Document:

EX 10.2 Form of Stock Settled Stock Appreciation Rights Agreement between the Company and Edward Grady (November 18, 2014 awards)

ELECTRO SCIENTIFIC INDUSTRIES, INC.
STOCK APPRECIATION RIGHTS AGREEMENT
This STOCK APPRECIATION RIGHTS AGREEMENT dated as of November 18, 2014, is between Electro Scientific Industries, Inc., an Oregon corporation (the “Company”), and Edward C. Grady (the “Recipient”), pursuant and subject to the Company’s 2004 Stock Incentive Plan (the “Plan”).  The Company and the Recipient agree as follows:
1.SAR Grant.  The Company hereby grants to the Recipient on the terms and conditions of this Agreement 350,000 stock appreciation rights (“SARs”).  Upon exercise of a SAR in accordance with this Agreement, Recipient shall receive the number of shares of the Company’s Common Stock (“Common Stock”) equal to (i) the excess of the closing price of the Common Stock on the date of exercise (the “Market Price”) over $7.00, (ii) multiplied by the number of SARs being surrendered, and (iii) dividing the result by the Market Price.  No fractional shares shall be issued upon exercise of a SAR and in lieu thereof the Company will pay Recipient cash in an amount equal to the fraction.  The terms and conditions of the SAR grant set forth in attached Exhibit A are incorporated into and made a part of this Agreement. 

2.Grant Date.  The Grant Date for this SAR is November 18, 2014.  The SAR shall continue in effect until the date ten years after the Grant Date (the “Expiration Date”) unless earlier terminated as provided in Section 1.5 of Exhibit A or pursuant to the Plan.

3.Time of Exercise.  Except as provided in Exhibit A or in the Plan, the SAR may be exercised from time to time in the following amounts:
116,667 on May 18, 2015;
116,667 on May 18, 2016; and 
116,666 on May 18, 2017.
(Signature Page Follows)

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written above.
ELECTRO SCIENTIFIC INDUSTRIES, INC.                RECIPIENT

By: _______________________________                    ____________________________            
Name:    __________________________________                ____________________________        
Title:[Chairman] [Vice Chairman]                        [Print Name]
_______________________
_______________________
[address]

EXHIBIT A
SAR TERMS AND CONDITIONS
2004 Stock Incentive Plan
Pursuant to the Company’s 2004 Stock Incentive Plan (the “2004 Plan”), the Board of Directors has voted in favor of granting to the Recipient stock settled stock appreciation rights to receive Common Stock of the Company (the “SAR”) in the amount determined pursuant to the attached Agreement. 
1.The SAR is granted upon the following terms:

1.1Duration of SAR.  Subject to reductions in the SAR period as hereinafter provided, in the event of termination of employment or death of the Recipient, the SAR shall continue in effect for a period of 10 years from the Grant Date.

1.2Time of Exercise.  Except as provided in paragraphs 1.5 and 1.6 and the Plan (including Section 17 thereof), the SAR may be exercised as set forth in Section 3 of the Agreement.

1.3Limitations on Rights to Exercise.  Except as provided in paragraphs 1.5 and 1.6, the SAR may not be exercised unless at the time of such exercise the Recipient is employed by the Company or any parent or subsidiary of the Company and shall have been so employed continuously since the date such SAR was granted. 

1.4Nonassignability.  The SAR is nonassignable and nontransferable by the Recipient except by will or by the laws of descent and distribution of the state or country of the Recipient’s domicile at the time of death, and is exercisable during the Recipient’s lifetime only by the Recipient.

1.5Termination of Service.

(a)Unless otherwise determined by the Board of Directors, if a Recipient’s employment or service with the Company terminates for any reason other than in the circumstances specified in subsection (b) or (c) below or Section 1.6, his or her SAR may be exercised at any time before the expiration date of the SAR or the expiration of five years after the date of termination, whichever is the shorter period, but only if and to the extent the Recipient was entitled to exercise the SAR at the date of termination.

(b)Unless otherwise determined by the Board of Directors, if a Recipient’s employment or service with the Company terminates because of total disability, his or her SAR may be exercised at any time before the expiration date of the SAR or before the fifth anniversary after the date of termination, whichever is the shorter period, but only if and to the extent the Recipient was entitled to exercise the SAR at the date of termination.  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 approved by the Company, 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 after both of the following have occurred:

(A)The two independent physicians have furnished their written opinion of total disability to the Company; and
(B)The Company has reached an opinion of total disability.

(c)Unless otherwise determined by the Board of Directors, if a Recipient dies while employed by or providing service to the Company, his or her SAR may be exercised at any time before the expiration date of the SAR or before the fifth anniversary after the date of death, whichever is the shorter period, but only if and to the extent the Recipient was entitled to exercise the SAR at the date of death and only by the person or persons to whom the Recipient’s rights under the SAR shall pass by the Recipient’s will or by the laws of descent and distribution of the state or country of domicile at the time of death.

(d)To the extent the SAR held by any deceased Recipient or by the Recipient whose employment is terminated shall not have been exercised within the limited periods provided above, all further rights to receive shares pursuant to the SAR shall cease and terminate at the expiration of such periods.

(e)Absence on leave approved by the Company or on account of illness or disability shall not be deemed a termination or interruption of employment or service.  Unless otherwise determined by the Board of Directors, vesting of SARs shall continue during a medical, family, military or other leave of absence, whether paid or unpaid.

1.6Double Trigger Acceleration on Change in Control.

(a)All of the SARs shall immediately vest if a Change in Control (as defined below) occurs and at any time after the Change in Control and on or before the first anniversary of the Change in Control, (i) the Recipient’s employment or service is terminated by the Company (or its successor) without Cause (as defined below), (ii) the Recipient’s employment is terminated by the Recipient for Good Reason (as defined below) or (iii) the Recipient’s employment is terminated by the Recipient upon retirement on or after Recipient’s 65th birthday not less than 60 days after the Change in Control.

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

(A)At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof; provided, however, that the term “Incumbent Director” shall also include each new director elected during such two-year period whose nomination or election was approved by two-thirds of the Incumbent Directors then in office;

(B)Any “person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) 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 Exchange Act), directly or indirectly, of more than fifty percent (50%) of the then outstanding Common Stock of the Company;

(C)A consolidation, merger or plan of exchange involving the Company (“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 corporation or a parent corporation of the surviving corporation immediately after the Merger, disregarding any Voting Securities issued to or retained by such holders in respect of securities of any other party to the Merger; or

(D)A sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company.

(c)For purposes of this Agreement, “Cause” shall mean (a) the willful and continued failure to perform substantially the Recipient’s reasonably assigned duties with the Company (or its successor) (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Recipient by the Company (or its successor) which specifically identifies the manner in which the Company (or its successor) believes that the Recipient has not substantially performed the Recipient’s duties, (b) the willful engagement in illegal conduct which is materially and demonstrably injurious to the Company (or its successor), or (c) the commission of an act by Recipient, or the failure of Recipient to act, which constitutes gross negligence or gross misconduct.  No act, or failure to act, shall be considered “willful” if the Recipient reasonably believed that the action or omission was in, or not opposed to, the best interests of the Company (or its successor).

(d)For purposes of this Agreement, “Good Reason” shall mean:

(A)the assignment of a different title, job or responsibilities that results in a decrease in the level of responsibility of the Recipient after the Change in Control when compared to the Recipient’s level of responsibility for the Company’s operations prior to the Change in Control; provided that Good Reason shall not exist if the Recipient continues to have the same or a greater general level of responsibility for Company operations after the Change in Control as the Recipient had prior to the Change in Control even if the Company operations are a subsidiary or division of the surviving company, 

(B)a reduction in the Recipient’s base pay as in effect immediately prior to the Change in Control, 

(C)a material reduction in total benefits available to the Recipient under cash incentive, stock incentive and other employee benefit plans after the Change in Control compared to the total package of such benefits as in effect prior to the Change in Control, or 

(D)the Recipient is required to be based more than 50 miles from where the Recipient’s office is located immediately prior to the Change in Control except for required travel on company business to an extent substantially consistent with the business travel obligations which the Recipient undertook on behalf of the Company prior to the Change in Control.

1.7Method of Exercise.  Shares may be acquired pursuant to the award only upon receipt by the Company of notice in writing from the Recipient of the Recipient’s intention to exercise, specifying the number of SARs as to which the Recipient desires to exercise the award and the date on which the Recipient desires to complete the transaction, which shall not be more than 30 days after receipt of the notice, and, unless in the opinion of counsel for the Company such a representation is not required in order to comply with the Securities Act of 1933, as amended, containing a representation that it is the Recipient’s present intention to acquire the shares for investment and not with a view to distribution.  The Recipient shall have none of the rights of a shareholder until a certificate for shares is issued to the Recipient.  No fractional shares shall be issued and in lieu thereof the Company shall pay Recipient cash equal to the value of such fractional share on the date of exercise.  The Recipient may elect in the applicable notice of exercise to have the Company reduce the number of shares deliverable to the Recipient by an amount necessary to allow the Company to satisfy all applicable federal, state and local withholding tax requirements.  If the Recipient does not so elect, the Recipient shall, upon notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the shares with respect to which the SAR was exercised, pay to the Company amounts necessary to satisfy any applicable federal, state and local withholding tax requirements.  If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the Recipient shall pay such amount to the Company on demand.

1.8Changes in Capital Structure.  In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or another corporation, by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number of SARs subject to this Agreement and/or the amount payable on exercise of the SARs.  Any such adjustment made by the Board of Directors shall be conclusive.

2.The obligations of the Company under this Agreement are subject to the approval of such state or federal authorities or agencies, if any, as may have jurisdiction in the matter.  The Company will use its best efforts to take such steps as may be required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the Company’s shares may then be listed, in connection with the issuance or sale of any shares acquired upon the exercise of the SAR.

3.Nothing in the 2004 Plan or this Agreement shall confer upon the Recipient any right to be continued in the employment of the Company or any subsidiary of the Company, or to interfere in any way with the right of the Company or any subsidiary by whom the Recipient is employed to terminate the Recipient’s employment at any time, with or without cause.

4.This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company but except as hereinabove provided the SAR herein granted shall not be assigned or otherwise disposed of by the Recipient.EX-10.3 Form of Performance-Based Restricted Stock Unit Award Agreement between the Company and Edward Grady (November 18, 2014)

PERFORMANCE-BASED RESTRICTED STOCK UNITS AWARD AGREEMENT
This Award Agreement (the “Agreement”) is entered into as of November 18, 2014 by and between Electro Scientific Industries, Inc., an Oregon corporation (the “Company”), and Edward C. Grady (“Recipient”), for the grant of restricted stock units with respect to the Company’s Common Stock (“Common Stock”).  By accepting this award Recipient agrees to be bound by the terms and conditions of this Agreement.  
On November 18, 2014, 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 155,000 restricted stock units, subject to the adjustments, restrictions, terms and conditions set forth in this Agreement; provided, however, that to the extent Recipient may be entitled to receive more than 155,000 restricted stock units under this Agreement, the grant of such excess amount shall be contingent on shareholder approval of an amendment to the Plan increasing the annual grant limit for restricted stock units to at least 325,000 shares.    

(a)Rights under Restricted Stock Units.  A restricted stock unit (an “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 Company’s 2017 fiscal year, the unvested RSUs shall be forfeited to the Company.

(ii)To the extent that the number of RSUs first specified above are reduced in accordance with Section 1(b)(iii) and except as provided in Section 1(d), the reduction shall be forfeited to the Company.  The extent to which any Performance Goal is achieved, if at all, shall be determined by a date that is no later than December 31, 2017 (the “Determination Date”).  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.

(iii)The RSUs shall be earned based on two “Performance Goals,” as follows:

(A)77,500 of the RSUs will be earned based on the Company’s fiscal 2017 revenue in accordance with the following:  vesting starts at revenue of $225 million and RSUs vest linearly up to revenue of $275 million, at which level 100% vesting occurs.  Additional RSUs vest linearly based on revenue between $275 million and $385 million, at which level 200% vesting occurs.  Vesting shall not exceed 200%.  No amount shall be earned if revenue is less than $225 million.

(B)77,500 of the RSUs will be earned based on the Company’s fiscal 2017 OIBT (as defined below) in accordance with the following:  vesting starts on OIBT of 2% and RSUs vest linearly up to OIBT of 6%, at which level 100% vesting occurs.  Additional RSUs vest linearly based on OIBT between 6% and 10%, at which level 200% vesting occurs.  Vesting shall not exceed 200%.  No amount shall be earned if OIBT is less than 2%.

(C)Notwithstanding (A) and (B) above, no RSUs shall vest under either such provision unless at least the minimum vesting measure under the other provision is achieved.  

(D)“OIBT” means the operating income of the Company on a consolidated basis determined in accordance with GAAP, adjusted to exclude stock compensation expense, variable pay, purchase accounting and other one-time charges, as a percentage of revenue.

(E)The number of RSUs determined pursuant to clauses (A) and (B) of this Section 1(b)(iii) shall vest on the last day of fiscal 2017, subject to Section 1(b)(i).  Except as provided in Section 1(d), any RSUs that are not vested at that time shall be forfeited.

(c)Delivery Date.  Except as set forth in Section 1(d)(iv), the delivery date for shares of Common Stock with respect to RSUs earned subject to this Agreement shall be as soon as practicable on or after the end of the fiscal 2017, but in no event later than December 31, 2017.

(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 prior to the end of fiscal 2017 by reason of Recipient’s death or total disability, the RSUs shall not be forfeited under Section 1(b)(i) and the following shall apply:

(1)The number of RSUs Recipient would otherwise be entitled to receive pursuant to Section 1(b)(iii) if Recipient were employed through the end of fiscal 2017 (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 Company’s fiscal year 2015 to the date of termination of employment (rounded down to the whole month) by 36 (the “Pro Rata Percentage”).  RSUs that exceed the reduced number shall be forfeited to the Company.

(2)The shares of Common Stock with respect to RSUs determined under (1) shall be delivered as soon as practicable on or after the end of fiscal 2017, but in no event later than December 31, 2017.  

(3)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 approved by the Company, causes Recipient to be unable to perform his or her duties as an employee, director, officer or consultant of the Company and unable to engage in any substantial gainful activity.  Total disability shall be deemed to have occurred after both of the following have occurred:

(A)The two independent physicians have furnished their written opinion of total disability to the Company; and

(B)The Company has reached an opinion of total disability.

(ii)Double Trigger Acceleration on Change in Control.  

(1)The number of unvested RSUs Recipient would otherwise be entitled to receive pursuant to Section 1(b)(iii) if Recipient were employed through the end of fiscal 2017 shall immediately vest (provided, however, that if vesting occurs pursuant to this Section 1(d)(ii) during or prior to fiscal 2017 it will be conclusively presumed that each Performance Goal would have been at the 100% vesting level for each such unfinished fiscal year) if a Change in Control (as defined below) occurs and either:

(A)at any time after the Change in Control and on or before the first anniversary of the Change in Control, (i) the Recipient’s employment is terminated by the Company (or its successor) without Cause (as defined below), (ii) the Recipient’s employment is terminated by the Recipient for Good Reason (as defined below) or (iii) the Recipient’s employment is terminated by the Recipient upon retirement on or after Recipient’s 65th birthday not less than 60 days after the Change in Control; or 

(B)at any time after the Change in Control the Company or the surviving or acquiring entity terminates this Agreement and all similar agreements, including because the achievement of any of the Performance Goals becomes reasonably unable to be determined;

Notwithstanding the foregoing, the RSUs may also immediately vest in connection with a sale of the Company as provided in Section 1(d)(iii) below.

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

(A)At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof; provided, however, that the term “Incumbent Director” shall also include each new director elected during such two-year period whose nomination or election was approved by two-thirds of the Incumbent Directors then in office;

(B)Any “person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) 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 Exchange Act), directly or indirectly, of more than fifty percent (50%) of the then outstanding Common Stock of the Company;

(C)A consolidation, merger or plan of exchange involving the Company (“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 fifty percent (50%) of the combined voting power of the outstanding Voting Securities of the surviving corporation or a parent corporation of the surviving corporation immediately after the Merger, disregarding any Voting Securities issued to or retained by such holders in respect of securities of any other party to the Merger; or

(D)A sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company.

(3)For purposes of this Agreement, “Cause” shall mean (a) the willful and continued failure to perform substantially the Recipient’s reasonably assigned duties with the Company (or its successor) (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Recipient by the Company (or its successor) which specifically identifies the manner in which the Company (or its successor) believes that the Recipient has not substantially performed the Recipient’s duties, (b) the willful engagement in illegal conduct which is materially and demonstrably injurious to the Company (or its successor), or (c) the commission of an act by Recipient, or the failure of Recipient to act, which constitutes gross negligence or gross misconduct.  No act, or failure to act, shall be considered “willful” if the Recipient reasonably believed that the action or omission was in, or not opposed to, the best interests of the Company (or its successor).

(4)For purposes of this Agreement, “Good Reason” shall mean:

(A)the assignment of a different title, job or responsibilities that results in a decrease in the level of responsibility of the Recipient after the Change in Control when compared to the Recipient’s level of responsibility for the Company’s operations prior to the Change in Control; provided that Good Reason shall not exist if the Recipient continues to have the same or a greater general level of responsibility for Company operations after the Change in Control as the Recipient had prior to the Change in Control even if the Company operations are a subsidiary or division of the surviving company, 

(B)a reduction in the Recipient’s base pay as in effect immediately prior to the Change in Control, 

(C)a material reduction in total benefits available to the Recipient under cash incentive, stock incentive and other employee benefit plans after the Change in Control compared to the total package of such benefits as in effect prior to the Change in Control, or 

(D)the Recipient is required to be based more than 50 miles from where the Recipient’s office is located immediately prior to the Change in Control except for required travel on company business to an extent substantially consistent with the business travel obligations which the Recipient undertook on behalf of the Company prior to the Change in Control.

(iii)Sale of the Company.  If there shall occur a merger, consolidation or plan of exchange involving the Company pursuant to which the outstanding shares of Common Stock of the Company are converted into cash or other stock, securities or property, or a 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, then, as determined by the Committee or the Board of Directors, either:

(1)the unvested RSUs shall be converted into restricted stock units for stock of the surviving or acquiring corporation in the applicable transaction, with the amount and type of shares subject thereto to be conclusively determined by the Committee, taking into account the relative values of the companies involved in the applicable transaction and the exchange rate, if any, used in determining shares of the surviving corporation to be held by the former holders of the Company’s Common Stock following the applicable transaction, and disregarding fractional shares, with the dates for vesting of RSUs and delivery of shares of Common Stock unchanged;

(2)the unvested RSUs shall be converted into a cash payment obligation of the surviving or acquiring corporation in an amount equal to the proceeds a holder of the underlying shares would have received in proceeds from such transaction with respect to those shares; or

(3)all of the unvested RSUs shall immediately vest and all underlying shares shall be delivered simultaneously with the closing of the applicable transaction such that the Recipient will participate as a shareholder in receiving proceeds from such transaction with respect to those shares.

(iv)Delivery Date.  For purposes of Section 1(d)(ii) or (iii), the delivery date for shares of Common Stock with respect to RSUs shall be as soon as practicable on or after the vesting described in such sections.

(e)Forfeiture of RSUs on Other Terminations of Employment.  If Recipient ceases to be an employee of the Company for any reason that does not result in acceleration or payment pursuant to Section 1(d), Recipient shall immediately forfeit all outstanding but unvested RSUs granted pursuant to this Agreement and Recipient shall have no right to receive the related Common Stock.

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

(g)Reinvestment of Dividend Equivalents.  On each date on which the Company pays a dividend on a share of Common Stock with respect to an RSU, the number of RSUs subject to this Agreement shall be increased by a number equal to the number of whole or fractional shares of Common Stock with a value 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.  If the vesting date for any RSUs subject to this Agreement occurs within seven business days of the payment date for a dividend, the Company, at its option, may elect to pay to Recipient cash, net of withholding, equal to the cash dividend payable on the RSUs which so vest in lieu of increasing the number of RSUs subject to this Agreement.

(h)Delivery on Delivery Date.  On the delivery date the Company shall deliver to Recipient a certificate for the number of shares of Common Stock represented by all 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.  If shares or cash are to be delivered on a particular date, the shares or cash shall be deemed delivered on that date for purposes of compliance with the terms of this Agreement if the cash or shares are actually delivered within 45 days after the specified date as determined in the Company’s discretion with the Recipient having no right to determine the delivery date.  Recipient shall not have any right to determine or direct the date of actual delivery; provided however, that delivery required to be made in no event later than December 31 of the calendar year in which the Performance Period ends must be made on or before such date.

(i)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.

(j)Tax Withholding.  Recipient acknowledges that, not later than the actual delivery date, the value of delivered shares of Common Stock 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.  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(h), Recipient shall pay to the Company the required withholding amount in cash or, at the election of Recipient (which election must be made on or before the vesting date), by surrendering to the Company for cancellation shares of the Company’s 

Common Stock to be delivered 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 vesting date.  If Recipient pays the withholding amount in shares of Common Stock, the Company shall pay to Recipient in cash the amount of any resulting over payment.

(k)Section 409A.  The award made pursuant to this Agreement 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.  For example, notwithstanding anything to the contrary in this Agreement, (i) a termination of employment shall be determined with respect to standards for “separation from service” within the meaning of applicable regulations; (ii) the provisions described in Sections 1(d)(ii)(1)(B), 1(d)(iii)(2) and 1(d)(iii)(3) shall apply only if such events qualify as a “termination or liquidation of the plan” within the meaning of Treas. Reg. § 1.409A‐3(j)(4)(ix); and the provision described in Section 1(d)(iii)(1) shall apply only if such events qualify as a “change of control event” within the meaning of Treas. Reg. § 1.409A-3(i)(5)(i).

(i)Notwithstanding any provision of the award to the contrary, 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 (1) 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 (2) comply with the requirements of Section 409A. 

(ii)If an amount is determined to be subject to applicable provisions of Section 409A of the Code, payment in connection with termination of employment for a reason other than death may not start or be made to Recipient if the Company determines Recipient is a “key employee” as defined in Section 416(i) of the Code, without regard to Section 416(i)(5) of the Code, before the date which is six months after the date of termination, notwithstanding any other provisions for time of payment in this Agreement, if such delay in payment is necessary to comply with Section 409A of the Code.  The Company may determine that Recipient is a key employee in the event of doubt or to avoid impractical efforts or expense to make an exact determination of key employees.  Recipient shall have no claim, rights or remedy if the determination is not correct.

2.Miscellaneous.

(a)Entire Agreement; Amendment.  This Agreement and the Plan (including without limitation Section 17 thereof) constitute 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.

ELECTRO SCIENTIFIC INDUSTRIES, INC.

By:___________________________________                    
Authorized Officer

EXHIBIT A
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.:

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.
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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