section 7.02(a),
unless the Purchaser elects cash settlement pursuant to Section 7.02(b), (i) the
Seller shall, beginning on the first Trading Day following the Default Notice
Day and ending when the Seller shall have satisfied its obligations under this
clause (the “Seller Termination Share Purchase Period”), purchase (subject to
the provisions of Section 4.01 and Section 4.02 hereof) a number of Alternative
Termination Delivery Units equal to (x) (A) the Termination Amount divided by
(B) the Termination Price less (y) any Alternative Termination Delivery Units
already held by or on behalf of the Seller in connection with its hedging
activity under this Transaction; and (ii) the Seller shall deliver such
Alternative Termination Delivery Units (for the avoidance of doubt, in an
aggregate number equal to the Termination Amount divided by the Termination
Price) to the Purchaser on the settlement dates relating to such purchases (or,
with respect to Alternative Termination Delivery Units described in (i)(y)
above, on or as soon as practicable following the applicable Early Termination
Date).

Section 7.04. Notice of Default. If an Event of Default occurs in respect of the
Purchaser, the Purchaser will, promptly upon becoming aware of it, notify the
Seller specifying the nature of such Event of Default.

ARTICLE 8

ADJUSTMENTS

Section 8.01. Extraordinary Cash Dividends. (a) If the Purchaser declares any
Extraordinary Cash Dividend that has a record date during the Contract Period,
then prior to or on the date on which such Extraordinary Cash Dividend is paid
by the Purchaser to holders of record, the Purchaser shall pay to the Seller an
amount in cash equal to the product of (i) the amount of such Extraordinary Cash
Dividend and (ii) the theoretical short delta number of shares, as determined by
the Calculation Agent, required for the Seller to hedge its exposure to the
Transaction.

Section 8.02. Other Dilution Adjustments. If (x) any corporate event occurs
involving the Purchaser or the Common Stock (other than an Extraordinary Cash
Dividend or an Ordinary Cash Dividend but including, without limitation, a stock
split, stock or other dividend or distribution, recapitalization or any other
event having a dilutive or concentrative effect on the Common Stock) or (y) as a
result of the definition of Trading Day (whether because of a suspension of
transactions pursuant to Section 4.02 or otherwise), any day that would
otherwise be a Trading Day during the Contract Period is not a Trading Day or on
such Trading Day, pursuant to Section 4.02, the Seller effects transactions with
respect to shares of Common Stock at a volume lower than originally anticipated
with respect to this Transaction, then in any such case, the Calculation Agent
shall make corresponding adjustments with respect to any one or more of the
Minimum Delivery Number, the Upside Threshold and the Settlement Number as the
Calculation Agent determines appropriate to preserve the fair value of the
Transaction to the Seller, and shall determine the effective date of such
adjustment.

ARTICLE 9

MISCELLANEOUS

Section 9.01. Successors and Assigns. All covenants and agreements in this
Confirmation made by or on behalf of either of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto whether so expressed or not.

 

12

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Section 9.02. Assignment and Transfer. Notwithstanding the Agreement, the Seller
may assign any of its rights or duties hereunder to any one or more of its
affiliates without the prior written consent of the Purchaser. Notwithstanding
any other provision in this Confirmation to the contrary requiring or allowing
Seller to purchase, sell, receive or deliver any shares of Common Stock or other
securities to or from the Purchaser, Seller may designate any of its affiliates
to purchase, sell, receive or deliver such shares of Common Stock or other
securities and otherwise to perform the Seller’s obligations in respect of this
Transaction and any such designee may assume such obligations. The Seller shall
be discharged of its obligations to the Purchaser only to the extent of any such
performance.

Section 9.03. Calculation Agent. Whenever the Calculation Agent is required to
act or to exercise judgment in a any way with respect to this Transaction, it
will do so in good faith and in a commercially reasonable manner.

Section 9.04. Non-Confidentiality. The Seller and the Purchaser hereby
acknowledge and agree that subject to Section 6.03 each is authorized to
disclose every aspect of this Confirmation and the transactions contemplated
hereby to any and all persons, without limitation of any kind, and there are no
express or implied agreements, arrangements or understandings to the contrary.

Section 9.05. Unenforceability and Invalidity. To the extent permitted by law,
the unenforceability or invalidity of any provision or provisions of this
Confirmation shall not render any other provision or provisions herein contained
unenforceable or invalid.

Section 9.06. Securities Contract. The parties hereto agree and acknowledge as
of the date hereof that (i) the Seller is a “financial institution” within the
meaning of Section 101(22) of Title 11 of the United States Code (the
“Bankruptcy Code”) and a “swap participant” within the meaning of Section 101(
53C) of the Bankruptcy Code and (ii) this Confirmation is a “securities
contract,” as such term is defined in Section 741(7) of the Bankruptcy Code, and
a “swap agreement,” as such term is defined in Section 101(53B) of the
Bankruptcy Code, entitled to the protection of, among other Sections, Sections
362(b)(6), 362(b)(17), 546(e), 546(g), 555 and 560 of the Bankruptcy Code.

Section 9.07. No Collateral, Netting or Setoff. Notwithstanding any provision of
the Agreement, or any other agreement between the parties, to the contrary, the
obligations of the Purchaser hereunder are not secured by any collateral.
Obligations under this Transaction shall not be netted, recouped or set off
(including pursuant to Section 6 of the Agreement) against any other obligations
of the parties, whether arising under the Agreement, this Confirmation, under
any other agreement between the parties hereto, by operation of law or
otherwise, and no other obligations of the parties shall be netted, recouped or
set off (including pursuant to Section 6 of the Agreement) against obligations
under this Transaction, whether arising under the Agreement, this Confirmation,
under any other agreement between the parties hereto, by operation of law or
otherwise, and each party hereby waives any such right of setoff, netting or
recoupment.

Section 9.08 Notices. Unless otherwise specified herein, any notice, the
delivery of which is expressly provided for in this Confirmation, may be made by
telephone, to be confirmed in writing to the address below. Changes to the
information below must be made in writing.

 

  (a) If to the Purchaser:

KLA-Tencor Corporation

160 Rio Robles

San Jose, California 95134

Attention: Jeffrey L. Hall, Chief Financial Officer

Telephone: (408) 875-6800

Facsimile: (408) 875-3030

 

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  (b) If to the Seller:

Merrill Lynch International

c/o Merrill Lynch & Co., Inc.

Merrill Lynch World Headquarters

4 World Financial Center, 5th Floor

New York, New York 10080

Attention: Equity Linked COO

Telephone: (212) 449-8637

Facsimile: (212) 738-1801

 

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Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing the copy of this Confirmation enclosed for that purpose
and returning it to us.

 

Yours sincerely,   Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent
for Merrill Lynch International By:  

/s/ BRIAN CARROLL

  Name:   Brian Carroll   Title:   Authorized Signatory   Merrill Lynch
International   By:  

/s/ WILLIAM MORLEY

  Name:   William Morley   Title:   Authorized Signatory  

Confirmed as of the date first above written:

 

KLA-TENCOR CORPORATION   By:  

/s/ JEFFREY L. HALL

  Name:   Jeffrey L. Hall  

Title:

  Chief Financial Officer  

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ANNEX A

COMMUNICATIONS PROCEDURES

February 22, 2007

 

I. Introduction

KLA-Tencor Corporation, a Delaware corporation (the “Purchaser”), Merrill Lynch
International (the “Seller”) and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, solely in its capacity as agent for the Seller have adopted these
communications procedures (the “Communications Procedures”) in connection with
entering into the Confirmation (the “Confirmation”) dated as of February 22,
2007 between Purchaser and Seller relating to the sale by Seller to Purchaser of
common stock, par value $0.001 per share, or security entitlements in respect
thereof (the “Common Stock”) of the Purchaser. These Communications Procedures
supplement, form part of, and are subject to the Confirmation.

 

II. Communications Rules

1. From the date hereof until the end of the Contract Period, neither Purchaser,
nor any Employee of Purchaser, nor any Designee of Purchaser shall (a) engage in
any Program Related Communication with any Equity Derivatives Personnel, other
than any of the Permitted Contact, or (b) in any event disclose any Material
Non-Public Information to any Equity Derivatives Personnel, other than any of
the Permitted Contact, and

2. Subject to the preceding provision, the Purchaser, any Employee of Purchaser
and any Designee of Purchaser may at any time engage in any Non-Program Related
Communication.

 

III. Termination

If, in the sole judgment of any Equity Derivatives Personnel or any affiliate or
Employee of Seller participating in any Communication with Purchaser or any
Designee of Purchaser, such Communication would not be permitted by these
Communications Procedures, such Equity Derivatives Personnel or such affiliate
or Employee of Seller shall immediately terminate such Communication. In such
case, or if such Equity Derivatives Personnel or such affiliate or Employee of
Seller determines following completion of any Communication with Purchaser, or
any Designee of Purchaser, that such Communication was not permitted by these
Communications Procedures, such Equity Derivatives Personnel or such affiliate
or Employee of Seller shall promptly consult with his or her supervisors and
with counsel for Seller regarding such Communication. If, in the reasonable
judgment of Seller’s counsel following such consultation, there is more than an
insignificant risk that such Communication could materially jeopardize the
availability of the affirmative defenses provided in Rule 10b5-1 under the 1934
Act with respect to any ongoing or contemplated activities of Seller or its
affiliates in respect of the Confirmation, it shall be an Additional Termination
Event with respect to the Confirmation.

 

IV. Definitions

Capitalized terms used and not otherwise defined herein shall have the meanings
ascribed to them in the Confirmation. As used herein, the following words and
phrases shall have the following meanings:

“Communication” means any contact or communication (whether written, electronic,
oral or otherwise) between Purchaser, any Employee of Purchaser or one or more
Designees of Purchaser, on the one hand, and Seller or any of its affiliates or
Employees, on the other hand.

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“Designee” means a person designated, in writing or orally, by Purchaser to
communicate with Seller on behalf of Purchaser.

“Equity Derivatives Personnel” means Dariush Maanavi, Brian Lehman, Kevin Tyler,
Charles Hill, Usman Khan and any other Employee of the public side of the Equity
Derivatives Group of Seller; provided that Seller may amend the list of Equity
Derivatives Personnel by delivering a revised list of Equity Derivatives
Personnel to Purchaser.

“Employee” means, with respect to any entity, any owner, principal, officer,
director, employee or other agent or representative of such entity, and any
affiliate of any of such owner, principal, officer, director, employee, agent or
representative.

“Material Non-Public Information” means information relating to the Purchaser or
the Common Stock that (a) has not been widely disseminated by wire service, in
one or more newspapers of general circulation, by communication from the
Purchaser to its shareholders or in a press release, or contained in a public
filing made by the Purchaser with the Securities and Exchange Commission and
(b) a reasonable investor might consider to be of importance in making an
investment decision to buy, sell or hold shares of Common Stock. For the
avoidance of doubt and solely by way of illustration, information should be
presumed “material” if it relates to such matters as dividend increases or
decreases, earnings estimates, changes in previously released earnings
estimates, significant expansion or curtailment of operations, a significant
increase or decline of orders, significant merger or acquisition proposals or
agreements, significant new products or discoveries, extraordinary borrowing,
major litigation, liquidity problems, extraordinary management developments,
purchase or sale of substantial assets and similar matters.

“Non-Program Related Communication” means any Communication other than a Program
Related Communication.

“Permitted Contact” means any of Gary Rosenblum or any of his designees.

“Program Related Communication” means any Communication the subject matter of
which relates to the Confirmation or any Transaction under the Confirmation or
any activities of Seller (or any of its affiliates) in respect of the
Confirmation or any Transaction under the Confirmation.

 

A-2

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EXHIBIT A

FORM OF PRICING SUPPLEMENT

Merrill Lynch International

Merrill Lynch Financial Centre

2 King Edward Street

London EC1A 1HQ

March 8, 2007

KLA-Tencor Corporation

160 Rio Robles

San Jose, California 95134

Ladies and Gentlemen:

This letter is a Pricing Supplement within the meaning of Section 2.04(c) of the
Confirmation dated as of February 22, 2007 (the “Confirmation”) between
KLA-Tencor Corporation, a Delaware corporation (the “Purchaser”), Merrill Lynch
International (the “Seller”) and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, solely in its capacity as agent for the Seller. Capitalized terms
used herein have the meanings set forth in the Confirmation.

This Pricing Supplement relates to the Transaction described in the
Confirmation. Upon the terms and subject to the conditions of the Confirmation,
the terms of the Transaction shall be as follows:

 

1. Hedging Price:    $ * ** 2. Upside Threshold:    $ * ** 3. Minimum Delivery
Number:      * ** 4. First Day of the Averaging Period:      * **

The expected last day of the Averaging Period is ***.

 

Very truly yours,   Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent
for Merrill Lynch International   By:  

/s/ BRIAN CARROLL

  Name:   Brian Carroll   Title:   Authorized Signatory  

 

Merrill Lynch International   By:  

/s/ WILLIAM MORLEY

  Name:   William Morley   Title:   Authorized Signatory  

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*** Certain information on this page has been omitted and filed separately with
the Commission pursuant to a request for Confidential Treatment.

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

Acknowledged and Confirmed:

 

KLA-TENCOR CORPORATION   By:  

/s/ JEFFREY L. HALL

  Name:   Jeffrey L. Hall   Title:   Chief Financial Officer  

 

Exh-A-2