EXHIBIT 10.3

PERFORMANCE-BASED

RESTRICTED STOCK UNITS AWARD AGREEMENT

This Award Agreement (the “Agreement”) is entered into as of _________, 2006 by
and between Electro Scientific Industries, Inc., an Oregon corporation (the
“Company”), and __________________________ (“Recipient”), for the grant of
restricted stock units with respect to the Company’s Common Stock (“Common
Stock”).

On July 19, 2006, the Compensation Committee of the Company’s Board of Directors
made a restricted stock units award to Recipient pursuant to the Company’s 2004
Stock Incentive Plan (the “Plan”). The award is intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
of 1986. Recipient desires to accept the award subject to the terms and
conditions of this Agreement.

IN CONSIDERATION of the mutual covenants and agreements set forth in this
Agreement, the parties agree to the following.

1. Grant and Terms of Restricted Stock Units. The Company grants to Recipient
under the Plan ______ restricted stock units, subject to the restrictions, terms
and conditions set forth in this Agreement.

(a) Rights under Restricted Stock Units. A restricted stock unit (a “RSU”)
represents the unsecured right to require the Company to deliver to Recipient
one share of Common Stock for each RSU. The number of shares of Common Stock
deliverable with respect to each RSU is subject to adjustment as determined by
the Board of Directors of the Company as to the number and kind of shares of
stock deliverable upon any merger, reorganization, consolidation,
recapitalization, stock dividend, spin-off or other change in the corporate
structure affecting the Common Stock generally.

(b) Vesting. The RSUs issued under this Agreement shall initially be 100%
unvested and subject to forfeiture as set forth below.

(i) Except as set forth in Section 1(d), if Recipient ceases to be employed by
the Company for any reason or for no reason prior to the end of the Performance
Period (as defined below), the unvested RSUs shall be forfeited to the Company.

(ii) To the extent that any of the RSUs do not vest in accordance with
Section 1(b)(iii) upon achievement to any extent of the Performance Goal (as
defined below) and except as provided in Section 1(d), the unvested RSUs shall
be forfeited to the Company. The extent to which the Performance Goal is
achieved, if at all, shall be determined no later than the date that the
Company’s fiscal year 2009 audit is completed. Nothing contained in this
Agreement shall confer upon Recipient any right to be employed by the Company or
to continue to provide services to the Company or to interfere in any way with
the right of the Company to terminate Recipient’s services at any time for any
reason, with or without cause.

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(iii) The “Performance Goal” shall be based on (A) the average earnings/(loss)
per share of the Company for the three-year period comprised of fiscal 2007,
2008 and 2009 (the “Performance Period”) as compared to the average
earnings/(loss) per share of the Company for the three-year period comprised of
fiscal 2004, 2005 and 2006 relative to (B) the average earnings/(loss) per share
for each member of the peer group companies set forth on Exhibit A for the
three-year period comprised of the three most recent fiscal years for which
annual earnings information is available prior to the date of the completion of
the Company’s fiscal 2009 audit (the “Comparable Period”) as compared to the
average earnings/(loss) per share for such company for the three-year period
comprised of the three fiscal years preceding the Comparable Period. All
information with respect to members of the peer group will be based upon
publicly available information. The RSUs shall vest as follows:

 

Company Percentile Rank vs. Peer Group   
Portion of RSUs subject to this Agreement Vesting >90th    200% 75th    150%
50th    100% 25th    50% <25th    0%

RSUs will vest proportionately between 0% and 200% for Company rankings between
the 25th and 90th percentiles. The Compensation Committee of the Board of
Directors may, in its discretion, permit the vesting of any or all of the RSUs
subject to this Agreement for a Company ranking below the 25th percentile. Those
RSUs vesting pursuant to this Section 1(b)(iii) shall vest immediately upon the
determination of the extent of the achievement of the Performance Goal.

(c) Delivery Date. Except as set forth in Section 1(d)(iv), the delivery date
for a RSU subject to this Agreement shall be the date of completion of the
Company’s fiscal 2009 audit.

(d) Proration upon Termination for Certain Reasons Prior to End of Performance
Period; Treatment on Change in Control

(i) Proration on Death or Total Disability. If Recipient ceases to be an
employee of the Company by reason of Recipient’s death or physical disability
prior to the end of the Performance Period, the RSUs Recipient would otherwise
be entitled to receive pursuant to Section 1(b)(iii) if Recipient were employed
through the end of the Performance Period (the “Base Payout”) shall be reduced
to a number determined by multiplying the Base Payout by a percentage calculated
by dividing the number of months elapsed from the beginning of the Performance
Period to the date of termination of employment (rounded down to the whole
month) by 36 (the “Pro Rata Percentage”); provided, however, that the Board of
Directors or the Compensation Committee of the Board of Directors, in its
discretion, may increase the number

 

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of RSUs the Recipient would otherwise be entitled to receive under this
Section 1(d)(i). The term “total disability” means a medically determinable
mental or physical impairment that is expected to result in death or has lasted
or is expected to last for a continuous period of 12 months or more and that, in
the opinion of the Company and two independent physicians, causes the Recipient
to be unable to perform his or her duties as an employee, director, officer or
consultant of the Company and unable to be engaged in any substantial gainful
activity. Total disability shall be deemed to have occurred on the first day
after the two independent physicians have furnished their written opinion of
total disability to the Company and the Company has reached an opinion of total
disability.

(ii) Proration on Normal Retirement. If Recipient terminates his employment with
the Company following normal retirement under the Company’s retirement policy in
place at such time prior to the end of the Performance Period, the Base Payout
shall be reduced to a number determined by multiplying the Base Payout by the
Pro Rata Percentage; provided, however, that the Board of Directors or the
Compensation Committee of the Board of Directors, in its discretion, may
increase the number of RSUs the Recipient would otherwise be entitled to receive
under this Section 1(d)(ii).

(iii) Proration on Termination Other Than for Cause. If the Company terminates
Recipient’s employment with the Company other than for cause prior to the end of
the Performance Period, the Base Payout shall be reduced to a number determined
by multiplying the Base Payout by the Pro Rata Percentage; provided, however,
that the Board of Directors or the Compensation Committee of the Board of
Directors, in its discretion, may increase the number of RSUs the Recipient
would otherwise be entitled to receive under this Section 1(d)(iii). The term
“cause” shall mean (i) the willful and continued failure by Recipient to perform
substantially Recipient’s reasonably assigned duties with the Company, other
than a failure resulting from Recipient’s incapacity due to physical or mental
illness, after a written demand for performance has been delivered to Recipient
by the Company which specifically identifies the manner in which the Company
believes that Recipient has not substantially performed Recipient’s duties,
(ii) the conviction of guilty or entering of a nolo contendere plea to a felony
which is materially and demonstrably injurious to the Company, or (iii) the
commission of an act by Recipient, or the failure of Recipient to act, which
constitutes gross negligence or gross misconduct. For purposes of this
Section 1(d)(iii), no act, or failure to act, on Recipient’s part shall be
considered “willful” unless done, or omitted to be done, by Recipient in knowing
bad faith. Any act, or failure to act based upon authority given pursuant to a
resolution duly adopted by the Board of Directors or based upon the advice of
counsel for the Company shall be conclusively presumed to be done, or omitted to
be done, by Recipient in good faith.

(iv) Treatment following Change in Control.

(1) If as a result of a Change in Control, the Company’s Common Stock ceases to
be listed for trading on a national securities exchange (an “Exchange”), any
RSUs subject to this award that are unvested on the date of the Change in
Control shall continue to vest according to the terms and conditions of this
award; provided that such award is replaced with an award for voting securities
of the resulting corporation or the acquiring corporation, as the case may be
(including without limitation, the voting securities of any corporation which as
a

 

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result of the Change in Control owns the Company or all or substantially all of
the Company’s assets either directly or through one or more subsidiaries) (the
“Surviving Company”) which are traded on an Exchange (a “Replacement Award”),
which Replacement Award shall consist of RSUs with a value (determined using the
Surviving Company’s stock price as of the date of the Change in Control) equal
to the value of the replaced award of RSUs (determined using the Company’s stock
price and assuming attainment of target performance or actual performance
achieved, if greater, as of the date of the Change in Control), with any
restrictions on such Replacement Award lapsing at the end of the measuring
period over which performance for the replaced RSUs was to be measured prior to
the granting of the Replacement Award; provided, however, that in the event of a
termination by the Company without Cause or by Recipient for Good Reason during
the vesting period of any Replacement Award, the Replacement Award shall
immediately vest; and provided further that upon the vesting date of all or a
portion of a Replacement Award, Recipient shall be entitled to receive a lump
sum cash payment equal to the decrease, if any, in the value of a share of the
Surviving Company’s stock from the date of the Change in Control (as increased
on a calendar quarterly basis using an annual interest rate, as of the last
business day of the calendar quarter, for zero-coupon U.S. government securities
with a constant maturity closest in length to the time period between the date
of the Change in Control and the date of vesting of the Replacement Award) to
the time of vesting multiplied by the total number of RSUs vesting on such date.
If any RSUs that are unvested at the time of the Change in Control are not
replaced with Replacement Awards, such RSUs shall immediately vest based upon
deemed attainment of target performance or actual performance achieved, if
greater.

(2) If as a result of a Change in Control, the Company’s Common Stock continues
to be listed for trading on an Exchange, any RSUs that are unvested on the date
of the Change of Control shall be replaced with RSUs where the number of such
RSUs shall be equal to the number of RSU assuming attainment of target
performance or actual performance achieved, if greater, as of the date of the
Change in Control with any restrictions on such RSUs lapsing at the end of the
measuring period over which performance for the replaced RSUs was to be measured
prior to the granting of the replaced award; provided however, that, in the
event of a termination by the Company without Cause or by Recipient for Good
Reason during the vesting period of this award such award shall immediately
vest; and provided further that upon the vesting date of all or portion of this
award, Recipient shall be entitled to receive a lump sum cash payment equal to
the decrease, if any, in the value of a share of the Company’s stock from the
date of the Change in Control (as increased on a calendar quarterly basis using
an annual interest rate, as of the last business day of the calendar quarter,
for zero-coupon U.S. government securities with a constant maturity closest in
length to the time period

 

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between the date of the Change in Control and the date of the vesting) to the
time of vesting, multiplied by the total number of RSUs vesting on such date.

(3) For purposes of this Agreement, a “Change in Control” of the Company shall
mean the occurrence of any of the following events:

(A) Any consolidation, merger or plan of share exchange involving the Company (a
“Merger”) as a result of which the holders of outstanding securities of the
Company ordinarily having the right to vote for the election of directors
(“Voting Securities”) immediately prior to the Merger do not continue to hold at
least 50% of the combined voting power of the outstanding Voting Securities of
the surviving or continuing corporation immediately after the Merger,
disregarding any Voting Securities issued or retained by such holders in respect
of securities of any other party to the Merger;

(B) Any sale, lease, exchange or other transfer (in one transaction or a series
of related transactions) of all, or substantially all, the assets of the
Company;

(C) The adoption of any plan or proposal for the liquidation or dissolution of
the Company;

(D) At any time during a period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (“Incumbent
Directors”) shall cease for any reason to constitute at least a majority
thereof, unless each new director elected during such two-year period was
nominated or elected by two-thirds of the Incumbent Directors then in office and
voting (with new directors nominated or elected by two-thirds of the Incumbent
Directors also being deemed to be Incumbent Directors); or

(E) Any Person (as hereinafter defined) shall, as a result of a tender or
exchange offer, open market purchases, or privately negotiated purchases from
anyone other than the Company, have become the beneficial owner (within the
meaning of Rule 13d 3 under the Securities Exchange Act of 1934), directly or
indirectly, of Voting Securities representing fifty percent (50%) or more of the
combined voting power of the then outstanding Voting Securities.

Notwithstanding anything in the foregoing to the contrary, unless otherwise
determined by the Board of Directors, no Change in Control shall be deemed to
have occurred for purposes of this Agreement if (1) Recipient acquires (other
than on the same basis as all other holders of the

 

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Company Common Stock) an equity interest in an entity that acquires the Company
in a Change in Control otherwise described under subparagraph (A) or (B) above,
or (2) Recipient is part of group that constitutes a Person which becomes a
beneficial owner of Voting Securities in a transaction that otherwise would have
resulted in a Change in Control under subparagraph (E) above.

(4) For purposes of this Agreement, the term “Person” shall mean and include any
individual, corporation, partnership, group, association or other “person”, as
such term is used in Section 14 (d) of the Securities Exchange Act of 1934 (the
“Exchange Act”), other than the Company, a wholly owned subsidiary of the
Company or any employee benefit plan(s) sponsored by the Company.

(5) For purposes of this Agreement, termination by Recipient of his or her
employment for “Good Reason” shall mean termination based on:

(A) a diminution of Recipient’s status, title, position(s) or responsibilities
from Recipient’s status, title, position(s) and responsibilities as in effect
immediately prior to the Change in Control or the assignment to Recipient of any
duties or responsibilities which are inconsistent with such status, title,
position(s) or responsibilities (in either case other than is isolated,
insubstantial or inadvertent actions which are remedied after notice), or any
removal of Recipient from such position(s), except in connection with the
termination of Recipient’s employment for Cause, total disability (as defined in
Section 1(d)(i)) or as a result of Recipient’s death or voluntarily by Recipient
other than for Good Reason;

(B) a reduction by the Company or Surviving Company in Recipient’s rate of base
salary, bonus or incentive opportunity or a substantial reduction in benefits
(other than reductions that do not impact Recipient’s compensation opportunity,
taken as a whole, or a reduction in benefits applicable to substantially all
employees); or

(C) the Company’s or Surviving Company’s requiring Recipient to be based more
than fifty miles from the principal office at in which Recipient is based
immediately prior to the Change in Control, except for reasonably required
travel on the Company’s business.

(e) Restrictions on Transfer and Delivery on Death. Recipient may not sell,
transfer, assign, pledge or otherwise encumber or dispose of the RSUs. Recipient
may designate beneficiaries to receive stock if Recipient dies before the
delivery date by so indicating on

 

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Exhibit B, which is incorporated into and made a part of this agreement. If
Recipient fails to designate beneficiaries on Exhibit B, the shares will be
delivered to Recipient’s estate.

(f) Reinvestment of Dividend Equivalents. On each date on which the Company pays
a dividend on shares of Common Stock underlying a RSU, Recipient shall receive
additional whole or fractional RSUs in an amount equal to the value of the
dividends that would have been paid on the stock deliverable pursuant to the
RSUs (if such shares were outstanding), divided by the closing stock price on
the dividend payment date.

(g) Delivery on Delivery Date. As soon as practicable following the delivery
date for a RSU, the Company shall deliver a certificate for the number of shares
represented by all vested RSUs having a delivery date on the same date, rounded
down to the whole share. No fractional shares of Common Stock shall be issued.
The Company shall pay to Recipient in cash an amount equal to the value of any
fractional shares that would otherwise have been issued, valued as of the
delivery date.

(h) Recipient’s Rights as Shareholder. Recipient shall have no rights as a
shareholder with respect to the RSUs or the shares underlying them until the
Company delivers the shares to Recipient on the delivery date.

(i) Tax Withholding. Recipient acknowledges that, at the delivery date, the
value of such vested RSUs will be treated as ordinary compensation income for
federal and state income and FICA tax purposes, and that the Company will be
required to withhold taxes on this income amount. Promptly following the
delivery date, the Company will notify Recipient of the required withholding
amount. Concurrently with or prior to the delivery of the certificate referred
to in Section 1(g), Recipient shall pay to the Company the required withholding
amount in cash or, at the election of the Recipient, by surrendering to the
Company for cancellation shares of the Company’s Common Stock to be issued with
respect to the RSUs or other shares of the Company’s Common Stock valued at the
closing market price for the Company’s Common Stock on the last trading day
preceding the date of Recipient’s election to surrender such shares. If the
Recipient pays the withholding amount in shares of Common Stock, the Company
shall pay to the Recipient in cash the amount of any resulting over payment.

(j) Section 409A. The award made pursuant to this Agreement is intended not to
constitute a “nonqualified deferred compensation plan” within the meaning of
Section 409A the Internal Revenue Code of 1986, as amended, and instead is
intended to be exempt from the application of Section 409A. To the extent that
the award is nevertheless deemed to be subject to Section 409A, the award shall
be interpreted in accordance with Section 409A and Treasury regulations and
other interpretive guidance issued thereunder, including without limitation any
such regulations or other guidance issued after the grant of the award.
Notwithstanding any provision of the award to the contrary, in the event that
the Company determines that the award is or may be subject to Section 409A, the
Company may adopt such amendments to the award or adopt other policies and
procedures (including amendments, policies and procedures with retroactive
effect), or take any other actions, that the Company determines are necessary or
appropriate to (i) exempt the award from the application of Section 409A or
preserve the intended tax treatment of the benefits provided with respect to the
award, or (ii) comply with the requirements of Section 409A.

 

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2. Miscellaneous.

(a) Entire Agreement; Amendment. This Agreement constitutes the entire agreement
of the parties with regard to the subjects hereof and may be amended only by
written agreement between the Company and the Recipient.

(b) Notices. Any notice required or permitted under this Agreement shall be in
writing and shall be deemed sufficient when delivered personally to the party to
whom it is addressed or when deposited into the United States mail as registered
or certified mail, return receipt requested, postage prepaid, addressed to
Electro Scientific Industries, Inc., Attention: Corporate Secretary, at its
principal executive offices or to the Recipient at the address of Recipient in
the Company’s records, or at such other address as such party may designate by
ten (10) days’ advance written notice to the other party.

(c) Rights and Benefits. The rights and benefits of this Agreement shall inure
to the benefit of and be enforceable by the Company’s successors and assigns
and, subject to the restrictions on transfer of this Agreement, be binding upon
the Recipient’s heirs, executors, administrators, successors and assigns.

(d) Further Action. The parties agree to execute such further instruments and to
take such further action as may reasonably be necessary to carry out the intent
of this Agreement.

(e) Applicable Law; Attorneys’ Fees. The terms and conditions of this Agreement
shall be governed by the laws of the State of Oregon. In the event either party
institutes litigation hereunder, the prevailing party shall be entitled to
reasonable attorneys’ fees to be set by the trial court and, upon any appeal,
the appellate court.

(f) Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original.

 

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ELECTRO SCIENTIFIC INDUSTRIES, INC.

By:       

Authorized Officer

___________________________________________

__________________________________, Recipient

 

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EXHIBIT A

PEER GROUP COMPANIES

Applied Materials

Asyst Technologies

Axcelis Technologies

Brooks Automation

Coherent

Cohu

Credence Systems

Cymer

FEI

FSI International

GSI Lumonics

Helix Technology

KLA-Tencor

Kulicke & Soffa Industries

Lam Research

LTX

Mattson Technology

Newport

Novellus Systems

Photronics

Teradyne

Ultratech

Varian Semiconductor

Veeco Instruments

Zygo

 

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EXHIBIT B

DESIGNATION OF BENEFICIARY

 

Name _____________________________    Social Security Number ____-___-_____

I designate the following person(s) to receive any restricted stock units
outstanding upon my death under the Performance-Based Restricted Stock Units
Award Agreement with Electro Scientific Industries, Inc.:

 

C. Primary Beneficiary(ies)

 

Name________________________    Social Security Number ____-___-_____ Birth Date
____________________    Relationship ________________________
Address__________________________    City__________ State____ Zip ________
Name________________________    Social Security Number ____-___-_____ Birth Date
____________________    Relationship ________________________
Address__________________________    City__________ State____ Zip ________
Name________________________    Social Security Number ____-___-_____ Birth Date
____________________    Relationship ________________________
Address__________________________    City__________ State____ Zip ________

If more than one primary beneficiary is named, the units will be divided equally
among those primary beneficiaries who survive the undersigned.

 

D. Secondary Beneficiary(ies)

In the event no Primary Beneficiary is living at the time of my death, I
designate the following the person(s) as my beneficiary(ies):

 

Name________________________    Social Security Number ____-___-_____ Birth Date
____________________    Relationship ________________________
Address__________________________    City__________ State____ Zip ________
Name________________________    Social Security Number ____-___-_____ Birth Date
____________________    Relationship ________________________
Address__________________________    City__________ State____ Zip ________
Name________________________    Social Security Number ____-___-_____ Birth Date
____________________    Relationship ________________________
Address__________________________    City__________ State____ Zip ________

If more than one Secondary Beneficiary is named, the units will be divided
equally among those Secondary beneficiaries who survive the undersigned.

This designation revokes and replaces all prior designations of beneficiaries
under the Performance-Based Restricted Stock Units Award Agreement.

 

      

Date signed:

       , 20     

Signature

         

 

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