<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K
(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934 [FEE REQUIRED] 
      FOR THE FISCAL YEAR ENDED JUNE 30, 1994
                                       OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

      FOR THE TRANSITION PERIOD FROM___TO ___ COMMISSION FILE NO. 0-9992

                          KLA INSTRUMENTS CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


<TABLE>
<S>                                                                      <C>
                         DELAWARE                                       04-2564110
             (STATE OR OTHER JURISDICTION OF                        (I.R.S.  EMPLOYER
              INCORPORATION OR ORGANIZATION)                       IDENTIFICATION  NO.)

                      160 RIO ROBLES                                        95134
                   SAN JOSE, CALIFORNIA                                  (ZIP CODE)
         (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>


    REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 434-4200

    SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:


<TABLE>
      <S>                           <C>
     TITLE OF EACH CLASS           NAME OF EACH EXCHANGE ON WHICH REGISTERED
     --------------------          -----------------------------------------
             NONE                                  NONE
</TABLE>


    SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         COMMON STOCK, $0.001 PAR VALUE
                          COMMON STOCK PURCHASE RIGHTS
                                (TITLE OF CLASS)


Indicate by check mark whether the Registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.       Yes __X__  No _____

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation    S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements
         incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [    ]


The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the average bid and asked prices of the registrant's
stock, as of August 31, 1994, was $994,164,000. Shares of common stock held by
each officer and director and by each person or group who owns 5% or more of
the outstanding common stock have been excluded in that such persons or groups
may be deemed to be affiliates.  This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

   The registrant had 22,974,230 shares of Common Stock outstanding as of
August 31, 1994.


<PAGE>   2




DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Annual Report to Stockholders for the fiscal year ended June
30, 1994 ("1994 Annual Report to Stockholders" ), are incorporated by reference
into Parts I, II and IV of this Report.

   Portions of the Proxy Statement for the Annual Meeting of Stockholders
("Proxy Statement" ) to be held on November 16, 1994, and to be filed pursuant
to Regulation 14A within 120 days after registrant's fiscal year ended June 30,
1994, are incorporated by reference into Part III of this Report.



PART I


Item 1.    DESCRIPTION OF BUSINESS

THE COMPANY AND ITS PRODUCTS

   The Company was incorporated under the laws of the State of Delaware in July
1975. The Company's headquarters are located at 160 Rio Robles, San Jose,
California, 95134, telephone (408) 434-4200. Unless the text requires
otherwise, the "Company" or "KLA" refers to KLA Instruments Corporation and its
subsidiaries.

   KLA is the leader in design, manufacture, marketing and service of yield
management and process monitoring systems for the semiconductor industry.  KLA
believes that it is the world's largest supplier to the wafer, reticle and
metrology inspection equipment markets.  The Company sells to virtually all of
the world's semiconductor manufacturers and has achieved very high market
shares in its principal businesses.  KLA's systems are used to analyze product
and process quality at critical steps in the manufacture of integrated
circuits, providing feedback so that fabrication problems can be identified,
addressed and contained.  This understanding of defect sources and how to
contain them enables semiconductor manufacturers to increase yields.  Quickly
attaining and then maintaining high yields is one of the most important
determinants of profitability in the semiconductor industry.  The Company
believes that its customers typically experience rapid paybacks on their
investments in the Company's systems.

   The growing complexity of semiconductor devices, including shrinking feature
dimensions, has substantially increased the cost to manufacture semiconductors,
making yield loss more expensive.  This trend has increased semiconductor
manufacturers' demand for systems which permit the detection and containment of
process problems.  The sensitivity of fabrication yields to defect densities
increases as devices become more complex.  Further, the escalating capital
investments necessary for the construction of semiconductor fabrication
facilities heighten manufacturers' need for yield enhancing systems which can
leverage their returns on these investments.




   Several years ago, the Company recognized the industry's need for in-line
monitoring to provide real-time process management capability.  In response,
the Company devoted substantial resources to developing systems with the
throughput, reliability and associated data analysis capabilities for
in-process inspection.  During the past several years, customers' use of the
Company's wafer inspection systems began evolving from single system, off-line
engineering analysis applications to multiple systems monitoring critical steps
directly on advanced fabrication lines.  Positive customer evaluation of the
Company's in-line production monitoring systems led to record order levels for
the Company's 1993 and 1994 fiscal years .  The Company believes that the
potential market for in-line monitoring systems is several times larger than
its traditional market for engineering analysis systems.


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YIELD MANAGEMENT

   Maximizing yields, or the number of good die per wafer, is a key goal of
modern semiconductor manufacturing.  Higher yields increase the revenue a
manufacturer can obtain for each semiconductor wafer processed.  As line width
geometries decrease, yields become more sensitive to the size and density of
defects.  Semiconductor manufacturers use yield management and process
monitoring systems to improve yields by identifying defects, by analyzing them
to determine process problems, and, after corrective action has been taken, by
monitoring subsequent results to ensure that the problem has been contained.
Monitoring and analysis may take place at many points in the fabrication
process as wafers move through a production cycle consisting of hundreds of
separate process steps.

   Semiconductor factories are increasingly expensive to build and equip.
Yield management and process monitoring systems, which typically represent a
fraction of the total investment required to build and equip a fabrication
facility, enable integrated circuit manufacturers to leverage these expensive
facilities and improve their returns on investment.

   The most significant opportunities for yield improvement generally occur
when production is started at new factories and when new products are first
built.  Equipment that helps a manufacturer to increase yields quickly when
products are new enables the manufacturer to offer products in volume at the
time when they are likely to generate the greatest profits.

   The following are some of the methods used to manage yield; they all require
the capture and analysis of data gathered through many measurements:

o    Engineering analysis is performed off the manufacturing line to identify
     and analyze defect sources.  Engineering analysis equipment operates with
     very high sensitivity to enable comprehensive analysis of wafers.  Because
     they operate off-line, engineering analysis systems do not require high
     speeds of operation.

o    In-line monitoring is used to review the status of circuits during
     production steps.  Information generated is used to determine whether the
     fabrication process steps are within required tolerances and to make any
     necessary process adjustments in real-time before wafer lots move to 
     subsequent process stations.  Because the information is needed quickly 
     to be of greatest value, in-line monitoring requires both high throughput 
     and high sensitivity.

o    Pass/fail tests are used at several steps in the manufacturing process to
     evaluate products.  For example, a pass/fail test is used to determine
     whether reticles used in photolithography are defect-free; electrical
     pass/fail testing is performed at the end of the manufacturing process to
     determine whether products meet performance specifications.

KLA STRATEGY

   KLA is the premier supplier of yield management and process monitoring
systems to the semiconductor manufacturing industry.  Key elements of KLA's
strategy are as follows:

o    Leadership in Yield Management.  The Company believes that yield
     management requires both the ability to identify defects and the ability
     to use defect data: (i) to recognize patterns which reveal process
     problems; and (ii) to resolve and contain process flaws which are causing
     reduced yields.  The Company has developed yield management solutions that
     consist of sophisticated defect detection sensors located at key steps in
     the production process, as well as analysis stations with relational
     database software that enable isolation of defect sources, identification
     of problem causes and implementation of corrective action.

     The Company believes that its world-wide organization of more than 50
     applications engineers provides an important competitive advantage.  These
     applications engineers serve


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<PAGE>   4




     as yield management consultants to the Company's customers, assisting 
     in applying KLA's systems to accelerate yield improvement and achieve 
     real-time process control.

o    Development of In-Line Monitoring Market.  KLA has introduced a family of
     wafer inspection systems with the wafer throughput and sensitivity
     necessary for in-line monitoring.  Prior to the introduction of KLA's 2100
     series, no suppliers' products were capable of both the speed and the
     sensitivity needed for in-line inspection for all defect types at critical
     process steps.  In-line inspection is a critical yield enhancement and
     cost reduction technique because it allows defect detection in real-time
     rather than waiting until after final test results become available to
     discover problems that have a significant yield impact.  As a result of
     these advantages, the Company believes that its customers will install
     multiple systems directly monitoring critical steps in the integrated
     circuit manufacturing process.

o    Technology Leadership.  The Company believes that it is the technological
     leader in integrated circuit yield management and process control
     monitoring.  To maintain its leadership position, KLA is committed to
     state-of-the-art multidisciplinary technologies.  See "-Technology" on
     page 8.


   The Company's long range objective is to develop an integrated yield
management network which spans the semiconductor fabrication process.

YIELD MANAGEMENT AND PROCESS MONITORING SYSTEMS

   KLA's systems are developed to work together to offer its customers not just
tools, but integrated yield management solutions.  KLA offers inspection
systems for key steps in the semiconductor manufacturing process and analysis
systems comprised of database management hardware and software to translate raw
inspection data into patterns which reveal process problems.  The Company's
wafer inspection and metrology systems are used for engineering analysis and
in-line monitoring, and its reticle inspection systems and wafer probers are
used for pass/fail tests.

   WISARD - Wafer Inspection Systems.  KLA's WISARD business unit created the
market for automated inspection of semiconductor wafers with the introduction
of the KLA 2000 series over nine years ago.  KLA continues to have a
predominant market share with its current generation of wafer inspection
systems, the 2100 series.

   KLA's 2100 series, combined with a dedicated defect data gathering and
analysis workstation, the KLA 2551, and an off-line Review Station, the KLA
2608, provide semiconductor manufacturers with a yield management system
sensitive enough for engineering analysis and fast enough for in-line
monitoring of the semiconductor manufacturing process.  The 2100 series of
inspection systems offers an increase in inspection speed of up to 2,000 times
over that of KLA's original wafer inspection system.  This marked increase in
speed and sensitivity allows customers to obtain very prompt feedback on
process status by placing wafer inspection systems on the production line.

   The selection of the technology architecture for the 2100 series was made to
allow the base unit to support a family of products capable of performance
enhancements through upgrades of various subsystems.  The first model, the KLA
2110, was introduced in 1991 with sufficient speed and sensitivity to enable
in-line inspection of repeating arrays typical in memory devices.  One year
later, in 1992, KLA introduced a new repeating array model, the KLA 2111, which
operates at up to five times the speed of the KLA 2110 and has improved
sensitivity.

   Shortly thereafter in 1992, KLA introduced the KLA 2130 which is capable of
"all pattern" inspection required for microprocessors and other logic devices
as well as both the logic and repeating array portions of memory devices.  In
late 1993, KLA introduced the new 2131 model for all pattern inspection which
operates at up to twice the speed of the KLA 2130 and with higher


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<PAGE>   5




sensitivity.  The Company believes that there are further opportunities to
expand the 2100 series family of systems and has several new models under
development.

   To manage defect data, KLA offers the KLA 2551 Analysis Station, a
multi-user work station using a relational database for storing defect
coordinates and digitized images.  Defect analysis and image review operates
through a WindowsTM -based interface.  The KLA 2551 incorporates an open
architecture which consolidates data from inspection systems, review stations,
wafer sort electrical testers, host computers, and scanning electron
microscopes (SEMs).  The data analysis software provides statistical process
control reports, defect source analysis, and automated correlation of in-line
process defects to bit failures.  The graphical software combines both data and
image to produce wafer maps, trend charts, and video review.  When coupled with
an optional remote terminal, the KLA 2551 permits process engineers in remote
locations to link to the database of defect records and images to perform
further analyses or compare data from different wafer fabrication facilities.

   The KLA 2608 Review Station provides a platform for reviewing and
classifying defects detected on KLA and non-KLA wafer inspection systems.  An
operator may append classification codes to the defect record, a record which
also includes wafer number, die coordinates, defect location, and defect size.

The average selling prices of KLA's 2100 series of wafer inspection systems
range from approximately $1 million to approximately $2 million.

RAPID - Reticle Inspection Systems.  RAPID, KLA's first business unit, created
the market for automated inspection of reticles and photomasks for the
semiconductor manufacturing industry over 16 years ago, and continues to have a
predominant market share.  KLA has delivered over 700 reticle and photomask
inspection systems worldwide.

   During photolithography, a stepper projects a circuit pattern from a reticle
onto a wafer.  Error-free reticles are the first step in ensuring high yields
in the manufacturing process because defects in reticles can translate into
millions of ruined die.

   In 1992, KLA introduced its new generation of reticle inspection systems,
the 300 series.  The KLA 301 Reticle Inspection System and the KLA 30 Reference
Data Computer together form the KLA 331 Inspection System which represents a
major advance in speed, sensitivity and flexibility.  The KLA 331 offers the
highest inspection sensitivity available in the market place, which the Company
believes is vital to meet reticle inspection requirements for today's more
complex microprocessors and larger DRAMs.

   During fiscal 1993 and 1994, delays in completing all features of the KLA
331 systems caused a decline in RAPID's business as many customers waited for
the new model.  Certain ease-of-use and performance enhancements to the KLA 331
which are yet to be completed will be required before some customers will order
systems.

   The average selling prices of KLA's 331 inspection systems range from
approximately $1.7 million to approximately $2.6 million.

   Metrology - Overlay and Critical Dimension Measurement Systems.  Lithography
for sub-micron semiconductor fabrication requires increasingly stringent
overlay and critical dimension tolerances.  In particular, decreasing line
widths, larger die sizes, and additional layers have made overlay
mis-registration errors a crucial cause of yield loss.  To address these
challenges, KLA offers the KLA 5000 series metrology systems: the 5100 for
overlay; and the 5015 for both overlay and critical dimension measurement.  KLA
estimates that during its fiscal 1993 and 1994, it had the leading share in the
worldwide market for overlay registration systems.


                                      5

<PAGE>   6




   The KLA 5000 series uses a patented coherence probe microscopy technology
which permits fast autofocus and precision critical dimension measurements.
Applying its expertise in digital image processing, KLA has developed
sophisticated measurement algorithms that are tolerant of process variations.
With coherence probe microscopy, the system scans the image-forming coherence
region through the wafer plane, only gathering information from in-focus
surfaces.  As a result, measurements are more tolerant of process and substrate
reflectivity variations than those from ordinary optical systems.

   The precision measurements from the KLA 5000 series identify the magnitude
and direction of overlay mis-registration errors arising from the stepping
process and from optical distortion inherent in the stepper lens.  Based upon
these measurements, users can fine-tune the stepper program to compensate for
these errors, and improve process yield.

   The average selling prices of KLA's metrology systems for the semiconductor
industry range from approximately $300,000 to approximately $550,000.

   The disk drive manufacturing industry is an emerging market for KLA's
metrology systems.  Disk drive  manufacturers use a semiconductor
photolithography process to produce thin film heads.  The Company's coherence
probe technology is particularly well-suited to handle the complex topography
characteristics encountered in the thin film head process.  The Company
believes that its solution to these requirements has allowed it to achieve the
major share of the thin film head metrology market.

   Wafer Probing Systems.  The ATS division sells and services a family of
automated wafer probers and network controllers which position individual
semiconductor devices still in wafer form under electrical test probes.  The
probers work in conjunction with electronic parametric and functional testers
to perform fully automated tests of the performance of completed die before the
wafers are diced and packaged.  The electrical test procedure also identifies
failed die, classifies die by performance and generates a database of test
results for use in process control.

   KLA develops, manufactures and markets these products in cooperation
with Tokyo Electron, Limited ("TEL"), the leading distributor of semiconductor
equipment in Japan.  KLA develops and manufactures the prober's image processing
electronics and optical subsystems.  TEL manufactures the prober's mechanical
chassis and incorporates the KLA electronics and subsystems.  The ATS division
sells the integrated prober systems in the United States and Europe with its own
control software and custom interfaces.  TEL sells and services the integrated
prober systems in Japan and the rest of Asia.

   The WATCHER business unit develops the image processing subsystems used in
ATS' and TEL's wafer prober systems.  This image processing computer performs a
number of steps: (i) optical character recognition (OCR) to identify the wafer;
(ii) precise wafer alignment and positioning to the probe head; and (iii) probe
process inspection to monitor prober performance.

   The average selling prices of KLA's basic wafer prober systems range from
approximately $150,000 to approximately $350,000.

   PRISM-Software Productivity and Analysis Systems.  The PRISM division was
formed in June 1994 to enter the software market with a family of standard
software packages for the global semiconductor industry. PRISM, which stands
for PRocess Information SysteMs, has adopted a charter to offer software
products that enhance yield and maximize factory productivity.

   PRISM's first products to market are a set of probe floor networking
products that provide an open architecture for prober and tester automation.
These were originally developed within the ATS division as an enhancement to
ATS prober systems. Within PRISM they have been integrated into an architecture
called CIMA, or Control and Information Management


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Architecture, and are being marketed as an open architecture probe floor
product suite that will integrate with most any prober and tester regardless of
manufacturer.

   SEMSpec-Scanning Electron Microscope Inspection Systems.  As feature sizes
of semiconductor circuits continue to decrease for leading edge semiconductor
products, the Company believes that conventional optical technologies
ultimately will begin to reach physical limits imposed by the wavelength of
light and fail to provide the necessary inspection resolution.  Working closely
with those customers with the most advanced inspection requirements, KLA has
developed the world's only fully automatic electron beam inspection systems.
These systems, comprised of the world's fastest scanning electron-optical
column and a high speed image computer, are used for reticle and wafer
inspection.  The development of these systems was funded in part by
customer-sponsored research and development programs.  KLA has sold four of
these systems to customers.  KLA expects the market for these inspection
systems to emerge slowly.

   KLA Acrotec Ltd.  The Company has an 8% equity investment in KLA Acrotec, a
Japanese company that develops optical systems that inspect flat panel displays
utilizing technology developed by the Company.  The Company has a research and
development agreement with KLA Acrotec to provide research, development and
engineering, on a best efforts cost reimbursement basis.  The Company believes
that KLA Acrotec is the leading supplier of flat screen inspection systems.


CUSTOMERS AND APPLICATIONS


   The Company believes that it is one of the few suppliers which sells its
systems to virtually all of the world's semiconductor manufacturers.  In fiscal
1992 and 1994, no single customer accounted for more than 10% of the Company's
revenues.  During fiscal 1993, Motorola accounted for approximately 11% of the
Company's revenues.

SALES, SERVICE AND MARKETING

   The Company sells products through a combination of direct sales and
distribution channels.  The Company believes that the size and location of its
field sales, service and applications engineering organization represents a
significant competitive advantage in its served markets.  In the United States
and Europe, the Company has a direct sales force located in major geographical
markets.  Sales, service and applications facilities throughout the world
employ over 400 sales, service and applications engineers.

   In Japan, the Company sells systems for the semiconductor market through
TEL.  TEL has been the Company's distributor to the Japanese semiconductor
market since 1978.  The sales effort in Japan is supported by KLA Japan, which
provides marketing, applications support, technical support and service to
Japanese customers.  Over the last two years, the Company significantly
increased its customer service organization in Japan in order to assume service
and support responsibilities from TEL.  KLA Japan has over 100 local employees
and occupies facilities at Tachikawa, Osaka and Fukuoka.

   In Singapore and Taiwan, the Company sells its systems through local sales
representatives.  In Korea, the Company will convert, in October 1994, from a
local sales representative to a direct sales force.

   KLA maintains an export compliance program that fully meets the requirements
of the U.S. Department of Commerce. KLA has never been denied approval to ship
against a purchase order.

   For information regarding the Company's revenues from foreign operations for
the Company's last three fiscal years, see Note 3 on page 20 of the 1994 Annual
Report to Stockholders, incorporated herein by reference.


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TECHNOLOGY

   KLA's inspection and metrology systems precisely capture trillions of
features on wafers and reticles that are as small as 10 millionths of an inch
on a side and analyze each of these features for possible defects through the
use of the following technologies:

   Image Acquisition.  KLA's systems acquire images of sub-micron features on
wafers and reticles.  The quality and brightness of the images greatly
influence the speed and sensitivity of the final inspection system.  KLA has
developed a wide range of optical imaging systems, such as laser scanners,
interference microscope systems, and conventional white light and deep UV
optical systems.  To satisfy the future sensitivity requirements of advanced
lithography, KLA has already developed an electron beam system which
incorporates the world's fastest scanning electron-optical column.

   Image Conversion.  The Company's equipment converts the photon or electron
image to an electronic digital format.  KLA has pioneered the use of
time-delay-integration sensors that convert as many as 100 million pixels
(picture elements) to 256-level gray scale images each second.  KLA also
utilizes other image conversion technologies such as avalanche diode detectors,
photo multiplier systems, and fixed frame pickups.

   Precision Mechanics.  In the most common configuration of an inspection
system, the reticle or the wafer is moved at a constant speed through the field
of the imaging system.  Since areas of interest are as small as 5 millionths of
an inch, and vibrations in the scanning system of one-tenth of the area of
interest can degrade system performance, the mechanical stage must be extremely
smooth and precise.  To address these requirements, KLA has eight years
experience in the design and manufacture of air-bearing linear drive stages.

   Proprietary Algorithms.  To perform the inspection or measurement task, the
Company's equipment examines the properties of the digitized images using a set
of logical steps (algorithms) which measure the desired image property.  KLA's
engineers develop sets of algorithms that are specifically tailored to obtain
optimum performance for its wafer, reticle and metrology systems.  These
algorithms are largely responsible for the state-of-the-art performance of
KLA's systems.

   Image Computers.  The combination of proprietary algorithms and special
purpose computers allows KLA's equipment to have a high performance to cost
ratio.  While general purpose computers are capable of executing KLA's
algorithms, very few computer architectures can sustain the computing speed
that is required in KLA's systems (as high as 72,000 MIPS).  To address this
requirement, KLA develops and builds special purpose image computers designed
to execute its algorithms.

   Database Analysis.  Many of the inspections that KLA reticle inspection
systems perform require a digital image representation of the ideal pattern
obtained from the data used to manufacture the reticle.  This capability allows
inspection systems to compare the actual circuit with its design
specifications.  KLA has been developing database systems for over 14 years to
satisfy this objective.  Its present generation of special purpose database
computers is capable of generating simulated images at the same high speeds at
which KLA's image conversion systems generate the digital image from the actual
reticle.

   Statistical Process Control.  Integrated circuit yield management and
process monitoring systems generate hundreds of thousands of data items each
day.  To enhance the utility of these data, KLA has a team of software
engineers who build systems containing statistical process control software to
simplify data and present these data in a useful manner.  KLA is continuing to
work on new software to enhance its statistical process control systems.


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RESEARCH AND DEVELOPMENT

   The market for yield management and process monitoring systems is
characterized by rapid technological development and product innovation.  The
Company believes that continued and timely development of new products and
enhancements to existing products are necessary to maintain its competitive
position.  Accordingly, the Company devotes a significant portion of its
personnel and financial resources to research and development programs and
seeks to maintain close relationships with customers to remain responsive to
their needs.

   In order to meet continuing developments in the semiconductor industry and
to broaden the applications for its image processing technology, the Company is
committed to significant engineering efforts for product improvement and new
product development. Approximately 18% of the Company's workforce is engaged in
engineering, research and development. For information regarding the Company's
research and development expense during the last three fiscal years, see page
18 and 21 of the 1994 Annual Report to Stockholders herein incorporated by
reference.

   KLA typically receives some external funding from customers, from industry
groups, and from government sources to augment its engineering, research and
development efforts.  In addition, KLA capitalizes some software development
costs.  Although the timing and the level of these external funds cannot be
predicted, the level of such funding and capitalization has been approximately
4%, 4% and 2% of sales for fiscal 1992, 1993 and 1994, respectively.  The
Company reports engineering, research and development expense net of this
funding and capitalization.  Thus, recorded amounts for engineering, research
and development expense were 17%, 10% and 9% of sales in fiscal 1992, 1993 and
1994, respectively.


MANUFACTURING

   The Company's principal manufacturing activities take place in San Jose,
California; Bevaix, Switzerland; and Migdal Ha'Emek, Israel; and consist
primarily of assembling and testing components and subassemblies which are
acquired from third party vendors and then integrated into the Company's
finished products.  Subsequent to June 30, 1994, the Company began planning the
construction of one or two additional buildings on undeveloped land at its
San Jose campus facility. The Company is also cross-training personnel, so that 
it can respond to changes in product mix by reallocating personnel in addition 
to hiring.

   The Company has been working with key vendors to improve inventory
management.  Volume purchase agreements and just-in-time delivery schedules
have reduced both inventory levels and costs.  The Company's manufacturing
engineers, in conjunction with key vendors, are improving the manufacturability
and reliability of the new wafer and reticle inspection systems.

   Many of the components and subassemblies are standard products, although
certain items are made to Company specifications.  Certain of the components
and subassemblies included in the Company's systems are obtained from a single
source or a limited group of suppliers.  Those parts subject to single or
limited source supply are routinely monitored by management and the Company
endeavors to ensure that adequate supplies are available to maintain
manufacturing schedules, should supply for any part be interrupted.  Although
the Company seeks to reduce its dependence on sole and limited source
suppliers, in some cases the partial or complete loss of certain of these
sources could have at least a temporary adverse effect on the Company's results
of operations and damage customer relationships.

COMPETITION

   The market for yield management and process control systems is highly
competitive.  In each of the markets it serves, the Company faces competition
from established and potential competitors, some of which may have greater
financial, engineering, manufacturing and marketing resources than the Company.
Significant competitive factors in the market for yield


                                      9

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management and process control systems include system performance, ease of use,
reliability, installed base and technical service and support.

   The Company believes that, while price and delivery are important
competitive factors, the customers' overriding requirement is for systems which
easily and effectively incorporate automated, highly accurate inspection
capabilities into their existing manufacturing processes, thereby enhancing
productivity.  The Company's yield management and process control systems for
the semiconductor industry are generally higher priced than those of its
present competitors and are intended to compete based upon performance and
technical capabilities.  These systems also compete with less expensive, more
labor-intensive manual inspection devices.

   The Company's wafer and reticle inspection systems have a predominant share
of their markets.  The Company is the leading provider of overlay registration
systems.  The Company believes it is the second largest supplier of wafer
prober systems in the U.S. and Europe.

   Many of the Company's competitors are investing in the development of new
products aimed at applications currently served by the Company.  The Company's
competitors in each product area can be expected to continue to improve the
design and performance of their products and to introduce new products with
competitive price/performance characteristics.  Competitive pressures often
necessitate price reductions which can adversely affect operating results.
Although the Company believes that it has certain technical and other
advantages over its competitors, maintaining such advantages will require a
continued high level of investment by the Company in research and development
and sales and marketing.  There can be no assurance that the Company will have
sufficient resources to continue to make such investments or that the Company
will be able to make the technological advances necessary to maintain these
competitive advantages.

   The yield management and process control industry is characterized by
rapidly changing technology and a high rate of technological obsolescence.
Development of new technologies that have price/performance characteristics
superior to the Company's technologies could adversely affect the Company's
results of operations.  In order to remain competitive, the Company believes
that it will be necessary to expend substantial effort on continuing product
improvement and new product development.  There can be no assurance that the
Company will be able to develop and market new products successfully or that
the products introduced by others will not render the Company's products or
technologies non-competitive or obsolete.

PATENTS AND OTHER PROPRIETARY RIGHTS

   The Company believes that, due to the rapid pace of innovation within the
yield management and process control systems industry, the Company's protection
of patent and other intellectual property rights is less important than factors
such as its technological expertise, continuing development of new systems,
market penetration and installed base and the ability to provide comprehensive
support and service to customers.

   The Company protects its proprietary technology through a variety of
intellectual property laws including patents, copyrights and trade secrets.
The Company's source code is protected as a trade secret and as an unpublished
copyright work.  The Company has a number of United States and foreign patents
and patent applications.  The Company's effort to protect its intellectual
property rights through trade secret and copyright protection may be impaired
if third parties are able to copy or otherwise obtain and use the Company's
technology without authorization.  Effective intellectual property protection
may be unavailable or limited in certain foreign countries.  In addition, the
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights.  No assurance can be given that any
patent held by the Company will be sufficient to protect the Company.


                                      10

<PAGE>   11





   BACKLOG

   Backlog orders for systems were $125 million as of June 30, 1994, with 99%
shippable in one year, as compared with $52 million as of June 30, 1993, with
98% shippable in one year. The Company generally ships systems within six
months after receipt of a customer's purchase order.


   EMPLOYEES

   As of August 31, 1994, KLA employed a total of approximately 1,135 persons.
None of KLA's employees is represented by a labor union.  KLA has experienced
no work stoppages and believes that its employee relations are excellent.

   Competition in the recruiting of personnel in the semiconductor and
semiconductor equipment industry is intense.  KLA believes that its future
success will depend in part on its continued ability to hire and retain
qualified management, marketing and technical employees.


I
tem 2.    PROPERTIES

   KLA owns a corporate facility which houses engineering, manufacturing and
administrative functions in San Jose, California, occupying approximately
232,000 square feet.  The Company purchased this facility in 1990 at a total
cost of approximately $30 million, including improvements.  The Company leases
additional office space for manufacturing, engineering, sales and service
activities, including seven locations in the U.S., four in Europe, three in
Japan, and one each in Malaysia, Korea, Taiwan and Israel.  Subsequent to June
30, 1994, the Company entered into two leases, for two year terms commencing
August 10, 1994 and November 1, 1994, for two buildings adjacent to its campus
facility, consisting of an aggregate of approximately 73,000 square feet.
Capital expenditures for fiscal 1995 are expected to approximate depreciation;
however, this assessment could change if demand continues to exceed estimates
and additional manufacturing capacity is required.  No estimate can be made of
the size or cost of any such additional capacity.  In addition, subsequent to
June 30, 1994, the Company began planning the construction of one or two
additional buildings on undeveloped land at its campus facility .


Item 3.    LEGAL PROCEEDINGS


   In June 1990, the Company filed a lawsuit in the U.S. Federal District
Court in San Jose, California, against Orbot Systems Ltd. and Orbot, Inc., now
Orbotech ("Orbot") for patent infringement. Orbot has since counter-sued for
interference with normal business. If the Company were to lose, Orbot would be
allowed to continue to sell products using its present illuminator. The Company
believes that the outcome of this suit will most likely be determined based
upon the validity of KLA's patent, U.S. Patent No. 4,877,326. The case is
scheduled to go to trial in early 1995.  Management believes the results of
this lawsuit will not have a significant adverse effect on the Company.

   In November 1993 KLA filed suit, in U.S. District Court in San Jose, CA,
against Orbot Instruments Inc. for infringing a KLA patent on die- to-database
inspection.  Orbot Instruments filed a cross-complaint alleging interference
with business.  This case is in the early phase of discovery.

   The Company is also the defendant in three suits resulting from the
discontinuance of the printed circuit inspection business.  In one case the
trial court denied the plaintiff's demand for damages.  This case is under
appeal.  The other two cases are in early discovery.  Management does not
believe that these suits will have a significant adverse effect on the Company.

   Beginning in August 1992 Jerome Lemelson, an independent inventor, filed
suit in U.S. District Court in Reno, NV,  against the three U.S.  automobile
companies, Motorola and several Mitsubishi subsidiaries for the infringement of
Lemelson's patents on machine vision.  Recently Motorola settled with Lemelson.
However, Lemelson has put other semiconductor companies on


                                      11

<PAGE>   12




notice .  In the event that Lemelson prevails in his suit against other 
semiconductor companies, KLA may be liable as a potential indemnitor.


Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   Not Applicable.



PART II


Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

         "Common Stock" on page 24 of the 1994 Annual Report to Stockholders is
incorporated herein by reference.


Item 6. SELECTED FINANCIAL DATA

    "Selected Financial Data" on page 14 of the 1994 Annual Report to
Stockholders is incorporated herein by reference.


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

    "Management's Financial Commentary" on pages 12 and 13 of the 1994 Annual
Report to Stockholders is incorporated herein by reference.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP dated July 26, 1994, appearing on pages 14 through 24 of
the aforementioned 1994 Annual Report to Stockholders are incorporated herein
by reference in this Form 10-K Annual Report. With the exception of the
information incorporated by reference in Items 1, 5, 6, 7 and 8, the 1994
Annual Report to Stockholders is not to be deemed filed as part of this Form
10-K Annual Report.


Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

   Not applicable.


                                      12

<PAGE>   13





PART III


Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   Set forth below are the names of the present executive officers of the
Company, their ages and positions held with the Company.



<TABLE>
<CAPTION>
Name                               Age                                  Position
- - ----                               ---                                  --------
<S>                                 <C>          <C>
Kenneth Levy                        51           Chairman of the Board of Directors and
                                                    Chief Executive Officer
Kenneth L. Schroeder                48           President, Chief Operating Officer and Director
Robert J. Boehlke                   53           Vice President of Finance and Administration,
                                                     Chief Financial Officer, and Assistant Secretary
Ben Tsai                            36           Vice President, Chief Technical Officer
Gary E. Dickerson                   36           Vice President, Wafer Inspection
Michael D. McCarver                 48           Vice President, Corporate Sales
Neil Richardson                     39           Vice President, Metrology
Magnus O. W. Ryde                   38           Vice President, Customer Support
Arthur P. Schnitzer                 51           Group Vice President, Wafer and Reticle Inspection
William Turner                      38           Vice President, Corporate Controller
Virginia J. DeMars                  52           Vice President, Human Resources
Christopher Stoddart                38           Treasurer
Leo J. Chamberlain                  64           Director
Robert E. Lorenzini                 57           Director
Yoshio Nishi                        54           Director
Samuel Rubinovitz                   64           Director
Dag Tellefsen                       52           Director
</TABLE>


   Mr. Levy co-founded the Company in July 1975 and served as President and
Chief Executive Officer and a Director of the Company until November 1991, when
he became Chairman of the Board of Directors and Chief Executive Officer.
Since May 1993, Mr. Levy has been a Director of Ultratech Stepper, Inc., a
manufacturer of photolithography equipment, and since April 1993 a director of
Network Peripherals, Inc., a supplier of high-performance client-server
networking solutions.

   Mr. Schroeder rejoined the Company in November 1991 as President, Chief
Operating Officer and Director.  Mr. Schroeder had worked previously at KLA
from 1979 through 1987, during which time he held the positions of Vice
President of Operations (1979); Vice President and General Manager, RAPID
(1982); Vice President and General Manager, WISARD (1983); and Senior Vice
President (1985).  In July 1988, he became President and Chief Executive
Officer of Photon Dynamics, Inc., a manufacturer of electro-optic test
equipment.  In mid-1989, he was appointed President, Chief Operating Officer,
and Director of Genus, Inc., a manufacturer of CVD chemical vapor deposition
and ion implant equipment.  He left Genus in October 1991, to rejoin KLA
Instruments Corporation.

    Mr. Boehlke joined the Company in April 1983 as Vice President and General
Manager of the RAPID Division.  Subsequently, he was General Manager of several
divisions and groups of divisions at KLA.  In June 1985, Mr. Boehlke was
elected to Senior Vice President and to Executive Vice President in January
1989, and to Chief Operating Officer in August 1989 until July 1990, when he
became Chief Financial Officer.

   Dr. Tsai joined the Company in June 1984 as a member of the WISARD Technical
Staff and was promoted to Manager of Algorithm Development for the WISARD
Division.  From August 1989 until September 1990 he served as Director of
Engineering for WISARD.  In October 1990, he


                                      13

<PAGE>   14




was promoted to Vice President of Engineering for KLA Acrotec, and in July 1994
he was elected Vice President of the Company and  promoted to Chief Technical
Officer.

   Mr. Dickerson joined KLA in January 1986 as a Senior Applications Engineer
in the Wafer Inspection Division. In July 1987 he was promoted to Manager of
Applications Engineering for the Wafer Inspection Division, followed by Manager
of Product Planning in July 1989, Director of Marketing in July 1990, and Vice
President of Marketing in July 1992. In July 1993, he was promoted to Vice
President and Director of the Wafer Inspection Business Unit. In July 1994, he
was elected to Vice President of the Company.

   Mr. McCarver joined the Company in October 1985 as Vice President of Sales
for the RAPID Division, was promoted to General Manager in July 1987, and was
additionally elected to Vice President of the Company in August 1989.  In
August 1993, he became Vice President of Corporate Sales.

   Dr. Richardson joined KLA in June 1993 as Vice President and General Manager
of the Metrology Division, and was elected Vice President of the Company in
July 1994.  He served as Vice President and General Manager of Diagnostic
Systems Group of Schlumberger Technologies from September 1985 to November
1991, and was the Corporate Technology Adviser for Schlumberger Ltd., a
manufacturer of electronic test equipment, from November 1991 to May 1993.

   Mr. Ryde joined KLA in June 1980 as Production Control Manager. In May 1981
he was promoted to Materials Manager, followed by Production Manager in January
1982 and Manager, Advance Manufacturing - KLA208 in May 1984. In March 1985 he
became Product Marketing Manager for the RAPID Division. In December 1988,
after leaving KLA for 6 months to pursue other interests, he returned as
Director of EMMI Business within the ATS Division. In January 1989 he was
promoted to Director of Operations - Europe, and in March 1991 became Vice
President of Operations for the ATS Division. He was promoted to Vice President
and General Manager of the Customer Support Division in July 1992 and was
elected to Vice President of the Company in July 1994.

   Mr. Schnitzer joined the Company in July 1978 as Software Engineering
Manager and was promoted to Director of Engineering of the RAPID Division in
July 1982, and was promoted to Vice President in July 1983. He became Vice
President of Technology and Marketing of RAPID in May 1987, and Vice President
of Advanced Inspection in January 1989. In October 1989, he was promoted to
General Manager of the WISARD Division and, additionally, was elected to Vice
President of the Company in July 1990. In July 1993, he became Group Vice
President of the Wafer and Reticle Inspection Group ("WRInG"), composed of the
former RAPID and WISARD divisions.

   Mr. Turner joined the Company in September 1983 as a Corporate Financial
Analyst, transferred to be the Field Service Financial Administrator of the
RAPID Division in August 1984, was promoted to RAPID Division Controller in
February 1986, transferred to International Division Controller in July 1988,
was promoted to Corporate Controller in December 1989, and was elected Vice
President of the Company in July 1990.

   Ms. DeMars joined KLA in 1988 as Director of Human Resources after a 13 year
career in Employee Relations at Monolithic Memories, Inc. and Advanced Micro
Devices.  In November 1991, KLA promoted Ms. DeMars to Vice President of Human
Resources, worldwide.

   Mr. Stoddart joined the Company in December 1991 as Treasurer.  Prior to
joining the Company, Mr. Stoddart was Treasurer of General Cellular
Corporation, a cellular telephone service provider, from October 1989 to
September 1991 and previously with The Cooper Companies, Inc., a manufacturer
of pharmaceuticals and medical equipment and implant equipment, as Assistant
Treasurer from August 1986 to July 1988, and then Treasurer from July 1988 to
September 1989.


                                      14

<PAGE>   15




   Mr. Chamberlain has served as a Director of the Company since 1982. He has
served as a Director of Octel Communications Corporation, a manufacturer of
high performance voice processing systems since March 1989.

   Mr. Lorenzini has served as a Director of the Company since 1976. He has
served since January 1993 as Chairman of SunPower Corporation, a manufacturer
of optoelectronic devices, and from October 1988 to January 1993, he served as
President and Chief Executive Officer. Since July 1993, he has also been a
Principal in Dalton Partners, a turn-around management company. He was a
founder and, until December 1986, Chairman of the Board of Siltec Corporation,
a manufacturer of semiconductor materials and manufacturing equipment. Since
October 1986, Mr. Lorenzini has also served as a Director of FSI International,
a semiconductor process equipment manufacturer.

   Mr. Nishi has served as a Director of the Company since 1989.  He is the
Director of ULSI Research Laboratory, Hewlett-Packard Laboratories, and also a
consultant professor in the Stanford University Department of Electrical
Engineering.

   Mr. Rubinovitz previously served as a Director of the Company from October
1979 to January 1989, and rejoined the Company as a Director in 1990. From
April 1989 through December 1993, he served as Executive Vice President of
EG&G, Inc., a diversified manufacturer of scientific instruments and
electronic, optical and mechanical equipment, and previously as Senior Vice
President of EG&G, Inc. between April 1986 and April 1989. Since April 1989,
Mr. Rubinovitz has served as a Director of EG&G. Since October 1984, he has
served as Director of Richardson Electronics, Inc., a manufacturer and
distributor of electron tubes and semiconductors and, since October 1986,
Director of Kronos, Inc., a manufacturer of electronic time keeping systems.

   Mr. Tellefsen has served as a Director of  the Company since 1978. He is
General Partner of the investment manager of Glenwood Ventures I and II,
venture capital funds. Since January 1983, he has served as a Director of
Iwerks Entertainment, a producer of movie-based specialty theaters, and since
1982, as a director of Octel Communications Corporation.


                                      15

<PAGE>   16





Item 11. EXECUTIVE COMPENSATION

   The information regarding Executive Compensation as it appears in the Proxy
Statement is incorporated herein by reference.


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information regarding Security Ownership of Certain Beneficial Owners
and Management as it appears in the Proxy Statement is incorporated herein by
reference.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information regarding Certain Relationships and Related Transactions as
it appears in the Proxy Statement is incorporated herein by reference.


                                      16

<PAGE>   17




                                    PART IV


Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORT ON FORM 8-K

   (a)   (1) Financial Statements: See Index to Financial Statements, page 19.

         (2) Financial Statement Schedules: See Index to Financial Statement
             Schedules, page 19.  (3) Exhibits: See Index to Exhibits, pages 
             23, 24 and 25.

   (b)   No reports on Form 8-K were filed during the quarter ended June 30,
         1994.


                                      17

<PAGE>   18




                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of San Jose,
State of California, on the 27th day of September 1994.


                                      KLA INSTRUMENTS CORPORATION



                                      By            WILLIAM TURNER 
                                          -----------------------------------
                                                    William Turner
                                          Vice President/Corporate Controller

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of this
registrant and in the capacities and on the dates indicated.






<TABLE>
<CAPTION>
Signature  Title                                   Date
         <S>                            <C>                                            <C>


             KENNETH LEVY               Director, Chairman of the Board, and           September 27, 1994
- - ----------------------------------         Chief Executive Officer                                                              
             Kenneth Levy                  


          KENNETH L. SCHROEDER          Director, President                            September 27, 1994
- - ------------------------------             And Chief Operating Officer                                                              
          Kenneth L. Schroeder             


           ROBERT J. BOEHLKE            Vice President Finance                         September 27, 1994
- - ----------------------------------         and Administration,                                                              
           Robert J. Boehlke               Chief Financial Officer,
                                           and Assistant Secretary

                                        Director                                       September 27, 1994
- - ----------------------------------                                                                       
          Leo J. Chamberlain


         ROBERT E. LORENZINI            Director                                       September 27, 1994
- - ----------------------------------                                                                       
         Robert E. Lorenzini


          DR. YOSHIO NISHI              Director                                       September 27, 1994
- - ----------------------------------                                                                       
          Dr. Yoshio Nishi


         SAMUEL RUBINOVITZ              Director                                       September 27, 1994
- - ----------------------------------                                                                       
         Samuel Rubinovit

           DAG TELLEFSEN                Director                                       September 27, 1994
- - ----------------------------------                                                                       
           Dag Tellefsen
</TABLE>



                                      18

<PAGE>   19




                  KLA INSTRUMENTS CORPORATION AND SUBSIDIARIES


                         INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                    Page(s) in
                                                                                                   1994 Annual
                                                                                                         Report* 
                                                                                               ------------------
<S>                                                                                                  <C>

Consolidated Statement of Operations for the three years ended June 30, 1994 .....................       14

Consolidated Balance Sheet at June 30, 1993 and 1994 .............................................       15

Consolidated Statement of Stockholders' Equity for the three years ended  June 30, 1994 ..........       16

Consolidated Statement of Cash Flows for the three years ended June 30, 1994 .....................       17

Notes to the Consolidated Financial Statements ...................................................     18-23

Report of Independent Accountants ................................................................       24
</TABLE>






                     INDEX TO FINANCIAL STATEMENT SCHEDULES


<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                   ----

<S>                                                                                                 <C>
Report of Independent Accountants on Financial Statement Schedules
For the three years ended June 30, 1994: ...................................................        20

Schedule VIII    -     Valuation and Qualifying Accounts ...................................        21

Schedule IX      -     Short-Term Borrowings ...............................................        22

</TABLE>

*Incorporated by reference from the indicated pages of the 1994 Annual Report
 to Stockholders.

   Financial Statement Schedules not included in this Form 10-K Annual Report
have been omitted because they are not applicable or the required information
is shown in the consolidated financial statements or notes thereto.


                                      19

<PAGE>   20




                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                         FINANCIAL STATEMENT SCHEDULES


To the Board of Directors
of KLA Instruments Corporation

   Our audits of the consolidated financial statements referred to in our
report dated July 26, 1994, appearing on page 24 of the 1994 Annual Report to
Stockholders of KLA Instruments Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedules listed
in the index on page 19 of this Form 10-K.  In our opinion, these Financial
Statement Schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.





Price Waterhouse LLP

San Jose, California
July 26, 1994



                                      20

<PAGE>   21




                                 SCHEDULE VIII



                          KLA INSTRUMENTS CORPORATION

                       VALUATION AND QUALIFYING ACCOUNTS






<TABLE>
<CAPTION>
                                  BALANCE AT          CHARGED TO                                 BALANCE AT
                                  BEGINNING           COSTS AND                                    END OF
     DESCRIPTION                  OF PERIOD           EXPENSES                DEDUCTIONS           PERIOD   
     -----------                  ------------        -----------             ----------         -----------
<S>                               <C>               <C>                    <C>                 <C>         


YEAR ENDED JUNE 30, 1992
    Provision for loss on
       investments                $  3,108,000       $    333,000            $        -        $  3,441,000
                                  ============       ============            ==========        ============

     Allowance for doubtful
        accounts                  $    641,000        $ 1,011,000            $        -        $  1,652,000
                                  ============        ===========            ==========        ============

YEAR ENDED JUNE 30, 1993
    Provision for loss on
       investments                $  3,441,000       $     94,000            $        -        $  3,535,000
                                  ============       ============            ==========        ============

     Allowance for doubtful
        accounts                  $  1,652,000      ($    183,000)           $        -        $  1,469,000
                                  ============       ============            ==========        ============

YEAR ENDED JUNE 30, 1994
    Provision for loss on
       investments                $  3,535,000       $          -            $        -         $ 3,535,000
                                  ============       ============            ==========         ===========

     Allowance for doubtful
        accounts                  $  1,469,000       $    285,000            $        -        $  1,754,000
                                  ============       ============            ==========        ============
</TABLE>



                                      21

<PAGE>   22




                                  SCHEDULE IX



                          KLA INSTRUMENTS CORPORATION
                             SHORT TERM BORROWINGS






<TABLE>
<CAPTION>
                                                     MAXIMUM             AVERAGE            WEIGHTED
                                      WEIGHTED       AMOUNT              AMOUNT             AVERAGE
                       BALANCE        AVERAGE        OUTSTANDING         OUTSTANDING        INTEREST RATE
                       AT END OF      INTEREST       DURING THE          DURING THE         DURING THE
DESCRIPTION            PERIOD         RATE           PERIOD              PERIOD 1           PERIOD 2   
- - -----------            -----------    --------       ------------        ------------       ------------
<S>                    <C>          <C>              <C>                 <C>                <C>


YEAR ENDED JUNE 30, 1992

Notes Payable3         $4,957,000       6.72%        $  8,345,000        $5,705,000            7.77%
                       ==========                    ============        ==========                    

YEAR ENDED JUNE 30, 1993

Notes Payable4         $2,532,000       4.51%        $  7,742,000        $3,651,000            5.82%
                       ==========                    ============        ==========                    

YEAR ENDED JUNE 30, 1994

Notes Payable5         $4,673,000       4.10%        $  6,770,000        $2,958,000            4.95%
                       ==========                    ============        ==========                    

</TABLE>


_________________


 1The average borrowings were determined based on the amounts outstanding at
  each month-end.

 2The weighted average interest rate during the year was computed by dividing
    the interest expense on these borrowings by the average short-term
    borrowings outstanding during the year.

 3Short-term borrowings at June 30, 1992 include $1.3 million local currency
    borrowings by one of the Company's foreign subsidiaries under the Company's
    $15 million multicurrency line of credit and $3.7 million of local currency
    borrowings by certain of the Company's foreign subsidiaries.

 4Short-term borrowings at June 30, 1993 include $1.2 million local currency
    borrowings by one of the Company's foreign subsidiaries under the Company's
    $15 million multicurrency line of credit and $1.4 million of local currency
    borrowings by certain of the Company's foreign subsidiaries.

 5Short-term borrowings at June 30, 1994 include $4.2 million local currency
    borrowings by one of the Company's foreign subsidiaries under the Company's
    $10 million multicurrency line of credit and $0.5 million of local currency
    borrowings by certain of the Company's foreign subsidiaries.


                                      22

<PAGE>   23




                               INDEX TO EXHIBITS

(I)      EXHIBITS INCORPORATED BY REFERENCE:
  3.1    Certificate of Incorporation, as amended11
  3.2    Bylaws, as amended8
  4.3    Rights Agreement dated as of March 15, 1989, between the Company and
            First National Bank of Boston, as Rights Agent.  The Rights
            Agreement includes as Exhibit A, the form of Right Certificate, and
            as Exhibit B, the form of Summary of Rights to Purchase Common
            Stock2
10.15    Statement of Partnership to Triangle Partners dated April 12, 19833
10.16    Lease Agreement and Addendum thereto dated January 10, 1983, between
            BBK Partnership and the Company3
10.18    Purchase and Sale Agreement dated January 10, 1983, between BBK
            Partnership, Triangle Partners and the Company3
10.23    Research and Development Agreement, Cross License and Technology
            Transfer Agreement and Agreement for Option to License and Purchase 
            Resulting Technology, all dated February 21, 1985, by and between 
            KLA Development No. 3, Ltd., and the Company4
10.24    Research and Development Agreement dated February 21, 1985, by and
            between KLA Development No. 3, Ltd., and the Company4
10.25    Agreement for Option to License and Purchase Resulting Technology
            dated February 21, 1985, by and between KLA Development No. 3,
            Ltd., and the Company4
10.33    (Research and Development) Agreement dated as of February 1, 1987, by
            and between IBM Corporation and the Company5
10.35    Research and Development Agreement, Cross License and Technology
            Transfer Agreement and Agreement for Option to License and Purchase 
            Resulting Technology, all dated September 30, 1986  and between 
            KLA Development No. 4, Ltd., and the Company5
10.43    Amendment to the Exclusive Marketing Agreement dated February 23,
            1989, by and between Micrion Limited Partnership and the Company6
10.44    Bank Loan Guarantee dated June 29, 1989, by the Company in favor of
            The First National Bank of Boston for the Micrion Limited
            Partnership6
10.45    Distribution Agreement, dated July 1990, by and between Tokyo Electron
            Limited, a Japanese Corporation, and the Company7
10.46    Principal facility Purchase Agreement dated July 1990, including all
            exhibits and amendments; Lease Agreement, Termination of Lease, 
            Lot line adjustment, rights of first refusal, Deeds of Trust7
10.47    Joint Venture Agreement between the Company and Nippon Mining Company,
            Limited, dated September 18, 19908 
10.48    Exercise of Option to Purchase Technology made effective as of 
            September 30, 1989, by and between KLA Development No. 3, and the 
            Company8
10.49    Exercise of Option to Purchase Technology made effective as of January
            1, 1990, by and between KLA Development No. 4, and the Company8
10.51    Guarantee Agreement between First National Bank of Boston and the
            Company, dated June 29, 19898
10.52    Amendment to the Guarantee Agreement between First National Bank of
         Boston and the Company, dated April 19, 19918
10.53    Secured Installment Note between Micrion and First National Bank of
            Boston, dated April 19, 19918
10.54    Micrion Corporation Series E Preferred Stock Purchase Agreement, 
            dated September 13, 19918
10.55    Micrion Corporation Guaranty and Warrant Agreement, dated December 8, 
            19898 
10.57    Stock repurchase and option grant  agreement between Bob Boehlke and 
            the Company, dated April 22, 19918
10.58    Purchase Agreement between the Company and Ono Sokki Co., Ltd., dated
         October 18, 1991 with


                                      23

<PAGE>   24




            certain portions for which confidential treatment has been 
            requested, excise9
10.59    Credit Agreement between Bank of America NT & SA and the Company,
            dated November 15, 1991, as amended July 29, 19929 
10.60    Employment agreement between the Company and Kenneth L. Schroeder 
            dated October 4, 19919
10.61    Amendment of Credit Agreement between Bank of America NT & SA and 
            theCompany, dated October 28, 199210 
10.62    Amendment of Credit Agreement between Bank of America NT & SA and 
            the Company, dated December 31, 199210
10.63    Amendment of Credit Agreement between Bank of America NT & SA and 
            the Company, dated February 28, 199310 
10.64    Amendment of Credit Agreement between Bank of America NT & SA and 
            the Company, dated March 31, 199310 
10.65    Amendment of Credit Agreement between Bank of America NT & SA and 
            the Company, dated June 1, 199310 
10.69    1982 Stock Option Plan, as amended by the Board of Directors on 
            July 20, 199012 
10.70    1981 Employee Stock Purchase Plan,  as amended by the Board of 
            Directors on July 20, 199013 
10.71    1990 Outside Directors Stock Option Plan14 
10.72    1993 Employee Stock Purchase Plan, as amended by the Board of 
            Directors on September 14, 1992.15

(II)     EXHIBITS INCLUDED HEREWITH:

10.66    Amendment of Credit Agreement between Bank of America NT & SA and 
            the Company, dated December 31, 1993 
10.67    Amendment of Credit Agreement between Bank of America NT & SA and 
            the Company, dated March 31, 1994 
10.68    Credit Agreement between Bank of America NT & SA and the
            Company, dated April 30, 1994 
13       1994 Annual Report to Stockholders.  This Annual Report shall not be
            deemed to be filed except to the extent that the information is
            specifically incorporated by reference
21       List of Subsidiaries of KLA Instruments Corporation 
23.1     Consent of Independent Accountants

____________________________________________________________
 1Filed as the same exhibit number as set forth herein to Form S-8, File 
  No. 33-15784, effective August 2, 1987 
 2Filed as exhibit number 1 to Form 8-A, filed effective March 23, 1989 
 3Filed as the same exhibit number as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1983
 4Filed as the same exhibit number as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1985 
 5Filed as the same exhibit number as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1987 
 6Filed as the same exhibit number as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1989 
 7Filed as the same exhibit number as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1990 
 8Filed as the same exhibit number as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1991 
 9Filed as the same exhibit number as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1992 
10Filed as the same exhibit number as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1993

                                      24

<PAGE>   25




11Filed as the same exhibit number to Registrant's registration 
statement no. 33-51819 on Form S-3, dated February 2, 1994 
12Filed as  exhibit number 4.4 as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1990
13Filed as  exhibit number 4.5 as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1990 
14Filed as exhibit number 4.6 as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1991 
15Filed as exhibit number 4.7 as set forth herein to Registrant's 
  Form 10-K for the year ended June 30, 1993

                                      25





<PAGE>   1

                                 EXHIBIT 10.66

             AMENDMENT OF CREDIT AGREEMENT BETWEEN BANK OF AMERICA
                NT & SA AND THE COMPANY DATED DECEMBER 31, 1993

                                      1

<PAGE>   2
                     SEVENTH AMENDMENT TO CREDIT AGREEMENT


         This SEVENTH AMENDMENT TO CREDIT AGREEMENT (this Amendment"), dated as
of December 31, 1993, is entered into by and between KLA INSTRUMENTS
CORPORATION (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION ("the Bank").


                                    Recitals

         A.    The Bank and the Borrower are parties to a Credit Agreement,
dated as OF November 15, 1991 (the "Original Credit Agreement"), as amended by
a Waiver and First Amendment, dated as of July 29, 1992, by a Second Amendment
to Credit Agreement, dated as of October 28, 1992, by a Third Amendment to
Credit Agreement, dated as of December 31, 1992, by a Fourth Amendment to
Credit Agreement, dated as of February 28, 1993, by a Fifth Amendment to Credit
Agreement, dated as of March 31, 1993, and by a Sixth Amendment to Credit
Agreement, dated as of June 1, 1993 (the Original Credit Agreement, as so
amended, is referred to herein as the "Credit Agreement"), pursuant to which
the Bank has extended certain credit facilities to the Borrower and certain of
its subsidiaries.

         B.    The Borrower has requested that the Bank extend this Credit
Agreement,
 as set forth in this Seventh Amendment.

         C.     The Bank is willing to amend the Credit Agreement subject to
the terms and conditions of this Amendment.


         NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as follows:


                 1.    Defined Terms.  Unless otherwise defined herein,
capitalized terms used herein shall have the meanings, if any, assigned to them
in the Credit Agreement.

                                      2

<PAGE>   3

                 2.     Amendments to Credit Agreement.

                          (a)   The first sentence of Paragraph 1.1 of the
                 Credit Agreement is hereby amended by replacing the phrase
                 "December 31, 1993" with the phrase "March 31, 1994."

                          (b)   The sixth sentence of Paragraph 1.2(b) of the
                 Credit Agreement is hereby amended by replacing the phrase
                 "December 31, 1993" with the phrase "March 31, 1994."

                          (c)   The definition of the term "CD Rate Interest
                 Period" occurring in Paragraph 1.3 (g) of the Credit Agreement
                 is hereby amended by replacing the phrase "beyond June 30,
                 1994" with the phrase "beyond September 30, 1994."

                          (d)   The definition of the term "Offshore Rate
                 Interest Period" occurring in Paragraph 1.4 (f) of the Credit
                 Agreement is hereby amended by replacing the phrase "beyond
                 June 30, 1994" with the phrase "beyond September 30, 1994".

                          (e)   Paragraph 1.5 (d) of the Credit Agreement is
                 hereby amended by replacing the phrase "June 30, 1994" with
                 the phrase "December 31, 1994".

                          (f)   Section 1.6 (d) of the Credit Agreement is
                 hereby amended to read in full as follows: "No standby
                 letter of credit shall expire later than March 31, 1995."
                

                          (g)   The first sentence of Paragraph 1.9 of the
                 Credit Agreement is hereby amended by replacing the phrase
                 "December 31, 1993" with the phrase "March 31, 1994."

                          (h)   The second sentence of Paragraph 1.9 of the
                 Credit Agreement is hereby amended by replacing the phrase
                 "and the last period which shall end on December 31, 1993"
                 with the phrase "and the last period which shall end on March
                 31, 1994."

                          (i)   The third sentence of Paragraph 1.9 of the
                 Credit Agreement is hereby amended by replacing the phrase
                 "December 31, 1993" with the phrase "March 31, 1994." 



                                      3

<PAGE>   4
                 3. Representations and Warranties.  The Borrower hereby
represents and warrants to the Bank as follows:

                          (a)   No Event of Default has occurred and is
                 continuing, and no event has occurred or condition exists
                 which with notice or the passage of time would become an Event
                 of Default..

                          (b)   The execution, delivery, and performance by the
                 Borrower of this Amendment have been duly authorized by all
                 necessary corporate and other action and do not and will not
                 require any registration with, consent or approval of, notice
                 to or action by, any person (including any governmental
                 agency) in order to be effective and enforceable.  The Credit
                 Agreement as amended by this Amendment constitutes the legal,
                 valid, and binding obligations of the Borrower, enforceable
                 against it in accordance with its respective terms,  without
                 defense, counterclaim or offset.

                         (c)   All representations and warranties of the
                 Borrower contained in the Credit Agreement are true and
                 correct.

                          (d)    The Borrower is entering into this Amendment
                 on the basis of its own investigation and for its own reasons,
                 without reliance upon the Bank or any other person.


                 4.     Effective Date.  This Amendment will become effective
as of December 31, 1993 (the" Effective Date") provided that each of the
following conditions precedent has been satisfied:

                        (a)       The Bank has received from the Borrower a
                 duly executed original of this Amendment.

                        (b)       All representations and warranties contained
                 herein are true and correct as of the Effective Date.
                                  


                 5.     Reservation of Rights.      The Borrower acknowledges
and agrees that the execution and delivery by the Bank of this Amendment shall
not be deemed to create a course of dealing or otherwise obligate the Bank to
forbear or execute similar amendments under the same or similar circumstances
in the future.

                                      4

<PAGE>   5
                 6.    Miscellaneous.

                          (a)    Except as herein expressly amended, all terms,
                 covenants, and provisions of the Credit Agreement are and
                 shall remain in full force and effect and all references
                 therein to such Credit Agreement shall henceforth refer to the
                 Credit Agreement as amended by this Amendment.  This Amendment
                 shall be deemed incorporated into, and a part of, the Credit
                 Agreement.

                          (b)    This Amendment shall be binding upon and inure
                 to the benefit of the parties hereto and thereto and their
                 respective successors and assigns.  No third party
                 beneficiaries are intended in connection with this Amendment.

                          (c)   This Amendment shall be governed by and 
                 construed in accordance with the law of the State of
                 California.

                          (d)     This Amendment may be executed in any number
                 of counterparts, each of which shall be deemed an original,
                 but all such counterparts together shall  constitute but one
                 and the same instrument.

                          (e)    This Amendment, together with the Credit
                 Agreement, contains the entire and exclusive agreement of the
                 parties hereto with reference to the matters discussed herein
                 and therein.  This Amendment supersedes all prior drafts and
                 communications with respect thereto.  This Amendment may not
                 be amended except in writing executed by both of the parties
                 hereto.

                          (f)    If any term or provision of this Amendment
                 shall be deemed prohibited by or invalid under any applicable
                 law, such provision shall be invalidated without affecting the
                 remaining provisions of this Amendment or the Credit
                 Agreement, respectively.

                          (g)   The Borrower covenants to pay to or reimburse
                 the Bank, upon demand, for all costs and expenses ( including
                 allocated costs of in-house counsel) incurred in connection
                 with the development, preparation, negotiation, execution and
                 delivery of this Amendment, including without limitation
                 appraisal, audit, search and filing fees incurred in
                 connection therewith.

                                      5

<PAGE>   6
         IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.


                          KLA INSTRUMENTS CORPORATION

                                   By:
                                   __________________________________________
                            
                                   Title:
                                   __________________________________________


                            
                                    BANK OF AMERICA NATIONAL TRUST
                                    AND SAVINGS ASSOCIATION

                                    By:
                                     _________________________________________
                                     Kevin McMahon, Vice President

                                      6



<PAGE>   1





                                 EXHIBIT 10.67

    AMENDMENT OF CREDIT AGREEMENT BETWEEN BANK OF AMERICA NT & SA AND THE
                         COMPANY DATED MARCH 31, 1994

<PAGE>   2

                     EIGHTH AMENDMENT TO CREDIT AGREEMENT

         This EIGHTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as
of  March 31, 1994,  is entered into by and between KLA INSTRUMENTS
CORPORATION (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION ("the Bank").

                                    Recitals

         A.  The Bank and the Borrower are parties to a Credit Agreement, dated
as of November 15, 1991 (the "Original Credit Agreement"),  as amended by a
Waiver and First Amendment,  dated as of July 29, 1992, by a Second Amendment
to Credit Agreement,  dated as of October 28, 1992, by a Third Amendment to
Credit Agreement,  dated as of December 31, 1992, by a Fourth Amendment to
Credit Agreement,  dated as of February 28, 1993, by a Fifth Amendment to
Credit Agreement, dated as of March 31, 1993, by a Sixth Amendment to Credit
Agreement, dated as of June 1, 1993 and by a Seventh Amendment to Credit
Agreement, dated as of December 31, 1993 (the Original Credit Agreement, as so
amended, is referred to herein as the "Credit Agreement") , pursuant to which
the Bank has extended certain credit facilities to the Borrower and certain of
its subsidiaries.

         B.  The Borrower
 has requested that the Bank extend the Credit
Agreement, as set forth in this Eighth Amendment.

         C.   The Bank is willing to amend the Credit Agreement subject to the
terms and conditions of this Amendment.

         NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as follows:


         1.   Defined Terms.  Unless otherwise defined herein, capitalized
terms used herein shall have the meanings, if any, assigned to them in the
Credit Agreement.


         2.   Amendments to Credit Agreement.

                 (a)   The first sentence of Paragraph 1.1 of the Credit
         Agreement is hereby amended by replacing the phrase "March 31, 1994"
         with the phrase "April 30, 1994".





                                       1

<PAGE>   3

                 (b)   The sixth sentence of Paragraph 1.2(b) of the Credit
         Agreement is hereby amended by replacing the phrase "March 31, 1994"
         with the phrase "April 30, 1994".

                 (c)  The first sentence of Paragraph 1.9 of the Credit
         Agreement             is hereby amended by replacing the phrase "March
         31, 1994" with the phrase "April 30, 1994".

                 (d)  The second sentence of Paragraph 1.9 of the Credit
         Agreement is hereby amended by replacing the phrase "and the last
         period which shall end on March 31, 1994" with the phrase "and the
         last period which shall end on April 30, 1994".

                 (e)  The third sentence of Paragraph 1.9 of the Credit
         Agreement is hereby amended by replacing the phrase "March 31, 1994"
         with the phrase "April 30, 1994".


         3.   Representations and Warranties.   The Borrower hereby represents
              and warrants to the Bank as follows:

                 (a)  No Event of Default has occurred and is continuing, and
         no event has occurred or condition exists which with notice or the
         passage of time would become an Event of Default.

                 (b)  The execution, delivery, and performance by the Borrower
         of this Amendment have been duly authorized by all necessary corporate
         and other action and do not and will not require any registration
         with, consent or approval of, notice to or action by, any person
         (including any governmental agency) in order to be effective and
         enforceable.  The Credit Agreement as amended by this Amendment
         constitutes the legal, valid, and binding obligations of the Borrower,
         enforceable against it in accordance with its respective terms,
         without defense, counterclaim or offset.

                 (c)  All representations and warranties of the Borrower
         contained in the Credit Agreement are true and correct.

                 (d)   The Borrower is entering into this Amendment on the
         basis of its own investigation and for its own reasons, without
         reliance upon the Bank or any other person.


         4.   Effective Date.  This Amendment will become effective as of MARCH
31, 1994 (the" Effective Date") provided that each of the following conditions
precedent has been satisfied:





                                       2

<PAGE>   4
                 (a)   The Bank has received from the Borrower a duly executed
         original of this Amendment.

                 (b)   All representations and warranties contained herein are
         true and correct as of the Effective Date.


         5.   Reservation of Rights.  The Borrower acknowledges and agrees that
the execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to forbear or execute
similar amendments under the same or similar circumstances in the future.

         6. Miscellaneous.

                 (a)   Except as herein expressly amended, all terms,
         covenants, and provisions of the Credit Agreement are and shall remain
         in full force and effect and all references therein to such Credit
         Agreement shall henceforth refer to the Credit Agreement as amended by
         this Amendment.  This Amendment shall be deemed incorporated into, and
         a part of, the Credit Agreement.

                 (b)   This Amendment shall be binding upon and inure to the
         benefit of the parties hereto and thereto and their respective
         successors and assigns.  No third party beneficiaries are intended in
         connection with this Amendment.

                 (c)   This Amendment shall be governed by and construed in
         accordance with the law of the State of California.

                 (d)   This Amendment may be executed in any number of
         counterparts, each of which shall be deemed an original, but all such
         counterparts together shall constitute but one and the same
         instrument.

                 (e)   This Amendment, together with the Credit Agreement,
         contains the entire and exclusive agreement of the parties hereto with
         reference to the matters discussed herein and therein.  This Amendment
         supersedes all prior drafts and communications with respect thereto.
         This Amendment may not be amended except in writing executed by both
         of the parties hereto.

                 (f)   If any term or provision of this Amendment shall be
         deemed prohibited by or invalid under any applicable law, such
         provision shall be invalidated without affecting the remaining
         provisions of this Amendment or the Credit Agreement, respectively.

                 (g)  The Borrower covenants to pay to or reimburse the Bank,
         upon demand, for all costs and expenses ( including allocated costs of
         in-house counsel) incurred in





                                       3

<PAGE>   5
          connection with the development, preparation, negotiation, execution 
          and delivery of this Amendment, including without limitation 
          appraisal, audit, search and filing fees incurred in connection 
          therewith.



IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.


                                  KLA INSTRUMENTS CORPORATION


                                  By: _________________________________  

                                  Title:



                                  BANK OF AMERICA NATIONAL TRUST
                                  AND SAVINGS ASSOCIATION

                                  By:_____________________________________
                                  Stephen L Parry, Vice President





                                       4



<PAGE>   1





                                 EXHIBIT 10.68

 CREDIT AGREEMENT BETWEEN BANK OF AMERICA NT & SA AND THE COMPANY DATED APRIL
                                   30, 1994

<PAGE>   2

________________________________________________________________________________
________________________________________________________________________________





                                CREDIT AGREEMENT



                           DATED AS OF APRIL 30, 1994



                                    BETWEEN


                          KLA INSTRUMENTS CORPORATION



                                      AND


                         BANK OF AMERICA NATIONAL TRUST
                            AND SAVINGS ASSOCIATION






________________________________________________________________________________
________________________________________________________________________________

<PAGE>   3
                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
Section                                                                                                                   Page
 <S>                                                                                                                        <C>
                                                                             ARTICLE I                      
                                                     Definitions and Financial Requirements.  . . . . . . . . . . . . . .    1
                                                     --------------------------------------                                  
                                                                                                            
  1.01  Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1
  1.02  Financial Requirements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    5
                                                                                                            
                                                                   ARTICLE II                               
                                                              The Credit Facilities . . . . . . . . . . . . . . . . . . .    5
                                                              ---------------------                                          
                                                                                                            
  2.01  The Revolving Facility  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    5
  2.02  Advances Under the Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    6
  2.03  Commercial Letters of Credit under the Revolving Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . .    7
  2.04  Standby Letters of Credit Under the Revolving Facility  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    7
  2.05  Local Currency Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    8
  2.06  Mandatory Payment   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8
  2.07  Facility Fee      . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8
  2.08  Default Rate  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9
  2.09  Early Termination of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9
  2.10  Prior Credit Agreement  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9
                                                                                                            
                                                                   ARTICLE III                              
                                            Extensions of Credit, Payments and Interest Calculations  . . . . . . . . . . .  9
                                            --------------------------------------------------------                         
                                                                                                            
  3.01  Requests for Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9
  3.02  Disbursements and Payments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9
  3.03  Branch Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9
  3.04  Evidence of Indebtedness  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    9
  3.05  Interest Calculation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
  3.06  Late Payments; Compounding  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
  3.07  Business Day  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
  3.08  Taxes and Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10
  3.09  Illegality  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11
  3.10  Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11
  3.11  Funding Losses  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11
  3.12  Inability to Determine Rates  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11
  3.13  Certificate
 of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11
  3.14 Debits to Borrower's Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   11
  3.15  Survival  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12
                                                                                                            
                                                                   ARTICLE IV                               
                                                      Conditions to Availability of Credit  . . . . . . . . . . . . . . .   12
                                                      ------------------------------------                                   
                                                                                                            
  4.01  Conditions to First Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12
  4.02  Conditions to Each Extension of Credit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   12
</TABLE>
                





                                       i

<PAGE>   4

<TABLE>
<CAPTION>
Section                                                                                                                   Page
  <S>                                                                                                                       <C>
                                                                    ARTICLE V                              
                                                         Representations and Warranties   . . . . . . . . . . . . . . . .   13
                                                         ------------------------------                                     
                                                                                                           
  5.01  Corporate Existence and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   13
  5.02  Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   13
  5.03  Enforceability  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   13
  5.04  Compliance with Laws  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   13
  5.05  Permits, Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   13
  5.06  Litigation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   13
  5.07  No Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14
  5.08  Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14
  5.09  Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14
  5.10  Information Submitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14
  5.11  No Material Adverse Effect  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14
  5.12  ERISA Compliance  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14
  5.13  Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14
                                                                                                           
                                                                    ARTICLE VI                    
                                                              Affirmative Covenants . . . . . . . . . . . . . . . . . . .   15
                                                              ---------------------                                         
                                                                                                           
  6.01  Notices of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15
  6.02  Financial and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15
  6.03  Books, Records, Audits and Inspections  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15
  6.04  Use of Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15
  6.05  Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16
  6.06  Compliance with Laws  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16
  6.07  Change in Name, Structure or Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16
  6.08  Existence and Properties  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16
  6.09  Additional Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16
                                                                                                           
                                                                   ARTICLE VII                             
                                                               Negative Covenants   . . . . . . . . . . . . . . . . . . .   16
                                                               ------------------                                           
  7.01  Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16
  7.02  Tangible Net Worth  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   16
  7.03  Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.04  Total Liabilities to Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.05  Acquisitions  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.06  Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.07  Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.08  Liquidations and Mergers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.09  Sale of Assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.10  Consecutive Quarterly Losses; Losses in One Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.11  Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
  7.12  Regulations G, T, U, and X  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
                                                                                                           
                                                                  ARTICLE VIII                             
                                                                Events of Default . . . . . . . . . . . . . . . . . . . .   18
                                                                -----------------                                           
                                                                                                           
  8.01  Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
</TABLE>
            





                                      ii

<PAGE>   5

<TABLE>
<CAPTION>
Section                                                                                                                   Page
  <S>                                                                                                                       <C>
              (a)  Failure to Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (b)  Breach of Representation or Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (c)  Specific Defaults  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (d)  Other Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (e)  Trade Suits  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (f)  Judgments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (g)  Failure to Pay Debts; Voluntary Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (h)  Involuntary Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (i)  Default of Other Financial Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (j)  Default under other Credit Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18
              (k)  Default of Other Bank Obligations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   19
              (l)  Material Adverse Effect  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   19
              (m)  ERISA  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   19
              (n)  Change of Control  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   19
  8.02  Remedies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   19
                                                                                                        
                                                                   ARTICLE IX                           
                                                                  Miscellaneous . . . . . . . . . . . . . . . . . . . . .   20
                                                                  -------------                                         
                                                                                                        
  9.01  Successors and Assigns  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20
  9.02  Consents and Waivers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20
  9.03  Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20
  9.04  Costs and Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20
  9.05  Integration; Amendment  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20
  9.06  Borrower's Documents  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20
  9.07  Participations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20
  9.08  General Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20
  9.09  Arbitration; Reference Proceeding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   21
  9.10  Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   21
  9.11  Headings; Interpretation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   22
  9.12  Severability  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   22
  9.13  Counterparts  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   22
</TABLE>
          





                                      iii

<PAGE>   6





                                CREDIT AGREEMENT


              THIS CREDIT AGREEMENT  (this "Agreement") is entered into as of
April 30, 1994, between  KLA INSTRUMENTS CORPORATION  (the "Borrower"), and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank").

              In consideration of the mutual covenants and agreements contained
herein, the Borrower and the Bank agree as follows:

                                   ARTICLE I

                    DEFINITIONS AND FINANCIAL REQUIREMENTS.

        1.01  Definitions.  The following terms (including plural and singular
          versions thereof) have the meanings indicated:

        "Acceptable Subsidiary":  a Subsidiary of the Borrower acceptable to
the Bank in its sole discretion that (a) is specified as a "Borrower" on a
continuing guaranty executed by the Borrower in form and substance satisfactory
to the Bank, and (b) has executed such credit and related documentation with
and in favor of the Bank as the Bank may request.

        "Advance":  an advance hereunder.

        "Availability Period":  the period commencing on the date of this
Agreement and ending on the date that is the earlier to occur of (a) 12/31/94,
and (b) the date on which the Bank's commitment to extend credit hereunder
terminates.

        "Business Day":  any day other than a Saturday, a Sunday, or other day
on which commercial banks in San Francisco, California, are authorized or
required by law to close and, if the applicable Business Day relates to any
Offshore Rate Advance, means such a day on which dealings are carried on in the
applicable offshore interbank market.

        "CD Rate":  for any CD Rate Interest Period, the rate of interest
(rounded upward to the next 1/100th of 1%) determined pursuant to the following
formula:

                              CD Rate =Certificate of Deposit Rate + Assessment
                                       1.00 - Reserve Percentage        Rate

       Where:

               "Assessment Rate" means, for any day of such CD Rate Interest
               Period, the rate determined by the Bank as equal to the annual
               assessment rate in effect on the first day of such CD Rate
               Interest Period that is payable to the Federal Deposit Insurance
               Corporation ("FDIC") by a member of the Bank Insurance Fund that
               is classified as adequately capitalized and within supervisory
               subgroup "A" (or a comparable successor assessment risk
               classification within the meaning of 12 C.F.R. Section 327.3(d))
               for insuring time deposits at offices of such member in the
               United States, or, in the event that the





                                       1

<PAGE>   7



               FDIC shall at any time hereafter cease to assess time deposits
               based upon such classifications or successor classifications,
               equal to the maximum annual assessment rate in effect on such 
               day that is payable to the FDIC by commercial banks (whether or  
               not applicable to the Bank) for insuring time deposits at 
               offices of such banks in the United States.

               "Certificate of Deposit Rate" means, for any CD Rate Interest
               Period, the rate of interest per annum determined by the Bank to
               be the arithmetic mean (rounded upward to the nearest 1/100th of
               1%) of the rates notified to the Bank as the rates of interest
               bid by two or more certificate of deposit dealers of recognized
               standing selected by the Bank for the purchase at face value of
               dollar certificates of deposit issued by major United States
               banks, for a maturity comparable to the CD Rate Interest Period
               and in the approximate amount of the CD Rate Advance to be made,
               at the time selected by the Bank on the first day of such CD
               Rate Interest Period.

               "Reserve Percentage" means, for any CD Rate Interest Period the
               maximum reserve percentage (expressed as a decimal, rounded
               upward to the nearest 1/100th of 1%), as determined by the Bank,
               in effect on the first day of such interest period (including
               any ordinary, marginal, emergency, supplemental, special and
               other reserve percentages) prescribed by the FRB for determining
               the maximum reserves to be maintained by member banks of the
               Federal Reserve System with deposits exceeding $1,000,000,000
               for new non-personal time deposits for a period comparable to
               the CD Rate Interest Period and in an amount of $100,000 or
               more.
       "CD Rate Advance":  an Advance that bears interest based on the CD Rate.

       "CD Rate Interest Period":  for each CD Rate Advance, the period
commencing on the date the CD Rate Advance begins to bear interest at a rate
based on the CD Rate and ending 30, 60, 90, or 180 days thereafter, as
requested by the Borrower; provided, however, that no such CD Rate Interest
Period shall extend beyond the Final Maturity Date.

       "Closing Date":  the date on which all conditions to the initial
extension of credit hereunder are satisfied.

       "Code":  the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder as from time to time in effect.

       "Credit Documents":  collectively, this Agreement and each other
agreement, documents and instrument now or hereafter delivered to the Bank
(including any Offshore Credit Provider) in connection with the credits
established herein and the transactions contemplated hereby.

"Credit Limit":  the amount $10,000,000 or the Equivalent Amount thereof.

       "Default":  any event or circumstance which, with the giving of notice,
the lapse of time, or both, would (if not cured or otherwise remedied during
such time) constitute an Event of Default.

       "Dollars", "dollars" and "$":  each, lawful money of the United States.

       "Dollar Advances":  specified in subsection 2.01(b).

       "Environmental Laws":  any foreign, federal, state, local, or municipal
laws, rules, orders, regulations, statutes, ordinances, codes, decrees,
requirements of any governmental authority, any and 

                                      2

<PAGE>   8

all requirements of law and any and all common law requirements, rules, and 
bases of liability regulating, relating to, or imposing liability or standards 
of conduct concerning pollution or protection of human health or the 
environment, as now or may at any time hereafter may be in effect.


       "Equivalent Amount":  (a) whenever this Agreement requires or permits a
determination on any date of the equivalent in dollars of an amount expressed
in a currency other than dollars, the equivalent amount in dollars of any
amount expressed in a currency other than dollars as determined by the Bank on
such date on the basis of the Spot Rate for the purchase of dollars with such
other currency on the relevant date; or (b) whenever this Agreement requires or
permits a determination on any date of the equivalent in a currency other than
dollars of an amount expressed in dollars, the equivalent amount in a currency
other than dollars of an amount expressed in dollars as determined by the Bank
on such date on the basis of the Spot Rate for the purchase of such other
currency with dollars on the relevant date.

       "ERISA":  the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder as from time to
time in effect.

       "ERISA Event":  (a) a Reportable Event with respect to a Pension Plan;
(b) a withdrawal by the Borrower from a Pension Plan subject to Section 4063 of
ERISA during a plan year in which it was a substantial employer (as defined in
Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as
such a withdrawal under Section 4062(e) of ERISA; (c) the filing of a notice of
intent to terminate, the treatment of a plan amendment as a termination under
Section 4041 or 4041A of ERISA or the commencement of proceedings by the PBGC
to terminate a Pension Plan subject to Title IV of ERISA; (d) a failure by the
Borrower to make required contributions to a Pension Plan or other Plan subject
to Section 412 of the Code; (e) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Pension Plan; (f) the
imposition of any liability under Title IV of ERISA, other than PBGC premiums
due but not delinquent under Section 4007 of ERISA, upon the Borrower; or (g)
an application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code with respect to any Pension Plan.

       "Event of Default":  any event listed in Article VIII of this Agreement.

       "FDIC":  the Federal Deposit Insurance Corporation, or any entity
succeeding to any of its principal functions.

       "Final Maturity Date":  (a) in respect of any Advances, June 30, 1995;
(b) in respect of any commercial letters of credit, June 30, 1995; (c) in
respect of any standby letters of credit, December 31, 1995.

       "Floating Rate":  specified in subsection 2.02(a).

       "FRB":  the Board of Governors of the Federal Reserve System, or any
entity succeeding to any of its principal functions.

       "Hazardous Substance":  any hazardous or toxic substance, material, or
waste, defined, listed, classified, or regulated as such in or under any
Environmental Laws, including asbestos, petroleum, or petroleum products
(including gasoline, crude oil, or any fraction thereof), polychlorinated
biphenyls, and urea-formaldehyde insulation.

       "IRS":  the Internal Revenue Service or any entity succeeding to any of
its principal functions under the Code.





                                       3

<PAGE>   9



       "L/C Outstanding Amount":  at any time, the undrawn amount at such time
of any letter of credit issued hereunder, plus the amount of all drafts or
drawings paid or accepted by the Bank which have not yet been reimbursed to the
Bank, plus any other obligation or liability of the Borrower or any Acceptable
Subsidiary to the Bank with respect to any letter of credit issued under this
Agreement.

       "Local Currency":  specified in subsection 2.01(b).

       "Local Currency Advance":  specified in subsection 2.01(b).

       "Material Adverse Effect":  (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, condition
(financial or otherwise) or prospects of the Borrower or the Borrower and its
Subsidiaries taken as a whole; (b) a material impairment of the ability of the
Borrower or any Acceptable Subsidiary to perform under any Credit Document; or
(c) a material adverse effect upon the legality, validity, binding effect or
enforceability of any Credit Document.

       "Offshore Credit Provider":  a foreign office, foreign branch or foreign
affiliate of the Bank, acceptable to the Bank.

       "Offshore Currency":  specified in subsection 2.01(b).

       "Offshore Currency Advance":  specified in subsection 2.01(b).

       "Offshore Rate":  for each Offshore Rate Interest Period, the rate of
interest (rounded upward to the next 1/16th of 1%) determined pursuant to the
following formula:

               Offshore Rate =            Offered Rate              
                               1.00 - Eurodollar Reserve Percentage

               Where:
                        "Offered Rate" means the rate of interest at which
               deposits in the applicable currency in the approximate amount of
               the Offshore Rate Advance to be made and having a maturity
               comparable to such Offshore Rate Interest Period would be
               offered by the Bank's London Branch (or such other office as may
               be designated for such purpose by the Bank) to major banks in
               the London interbank market upon request of such banks at
               approximately 11:00 a.m. (London, England time) two Business
               Days prior to the first day of such Offshore Rate Interest
               Period.

                        "Eurodollar Reserve Percentage" means, for any Offshore
               Rate Interest Period, the maximum reserve percentage (expressed
               as a decimal, rounded upward to the next 1/100th of 1%) in
               effect on the first day of such Offshore Rate Interest Period
               (whether or not applicable to the Bank) under regulations issued
               from time to time by the FRB for determining the maximum reserve
               requirement (including any emergency, supplemental or other
               marginal reserve requirement) with respect to Eurocurrency
               funding (currently referred to as "Eurocurrency liabilities")
               having a term comparable to such Offshore Rate Interest Period.

       "Offshore Rate Advance":  an Advance for which interest is based on the
Offshore Rate.

       "Offshore Rate Interest Period":  for each Offshore Rate Advance the
period commencing on the date the Offshore Rate Advance begins to bear interest
at a rate based on the Offshore Rate and ending one, two, three, or six months
thereafter, as requested by the Borrower; provided, however, that





                                       4

<PAGE>   10



the last day of each Offshore Rate Interest Period shall be determined in
accordance with the practices of the applicable offshore interbank markets as
from time to time in effect, and provided further that no such interest period
shall extend beyond the Final Maturity Date.

       "PBGC":  the Pension Benefit Guaranty Corporation or any entity
succeeding to any of its principal functions under ERISA.

       "Pension Plan":  a pension plan (as defined in Section 3(2) of ERISA)
subject to Title IV of ERISA which the Borrower sponsors, maintains, or to
which it makes, is making, or is obligated to make contributions, or in the
case of a multiple employer plan (as described in Section 4064(a) of ERISA) has
made contributions at any time during the immediately preceding five (5) plan
years.

       "Plan":  an employee benefit plan (as defined in Section 3(3) of ERISA)
which the Borrower sponsors or maintains or to which the Borrower makes, is
making, or is obligated to make contributions and includes any Pension Plan.

       "Reference Rate":  for any day, the rate of interest in effect for such
day as publicly announced from time to time by the Bank in San Francisco,
California, as its "reference rate."  It is a rate set by the Bank based upon
various factors including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans, which may be priced at, above, or below such announced rate.  Any change
in the reference rate announced by the Bank shall take effect at the opening of
business on the day specified in the public announcement of such change.

       "Reference Rate Advance":  an Advance that bears interest based on the
Reference Rate.

       "Reportable Event":  any of the events set forth in Section 4043(b) of
ERISA or the regulations thereunder, other than any such event for which the
30-day notice requirement under ERISA has been waived in regulations issued by
the PBGC.

       "Revolving Facility":  the line of credit described in Section 2.01.

       "Spot Rate":  for a currency, the rate quoted by the Bank as the spot
rate for the purchase by the Bank of such currency with another currency
through its Foreign Exchange Trading Center #5193, San Francisco, California,
or such other of the Bank's offices as it may designate from time to time, at
approximately 8:00 a.m. (San Francisco time) on the date two Business Days
prior to the date as of which the foreign exchange computation is made.

       "Subsidiary":  of the Borrower, any corporation, association,
partnership, joint venture, or other business entity of which more than 50% of
the voting stock or other equity interests (in the case of entities other than
corporations), is owned or controlled directly or indirectly by the Borrower or
one or more Subsidiaries of the Borrower or a combination thereof.

       "Unfunded Pension Liability":  the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance with the assumptions used for funding
the Pension Plan pursuant to Section 412 of the Code for the applicable plan
year.

       1.02  Financial Requirements.  Unless otherwise specified in this
Agreement, all accounting terms used in this Agreement shall be interpreted,
all financial computations required under this Agreement shall be made, and all
financial information required under this Agreement shall be prepared, in
accordance with generally accepted accounting principles in effect from time to
time in the United States, consistently applied.





                                       5

<PAGE>   11




                                   ARTICLE II

                             THE CREDIT FACILITIES

       2.01  The Revolving Facility.  (a)  From time to time during the
Availability Period, subject to the terms and provisions hereof, the Bank, on a
revolving basis, will (i) make Advances to the Borrower or an Acceptable
Subsidiary , (ii) create and issue commercial and standby letters of credit for
the Borrower's or an Acceptable Subsidiary's account.

               (b)  Advances hereunder may be made in (i) dollars ("Dollar
Advances"), (ii) in a lawful currency other than dollars which is freely
transferable and convertible into dollars and is traded in the offshore
interbank currency markets at the time of the Advance (an "Offshore Currency")
("Offshore Currency Advances"), or (iii) in a lawful currency other than
dollars which is available at a branch or affiliate of the Bank located in a
country other than the United States and is the legal tender of that country
where the branch or affiliate is located (a "Local Currency") ("Local Currency
Advances").

               (c)  The aggregate of (i) all Dollar Advances , (ii) the
Equivalent Amount of all Offshore Currency Advances and Local Currency
Advances,  and (iii) the L/C Outstanding Amount of all letters of credit, may
not exceed at any one time the Credit Limit.

       2.02  Advances Under the Revolving Facility.  (a)  Subject to the other
provisions of this Section, Dollar Advances under the Revolving Facility shall
bear interest at a rate per annum equal to the Reference Rate plus 0.00
percentage points per annum (the Reference Rate plus 0.00 percentage points per
annum is referred to herein as the "Floating Rate").  The Borrower shall pay or
cause the applicable Acceptable Subsidiary to pay interest monthly, on the 1st
day of each month until the Final Maturity Date, on which date all accrued and
unpaid interest shall be due and payable.  The Borrower shall repay or cause
the applicable Acceptable Subsidiary to repay the principal amount of each
Reference Rate Advance on the date such advance is converted into an Offshore
Rate Advance or a CD Rate Advance under subsections (b) or (c) below, and on
the Final Maturity Date.

               (b) In lieu of the interest rate described above, the Borrower
or the applicable Acceptable Subsidiary may elect during the Availability
Period to have all or portions of Advances under the Revolving Facility be in
dollars or an Offshore Currency and bear interest at the Offshore Rate plus
0.875%  per annum during an Offshore Rate Interest Period, subject to the
following requirements:

               (i)   Each Offshore Rate Advance shall be for an amount not less
       than $500,000 or the Equivalent Amount thereof if the related Offshore
       Rate Interest Period is 30 days or longer, and, if the related Offshore
       Rate Interest Period is less than 30 days, shall be in an amount not
       less than an amount which, when multiplied by the number of days in the
       related Offshore Rate Interest Period, is not less than $15,000,000, or
       the Equivalent Amount thereof.

               (ii)  The Borrower shall pay or shall cause the applicable
       Acceptable Subsidiary to pay interest on each Offshore Rate Advance on
       the last day of the Offshore Rate Interest Period for such Advance;
       provided, however, that if any Interest Period for a Offshore Rate
       Advance exceeds three months, interest shall also be payable on the date
       which falls three months after the beginning of such Interest Period and
       on each date which falls three months after any such interest payment
       date. The Borrower shall repay or shall cause the applicable Acceptable
       Subsidiary to repay the principal balance of each Offshore Rate Advance
       on the last day of the Offshore Rate Interest Period for such Advance,
       and (if sooner occurring) on the Final Maturity Date.





                                       6

<PAGE>   12




               (iii)  Any payment of an Offshore Rate Advance prior to the last
day of the Offshore Rate Interest Period for such Advance, whether voluntary,
by reason of acceleration or otherwise,  including any mandatory payments
required under this Agreement and applied by the Bank to an Offshore Rate 
Advance, shall be accompanied by the amount of accrued interest on the amount 
repaid and by the amount (if any) required by Section 3.11.

               (c)  In lieu of the interest rates described above in this
Section, the Borrower or the applicable Acceptable Subsidiary may elect during
the Availability Period to have all or portions of Advances under the Revolving
Facility be in dollars and bear interest at the CD Rate plus 0.875% per annum
during a CD Rate Interest Period, subject to the following requirements:

               (i)  Each CD Rate Advance shall be in an amount not less than a
minimum amount satisfactory to the Bank.

               (ii)  The Borrower shall pay or shall cause the applicable
       Acceptable Subsidiary to pay interest on each CD Rate Advance on the
       last day of the CD Rate Interest Period for such Advance; provided,
       however, that if any Interest Period for a CD Rate Advance exceeds 90
       days, interest shall also be payable on the date which falls 90 days
       after the beginning of such Interest Period and on each date which falls
       90 days after any such interest payment date.  The Borrower shall repay
       or shall cause the applicable Acceptable Subsidiary to repay the
       principal balance of each CD Rate Advance on the last day of the CD Rate
       Interest Period for such Advance, and (if sooner occurring) on the Final
       Maturity Date.

               (iii)  Any payment of a CD Rate Advance prior to the last day of
       the CD Rate Interest Period for such Advance, whether voluntary, by
       reason of acceleration or otherwise, including mandatory payments
       required under this Agreement and applied by the Bank to a CD Rate
       Advance, shall be accompanied by the amount of accrued interest on the
       amount repaid and by the amount (if any) required by Section 3.11.

               (d)  For purposes of determining the Borrower's and any
applicable Acceptable Subsidiary's compliance with subsection 2.01(c), the
Equivalent Amount of Offshore Currency Advances shall be determined, and
redetermined by the Bank as of the applicable borrowing date in respect of such
Advance (including the date such Advance was converted into an Offshore
Currency Advance under subsection 2.02(b)), and on the last Business Day of
each month.

       2.03 Commercial Letters of Credit under the Revolving Facility.  (a)
Each commercial letter of credit shall be denominated in dollars and issued
pursuant to the terms and conditions hereof and of a Bank standard form
Application and Security Agreement for Commercial Letter of Credit (or such
other form as the Bank may require) executed by the Borrower or an Acceptable
Subsidiary.

               (b)  Each commercial letter of credit shall:

               (i)    expire on or before 180 days after the date such letter
       of credit is issued, but in no event later than the Final Maturity Date;

(ii)   require drafts payable in dollars at sight or up to 180 days after
sight; and

               (iii)   be otherwise in form and substance and in favor of
beneficiaries and for purposes satisfactory to the Bank.





                                       7

<PAGE>   13



               (c)  The Borrower shall pay or cause the applicable Acceptable
Subsidiary to pay to the Bank issuance fees, negotiation fees, and other fees
at the times and in the amounts the Bank advises the Borrower from time to time
as being applicable to the Borrower's or the Acceptable Subsidiary's commercial
letters of credit.

               (d)  Each draft paid by the Bank under a commercial letter of
credit issued hereunder shall be reimbursed by the Borrower or the applicable
Acceptable Subsidiary to the Bank on the date such draft is paid by the Bank.
Any sum owed to the Bank with respect to a commercial letter of credit issued
for the Borrower's or any Acceptable Subsidiary's account which is not paid
when due shall, at the option of the Bank in each instance, be deemed to be an
Advance to the Borrower outstanding under the Revolving Facility and shall
thereafter bear interest at the Floating Rate.

               (e) At the expiration of the Availability Period, the Bank may
require the Borrower to provide cash collateral in the amount of the L/C
Outstanding Amount of any commercial letters of credit outstanding under this
Agreement, and, in  addition to any other rights or remedies which the Bank may
have under this Agreement or otherwise, upon the occurrence of an Event of
Default, the Bank may require the Borrower to provide cash collateral in the
amount of the L/C Outstanding Amount of any commercial letters of credit
outstanding under this Agreement.


       2.04 Standby Letters of Credit Under the Revolving Facility.  (a)  Each
standby letter of credit shall be denominated in dollars and issued pursuant to
the terms and conditions hereof and of a Bank standard form Application and
Agreement for Standby Letter of Credit (or such other form as the Bank may
require) executed by the Borrower or an Acceptable Subsidiary.

               (b)  Each standby letter of credit shall:  (i) expire on or
before 360 days after the date such letter of credit is issued, but in no event
later than the Final Maturity Date; and (ii) be otherwise in form and substance
and in favor of beneficiaries and for purposes satisfactory to the Bank.

               (c)  The Borrower shall pay to the Bank a non-refundable fee
equal to 0.875% per annum of the outstanding undrawn amount of each financial
standby letter of credit and .0625% per annum of the outstanding undrawn amount
of each performance standby letter of credit, payable quarterly in advance, and
calculated on the basis of the face amount outstanding on the day the fee is
calculated.  The decision as to whether the standby letter of credit is defined
as financial or performance will be the solely determined by the Bank.
However, if an Event of Default exists, at the option of the Bank, the amount
of the fee shall be increased to 2.00% per annum, commencing on the day the
Bank provides notice of the increase to the Borrower.  The Borrower shall also
pay such other fees and commissions at the times and in the amounts the Bank
advises the Borrower from time to time as being applicable to the Borrower's
standby letters of credit.

               (d)  Each draft paid by the Bank under a standby letter of
credit issued hereunder shall be reimbursed by the Borrower or the Acceptable
Subsidiary to the Bank on the date such draft is paid by the Bank.  Any sum
owed to the Bank with respect to a standby letter of credit issued for the
Borrower's account which is not paid when due shall, at the option of the Bank
in each instance, be deemed to be an Advance outstanding under the Revolving
Facility and shall thereafter bear interest at the Floating Rate.

               (e) In addition to any other rights or remedies which the Bank
may have under this Agreement or otherwise, upon the occurrence of an Event of
Default, the Bank may require the Borrower to provide cash collateral in the
amount of the L/C Outstanding Amount of any standby letters of credit
outstanding under this Agreement.





                                       8

<PAGE>   14



       2.05  Local Currency Advances.  (a)  From time to time during the
Availability Period, the Bank or any Offshore Credit Provider may, in its sole
discretion, make Local Currency Advances to the Borrower and to Acceptable
Subsidiaries.

               (b)  Neither the Bank nor any Offshore Credit Provider shall
have any obligation to make any Local Currency Advance unless the following
conditions are satisfied:

                        (i)   The Bank and the Borrower or the relevant
Acceptable Subsidiary agree, at the time of Borrower's or such Acceptable
Subsidiary's request for a Local Currency Advance, on the currency, the amount,
the principal payment date(s), the interest rate and payment date(s), the
prepayment and overdue payment terms, and the reserve, tax and other material
provisions for such Advance; and

                        (ii)  The Borrower or such Acceptable Subsidiary shall
execute such additional documentation as the Bank or such Offshore Credit
Provider may require relating to each Local Currency Advance.


         2.06 Mandatory Payment.  If at any time and for any reason the total
amount of credit outstanding under this Agreement exceeds the limitations set
forth herein, the Borrower shall pay to the Bank, upon demand, the amount of
the excess.  Payments under this Section may be applied to the obligations of
the Borrower to the Bank in the order and manner as the Bank in its discretion
may determine.   Payments to be applied to outstanding  letters of credit and
drafts accepted under letters of credit may, at the Bank's option, be used to
prepay, or held as cash collateral to secure, the Borrower's or any Acceptable
Subsidiary's obligations to the Bank with respect thereto.

         2.07 Facility Fee.  The Borrower shall pay to the Bank a facility fee
at the rate of .25% per annum on the total amount of the facility.  The
facility fee shall be computed on a calendar quarter basis, except for the
first period which shall commence on the closing date, and end on  March 31,
1994, and the last period which shall end on  December 31, 1994.  The facility
fee shall be payable in arrears on March 31, 1994, on the last day of each
successive calendar quarter  thereafter, and on the last day of the
Availability Period.

         2.08 Default Rate.  Upon the occurrence and during the continuation of
any Event of Default, and without constituting a waiver of any such Event of
Default,  Advances under the Revolving Facility shall at the option of the Bank
bear interest at a rate per annum which is 2.00% per annum higher than the rate
of interest otherwise provided under this Agreement.

         2.09 Early Termination of Commitment.  The Borrower may at any time
terminate the Bank's (including any Offshore Credit Provider's) commitment to
extend credit hereunder by paying in full the entire amount of credit
outstanding hereunder (including the L/C Outstanding Amount, together with any
sums due under Section 3.11).  Payments to be applied to outstanding letters of
credit and drafts accepted under letters of credit, may, at the Bank's option,
be used to prepay, or held as cash collateral to secure, the Borrower's and
Acceptable Subsidiaries' obligations to the Bank with respect thereto.

         2.10 Prior Credit Agreement.   The Bank and the Borrower entered into
a Credit Agreement, dated as of November 15, 1991, as amended by a Waiver and
First Amendment, dated as of July 29, 1992, by a Second Amendment to Credit
Agreement, dated as of October 28, 1992, by a Third Amendment to Credit
Agreement, dated as of December 31, 1992, by a Fourth Amendment to Credit
Agreement, dated as of February 28, 1993, by a Fifth Amendment to Credit
Agreement, dated as of March 31, 1993, by a Sixth Amendment to Credit
Agreement, dated as of June 1, 1993, and by a Seventh Amendment to Credit
Agreement, dated as of December 31, 1993 ( as so amended the "Prior





                                       9

<PAGE>   15



Credit Agreement").  The Bank and the Borrower agree that from and after the
Closing Date, the Bank's commitment to make extensions of credit and to
continue to extend credit under the Prior Credit Agreement to the Borrower and
to the Borrower's Subsidiaries shall terminate without necessity of further act
by either the Bank or the Borrower.  All credit extended under the Prior Credit
Agreement to the Borrower and/or to its Subsidiaries shall be deemed to be
credit extended under this Agreement and amounts available for borrowing under
this Agreement shall be reduced by the amount of the credit extended and
outstanding under the Prior Credit Agreement.


                                  ARTICLE III

            EXTENSIONS OF CREDIT, PAYMENTS AND INTEREST CALCULATIONS

         3.01 Requests for Credit.  Each request for an extension of credit
shall be made in writing on a form acceptable to the Bank or in any other
manner acceptable to the Bank.

         3.02 Disbursements and Payments.  Each disbursement by the Bank and
each payment by the Borrower under this Agreement shall be made in the funds
and at such branch of the Bank as the Bank may from time to time select.

         3.03 Branch Accounts.  Each extension of credit under this Agreement
shall be made for the account of such branch, office, or affiliate of the Bank
as the Bank may from time to time select.

         3.04 Evidence of Indebtedness.  Principal, interest, and all other
sums due to the Bank (or any Offshore Credit Provider) under this Agreement
shall be evidenced by entries in records maintained by the Bank (or such
Offshore Credit Provider), and, if required by the Bank, by a promissory note
or notes.  Each payment on and any other credits with respect to principal,
interest, and all other sums due under this Agreement shall be evidenced by
entries to records maintained by the Bank or such Offshore Credit Provider.
The loan accounts or records maintained by the Bank or any Offshore Credit
Provider shall be conclusive absent manifest error of the amount of the credit
extended hereunder and the interest and payments thereon.  Any failure to so
record or any error in doing so shall not, however, limit or otherwise affect
the obligation of the Borrower or any Acceptable Subsidiary hereunder to pay
any amount owing.

         3.05 Interest Calculation.  Interest based on the Reference Rate shall
be computed on the basis of a 365/366-day year, actual days elapsed.  All other
interest and fees payable under this Agreement shall be computed on the basis
of a 360 day year and actual days elapsed, which results in more interest or a
larger fee than if a 365-366 day year were used.

         3.06 Late Payments; Compounding.  Any sum payable by the Borrower
hereunder (including unpaid interest) if not paid when due shall bear interest
(payable on demand) from its due date until payment in full at a rate per annum
equal to the Reference Rate plus 2.00% per annum.  At the option of the Bank,
in each instance, any sum payable hereunder which is not paid when due
(including unpaid interest) may be added to principal of the Revolving Facility
and shall thereafter bear interest at the rate applicable to principal.

         3.07 Business Day.  Any sum payable by the Borrower hereunder which
becomes due on a day which is not a Business Day shall be due on the next
Business Day after such due date,  unless, in the case of an Offshore Rate
Loan, the result of such extension would be to carry such Offshore Rate
Interest Period into another calendar month, in which event such Offshore Rate
Interest Period shall end on the immediately preceding Business Day.  Any
payments received by the Bank on a day which





                                       10

<PAGE>   16



is not a Business Day shall be deemed to be received on the next Business Day
after such date of receipt.

         3.08 Taxes and Other Charges.  (a) (i)  If any taxes (other than taxes
on net income (A) imposed by the country or any subdivision of the country in
which the Bank's principal office or actual lending office is located and (B)
measured by the United States taxable income the Bank would have received if
all payments under or in respect of this Agreement and any instrument or
agreement required hereunder were exempt from taxes levied by the Borrower's
country) are at any time imposed on any payments under or in respect of this
Agreement or any instrument or agreement required hereunder including, but not
limited to, payments made pursuant to this Section, the Borrower shall pay all
such taxes and shall also pay to the Bank, at the time interest is paid, all
additional amounts which the Bank specifies as necessary to preserve the after-
tax yield the Bank would have received if such taxes had not been imposed.

                                  (ii)  The additional amounts necessary to
preserve the after-tax yield the Bank would have received if such taxes had not
been imposed shall be calculated pursuant to the formula:

                                                 (w)(t)(i)
                                           y = -----------
                                                   1-w-t

where the terms are defined as follows:

                          y = additional payment to be made to the Bank

                          w = withholding tax rate levied by foreign
                              government

                          t  = the Bank's combined Federal and state tax rate

                          i  = amount of interest to be paid on Credit
                               (computed by using the base rate plus quoted 
                               spread)

                          1  = one


                 (b)  The Borrower will provide the Bank with original tax
receipts, notarized copies of tax receipts, or such other documentation as will
prove payment of tax in a court of law applying the United States Federal Rules
of Evidence, for all taxes paid by the Borrower pursuant to subsection (a)
above.  The Borrower will deliver receipts to the Bank within 30 days after the
due date for the related tax.

         3.09 Illegality.  (a)  If the Bank determines that (i) the
introduction of any law, rule, regulation, treaty, or determination of an
arbitrator or court or other governmental authority or any change in or in the
interpretation or administration thereof has made it unlawful, or that any
central bank or other governmental authority has asserted that it is unlawful,
for the Bank (directly or through any Offshore Credit Provider) to make or
extend any Advance or other credit under this Agreement, or (ii) any order,
judgment, or decree of any governmental authority or arbitrator purports by its
terms to enjoin or restrain the Bank (or any Offshore Credit Provider) from
making or extending any Advance or other credit hereunder, then, on notice
thereof by the Bank to the Borrower, the obligation of the Bank to make or
extend such Advance or other credit (directly or through any Offshore Credit
Provider) shall be





                                       11

<PAGE>   17



suspended until the Bank shall have notified the Borrower that
the circumstances giving rise to such determination no longer exist.

                 (b)  If the Bank determines that it is unlawful for it or any
applicable Offshore Credit Provider to maintain any Offshore Rate Advance or
Local Currency Advance hereunder, the Borrower shall prepay in full all
Offshore Rate Advances or Local Currency Advances, as the case may be then
outstanding, together with interest accrued thereon, either on the last day of
the applicable Offshore Rate Interest Period or the interest period applicable
to the Local Currency Advance if the Bank or such Offshore Credit Provider may
lawfully continue to maintain such Advances to such day and such loans have an
interest period, or immediately, if the Bank may not lawfully continue to
maintain such Advances or such loans have no interest period, together with any
amounts required to be paid in connection therewith pursuant to Section 3.11.

         3.10 Increased Costs.  The Borrower shall pay to the Bank, on demand,
the Bank's costs or losses arising from any statute or regulation, or any
request or requirement of a regulatory agency which is applicable to all
national banks or a class of all national banks.  The costs and losses will be
allocated to this facility in a manner determined by the Bank, using any
reasonable method.  The costs include the following:

                 (a)  any reserve or deposit requirements; and

                 (b)  any capital requirements relating to the Bank's assets
and commitments for credit.

         3.11 Funding Losses.  The Borrower shall reimburse the Bank and hold
the Bank harmless from any loss or expense which the Bank may sustain or incur
as a consequence of the failure of the Borrower (or any Acceptable Subsidiary)
to make any payment or prepayment of principal of any Advance hereunder made at
a rate of interest related to the Offshore Rate or the CD Rate (including
payments made after any acceleration thereof), or to borrow at such a rate, or
the prepayment of an Advance which bears interest at such a rate on a day which
is not the last day of the interest period with respect thereto (including
payments made after any acceleration thereof or because the total amount of
credit exceeds the limitations set forth herein), or the redenomination and
conversion, upon the occurrence of any Event of Default, of an Advance which
bears interest at such a rate; including any such loss or expense arising from
the liquidation or reemployment of funds obtained by it to maintain its
Advances made at a rate related to the Offshore Rate or the CD Rate hereunder
or from fees payable to terminate any deposits from which such funds were
obtained or deemed obtained.

         3.12 Inability to Determine Rates.  The Bank has no obligation to
accept an election for an Offshore Rate Advance or a CD Rate Advance if (a)
Dollar deposits in the principal amount, and for the period equal to the
interest period, for such Advance are not available in the applicable funding
market; or (b) the Offshore Rate or CD Rate does not accurately reflect the
cost of such Advance.  Nothing contained herein shall, however, obligate the
Bank to obtain the funds for any Advance in any particular manner.

         3.13 Certificate of the Bank.  If the Bank claims any reimbursement or
compensation pursuant to Section 3.10 or Section 3.11 hereof, then the Bank
shall deliver to the Borrower a certificate setting forth in reasonable detail
the amount payable to the Bank thereunder and such certificate shall be
conclusive and binding on the Borrower in the absence of manifest error.

         3.14 Debits to Borrower's Account.  The Borrower hereby authorizes the
Bank to debit the Borrower's deposit account number 14831-00220 at the Palo
Alto High Technology office of the Bank in the amount of principal, interest,
fees, or any other amount due under this Agreement or under any instrument or
agreement required under this Agreement.  The Bank may, at its option, debit
the account





                                       12

<PAGE>   18



on the date such amounts become due, or, if such due date is not a Business
Day, on the next Business Day after such due date.  If there are insufficient
funds in the account to cover the amount debited to the accounts in accordance
with this Section, such debit may be reversed in whole or in part, at the
option of the Bank in its sole discretion, and the amount not debited shall be
deemed to remain unpaid.

         3.15 Survival.  The agreements and obligations of the Borrower under
Sections 3.08 through 3.11 hereof shall survive the payment of all other
obligations of the Borrower hereunder.

                                   ARTICLE IV

                     CONDITIONS TO AVAILABILITY OF CREDIT.

         The Bank's obligation to extend credit under this Agreement is subject
to the Bank's receipt of the following, each in form and substance satisfactory
to the Bank:

         4.01    Conditions to First Extension of Credit.  Before the first
extension of credit:

                 (a)  This Agreement, executed by the Borrower;

                 (b)  Satisfactory evidence of due authorization of the
execution, delivery, and performance by the Borrower and all Acceptable
Subsidiary of this Agreement and any other Credit Documents, including
certified resolutions, incumbency certificate, articles of incorporation and
bylaws;

                 (c)  If requested by the Bank, an opinion of counsel for the
Borrower (which counsel must be satisfactory to the Bank) with respect to such
legal matters relating hereto as the Bank may request;

                 (d)  Certificates of state officials showing that the Borrower
and any Acceptable Subsidiary is in good standing or qualified to conduct
business under the laws of the state of its organization and, if requested by
the Bank, in any other state in which the Borrower and any Acceptable
Subsidiary is required to be so qualified;

                 (e)  A certificate of an appropriate officer of the Borrower
as to the matters set forth in Section 4.02(a) and (b);

                 (f)  Payment of any fee or expense required hereunder prior to
the first extension of credit;

                 (g)  A continuing guaranty in favor of the Bank, executed by
the Borrower, guaranteeing all debts and obligations (whether contingent or
otherwise) of any and all Acceptable Subsidiaries arising under or in
connection with this Agreement.


         4.02 Conditions to Each Extension of Credit.  Before each extension or
renewal of credit (including pursuant to any election under Section 2.02(b)and
Section 2.02(c), including the first:

                 (a)  The representations and warranties of the Borrower
contained in this Agreement shall be true on and as of the date of each
extension of credit;





                                       13

<PAGE>   19



                 (b)  Immediately prior to and immediately after giving effect
to such extension of credit, no Default or Event of Default shall exist;

                 (c)  Executed originals of all Credit Documents required under
Article II shall have been delivered to the Bank.

         Each request for an extension of credit hereunder shall constitute a
representation and warranty by the Borrower, as of the date of each such
request and as of the date of each extension of credit, that the conditions in
this Section are satisfied.

                                   ARTICLE V

                         REPRESENTATIONS AND WARRANTIES

         The Borrower represents and warrants that:

         5.01 Corporate Existence and Power.  The Borrower, and each Acceptable
Subsidiary:  (a) is a corporation duly organized and existing under the laws of
the state of its organization; (b) has the power and authority and all
governmental licenses, authorizations, consents, and approvals to own its
assets, carry on its business, and to execute, deliver, and perform its
obligations under, the Credit Documents; and (c) is duly qualified and properly
licensed and in good standing under the laws of each jurisdiction where its
ownership, lease, or operation of property or the conduct of its business
requires such license or qualification.

         5.02 Authorization.  The execution, delivery, and performance by the
Borrower and each Acceptable Subsidiary of this Agreement and any other Credit
Document to which any of them is a party, have been duly authorized by all
necessary corporate action, and do not and will not:

                 (a)  contravene the terms of any organizational or charter
documents;

                 (b)  conflict with or result in any breach or contravention
of, or the creation of any lien, security interest, or charge under, any
agreement, contract, indenture, document, or instrument to which the Borrower
or any Acceptable Subsidiary is a party or by which any property is bound, or
any order, injunction, writ, or decree of any governmental authority to which
the Borrower or any Acceptable Subsidiary or any property is subject; or

                 (c)  violate any law, rule, regulation, or determination of an
arbitrator or of a court or other governmental authority, in each case
applicable to or binding upon the Borrower or any Acceptable Subsidiary or any
property.

         5.03 Enforceability.  This Agreement is a legal, valid, and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and the other Credit Documents and any other instrument or agreement
required under this Agreement, when executed and delivered, will be legal,
valid, binding, and enforceable in accordance with its terms against the
Borrower or the Acceptable Subsidiary, as applicable.

         5.04 Compliance with Laws. The Borrower and the Acceptable
Subsidiaries are in compliance with all foreign, federal, state and local laws,
rules, regulations and determinations of arbitrators, courts and other
governmental authorities materially affecting the business, operations or
property of the Borrower and the Acceptable Subsidiaries (including
Environmental Laws).





                                       14

<PAGE>   20




         5.05 Permits, Franchises.  The Borrower or its Subsidiaries possess
all permits, memberships, franchises, contracts, and licenses required and all
trademark rights, trade name rights, patent rights, and fictitious name rights
necessary to enable the Borrower and its Subsidiaries to conduct the businesses
in which they are now engaged.

         5.06 Litigation.  There is no litigation, tax claim, proceeding,
governmental or administrative action, arbitration proceeding or dispute
pending, or, to the knowledge of the Borrower, threatened, against or affecting
the Borrower or any of its Subsidiaries or any of their properties, the adverse
determination of which would result in a Material Adverse Effect.

         5.07 No Event of Default.  There exists no Default or Event of Default.

         5.08 Other Obligations.  As of the Closing Date, the Borrower is not
in default under any other agreement involving the borrowing of money, the
extension of credit, or the lease of real or personal property, to which the
Borrower is a party as borrower, guarantor, installment purchaser, or lessee,
except as disclosed in writing to the Bank prior to the Closing Date.

         5.09 Tax Returns.  The Borrower has no knowledge of any material
pending assessments or adjustments with respect to its income tax liabilities
for any year, except as disclosed in writing to the Bank prior to the Closing
Date.

         5.10 Information Submitted.  All financial and other information that
has been submitted by the Borrower or an Acceptable Subsidiary to the Bank,
including the Borrower's financial statement delivered  to the Bank most
recently prior to the Closing Date:  (a) in the case of financial statements,
is prepared in accordance with generally accepted accounting principles
consistently applied; and (b) is true and correct in all material respects and
is complete insofar as may be necessary to give the Bank  true and accurate
knowledge of the subject matter thereof.

         5.11 No Material Adverse Effect.  Since September 30, 1993, there has
           been no Material Adverse Effect.

         5.12 ERISA Compliance.  Except as specifically disclosed to the Bank
in writing prior to the Closing Date: (a) each Plan is in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
federal or state law; (b) there are no pending, or to the best knowledge of
Borrower, threatened claims, actions or lawsuits, or action by any governmental
authority, with respect to any Plan which has resulted or could reasonably be
expected to result in a Material Adverse Effect; (c) there has been no
prohibited transaction or other violation of the fiduciary responsibility rule
with respect to any Plan which could reasonably result in a Material Adverse
Effect; (d) no ERISA Event has occurred or is reasonably expected to occur with
respect to any Pension Plan; (e) no Pension Plan has any Unfunded Pension
Liability; (f) the Borrower has not incurred, nor does it reasonably expect to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (g)
no trade or business (whether or not incorporated under common control with the
Borrower within the meaning of Section 414(b), (c), (m) or (o) of the Code)
maintains or contributes to any Pension Plan or other Plan subject to Section
412 of the Code; and (h) neither the Borrower or entity under common control
with the Borrower in the preceding sentence has ever contributed to any
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA.

         5.13 Environmental Matters.  (a)  (i) The properties of the Borrower
and its Subsidiaries do not contain and have not previously contained (at,
under, or about any such property) any Hazardous Substances or other
contamination (A) in amounts or concentrations that constitute or constituted a
violation of, or could give rise to liability under, any Environmental Laws,
(B) which could interfere with





                                       15

<PAGE>   21



the continued operation of such property, or (C) which could impair the fair
market value thereof; and (ii) there has been no transportation or disposal of
Hazardous Substances from, nor any release or threatened release of Hazardous
Substances at or from, any property of the Borrower or any of its Subsidiaries
in violation of or in any manner which could give rise to liability under any
Environmental Laws.

                 (b)  Neither the Borrower nor any of its Subsidiaries has
received or is aware of any material claim or notice of material violation,
alleged material violation, non-compliance, liability or potential liability
regarding environmental matters or compliance with Environmental Laws with
regard to the properties or operations of the Borrower or any of its
Subsidiaries, nor does the Borrower have knowledge or reason to believe that
any such action is being contemplated, considered, or threatened.
                                   ARTICLE VI

                             AFFIRMATIVE COVENANTS

         So long as credit is available under this Agreement and until full and
final payment of all of the Borrower's and any Acceptable Subsidiaries'
obligations under this Agreement and any other Credit Document:

         6.01 Notices of Certain Events.  The Borrower shall promptly give
written notice to the Bank of:

                 (a)  all litigation, proceedings or actions affecting the
Borrower or its Subsidiaries where the amount claimed is $ 5,000,000 or more;

                 (b)  any substantial dispute which may exist between the
Borrower or its Subsidiaries and any governmental regulatory body or law
enforcement authority;

                 (c)  any Default or Event of Default;

                 (d)  any of the representations and warranties in Article V
ceases to be true and correct; and

                 (e)  any other matter which has resulted or could reasonably
be expected to result in a Material Adverse Effect.

         6.02 Financial and Other Information.  The Borrower shall deliver to
the Bank in form and detail satisfactory to the Bank, and in such number of
copies as the Bank may request:

                 (a)  Within 90 days after the end of each fiscal year, the
Borrower's consolidated financial statements for such year audited by a
certified public accountant together with an unqualified opinion of such
certified public accountant;

                 (b)  Within 45 days after the end of each quarterly accounting
period, the Borrower's consolidated financial statements for such period
prepared by the Borrower;

                 (c)  Within 10 days after the date of filing with the
Securities and Exchange Commission, copies of any of the Borrower's Form 10-K
Annual Reports, Form 10-Q Quarterly Reports and Form 8-K Current Reports;

                 (d)  Promptly upon request, such other materials and
information relating to the Borrower or its Subsidiaries as the Bank may
request.





                                       16

<PAGE>   22



         6.03 Books, Records, Audits and Inspections.  The Borrower shall, and
shall cause its Subsidiaries to, maintain adequate books, accounts and records,
and prepare all financial statements required hereunder in accordance with
generally accepted accounting principles consistently applied, and in
compliance with the regulations of any governmental regulatory body having
jurisdiction over the Borrower or its Subsidiaries, or the Borrower's or its
Subsidiaries' businesses, and upon prior notice from the Bank permit employees
or agents of the Bank at any reasonable time to inspect the Borrower's and its
Subsidiaries' properties, and to examine or audit the Borrower's and its
Subsidiaries' books, accounts, and records and make copies and memoranda
thereof; provided, however, that during any period in which Default or an Event
of Default has occurred and is continuing, the Bank need not give prior notice
of inspection, examination, or auditing.

         6.04 Use of Facility.  The Borrower shall use the credit facility
provided herein solely for working capital and other general corporate purposes
not in contravention of any requirement of law.

         6.05 Insurance.  The Borrower shall maintain and keep in force
insurance of the types and in amounts customarily carried in lines of
businesses similar to those of the Borrower, including fire, extended coverage,
public liability (including coverage for contractual liability), property
damage (including use and occupance), business interruption, and workers'
compensation, all carried by insurers and in amounts satisfactory to the Bank,
with loss payable endorsements on such types of insurance as the Bank may
request, and deliver to the Bank from time to time, at the Bank's request, a
copy of each insurance policy, or if permitted by the Bank, a certificate of
insurance setting forth all insurance then in effect.

         6.06 Compliance with Laws.  The Borrower shall at all times comply
with, and cause its Subsidiaries to comply with, all laws, statutes (including
any fictitious name statute), rules, regulations, orders, and directions of any
governmental authority having jurisdiction over the Borrower or any of its
Subsidiaries or the business of the Borrower or any of its Subsidiaries
(including all Environmental Laws).

         6.07 Change in Name, Structure or Location.  The Borrower shall notify
the Bank in writing prior to any change in (a) the Borrower's name or the name
of any Acceptable Subsidiary, (b) the Borrower's or any Acceptable Subsidiary's
business or legal structure, or (c) the Borrower's or any Acceptable
Subsidiary's place of business or chief executive office if the Borrower has
more than one place of business.

         6.08 Existence and Properties.  The Borrower and each of its
Subsidiaries shall maintain and preserve its existence and all rights,
privileges, and franchises now enjoyed, conduct its business in an orderly,
efficient, and customary manner, keep all its properties in good working order
and condition, and from time to time make all needed repairs, renewals, or
replacements thereto and thereof so that the efficiency of such property shall
be fully maintained and preserved.

         6.09 Additional Acts.  The Borrower shall perform, on request of the
Bank, such acts as may be necessary or advisable to perfect any lien or
security interest contemplated hereby or otherwise to carry out the intent of
this Agreement.


                                  ARTICLE VII

                               NEGATIVE COVENANTS





                                       17

<PAGE>   23



         So long as credit is available under this Agreement and until full and
final payment of all of the Borrower's and any Acceptable Subsidiary's
obligations under this Agreement and any other Credit Document:

         7.01 Liens.  The Borrower shall not, and shall not suffer or permit
any of its Subsidiaries to, create, assume, or suffer to exist any security
interest, deed of trust, mortgage, lien (including the lien of an attachment,
judgment, or execution), or encumbrance, securing a charge or obligation, on or
of any of its or their property, real or personal, whether now owned or
hereafter acquired, except:  (a) security interests and deeds of trust in favor
of the Bank; (b) liens, security interests, and encumbrances in existence as of
the date of this Agreement and disclosed to the Bank in writing prior to the
Closing Date; (c) liens for current taxes, assessments, or other governmental
charges which are not delinquent or remain payable without any penalty; (d)
liens in connection with workers' compensation, unemployment insurance, or
other social security obligations; (e) mechanics', worker's, materialmen's,
landlords', carriers', or other like liens arising in the ordinary and normal
course of business with respect to obligations which are not due; (f) purchase
money security interests in personal property hereafter acquired when the
security interest does not extend beyond the property purchased and (g)
additional security interests or liens on fixed assets which secure liabilities
(other than liabilities for borrowed money) in an aggregate principal amount
not exceeding, at any one time, $10,000,000 .

         7.02 Tangible Net Worth.  The Borrower shall not permit as of the last
day of any fiscal quarter on a consolidated basis its Tangible Net Worth  to be
less than $145,000,000 ; where:

                 "Tangible Net Worth" means the gross book value of the assets
         of the Borrower and its Subsidiaries on a consolidated basis
         (exclusive of goodwill, patents, trademarks, trade names, organization
         expense, treasury stock, unamortized debt discount and expense,
         deferred charges, and other like intangibles) less (a) reserves
         applicable thereto, and (b) all liabilities (including accrued and
         deferred income taxes).

         7.03 Quick Ratio.  The Borrower shall not permit as of the last day of
any fiscal quarter on a consolidated basis, "A" to be less than 1.25 times "B";
provided, however, that as of the last day of each successive fiscal quarter
commencing with the last day of the fiscal quarter in which the aggregate
cumulative consideration for acquisitions and purchases permitted under Section
7.05 paid by the Borrower and its Subsidiaries exceeds $40,000,000, "A" shall
not be less than 1.50 times "B", on a consolidated basis.

For  purposes of this Section:

"A" means the sum of cash, short-term cash investments, marketable securities
not classified as long-term investments and accounts receivable; and

"B" equals current liabilities.

         7.04 Total Liabilities to Tangible Net Worth.  The Borrower shall not
permit as of the last day of any fiscal quarter on a consolidated basis the
Borrower's total liabilities to exceed its Tangible Net Worth.

         7.05 Acquisitions.  The Borrower and its Subsidiaries shall not
acquire or purchase control of, or the assets or business of, any other person,
firm, or corporation for an aggregate consideration, including assumption of
existing obligations, cumulatively, in excess of $60,000,000.

         7.06 Dividends.  Neither the Borrower nor any of its Subsidiaries that
is not wholly-owned by the Borrower shall declare or pay any dividends or
distributions on any of its shares now or hereafter





                                       18

<PAGE>   24



existing, or purchase, redeem or otherwise acquire for value any of its shares,
or create any sinking fund in relation thereto, except: (a) dividends payable
solely in its capital stock; (b) up to 25% of earnings available therefor and
earned during the immediately preceding fiscal year.

         7.07 Loans.  Neither the Borrower nor any of its Subsidiaries shall
make any loans, advances, or other extensions of credit to any of the
Borrower's or such Subsidiary's executives, officers, or directors or
shareholders (or any relatives of any of the foregoing) other than in the
ordinary course of business , or make loans, advances or other extensions of
credit to or invest in any other person, firm, corporation, or other entity,
other than (a) investments in cash equivalents; (b) extensions of credit in the
nature of accounts receivable or notes receivable arising from the sale or
lease of goods or services in the ordinary course of business; (c) extensions
of credit by the Borrower to any of its Subsidiaries or by any of its
Subsidiaries to another of its Subsidiaries; and (d) other investments not to
exceed $10,000,000 over the life of the Credit Agreement.

         7.08 Liquidations and Mergers.  The Borrower shall not liquidate or
dissolve.

         7.09 Sale of Assets.  Neither the Borrower nor any of its Subsidiaries
shall (a) sell, lease, or otherwise dispose of its business or of assets
exceeding $1,000,000 except for full, fair and reasonable consideration; or (b)
sell or otherwise dispose of any of its accounts receivable except in
connection with the collection of same in the ordinary course of business.

         7.10 Consecutive Quarterly Losses; Losses in One Quarter.  The
Borrower on a consolidated basis shall not incur, (a) any quarterly net or
operating loss in any two (2) consecutive fiscal quarters or (b) any quarterly
net or operating loss in excess of 5.00% of Tangible Net Worth.

         7.11 Business Activities.  The Borrower shall not engage in any
business activities or operations substantially different from or unrelated to
present business activities and operations.

         7.12 Regulations G, T, U, and X.  The Borrower shall not, and shall
not permit any of its Subsidiaries to, use any portion of the proceeds of any
Advances or extensions of credit hereunder, directly or indirectly, (i) to
purchase or carry margin stock (within the meanings of Regulations G, T, U, and
X of the FRB), (ii) to repay or otherwise refinance indebtedness of the
Borrower or others incurred to purchase or carry any such margin stock, (iii)
to extend credit for the purpose of purchasing or carrying any such margin
stock, or (iv) to acquire any security in any transaction that is subject to
Section 13 or 14 of the Securities Exchange Act of 1934, as amended.


                                  ARTICLE VIII

                               EVENTS OF DEFAULT

         8.01 Events of Default.  The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement:

                 (a)  Failure to Pay.  The Borrower or any Acceptable
Subsidiary fails to pay, when due, any installment of principal, or within 7
days after the date when due any interest, fee or any other sum due under this
Agreement or any other Credit Document in accordance with the terms hereof or
thereof.

                 (b)  Breach of Representation or Warranty.  Any representation
or warranty herein or in any other Credit Document proves to have been false or
misleading in any material respect when made.





                                       19

<PAGE>   25



                 (c)  Specific Defaults.  The Borrower fails to perform or
observe any term, covenant or agreement contained in Section 6.01, 6.02 or 6.03
or Article VII hereof.

                 (d)  Other Defaults.  The Borrower fails to perform or observe
any other term or covenant contained in this Agreement or any Credit Document.

                 (e)  Trade Suits.  One or more suits are filed against the
Borrower or any of its Subsidiaries by a trade creditor or trade creditors of
the Borrower or any of its Subsidiaries in the aggregate amount of
 $15,000,000 or more.

                 (f)  Judgments.  One or more judgments or arbitration awards
are entered against the Borrower or any of its Subsidiaries or any guarantor of
any of the Borrower's obligations to the Bank, or the Borrower or any of its
Subsidiaries or any such guarantor enters into any settlement agreement with
respect to any litigation or arbitration, in the aggregate amount of $5,000,000
or more on a claim or claims not covered by insurance.

                 (g)  Failure to Pay Debts; Voluntary Bankruptcy.  The Borrower
or any Subsidiary or any guarantor of any of the Borrower's or any Acceptable
Subsidiary's obligations to the Bank (i) fails to pay the Borrower's or such
Subsidiary's or such guarantor's debts generally as they come due, or (ii)
files any petition, proceeding, case, or action for relief under any
bankruptcy, reorganization, insolvency, or moratorium law, or any other law or
laws for the relief of, or relating to, debtors.

                 (h)  Involuntary Bankruptcy.  An involuntary petition is filed
under any bankruptcy or similar statute against the Borrower or any Subsidiary
or any guarantor of any of the Borrower's or any Acceptable Subsidiary's
obligations to the Bank, or a receiver, trustee, liquidator, assignee,
custodian, sequestrator, or other similar official is appointed to take
possession of the properties of the Borrower or any Subsidiary or such
guarantor; provided, however, that such Event of Default shall be deemed cured
if such petition or appointment is set aside or withdrawn or ceases to be in
effect within 60 days from the date of said filing or appointment.

                 (i)  Default of Other Financial Obligations.  Any default
occurs under any other agreement involving the borrowing of money or the
extension of credit to which the Borrower or any Subsidiary or any guarantor of
any of the Borrower's or an Acceptable Subsidiary's obligations to the Bank may
be a party as borrower, guarantor, or installment purchaser, if such default
consists of the failure to pay any obligation when due or if such default gives
to the holder of the obligation concerned the right to accelerate the
obligation.

                 (j)  Default under other Credit Documents.  Any Credit
Document (other than this Agreement), guaranty, subordination agreement, or
other agreement or instrument required hereunder or executed in connection
herewith is breached or becomes ineffective or any default occurs under any
such agreement or instrument.

                 (k)  Default of Other Bank Obligations.  Any default occurs
under any other obligation of the Borrower or any Subsidiary/Acceptable
Subsidiary to the Bank or to any subsidiary or affiliate of the Bank.

                 (l)  Material Adverse Effect.  There occurs a Material Adverse
Effect.

                 (m)  ERISA.  (i) An ERISA Event shall occur with respect to a
Pension Plan which has resulted or could reasonably be expected to result in
liability of the Borrower under Title IV of ERISA to the Pension Plan or PBGC
in an aggregate amount in excess of $5,000,000; (ii) the commencement or





                                       20

<PAGE>   26



increase of contributions to, or the adoption of or the amendment of a Pension
Plan by the Borrower which has resulted or could reasonably be expected to
result in an increase in Unfunded Pension Liability among all Pension Plans in
an aggregate amount in excess of $5,000,000; or (iii) any of the
representations and warranties contained in Section V shall cease to be true
and correct which, individually or in combination, has resulted or could
reasonably be expected to result in a Material Adverse Effect.

                 (n)  Change of Control.  (i) any person or two or more persons
acting in concert shall acquire beneficial ownership, directly or indirectly,
of securities of the Borrower (or other securities convertible into such
securities) representing 30% or more of the combined voting power of all
securities of the Borrower entitled to vote in the election of directors; or
(ii) during any period of up to 12 consecutive months, commencing after the
Closing Date, individuals who at the beginning of such 12-month period were
directors of the Borrower shall cease for any reason to constitute a majority
of the Board of Directors of the Borrower unless the persons replacing such
individuals were nominated by the Board of Directors of the Borrower; or (iii)
any person or two or more persons acting in concert acquiring by contract or
otherwise, or entering into a contract or arrangement which upon consummation
will result in its or their acquisition of, or control over, securities of the
Borrower (or other securities convertible into such securities) representing
30% or more of the combined voting power of all securities of the Borrower
entitled to vote in the election of directors.

         8.02 Remedies.  If any Event of Default occurs,

                 (a) any indebtedness of the Borrower or of any Acceptable
Subsidiary under any of the Credit Documents, any term thereof to the contrary
notwithstanding, shall at the Bank's option (but automatically upon the
occurrence of an Event of Default described in subsection 8.01(g)(ii) or
subsection 8.01(h)) and without notice become immediately due and payable
without presentment, demand, protest, or notice of dishonor, or any other
notice, all of which are hereby expressly waived by the Borrower to the full
extent permitted by law , and the Bank may declare an amount equal to the
maximum aggregate amount that is or at any time thereafter may become available
for drawing under any then- outstanding letters of credit,  (whether or not any
beneficiary shall have presented, or be entitled at such time to present, the
drafts or other documents required to draw under such letters of credit) to be
immediately due and payable;

                 (b) the obligation, if any, of the Bank (including through any
Offshore Credit Provider) to make further loans or extensions of credit
hereunder shall immediately cease and terminate, and

                 (c)  the Bank and each Offshore Credit Provider shall have all
rights, powers, and remedies available under each of the Credit Documents, or
accorded by law, including the right to resort to any or all security for any
credit accommodation described herein, and to exercise any or all of the rights
of a beneficiary or secured party pursuant to applicable law.

All rights, powers, and remedies of the Bank and each Offshore Credit Provider
may be exercised at any time by the Bank or such Offshore Credit Provider and
from time to time after the occurrence of an Event of Default.  All rights,
powers, and remedies of the Bank and any Offshore Credit Provider in connection
with each of the Credit Documents are cumulative and not exclusive and shall be
in addition to any other rights, powers, or remedies provided by law or equity.


                                   ARTICLE IX

                                 MISCELLANEOUS





                                       21

<PAGE>   27




         9.01 Successors and Assigns.  This Agreement shall bind and inure to
the benefit of the parties hereto and their respective successors and assigns;
provided, however, that the Borrower shall not assign this Agreement or any
other Credit Document or any of the rights, duties or obligations of the
Borrower hereunder without the prior written consent of the Bank.

         9.02 Consents and Waivers.  No failure to exercise and no delay in
exercising, on the part of the Bank or any Offshore Credit Provider, any right,
remedy, power, or privilege hereunder, shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, remedy, power, or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy, power, or privilege.  No consent or waiver under this
Agreement shall be effective unless in writing.  No waiver of any breach or
default shall be deemed a waiver of any breach or default thereafter occurring.

         9.03 Governing Law.  This Agreement shall be governed by and construed
under the laws of the State of California.

         9.04 Costs and Attorneys' Fees.  The Borrower shall, whether or not
the transactions contemplated hereby shall be consummated, pay or reimburse the
Bank on demand for all costs and expenses incurred by the Bank in connection
with the development, preparation, delivery, administration, and execution of,
and any amendment, supplement, waiver or modification to, this Agreement and
any other Credit Document and the consummation of the transactions contemplated
hereby and thereby, including reasonable attorney fees and disbursements and
the allocated cost of internal counsel and disbursements, incurred by the Bank
with respect thereto; and in connection with the enforcement, attempted
enforcement or preservation of any rights or remedies hereunder or under any
Credit Document, including any "workout" or restructuring under this Agreement,
including attorney fees and disbursements and the allocated cost of internal
counsel and disbursements.

         9.05 Integration; Amendment.  This Agreement, together with the other
Credit Documents, embodies the entire agreement and understanding between the
Borrower and the Bank.  This Agreement may be amended or modified only in
writing, signed by the Borrower and the Bank.

         9.06 Borrower's Documents.  The Bank shall be under no obligation to
return any schedules, invoices, statements, budgets, forecasts, reports or
other papers delivered by the Borrower and shall destroy or otherwise dispose
of same at such time as the Bank, in its discretion, deems appropriate.

         9.07 Participations.  The Bank may at any time sell, assign, grant
participations in, or otherwise transfer to any other person, firm, corporation
or other entity (a "Participant") all or part of the obligations of the
Borrower and any Acceptable Subsidiary under this Agreement and any other
Credit Document; provided, however, that the Borrower and /or the Acceptable
Subsidiary shall continue to deal solely and directly with the Bank in
connection with this Agreement and the other Credit Documents.  The Borrower
authorizes the Bank and each Participant, upon the occurrence of an Event of
Default, to proceed directly by right of setoff, banker's lien, or otherwise,
against any assets of the Borrower and any Acceptable Subsidiary which may be
in the hands of the Bank or such Participant, respectively.  The Borrower
authorizes the Bank to disclose to any prospective Participant and any
Participant any and all information in the Bank's possession concerning the
Borrower and its Subsidiaries, this Agreement or any other Credit Document;
provided, however, that any such prospective Participant or Participant shall
agree to keep any such information confidential.

         9.08 General Indemnification.  The Borrower shall pay and indemnify
the Bank, the Offshore Credit Providers, the Bank's parent company, and each of
their respective officers, directors, employees, counsel, agents and
attorneys-in-fact (each, an "Indemnified Person") harmless from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs,





                                       22

<PAGE>   28



charges, expenses, or disbursements (including attorneys' fees and
disbursements and the allocated costs of internal counsel) of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance, and administration of this Agreement and any other Credit
Documents, or the transactions contemplated hereby and thereby, and with
respect to any investigation, litigation, or proceeding related to this
Agreement, any violation of any Environmental Law by the Borrower or its
Subsidiaries, any release of a Hazardous Substance at or from any property of
the Borrower or any of its Subsidiaries, or the loans and other extensions of
credit hereunder or the use of the proceeds thereof, whether or not any
Indemnified Person is a party thereto (all the foregoing, collectively, the
"Indemnified Liabilities"); provided, that the Borrower shall have no
obligation hereunder to any Indemnified Person with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of such
Indemnified Person.  The agreements in this Section shall survive payment of
all other obligations of the Borrower or any Acceptable Subsidiary hereunder or
under the other Credit Documents.

         9.09 Arbitration; Reference Proceeding.  (a)  Any controversy or claim
between or among the parties, including but not limited to those arising out of
or relating to this Agreement or any other Credit Document or other agreements
or instruments relating hereto or delivered in connection herewith and any
claim based on or arising from an alleged tort, shall at the request of any
party be determined by arbitration.  The arbitration shall be conducted in
accordance with the United States Arbitration Act (Title 9, U.S. Code),
notwithstanding any choice of law provision in this Agreement, and under the
Commercial Rules of the American Arbitration Association ("AAA").  The
arbitrator(s) shall give effect to statutes of limitation in determining any
claim.  Any controversy concerning whether an issue is arbitrable shall be
determined by the arbitrator(s).  Judgment upon the arbitration award may be
entered in any court having jurisdiction.  The institution and maintenance of
an action for judicial relief or pursuit of a provisional or ancillary remedy
shall not constitute a waiver of the right of any party, including the
plaintiff, to submit the controversy or claim to arbitration if any other party
contests such action for judicial relief.

                 (b)  Notwithstanding the provisions of subsection (a) of this
Section, no controversy or claim shall be submitted to arbitration without the
consent of all parties if, at the time of the proposed submission, such
controversy or claim arises from or relates to an obligation to the Bank which
is secured by real property collateral located in California.  If all parties
do not consent to submission of such a controversy or claim to arbitration, the
controversy or claim shall be determined as provided in subsection (c) of this
Section.

                 (c)  A controversy or claim which is not submitted to
arbitration as provided and limited in subsections (a) and (b) of this Section
shall, at the request of any party, be determined by a reference in accordance
with California Code of Civil Procedure Sections 638 et seq.  If such an
election is made, the parties shall designate to the court a referee or
referees selected under the auspices of the AAA in the same manner as
arbitrators are selected in AAA-sponsored proceedings.  The presiding referee
of the panel, or the referee if there is a single referee, shall be an active
attorney or retired judge.  Judgment upon the award rendered by such referee or
referees shall be entered in the court in which such proceeding was commenced
in accordance with California Code of Civil Procedure Sections 644 and 645.

                 (d)  No provision of this paragraph shall limit the right of
any party to this Agreement to exercise self-help remedies such as setoff, to
foreclose against or sell any real or personal property collateral or security,
or to obtain provisional or ancillary remedies from a court of competent
jurisdiction before, after, or during the pendency of any arbitration or other
proceeding.  The exercise of a remedy does not waive the right of either party
to resort to arbitration or reference.  At the Bank's option, foreclosure under
a deed of trust or mortgage may be accomplished either by exercise of power of
sale under the deed of trust or mortgage or by judicial foreclosure.





                                       23

<PAGE>   29



         9.10 Notices.  (a)  All notices, requests and other communications
provided for hereunder shall be in writing and mailed or delivered to a party
at its address specified on the signature pages hereof, or to such other
address as shall be designated by such party in a written notice to the other
parties.

                 (b)  All such notices and communications shall, when
transmitted by overnight delivery, be effective when delivered for overnight
delivery, or if personally delivered, upon such personal delivery, except that
notices pursuant to Article II shall not be effective until actually received
by the Bank.

                 (c)  The Borrower acknowledges and agrees that any agreement
of the Bank pursuant to Article II hereof to receive notices by telephone or
facsimile is solely for the convenience and at the request of the Borrower.
Telephone requests may be made by any individual identified in writing to the
Bank on a form acceptable to the Bank as being authorized to make such
requests.  The Bank shall be entitled to rely upon any written or telephone
request from persons it reasonably believes to be authorized by the Borrower to
make such requests without making independent inquiry.  The Borrower assumes
the full risk of, and the Bank shall not be responsible for, any delays or
errors in transmission, and the obligation of the Borrower to repay the loans
and other extensions of credit hereunder shall not be affected in any way or to
any extent by any failure by the Bank to receive written confirmation of any
telephonic or facsimile notice or the receipt by the Bank of a confirmation
which is at variance with the terms understood by the Bank to be contained in
the telephonic or facsimile notice.

         9.11 Headings; Interpretation.  Article, section, and paragraph
headings are for reference only and shall not affect the interpretation or
meaning of any provisions of this Agreement.  The meaning of defined terms
shall be equally applicable to the singular and plural forms of the defined
terms.  The words "hereof", "herein", "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement; and subsection, section, schedule
and exhibit references are to this Agreement unless otherwise specified.  The
term "including" is not limiting and means "including without limitation." In
the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including"; the words "to" and "until"
each mean "to but excluding", and the word "through" means "to and including."

         9.12 Severability.  The illegality or unenforceability of any
provision of this Agreement or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Agreement or any instrument or agreement required
hereunder.

         9.13 Counterparts.  This Agreement may be executed in as many
counterparts as may be deemed necessary or convenient, and by the different
parties hereto on separate counterparts each of which, when so executed, shall
be deemed an original but all such counterparts shall constitute but one and
the same agreement.





                                       24

<PAGE>   30




         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.


                                 KLA Instruments Corporation



                                 By: ___________________________________________

                                 Typed Name: ___________________________________

                                 Title: ________________________________________


                                 By: ___________________________________________

                                 Typed Name: ___________________________________

                                 Title: ________________________________________


                                 Address where notices to
                                 Borrower are to be sent:

                                 _______________________________________________

                                 _______________________________________________


                                 BANK OF AMERICA NATIONAL TRUST
                                 AND SAVINGS ASSOCIATION

                                 By: ___________________________________________

                                 Typed Name: STEPHEN L. PARRY

                                 Title:   VICE PRESIDENT


                                 Address where notices to
                                 Bank are to be sent:

                                 530 LYTTON AVENUE 2ND FLOOR

                                 PALO ALTO, CA. 94301





                                       25



<PAGE>   1
                                      
                                        EXHIBIT 13
                                      
                            1994 ANNUAL REPORT TO STOCKHOLDERS



<PAGE>   2





1994                                 KLA                        ANNUAL REPORT
                          ----------------------------
                          THE YIELD MANAGEMENT COMPANY


<PAGE>   3

SELECTED QUARTERLY FINANCIAL DATA (unaudited)


<TABLE>
<CAPTION>
                              Fiscal 1993                             Fiscal 1994
Quarter Ended                   Sept. 30    Dec. 31  March 31   June 30  Sept. 30   Dec. 31  March 31  June 30 
- - --------------------------------------------------------------------------------------------------------------
                                                                       (In millions, except per share amounts) 
<S>                               <C>       <C>      <C>      <C>        <C>       <C>       <C>        <C>
NET SALES                         $ 38.5    $38.6     $42.2    $ 47.9    $ 51.9    $ 57.1    $ 62.6     $72.1
Gross profit                        13.0     13.6      15.6      17.6      20.7      24.7      29.4      35.9
                                    33.8%    35.2%     37.0%     36.7%     39.9%     43.3%     47.0%     49.8%
Engineering, research and
   development expense               4.0      4.2       4.4       3.7       4.9       4.8       5.5       7.2
                                    10.4%    10.9%     10.4%      7.7%      9.4%      8.4%      8.8%     10.0%
Selling, general and
   administrative expense            7.5      7.7       8.4       9.1       9.9      11.3      12.0      15.0
                                    19.5%    19.9%     19.9%     19.0%     19.1%     19.8%     19.2%     20.8%
Net income                           0.6      1.4 (a)   2.0       3.0       4.2       6.3       9.0      10.7
                                     1.6%     3.6%      4.7%      6.3%      8.1%     11.0%     14.4%     14.8%
NET INCOME PER SHARE              $  0.03   $ 0.07    $ 0.10   $  0.15   $  0.20   $  0.30   $  0.40    $ 0.45
Weighted average common
   shares outstanding               18.9     19.5      20.0      20.5      20.8      20.9      22.7      23.7
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Includes recovery from restructuring of $0.7 million.

NET SALES [chart]

NET INCOME [chart]


                                      1

<PAGE>   4
                                  [ART WORK]


KENNETH LEVY
Chairman
Chief Executive Officer


Dear Stockholder:

This past year, your Company recorded the best financial results in its 18-year
history, setting new records in bookings, sales and profits.  This outstanding
performance was primarily the result of a strong, technically advanced
 product
line developed over the past five years and the realization by global
semiconductor manufacturers that these products are the key to increased
manufacturing yields, resulting in a high return on investment. Other key
elements include the exceptional international sales and service network KLA
has constructed over the past ten years and a strengthened commitment to
excellence, efficiency and profitability by employees throughout the Company.

As impressive as our achievements were in 1994, the KLA team views the year as
an intermediate step along the way toward building an even stronger global
organization. This report shares with you the key elements which will position
KLA to achieve its long-term objectives of high value for our customers, a high
rate of return for investors and outstanding career opportunities for our
employees.

First, let us look at last year's results. For the year ended June 30, 1994,
your Company recorded sales of $243.7 million, which was 46% higher than 1993
sales of $167.2 million. Net income was $30.2 million, which was 331% higher
than 1993 income of $7.0 million. The order rate was 70% higher than in 1993
and backlog at year-end was $125 million, the largest in the Company's history.

In addition to vastly improved operating results, KLA ended its fiscal year
with its strongest balance sheet ever. As a result of an equity offering in
February 1994 and $11 million generated by operations, we ended the year with
$139 million in cash and cash equivalents. This very strong financial
position will provide the resources to expand our business as appropriate
opportunities present themselves.

While the largest contributor to both sales and earnings was the Wafer
Inspection Business Unit -- the focal point of KLA's yield management
technology -- we are pleased to report that all divisions contributed to a
successful year. New orders in the Reticle Inspection Business Unit reached a
two-year high, thanks to increased demand for the KLA 331 Reticle Inspection
System, while the ATS Division achieved a four-year high in new wafer prober
orders.

The Metrology Division, now in its third year as the market leader for optical
metrology, continued to book orders at a high level, leading KLA to a 50%
market share in semiconductors and a 70% share in the important thin-film head
industry. In the fourth quarter, this division introduced its next-generation
overlay metrology system, the KLA 5100, which meets the speed, throughput and
precision requirements needed for sub-half-micron production. This system is
expected to have a positive impact on results in 1995.

Geographically, the U.S. and Japan remained the largest components of our
business. Each accounted for about one-third of total sales, with the remaining
one-third representing Asia Pacific and Europe combined. The Japanese market
showed strong improvement this year, and should continue to do so since our
many customers in that country are just now exploring the yield management
benefits of the KLA 2100 Series. Our KLA Acrotec venture in Japan continued to
make progress in the growing flat panel display market. Its products are now on
order or in use by all of the major flat panel producers in Japan, Korea and
Taiwan.

In our annual report three years ago, KLA first announced to stockholders the
goal of networking its data gathering and analysis capability into the
industry's first total yield management systems. At the time we stated that
"Over the next five years, control of defects and yields will make the
difference between profit and loss for semiconductor companies." We began to
realize that goal in 1991 by introducing the KLA 2100 Series Defect Monitoring
Systems. The introduction of the KLA 2550 followed in 1992 and represented the
Company's first data and yield management system capable


                                      2

<PAGE>   5
                                  [ARTWORK]

KENNETH L. SCHROEDER
President
Chief Operating Officer

of interfacing with both KLA and non-KLA tools. Together, the 2100 Series and
the 2550 create the industry's first on-line yield management capability. The
semiconductor industry was quick to respond to the prospect of being able, for
the first time, to proactively manage yields through real-time inspection and
data analysis right on the production line. This year has seen continued
improvements in both product lines with the introduction of the KLA 2551
Analysis Station and, in particular, the KLA 2131 All-pattern Defect Monitoring
System.

At first, our customers made single-unit purchases since, without testing, they
were understandably reluctant to accept the value of this new concept. By the
end of 1993, results indicated major yield improvements, and many customers
began to order additional systems. That trend accelerated throughout fiscal
1994, and by the end of the year, 38 wafer fabrication facilities around the
globe had multiple KLA monitors either installed or on order.

Wafer fabs using our 2100 series products already average two systems per
manufacturing facility, with the most advanced facilities having five or six
systems per line. As manufacturers continue to learn how to utilize KLA systems
to increase their "rate-of-learning," our KLA 2100 Series business will grow
accordingly. As linewidths in semiconductor circuits continue to shrink, more
manufacturing lines will use KLA systems, and the average number of systems per
line will trend toward the larger number now used by the most advanced
customers.

As our business grows, KLA continues to strengthen our management team. This
past year, Yasuo Mizokami took over the presidency of KLA Japan, while the
newly-created positions of president of KLA Korea and president of KLA Europe
were assumed by Hee-June Choi and Dick Conn, respectively.  In addition, four
new corporate vice presidents were elected in recognition of their excellent
contributions and growing organizational responsibilities. Dr. Ben Tsai is now
vice president, chief technical officer; Dr. Neil Richardson, vice president
and general manager of the Metrology Division; Gary Dickerson, vice president
and business unit director of the Wafer Inspection Business Unit; and Magnus
Ryde, vice president and general manager of the Customer Support Division.

KLA continues to explore new methods to help customers fill their yield
management needs. Just before year-end, your Company announced its entry into
the software business with a planned series of standard, open-architecture
software packages designed to work in conjunction with KLA equipment as well as
other wafer fab systems. The new PRISM (PRocess Information SysteMs) Division
was formed, and Dr. Michael Pliner, a 20-year veteran of the software
business, was named general manager of this new venture. The products from this
division will further expand KLA's ability to help our customers increase their
yields by making better use of the information available on the factory floor.

Since outlining its yield management goal in 1991, KLA has made a key
transition from being a supplier of important, but capacity-dependent,
inspection tools to being a supplier of enabling technology without which our
customers' own design goals cannot be achieved. This reality gives us
confidence in the future of your Company, and we hope that you share that
confidence with us.


/s/ Kenneth Levy
- - --------------------------------
Kenneth Levy
Chairman  
Chief Executive Officer


/s/ Kenneth L. Schroeder
- - --------------------------------
Kenneth L. Schroeder
President 
Chief Operating Officer
                                                                        


                                      3

<PAGE>   6
           [ARTWORK]                             [ARTWORK]
Thin film, Develop and Etch Monitor       Reticle Defect Inspection
    and Engineerng Analysis
         [ARTWORK]
Overlay/Linewidth Metrology

KLA'S ROLE IN INTEGRATED CIRCUIT MANUFACTURING

Semiconductor production is one of the most complex manufacturing processes
ever devised by mankind. Yet, for all its technological sophistication, its
manufacturing process is still evolving. As this process matures, the industry
is relying heavily on advanced process control techniques like those pioneered
by KLA.

By monitoring wafers after each critical process step, KLA technology enables
early detection, analysis and elimination of process-induced defects. The
result is improved process yield and a steadily increasing KLA system presence
throughout the wafer fabrication line.

MASK MAKING [ARTWORK]

Expose
Develop/Etch
Linewidth-Overlay Metrology
Defect Inspection
Defect Repair
Clean 
Contamination/Particle
Inspection


WAFER FABRICATION [ARTWORK]

Thin Film Deposition    
Thin Film Monitor    
Resist Coat & Develop
Expose    
Overlay Metrology    
Photo Monitor      
Etch and Clean   
Etch Monitor
Linewidth Metrology
Implant

Accomplishing the process steps depicted here requires many highly
sophisticated systems which incorporate electronics, optics, mechanics,
material handling, software and other technologies.

OFF-LINE ENGINEERING ANALYSIS [ARTWORK]
Optical Defect Detection,    
Review and Analysis
SEM-based Defect Detection,
Review and Analysis






NETWORK

Data Analysis and Communication

TEST AND ASSEMBLY [ARTWORK]  
Probe
Dice
Die Attach
Wire Bond
Encapsulate
Final Test


                                    4 - 5

<PAGE>   7

Reticle Defect Inspection
                                  [ART WORK]

Overlay and Linewidth Metrology

Reticles and masks are to semiconductor fabrication what negatives are to
photography; they contain the master circuit patterns to be transferred to
wafers in the lithography process. KLA yield management starts with inspection
of these reticles for defects before the transfer begins. This is followed by
evaluation of features on the wafer to assure that the pattern has been
accurately transferred, a process which includes overlay and linewidth
metrology. The increased complexity of today's multi-layer circuits requires
reticle inspection and wafer metrology to be highly sensitive and versatile.

The KLA 331 Reticle Inspection System offers the highest defect sensitivity
available and is extendible to advanced lithographic processes such as phase
shift masks. Introduced two years ago, the KLA 331 achieved immediate
acceptance with manufacturers gearing up for production of 64Mb circuits. In
addition, the Company recently introduced an important new reticle inspection
capability called STARlight, which uses reflected and transmitted light
detection techniques simultaneously to identify reticle contaminants, including
airborne particles.

KLA has set the industry standard for wafer metrology following pattern
transfer with the KLA 5000 Series systems, and now holds 50% of the global
market -- twice that of any other vendor. Using proprietary coherence probe
measurement technology, these systems increase lithographic efficiency by
providing improved pattern characterization and real-time control. The KLA 5100
Overlay Metrology System, introduced in June 1994, extends these capabilities
to advanced wafer fabrication facilities that produce devices with features as
small as 0.25 micron with 30% greater throughput than previous systems.

KLA's metrology technology also leads in the characterization of thin-film
heads for computer disk drives, with the company now holding approximately 70%
of this fast-growing market.

                               [ART WORK]
Above: Proprietary KLA image computer technology helps KLA reticle inspection
systems detect leading-edge phase-shift reticle defects.

Right: Patented KLA coherence probe microscopy enhances the repeatability and
accuracy of overlay registration measurements.



                                      6

<PAGE>   8
"In the case of leading edge semiconductor technologies, the quality of
masks can make the difference between climbing the yield curve or struggling
with too narrow a process window."

Geoff Akiki, mask house manager, IBM Corp., Essex Junction, Vermont (At a 1993
BACUS-sponsored meeting in San Francisco)

                                      7

<PAGE>   9
"  An emerging practice is the use of in-line process measurements to better
understand specific die yield limiters. (This) includes the statistical
correlation of die yield with process flow tracking and metrology data."

Report on "Improving Semiconductor Manufacturing Competitiveness," from the
Engineering Research Center, University of California, Berkeley

                                      8

<PAGE>   10
                            Wafer Defect Inspection

                        Electron-beam Defect Inspection

                                  [ART WORK]

During semiconductor wafer fabrication, rapid detection of process-generated
yield-limiting defects is crucial. KLA's systems move this detection from
off-line analysis into the actual fabrication cycle where immediate corrective
action is possible. The KLA 2100 Series, in conjunction with the KLA 2551
Analysis Station, provides a real-time, in-line defect monitor. Throughout the
fab, these systems produce statistical information and defect signature maps
for easy identification and rapid control of defects and their causes. In
addition to these tools, KLA also has partnerships with major universities and
sponsors a forum for the development and dissemination of new yield management
technology and applications. Held throughout the world, these Yield Management
Seminars have had over 700 attendees in their first year, giving KLA a customer
interface which assures that system enhancements are in direct, considered
anticipation of customer needs, and that customers are constantly aware of the
full range of KLA yield management capabilities.

In addition to in-line monitoring, there is still a need for off-line
engineering analysis, both to determine corrective actions and to optimize
processes. With their all-layer, all-defect-types performance, KLA's 2100
Series optical defect detection systems are the industry standard for
addressing these needs. For future technologies, or to complement existing
optical inspection, KLA's SEMSpec Electron-beam Inspection System can detect
and display defects beyond the capabilities of optical technology. As feature
sizes continue to decrease, high-sensitivity SEMSpec inspection will become
more and more integral to leading-edge process optimization and device
production.

                                 [ART WORK]

Above: KLA's scanning electron-beam inspection technology finds defects like
this electrical failure which are beyond the capabilities of optical systems.

Left: High-precision optical systems give the KLA 2131 the ability to find
yield limiting defects like this bridge between two wafer features

                                      9

<PAGE>   11
Yield and Productivity Improvement Software

Defect Data Analysis

Probe Data Analysis                      [ART WORK]

Networking Systems

Finding defects, measuring critical dimensions and overlay, and locating bad
die are merely data gathering procedures. To truly manage yield, this data must
be stored, analyzed, interpreted, and then shared among the fab areas it
affects. Open architecture software and networking systems are the tools
through which the semiconductor manufacturer's growing reliance on yield data
and its analysis can be realized.

In the wafer fab, KLA's Yield Management System depends upon the KLA 2551
Analysis Station, which stores and analyzes in-line defect data and images,
calculates the detailed statistical information and defect signature maps that
enable corrective actions, and then transmits these results to the appropriate
areas over a variety of industry standard networks.

On the test floor, where finished wafers are first tested for electrical
functionality, KLA's new networking software products, Navigator Plus,
Integrator, and Analyzer, are the direct result of KLA's extensive test floor
presence and experience in the sales and support of the ATS Division's
highly-regarded automated wafer probers. KLA realized that, for a variety of
reasons, there was no easy way to directly correlate test floor results to
wafer fab conditions. In response to this and other test floor needs, KLA's
networking software packages standardize user interfaces, streamline prober
program set-up and storage, monitor test results in real-time, provide data
storage and exchange in a standardized data format and analyze test results for
early problem detection and correlation with the wafer fab.

On a larger scale, continuous overall process monitoring and improvement
requires a way of quickly correlating specific process measurement data with
overall fab yield. Recognizing this, KLA recently formed the PRISM (PRocess
Information SysteMs) Division to continue developing the existing test floor
networking products and to develop new stand-alone software packages. PRISM's
first major development effort, now nearing completion, is a Yield Management
Software System that automatically collects and correlates inputs from major
measurement sources in the fab and on the test floor.

                                      10

<PAGE>   12
"In the year 2000, computer-assisted analysis will become an absolute
requirement (in semiconductor manufacturing)."

Dr. Robert McDonald, Manager, Materials Technology Department, Intel Corp.,
Santa Clara, California (Quoted in Semiconductor International, January 1994)

                                      11

<PAGE>   13

MANAGEMENT'S FINANCIAL COMMENTARY

Annual Results of Operations

Fiscal 1994 was a breakthrough year for KLA. Earnings per share of $1.37 were
almost four times those of fiscal 1993 and were more than double our previous
best of $0.65, in fiscal 1989. This sharp improvement was the result of several
factors. First and foremost, the industry leaders increased their understanding
of the value of in-line monitoring for improving the yields of their
manufacturing operations. As a result, the industry began a more significant
adoption of the KLA methodology of using more of the KLA monitors on each of
their fabrication lines. Second, the worldwide semiconductor industry, as a
whole, continued to expand and invest in scarce leading edge (0.5 micron)
semiconductor manufacturing capacity. Third, the cost reductions KLA began in
fiscal 1992 and continuing efficiency improvements benefited our bottom line.

During fiscal 1994, the Wafer Inspection Business Unit (WISARD) was engaged in
an intensive effort to educate the industry on the emerging science of
controlling manufacturing yields. This has resulted in a paradigm shift in our
customers' yield management strategy toward employing multiple in-line,
real-time wafer defect inspection units, rather than the previous strategy of
utilizing a single unit for analysis. The number of fabs worldwide that have
multiple 2100 Series systems increased in fiscal 1994 from 17 to 38. Driven
largely by the growing demand for the 2100 Series, KLA's bookings grew 70% in
fiscal 1994. Backlog rose from $52 million at June 30, 1993, to $125 million at
June 30, 1994.

Sales increased 46% in fiscal 1994 compared with increases of 7% and 5% in
fiscal 1993 and 1992, respectively. Although the dollar sales increase in
fiscal 1994 was primarily attributable to WISARD, the revenue increase in the
Metrology Division was almost as high in percentage increase. Revenue increases
were also recorded in the Reticle and Photomask Business Unit (RAPID) as well
as in the ATS and Watcher Divisions.  The SEM Division sales declined as the
market is just developing for advanced detection capability. The 7% sales
increase in fiscal 1993 reflected strength in the ATS and Metrology Divisions,
which more than offset a decline in the RAPID Business Unit caused by a delay
in completing all the features of its new 300 Series product lines. The 5%
sales increase in fiscal 1992 occurred as WISARD successfully launched the 2100
Series product line and because of an increase in Metrology revenues, offset by
a decline in RAPID revenues from its record level in fiscal 1991. This decline
occurred because of consolidations in the photomask industry and because of the
delayed introduction of the 300 Series product line.

International sales were 57%, 62% and 65% in fiscal years 1992, 1993 and 1994,
respectively. The rising share of international revenues occurred to a large
extent because Korean semiconductor manufacturers were the first to realize the
significance of utilizing multiple process monitors in a single fabrication
line and subsequently made significant investments in adopting this KLA
methodology.  Additionally, in 1994, the Japanese semiconductor industry
completed a recovery to levels of profitability and investment approximating
those of 1990 and 1991.

Gross margins were 36%, 36%, and 45% in fiscal years 1992, 1993 and 1994,
respectively. The sharp improvement in fiscal 1994 was due primarily to an
increase in WISARD's share of overall KLA revenues as well as to an increase in
WISARD's gross margins. Additionally, there were gross margin improvements in
the Customer Support Division coinciding with KLA's assumption of service
responsibilities in Japan. The rise in WISARD's gross margins was due to very
favorable manufacturing efficiencies as unit volumes increased dramatically and
the organization gained experience with the 2100 Series product line. Lower
installation and warranty costs were also achieved as the 2100 Series became
increasingly stable. Finally, the Company benefited in aggregate by a favorable
yen/dollar exchange rate. Gross margins in both fiscal years 1992 and 1993 were
adversely impacted by new product transitions in all divisions which generated
large scrap, rework and overhead variance costs. In RAPID, these transitions,
unlike others in KLA's history, involved redesigns of every significant
subsystem.

Engineering, research and development expenses were 17%, 10% and 9% of revenue
in fiscal 1992, 1993 and 1994, respectively. In absolute dollars, these
expenses rose by $6.1 million or 38% in fiscal 1994. The dollar increase
occurred primarily in WISARD and, secondarily, in Metrology. The decline in the
percent of sales to 9% was due to the fact that WISARD was able to add
engineering staff only half as fast as its revenues were increasing.

Engineering, research and development expenses are shown net of funds KLA
receives from customers, industry groups and government sources. Any
capitalization of software costs also reduces the gross spending. In fiscal
1994, KLA's gross R&D expenses were reduced by 2% from these sources versus
about 4% in fiscal 1992 and 1993. The reduction in percentage was due about
equally to a decline in contract engineering for flat panel inspection products
and to a reduction in the amount of software capitalized by KLA.

Selling, general and administrative costs were 23%, 20% and 20% in fiscal years
1992, 1993 and 1994, respectively. In fiscal 1994, as a percent of sales, both
sales and administration expenses fell slightly. Representative commissions, as
a percent of sales, rose modestly due to an increase in the share of revenue
derived from Japan, Korea and Taiwan, where the bulk of representative
commissions are incurred. Profit-sharing expenses increased substantially,
reflecting the improvement in KLA's financial performance. The reduction in
selling, general and administrative expenses in fiscal 1993 was due to the
restructuring actions and the continuing effects of the reduction in headcount
implemented at the end of fiscal 1992.

Interest income and other, net, increased in fiscal 1994 due to higher average
cash balances of approximately $48 million. Interest income and other, net, did 
not vary significantly between fiscal 1992 and fiscal 1993.             

Interest expense declined in fiscal 1994 due primarily to the resetting in
August 1993 of the interest rate on KLA's mortgage loan for its principal
facility from 10.3% to 5.63%. Interest expense declined in fiscal 1993
primarily due to lower interest rates.

Effective July 1, 1992, the Company adopted Statement of Financial Accounting
Standards No. 109 (FAS 109) "Accounting for Income Taxes." The adoption of FAS
109 changed the Company's method of accounting for

                                      12

<PAGE>   14
income taxes from the deferred method (APB 11) to an asset and liability 
approach. The asset and liability approach requires the recognition of deferred 
tax liabilities and assets for the expected future tax consequences of 
temporary differences between the carrying amounts and the tax bases of other 
assets and liabilities. Adoption of FAS 109 did not have a significant effect 
on the consolidated financial statements.

The deferred tax assets valuation allowance at July 1, 1992, and at June 30,
1993 and 1994, is attributed to U.S. federal and state deferred tax assets. The
Company has $13.3 million of net deferred tax assets in the U.S. at June 30,
1994. Management believes sufficient uncertainty exists such that a valuation
allowance of $11.1 million against these net deferred tax assets is required.
When these reserved deferred tax assets are ultimately realized, $6.0 million
will reduce the Company's federal and state tax provisions and $5.1 million
will be credited to paid-in capital (related to stock option deductions). The
Company's net deferred tax assets in the U.S. at July 1, 1992, and June 30,
1993 were fully reserved.

Net deferred tax liabilities at June 30, 1994, reflect foreign liabilities of
$3.3 million offset by $2.2 million of U.S. assets. The net deferred tax
liability at July 1, 1992, and at June 30, 1993, relates to foreign operations.

The provision for income taxes on pretax income from continuing operations was
2%, 25% and 25% in fiscal 1992, 1993 and 1994, respectively. In fiscal 1992,
the income tax provision of 2% on pretax loss was due primarily to limited loss
carryback availability in the United States, combined with the effect of
foreign income taxes on the Company's European and Asian operations. In fiscal
1993 and 1994, the income tax rate was lower than the statutory U.S. tax rate
because of tax advantages in Switzerland which lowered the net foreign tax rate
and because of the realization of deferred tax assets previously reserved.
Additionally, the fiscal 1994 rate was reduced by the utilization of $1.9
million in foreign tax credits.

The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1985-1992. Management believes sufficient taxes have been provided
in prior years and that the ultimate outcome of this review will not have a
material adverse impact on the Company's financial position or results of
operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $87 million in fiscal 1994 with $69
million from KLA's secondary public offering in February 1994, $11 million from
continuing operations and $9 million from KLA's stock option and stock purchase
plans. Cash provided by operations was reduced somewhat by investments in
working capital to support the 46% rise in revenues.

Capital expenditures totaled approximately $6 million in fiscal 1994, compared
with depreciation charges of approximately $11 million in fiscal 1994. Capital
expenditures for fiscal 1995 are expected to approximate depreciation; however,
this assessment could change if demand continues to exceed estimates and
additional manufacturing capacity is required. No estimate can be made of the
size or cost of any such additional capacity. The Company has begun planning
the construction of one or two additional buildings on undeveloped land at its
campus facility.

KLA currently has a $10 million multicurrency line of credit through Bank of
America. Borrowings under this line of credit were $4.2 million at June 30,
1994. KLA's overseas entities use this facility from time to time for
short-term cash management purposes. In addition, certain of KLA's overseas
entities have local currency borrowings totaling $0.5 million at June 30, 1994.

KLA believes that its current level of liquid assets, working capital and cash
expected to be generated from operations will be sufficient to fund its growth
through at least fiscal 1995. The current policy of KLA is not to pay
dividends. Management believes that it is in the best interests of the
stockholders to continue to reinvest KLA's earnings in the business.

BUSINESS RISKS AND UNCERTAINTIES

The Company's future results will depend on its ability to continuously
introduce new products and enhancements to its customers as demands for higher
productivity and specifications of semiconductor test equipment change or
increase. Due to the risks inherent in transitioning to new products, the
Company must accurately forecast demand in both volume and configuration and
also manage the transition from older products. The Company's results could be
affected by the ability of competitors to introduce new products which have
technological and/or pricing advantages.  The Company's results also will be
affected by strategic decisions made by management regarding whether to
continue particular product lines, and by volume, mix and timing of orders
received during a period, fluctuations in foreign exchange rates, and changing
conditions in both the semiconductor industry and key semiconductor markets
around the world. As a result, the Company's operating results may fluctuate,
especially when measured on a quarterly basis.


                                      13

<PAGE>   15
SELECTED FINANCIAL DATA (unaudited)


<TABLE>
<CAPTION>
                                                        1990        1991         1992         1993         1994
- - ---------------------------------------------------------------------------------------------------------------
                                                                      (In thousands, except per share amounts)
<S>                                                <C>          <C>          <C>          <C>         <C>
YEARS ENDED JUNE 30,
   Net sales                                       $161,642     $148,432     $155,963     $167,236    $243,737
   Restructuring charges (recovery)                       -            -        8,158         (718)          -
   Income (loss) from continuing operations          12,174        2,415      (16,610)       6,961      30,188
                                                                                                              
   Net income (loss)                                  9,380      (10,585)     (13,810)       6,961      30,188
                                                                                                              
   Income (loss) per share from continuing 
      operations                                       0.67         0.13        (0.90)        0.35        1.37
                                                                                                                           
   Net income (loss) per share                         0.52        (0.57)       (0.75)        0.35        1.37
   Weighted average common and dilutive
      common equivalent shares outstanding           18,038       18,552       18,451       19,707      22,044

AT JUNE 30,
   Cash and cash equivalents                         32,263       31,254       23,711       52,362     139,126
   Working capital                                   99,151       91,116       83,961       93,611     212,873
   Total assets                                     179,276      198,023      188,457      199,089     321,570
   Long-term debt                                         -       24,000       24,000       20,000      20,000
   Stockholders' equity                             122,136      113,161      103,032      114,050     227,382
</TABLE>


CONSOLIDATED STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,                                                      1992             1993           1994
- - --------------------------------------------------------------------------------------------------------------
                                                                      (In thousands, except per share amounts)
<S>                                                                   <C>              <C>            <C>
Net sales                                                             $155,963         $167,236       $243,737
- - --------------------------------------------------------------------------------------------------------------  
Costs and expenses:
   Cost of sales                                                        99,993          107,466        133,028
                                                                                                          
   Engineering, research and development                                25,860           16,314         22,435
                                                                                                          
   Selling, general and administrative                                  35,537           32,684         48,192
                                                                                                          
   Restructuring charges (recovery)                                      8,158             (718)             -
- - --------------------------------------------------------------------------------------------------------------
                                                                       169,548          155,746        203,655
- - -------------------------------------------------------------------------------------------------------------- 
Income (loss) from operations                                          (13,585)          11,490         40,082
                                                                                                          
Interest income and other, net                                           1,170            1,217          2,174
                                                                                                          
Interest expense                                                        (3,877)          (3,426)        (2,005)
- - -------------------------------------------------------------------------------------------------------------- 
Income (loss) from continuing operations before income taxes           (16,292)           9,281         40,251
                                                                                                                             
Provision for income taxes                                                 318            2,320         10,063
- - --------------------------------------------------------------------------------------------------------------   
Income (loss) from continuing operations                               (16,610)           6,961         30,188
                                                                                                          
Discontinued operations:
   Recovery of loss on 1991 discontinuance of PCB business               2,800                -              -
- - --------------------------------------------------------------------------------------------------------------
Net income (loss)                                                     $(13,810)        $  6,961       $ 30,188
- - --------------------------------------------------------------------------------------------------------------    
Income (loss) per share from continuing operations                    $  (0.90)        $   0.35       $   1.37
Income per share from discontinued PCB business                           0.15                -              -
- - --------------------------------------------------------------------------------------------------------------
Net income (loss) per share                                           $  (0.75)        $   0.35       $   1.37
- - --------------------------------------------------------------------------------------------------------------
Weighted average common and dilutive common
   equivalent shares outstanding                                        18,451           19,707         22,044
- - --------------------------------------------------------------------------------------------------------------           
See accompanying notes to consolidated financial statements.
</TABLE>



                                       14

<PAGE>   16
CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
ASSETS
AT JUNE 30,                                                                                1993           1994
- - --------------------------------------------------------------------------------------------------------------
                                                                                                (In thousands)
<S>                                                                                  <C>             <C>
Current assets:
   Cash and cash equivalents                                                         $   52,362      $ 139,126
   Accounts receivable, net of allowances of $1,469 and $1,754                           48,077         74,226
   Inventories                                                                           42,489         53,265
   Deferred income taxes                                                                  3,917          7,495
   Other current assets                                                                   4,724          4,343
- - --------------------------------------------------------------------------------------------------------------
      Total current assets                                                              151,569        278,455
- - --------------------------------------------------------------------------------------------------------------
Land, property and equipment, net                                                        39,384         37,149
Other assets                                                                              8,136          5,966
- - --------------------------------------------------------------------------------------------------------------
Total assets                                                                         $  199,089      $ 321,570
- - --------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable and current portion of long-term debt                                 $  6,532      $   4,673

   Accounts payable                                                                       8,953         11,890
   Income taxes payable                                                                   9,403         12,466
   Other current liabilities                                                             33,070         36,553
- - --------------------------------------------------------------------------------------------------------------
      Total current liabilities                                                          57,958         65,582
- - --------------------------------------------------------------------------------------------------------------
Deferred income taxes                                                                     7,081          8,606
Long-term debt                                                                           20,000         20,000
Commitments and contingencies
Stockholders' equity:
   Preferred Stock $.001 par value, 1,000 shares authorized,
      none outstanding                                                                        -              -
   Common shares, $.001 par value, 75,000 shares authorized,
      19,503 and 22,864 shares issued and outstanding                                        20             23
   Capital in excess of par value                                                        64,638        147,358
   Retained earnings                                                                     50,087         80,275
   Treasury stock                                                                          (581)          (581)
   Cumulative translation adjustment                                                       (114)           307
- - --------------------------------------------------------------------------------------------------------------
      Total stockholders' equity                                                        114,050        227,382
- - --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                           $  199,089     $  321,570
- - --------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                      15


<PAGE>   17
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                Common Stock and Capital
                                  in excess of par value      Retained        Treasury Stock      Translation
                                  Shares         Amount       Earnings       Shares   Amount      Adjustments
- - --------------------------------------------------------------------------------------------------------------
                                                                                                (In thousands)
                                                                                                              
<S>                               <C>          <C>           <C>              <C>     <C>            <C>
Balance at June 30, 1991          18,298       $ 56,094       56,936          (55)    $(581)         $   712
- - ------------------------------------------------------------------------------------------------------------          
Exercise of stock options            203          1,431
Shares sold in stock
   purchase plan                     195          1,432
Net loss                                                     (13,810)
                                                                    
Translation adjustments                                                                                  818
- - ------------------------------------------------------------------------------------------------------------
Balance at June 30, 1992          18,696         58,957       43,126          (55)     (581)           1,530
- - ------------------------------------------------------------------------------------------------------------
                                                                                                          
Exercise of stock options            604          4,277
Shares sold in stock
   purchase plan                     203          1,424
Net income                                                     6,961
                                                                    
Translation adjustments                                                                               (1,644)
- - ------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993          19,503         64,658       50,087          (55)     (581)            (114)
- - ------------------------------------------------------------------------------------------------------------
                                                                                                              
Exercise of stock options            854          6,960
Tax benefit on exercise of
   stock options                                  5,232
Shares sold in stock
   purchase plan                     207          1,965
Shares sold in stock
   offering                        2,300         68,566
Net income                                                    30,188
                                                                    
Translation adjustments                                                                                  421
- - ------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994          22,864       $147,381       80,275          (55)    $(581)         $   307
- - ------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                      16


<PAGE>   18
CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,                                                     1992             1993            1994
- - --------------------------------------------------------------------------------------------------------------
                                                                                                (In thousands)
<S>                                                                 <C>              <C>             <C>
Cash flows from continuing operating activities:
   Income (loss) from continuing operations                         $ (16,610)       $   6,961       $  30,188
Adjustments required to reconcile income (loss)
   from continuing operations to cash provided
   by (used for) continuing operations:
      Depreciation and amortization                                    10,732            9,646          10,734
      Deferred income taxes                                               142             (466)         (2,053)
      Changes in assets and liabilities:
         Accounts receivable                                           (2,583)             947         (26,149)
         Inventories                                                       70            6,048         (10,776)
         Other current assets                                            (766)           2,062             381
         Accounts payable                                              (1,970)           3,375           2,937
         Income taxes payable                                            (820)            (429)          3,063
         Other current liabilities                                      6,840            2,655           3,483
         Other assets                                                     526             (492)           (520)
- - --------------------------------------------------------------------------------------------------------------
Cash provided by (used for) continuing operations                      (4,439)          30,307          11,288
- - --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Capital expenditures                                                (5,085)          (3,226)         (5,809)
   Other                                                               (1,280)            (357)              -
- - --------------------------------------------------------------------------------------------------------------
Cash (used for) investing activities                                   (6,365)          (3,583)         (5,809)
- - --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Short-term borrowings, net                                             125           (2,881)          2,141
   Payment of current portion of long term debt                             -                -          (4,000)
   Sales of common stock                                                2,863            5,701          82,723
- - --------------------------------------------------------------------------------------------------------------
Cash provided by financing activities                                   2,988            2,820          80,864
- - --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes                                           273             (893)            421
- - --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                       (7,543)          28,651          86,764
Cash and cash equivalents at beginning of year                         31,254           23,711          52,362
- - --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                            $  23,711        $  52,362       $ 139,126
- - --------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEARS ENDED JUNE 30,                                                     1992             1993            1994
- - --------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
   Interest                                                         $   3,778        $   3,515       $   2,007
   Income taxes                                                         1,361            1,914           3,369
- - --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>



                                      17

<PAGE>   19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Subsidiaries with
accounts denominated in foreign currencies have been translated principally
using the local currencies as the functional currencies. Accordingly, the
assets and liabilities of these subsidiaries are translated at the rates of
exchange on the balance sheet date, income and expense items are translated at
average rates of exchange for the year, and the resulting translation gains or
losses are included in stockholders' equity. Foreign currency transaction gains
and losses have not been material and are included in interest income and
other, net.

REVENUE RECOGNITION - The Company recognizes sales of wafer inspection,
metrology, reticle and photomask inspection systems upon acceptance at the
Company's plant, which is when title transfers. Customers may observe and
approve satisfactory completion of the tests. Sales of other systems are
recognized upon shipment. A provision for the estimated future cost of system
installation and warranty is recorded at the time revenue is recognized.
Revenues from service contracts are recognized during the terms of the
contracts on a straight-line basis.

INCOME PER SHARE - Income per common and common equivalent share is computed
using the weighted average number of common and common equivalent shares
outstanding during the respective periods, including the assumed net shares
issuable upon exercise of stock options, when dilutive.

RESEARCH AND DEVELOPMENT - The Company is actively engaged in significant
product improvement and new product development efforts. Research and
development expenses relating to possible future products aggregated
approximately $19.3, $13.4 and $16.8 million for fiscal 1992, 1993 and 1994,
respectively.

SOFTWARE DEVELOPMENT COSTS - The Company capitalizes software development costs
in accordance with Statement of Financial Accounting Standards No. 86. For the
years 1992, 1993 and 1994, the Company capitalized $1.3, $1.2 million and none,
respectively, of software development costs in connection with the development
of new products and new features and functions on existing products. Such costs
are amortized on a straight-line basis over the estimated useful life of three
years or the ratio of current revenue to the total of current and anticipated
future revenue, whichever is greater. Amortization charged to expense during
the fiscal years ended 1992, 1993 and 1994 was $2.1, $1.9 and $2.8 million,
respectively. Capitalized software, net of software amortization, totaled $5.0,
$4.3 and $1.5 million at June 30, 1992, 1993 and 1994, respectively.

INCOME TAXES - Effective July 1, 1992, the Company adopted Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes." The adoption of FAS 109 changed the Company's method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability
approach. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of other
assets and liabilities. Adoption of FAS 109 did not have a significant effect
on the consolidated financial statements. Undistributed earnings of certain of
the Company's foreign subsidiaries, for which no U.S. income taxes have been
provided, aggregated approximately $6.0 million at June 30, 1994. The amount of
the unrecognized deferred tax liability related to this investment is estimated
at approximately $2.2 million at June 30, 1994.

CASH EQUIVALENTS - Cash equivalents consist of highly liquid investments with a
maturity date at acquisition of three months or less. Cash and cash equivalents
are stated at cost, plus accrued interest, which approximates market value.
During 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (FAS 115), "Accounting for Certain
Investments in Debt and Equity Securities," which requires a change in the
method used to account for certain investments. FAS 115 will be effective for
the Company's fiscal 1995. The Company does not believe that the adoption of
this statement will have a material impact on its financial position or results
of operations.

INVENTORIES - Inventories are stated at the lower of cost or market, cost being
determined using standard costs which approximate actual costs on a first-in,
first-out basis.

PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets, which are 30 years for buildings and
building improvements, five years for furniture and fixtures, and range from
three to five years for machinery and equipment. The life of the lease or the
useful life, whichever is shorter, is used for the amortization of leasehold
improvements.

FOREIGN EXCHANGE HEDGING - The Company purchases forward exchange contracts and
options to hedge against currency fluctuations which affect certain foreign
currency denominated sales and purchase transactions. Because the impact of
movements in currency exchange rates on foreign exchange contracts offsets the
related impact on the underlying items being hedged, these financial
instruments do not subject the Company to speculative risk that would otherwise
result from changes in currency exchange rates. Unrealized gains and losses on
these contracts are deferred and accounted for as part of the hedged
transactions. Cash flows from these contracts are classified in the Statement
of Cash Flows in the same category as the hedged transactions.

At June 30, 1993, the Company had foreign exchange contracts maturing
throughout fiscal 1994 to sell approximately $19.2 million in foreign currency,
primarily Japanese yen, and to purchase approximately $0.7 million of Japanese
yen. At June 30, 1994, the Company had foreign exchange contracts maturing
during fiscal 1995 to sell approximately $48.1 million in foreign currency,
primarily Japanese yen, and to purchase approximately $5.8 million of Japanese
yen. Of these contracts, approximately $35.2 million of foreign currency
contracts hedge foreign currency payables and receivables carried on the
balance sheet as of June 30, 1994, and


                                      18

<PAGE>   20
NOTE 1 (continued)

consequently, the financial statements reflect the fair market value of the
contracts and their underlying transactions. Approximately $16.5 million and
$2.2 million of the contracts hedge firm commitments for future sales and
purchases, respectively, denominated in foreign currency.  The fair market
value of these contracts at June 30, 1994, based upon prevailing market rates
at that date, was approximately $16.7 million and $2.2 million, respectively.

CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash equivalents, trade accounts receivable and financial instruments used in
hedging activities.

The Company places its cash equivalents in a variety of financial instruments
such as certificates of deposit, commercial paper, municipal debt and U.S.
Government agency debt. Company policy limits the amount of credit exposure to
any one financial institution or commercial issuer.

The Company sells its systems to semiconductor manufacturers throughout the
world. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The Company maintains an allowance for uncollectible accounts receivable based
upon expected collectibility of all accounts receivable.

The Company is exposed to credit loss in the event of nonperformance by
counterparties on the foreign exchange contracts used in hedging activities.
The Company does not anticipate nonperformance by any of these counterparties.

NOTE 2 DETAILS OF FINANCIAL STATEMENT COMPONENTS

<TABLE>
                                                                                       1993              1994
- - --------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>          <C>
Inventories:                                                                                    (In thousands)
   Customer service spares                                                           13,530         12,220
   Systems raw materials                                                              8,389         12,597
   Work-in-process                                                                   10,004         13,348
   Demonstration equipment                                                           10,566         15,100
- - --------------------------------------------------------------------------------------------------------------
                                                                                     42,489         53,265
- - --------------------------------------------------------------------------------------------------------------
Land, property and equipment:
   Land                                                                             $10,502         10,502
   Buildings and improvements                                                        20,361         21,928
   Machinery and equipment                                                           30,780         33,143
   Furniture and fixtures                                                             4,625          4,549
   Leasehold improvements                                                             6,321          4,029
- - --------------------------------------------------------------------------------------------------------------
                                                                                     72,589         74,151
   Less accumulated depreciation and amortization                                   (33,205)       (37,002)
- - --------------------------------------------------------------------------------------------------------------
                                                                                     39,384         37,149
- - --------------------------------------------------------------------------------------------------------------
Other current liabilities:
   Accrued compensation and benefits                                                $11,682         16,328
   Accrued warranty and installation                                                 12,188         14,367
   Unearned service contract revenue                                                  2,854          3,054
   Other                                                                              6,346          2,804
- - --------------------------------------------------------------------------------------------------------------
                                                                                     33,070         36,553
- - --------------------------------------------------------------------------------------------------------------
</TABLE>




                                      19

<PAGE>   21
NOTE 3 GEOGRAPHIC REPORTING

The Company is a leading manufacturer of yield monitoring and process control
systems for the semiconductor manufacturing industry. For geographic reporting,
sales are attributed to the geographic location of the sales and service
organizations and costs directly and indirectly incurred in generating sales
are similarly assigned. During fiscal 1993, one customer accounted for 11% of
net sales. During fiscal 1992 and 1994, no customer accounted for more than 10%
of sales. The following is a summary of operations by geographical territories:


<TABLE>
<CAPTION>
                                                                      1992             1993           1994
- - ----------------------------------------------------------------------------------------------------------
                                                                                            (In thousands)
<S>                                                               <C>              <C>            <C>
Net sales from unaffiliated customers:
   United States                                                  $ 67,240         $ 62,802       $ 84,493
                                                                                                          
   Western Europe                                                   22,484           34,141         37,854
                                                                                                          
   Japan                                                            48,825           46,914         79,820
                                                                                                          
   Asia Pacific                                                     17,414           23,379         41,570
- - ----------------------------------------------------------------------------------------------------------
                                                                  $155,963         $167,236       $243,737
- - ----------------------------------------------------------------------------------------------------------
Operating results:
   United States                                                  $ (5,570)        $  7,558       $ 15,407
                                                                                                          
   Western Europe                                                      608            6,262          9,234
                                                                                                          
   Japan                                                            (5,214)          (1,783)        11,166
                                                                                                          
   Asia Pacific                                                      2,204            3,896         14,544
- - ----------------------------------------------------------------------------------------------------------
                                                                    (7,972)          15,933         50,351
                                                                                                          
   General corporate expenses                                       (5,613)          (4,443)       (10,269)
- - ----------------------------------------------------------------------------------------------------------
   Operating profit (loss)                                        $(13,585)        $ 11,490       $ 40,082
- - ----------------------------------------------------------------------------------------------------------
Identifiable assets:
   United States                                                  $103,960         $ 96,383       $ 95,041
                                                                                                          
   Western Europe                                                   15,272           22,631         19,853
                                                                                                          
   Japan                                                            27,026           18,627         38,444
                                                                                                          
   Asia Pacific                                                     18,581           13,487         24,264
- - ----------------------------------------------------------------------------------------------------------
                                                                   164,839          151,128        177,602
                                                                                                          
   General corporate assets                                         23,618           47,961        143,968
- - ----------------------------------------------------------------------------------------------------------
   Total assets                                                   $188,457         $199,089       $321,570
- - ----------------------------------------------------------------------------------------------------------
</TABLE>



Intercompany transfers of products from the United States to other regions,
based on cost of products transferred, were approximately $34.2, $39.7 and
$52.1 million in fiscal years 1992, 1993 and 1994, respectively. Transfers from
other regions were not significant in fiscal 1992 and 1993. During fiscal 1994,
transfers to the U.S. from other regions were $9.7 million. Corporate assets
consist primarily of cash and cash equivalents and other investments. Corporate
expenses consist primarily of general, administrative and other expenses not
attributable to geographical regions. Capital expenditures and depreciation
expense have been primarily in the United States.


NOTE 4 EMPLOYEE BENEFIT PLANS

The Company has a profit sharing program, wherein a percentage of pretax
profits, as determined by the Board of Directors, is accumulated and
distributed quarterly to all employees who have completed a stipulated
employment period. In addition, the Board may approve matching contributions to
the Company's savings and investment plan, a qualified salary reduction plan
under section 401(k) of the Internal Revenue Code. The total charge to
operations under the profit sharing and 401(k) programs aggregated
approximately $0.4, $0.7 and $3.3 million in fiscal 1992, 1993 and 1994,
respectively.

Under the 1982 Stock Option Plan, as amended, 4,750,000 shares have been
reserved for issuance to eligible employees and directors as either Incentive
Stock Options (ISO's) or non-qualified options. Options under this plan are
granted at prices determined by the Board of Directors, but not less than the
fair market value on the date of grant, and expire ten years after the date of
grant. Generally, options become exercisable within five years of the date of
grant, vesting monthly after a waiting period of six to thirty months.

In October 1990, the Company adopted the 1990 Outside Directors Stock Option
Plan to grant options to non-employee directors. This plan calls for an annual
grant of 2,500 options, at fair market value, to each outside director. The
options become exercisable at one fifty-fourth per month beginning six months
from date of grant and expire ten years from grant date. A total of 100,000
shares have been reserved for issuance under this plan.

In August 1992, the Company allowed all holders of outstanding options, with
the exception of holders who were officers or directors of the Company during
all of fiscal 1992, to exchange higher priced options for new non-qualified
options at $7.50 per share, the fair market value on the date of the Board's
action; 412,000 options were exchanged.

                                      20



<PAGE>   22
NOTE 4 (CONTINUED)

Following is a summary of stock option transactions:

<TABLE>
<CAPTION>                                                                                 STOCK       RESERVED 
                                                                                        OPTIONS         SHARES
                                                                  OPTION PRICE      OUTSTANDING      AVAILABLE
- - --------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                  <C>            <C>
Balance at June 30, 1991                                          $ 3.17-21.25        3,109,109        907,286
   Options granted                                                  8.63-11.88          264,050       (264,050)
   Options cancelled                                                3.17-20.25         (231,665)       231,665
   Options exercised                                                3.17-13.00         (202,902)
- - --------------------------------------------------------------------------------------------------------------
Balance at June 30, 1992                                         $  6.13-21.25        2,938,592        874,901
   Options granted                                                  7.50-12.38        1,048,246     (1,048,246)
   Options cancelled                                                6.13-20.50         (594,311)       594,311
   Options exercised                                                6.13-14.00         (603,912)
- - --------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993                                         $  7.00-21.25        2,788,615        420,966
   Options granted                                                 19.13-41.63          235,050       (235,050)
   Options cancelled                                                7.00-31.75         (113,749)       113,749
   Options exercised                                                7.00-31.75         (853,509)
- - --------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994                                         $  7.00-41.63        2,056,407        299,665
- - --------------------------------------------------------------------------------------------------------------
</TABLE>


At June 30, 1994, options to purchase 736,686 shares of stock were exercisable
under all option plans.

The Company has reserved 1,700,000 shares of common stock to be issued under
the 1981 Employee Stock Purchase Plan. The Plan permits eligible employees to
purchase common stock, through payroll deductions, at 85% of the lower of the
fair market value of the common stock on the date at the beginning of the
two-year offering period or the last day of the purchase period. Substantially
all employees are eligible to participate in the Plan. At June 30, 1994,
204,393 shares were available for future issuance under the Plan.

NOTE 5 FINANCING ARRANGEMENTS

At June 30, 1994, the Company had a $20 million interest-only mortgage on its
principal facility due August 1995 bearing interest of 5.63% per annum through
August 1994.  Under the terms of the loan, the interest rate will be reset in
August 1994 to 7.62%.  The mortgage, which is secured by $32.4 million in land,
buildings and building improvements at June 30, 1994, requires the Company to
maintain, among other things, minimum working capital and tangible net worth.

As of June 30, 1994, the Company had a $10 million multicurrency line of credit
with a bank, expiring December 31, 1994.  The line of credit has a facility fee
of 0.25% per annum.  Interest on domestic and foreign borrowings is charged at
the bank's reference rate and at the bank's offshore reference rate plus
0.875%, respectively.  The agreement requires the Company to maintain, among
other things, minimum quick ratio, tangible net worth and profitability.  At
June 30, 1994, the Company was in compliance with all of these covenants.  As
of June 30, 1994, approximately $4.2 million had been borrowed at the related
offshore interest rate of 3.91% per annum.

In addition, certain of the Company's foreign subsidiaries had short-term local
currency borrowings of approximately $0.5 million at an average interest rate
of 4.62% at June 30, 1994.

Based upon interest rates available to the Company for issuance of debt with
similar terms and remaining maturities, the fair value of the long-term
mortgage debt and notes payable was approximately equal to the recorded value.

NOTE 6 RESEARCH AND DEVELOPMENT ARRANGEMENTS

The Company has entered into research and development arrangements with certain
key customers and other entities to partially fund the development of new
technology on a best efforts basis. The financial risks of these research and
development arrangements are substantively and genuinely those of the funding
entities. In fiscal 1992, 1993 and 1994, revenues of $6.1, $6.8 and $5.7
million, respectively, have been recognized on these research and development
contracts on the percentage of completion basis. These revenues are offset
against gross engineering, research and development expenses.

NOTE 7 INVESTMENT IN ACROTEC

During fiscal 1991, the Company invested approximately $0.2 million cash for an
8% equity investment in Acrotec, a Japanese company developing an automated
optical inspection device for flat panel displays utilizing base technology
provided by the Company. In addition, the Company has a research and
development arrangement with Acrotec to provide research, development and
engineering on a best efforts cost reimbursement basis. The Company received
$2.5, $2.1 and $1.6 million in fiscal 1992, 1993 and 1994, respectively, under
this research and development arrangement, and has recorded these amounts as a
reduction of sales, administrative, engineering, research and development
expenses (see Note 6).

                                      21



<PAGE>   23
NOTE 8 INCOME TAXES

The components of income (loss) from continuing operations before income taxes
were as follows:

<TABLE>
<CAPTION>
                                                                         1992          1993        1994
                                                                                         (In thousands)
- - -------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>        <C>
Domestic                                                             $(22,582)       $1,828     $31,515
                                                                                                          
Foreign                                                                 6,290         7,453       8,736
- - -------------------------------------------------------------------------------------------------------          
                                                                     $(16,292)       $9,281     $40,251
- - -------------------------------------------------------------------------------------------------------                     
</TABLE>



The provisions for income taxes charged to continuing operations were as
follows:


<TABLE>
<CAPTION>
                                                                         1992            1993         1994
                                                                                            (In thousands)
- - ----------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>          <C>
Federal:
   Currently payable (refundable)                                     $(1,698)        $   495     $  7,587
                                                                                                          
   Deferred                                                               204               -       (2,195)
- - ----------------------------------------------------------------------------------------------------------                        
                                                                       (1,494)            495        5,392
- - ----------------------------------------------------------------------------------------------------------         
State:
- - ----------------------------------------------------------------------------------------------------------
   Currently payable                                                      175             321        2,222
                                                                                                          
   Deferred                                                              (175)              -            -
- - ----------------------------------------------------------------------------------------------------------
                                                                            -             321        2,222
- - ----------------------------------------------------------------------------------------------------------                       
Foreign:
   Currently payable                                                      867           2,679        2,307
                                                                                                          
   Deferred                                                               945          (1,175)         142
- - ----------------------------------------------------------------------------------------------------------
                                                                        1,812           1,504        2,449
- - ----------------------------------------------------------------------------------------------------------                          
Provision for income taxes from continuing operations                 $   318         $ 2,320     $ 10,063
- - ----------------------------------------------------------------------------------------------------------
</TABLE>



The following is a reconciliation of the effective income tax rates from
   continuing operations and the United States statutory federal income tax
   rate:  




<TABLE>
<CAPTION>
                                                                          1992              1993         1994
- - -------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>               <C>           <C>
Statutory federal income tax rate                                        (34.0)%            34.0%        35.0%
State income taxes, net of federal tax benefits                              -               2.3          3.6
Effect of foreign operations at lower tax rates                           (2.0)            (11.1)        (1.7)
Non-taxable FSC income                                                       -                 -         (1.5)
Financial statement operating loss carryforward
   not recognized because realization is uncertain                        35.3                 -            -
Foreign tax credit                                                           -                 -         (4.8)
Realized deferred tax assets previously reserved                             -              (3.8)        (5.8)
Other                                                                      2.7               3.6          0.2
- - -------------------------------------------------------------------------------------------------------------
Effective tax rate                                                         2.0%             25.0%        25.0%
- - -------------------------------------------------------------------------------------------------------------
</TABLE>



Deferred tax liabilities (assets) at July 1, 1992, June 30, 1993 and 1994 are
comprised of the following:


<TABLE>
<CAPTION>
                                                                   July 1,         June 30,       June 30,
                                                                      1992             1993           1994
                                                                                            (In thousands)
- - ----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>            <C>
Deferred tax liabilities:                                                        
   Depreciation                                                   $  4,342         $  4,317          5,157
                                                                                                          
   Unremitted earnings of foreign subsidiaries not 
     permanently reinvested                                          3,902            2,726          6,327
                                                                                                                            
   Capitalized software                                              1,963            1,679            641
   Other                                                               963            1,596          1,255
- - ----------------------------------------------------------------------------------------------------------                       
                                                                    11,170           10,318         13,380
- - ----------------------------------------------------------------------------------------------------------           
Deferred tax assets:
   Inventory reserves and basis differences                         (9,357)          (9,876)       (11,483)
                                                                                                          
   Federal and state loss and credit carryforwards                  (5,279)          (4,816)        (4,696)
                                                                                                          
   Other asset valuation reserves                                   (2,079)          (1,874)        (2,008)
                                                                                                          
   Reserves for restructured and discontinued operations            (1,749)            (668)          (331)
   Employee benefit accruals                                        (1,026)          (1,528)        (1,885)
                                                                                                          
   Warranty and installation accruals                                 (674)            (934)        (1,880)
                                                                                                          
   Other                                                              (984)            (853)        (1,064)
- - ----------------------------------------------------------------------------------------------------------
                                                                   (21,148)         (20,549)       (23,347)
- - ----------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance                             13,746           13,395         11,078
- - ----------------------------------------------------------------------------------------------------------
Total net deferred tax liabilities                                $  3,768         $  3,164          1,111
- - ----------------------------------------------------------------------------------------------------------
                                                                                                          
</TABLE>


                                                    22


<PAGE>   24
NOTE 8 (CONTINUED)

The deferred tax assets valuation allowance at June 30, 1993 and 1994, is
attributed to U.S. federal and state deferred tax assets. The Company has $13.3
million of net deferred tax assets in the U.S. at June 30, 1994. Management
believes sufficient uncertainty exists such that a valuation allowance of $11.1
million against these net deferred tax assets is required. When these reserved
deferred tax assets are ultimately realized, $6.0 million will reduce the
Company's federal and state tax provisions and $5.1 million will be credited to
paid-in capital (related to stock option deductions). The Company's deferred
tax assets in the U.S. at July 1, 1992, and June 30, 1993, were fully reserved.
During fiscal 1993 and 1994, the Company realized $0.4 and $2.3 million,
respectively, of deferred tax assets previously reserved, reducing the
valuation allowance by corresponding amounts.

In accordance with FAS 109, the valuation allowance is allocated pro-rata to
federal and state current and non-current deferred tax assets. Net deferred tax
liabilities at June 30, 1994, of $1.1 million, reflect foreign liabilities of
$3.3 million offset by $2.2 million of U.S. assets.  The net deferred tax
liability at July 1, 1992 and June 30, 1993 relates to foreign operations.

The Company has federal research and development and other tax credit
carryovers of approximately $4.6 million that will expire primarily in fiscal
1998 through 2009.

The Company's manufacturing operations in Switzerland are exempt from taxes
through 2001. The effect of this tax exemption was to increase net income in
fiscal 1993 and 1994 by approximately $0.6 million for each year.

The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1985 to 1992. Management believes sufficient taxes have been
provided in prior years and that the ultimate outcome of these reviews will not
have a material adverse impact on the Company's financial position or results
of operations.

NOTE 9 COMMITMENTS AND CONTINGENCIES

The Company leases several facilities under operating leases expiring at
various dates through fiscal 2025 with renewal options at fair market value for
additional periods ranging up to ten years. The aggregate minimum rental
commitment under these lease agreements as of June 30, 1994, excluding property
taxes, insurance and certain other costs to be paid by the Company, are
approximately $2.3, $1.4, $1.0, $1.0, $0.5 and $1.3 million in fiscal 1995
through 1999 and thereafter, respectively. Total rental expense under all
operating leases was $3.2, $2.9 and $2.5 million in fiscal 1992, 1993 and 1994,
respectively.

The Company is the plaintiff in two patent infringement suits in which the
defendants filed counterclaims alleging interference with business.  In
addition the Company has also filed suit against two of its vendors for
defective merchandise delivered by them. One of these resulted in a
counterclaim. The Company is also a defendant in three suits arising out of the
discontinued printed circuit board inspection business. In one of them the
trial court ruled in favor of the Company on all causes of action asserted
against it. This case is presently under appeal. The remaining cases are in the
early discovery stage. The Company also filed a complaint against another
semiconductor equipment manufacturer in which the Company holds a minority
interest. The Company alleges that its ownership was unjustly diluted by the
defendant. In addition to the above, the Company from time to time is put on
notice by its customers regarding possible patent infringement. Management does
not believe that any of these matters will have an adverse material effect on
the Company's financial position or results of operations.

NOTE 10 STOCKHOLDERS' EQUITY 

In February 1994, the Company sold 2,300,000 shares of common stock at $ 31.50
per share in a public offering resulting in $68.6 million of proceeds to the
Company, net of offering expenses.

In March 1989, the Company implemented a plan to protect stockholders' rights
in the event of a proposed takeover of the Company. Under the plan, each share
of the Company's outstanding common stock carries one Common Stock Purchase
Right (Right). The Right entitles the holder, under certain circumstances, to
purchase common stock of the Company or its acquirer at a discounted price. The
Rights are redeemable by the Company and expire in 1999.

NOTE 11 FISCAL 1992 RESTRUCTURING

Restructuring charges in fiscal 1992 of $8.2 million include $2.4 million for
costs associated with the discontinuance of the EMMI product line, $1.6 million
of expenses for eliminating one corporate facility, $0.9 million in severance
costs, and $3.3 million for costs associated with a redefinition of certain
product strategies. During fiscal 1993, a $0.7 million recovery was recognized
on the sale of the EMMI product line.

NOTE 12 DISCONTINUED PCB BUSINESS

In December 1990, the Company divested its printed circuit board (PCB)
inspection business and recorded a $15 million pretax charge as a result. In
October 1991, the Company entered into an agreement to sell substantially all
of the assets and related technology of the PCB business for approximately $4.3
million plus future royalties. The agreement required the Company to transfer
the technology, provide training and develop certain software to enhance the
product. The Company recognized a $2.8 million recovery of the fiscal 1991
provision in the third quarter of fiscal 1992 upon substantial completion of
its obligations under the sale agreement.

                                      23


<PAGE>   25
R
EPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and
Board of Directors of
KLA Instruments Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of KLA
Instruments Corporation and its subsidiaries at June 30, 1993 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.


PRICE WATERHOUSE LLP

San Jose, California
July 26, 1994





<TABLE>
<CAPTION>
Common Stock                                                     1993                                  1994
                                                          High          Low                     High          Low
- - -----------------------------------------------------------------------------------------------------------------
<S>                                                     <C>          <C>                      <C>         <C>
First Quarter                                            9            7 1/8                   26 1/2       17
                                                                                                            
Second Quarter                                          12 1/4        7 3/4                   28           19
                                                                                                            
Third Quarter                                           14 3/4       10 5/8                   43           25 7/8
                                                                                                              
Fourth Quarter                                          19 1/2       11 1/4                   43 1/4       32 1/4
- - ----------------------------------------------------------------------------------------------------------------- 
</TABLE>


The Company's common stock is traded on the NASDAQ National Market System under
the symbol "KLAC." All common stock prices reflect closing prices per the
NASDAQ National Market System.

The Company has not paid cash dividends on its common stock and does not plan
to pay cash dividends to its stockholders in the near future. The Company
presently intends to retain its earnings to finance further growth of its
business. As of June 30, 1994, the Company had approximately 1,014 stockholders
of record.


                                      24

<PAGE>   26
CORPORATE DIRECTORY

OFFICERS

Kenneth Levy
Chairman of the Board
Chief Executive Officer

Kenneth L. Schroeder
President
Chief Operating Officer

Robert J. Boehlke
Vice President Finance
  and Administration,
  Chief Financial Officer

Gary E. Dickerson
Vice President

Michael D. McCarver
Vice President

Neil Richardson, Ph. D.
Vice President

Magnus O. W. Ryde
Vice President

Arthur P. Schnitzer
Vice President

Ben Tsai, Ph. D.
Vice President
Chief Technical Officer

Virginia DeMars
Vice President,
Human Resources

Christopher Stoddart
Treasurer

William Turner
Vice President,
Controller

Paul E. Kreutz, Esq.
Secretary

DIRECTORS

Kenneth Levy
Chairman of the Board
Chief Executive Officer

Kenneth L. Schroeder
President
Chief Operating Officer

Leo J. Chamberlain
Private Investor

Robert E. Lorenzini
Private Investor

Yoshio Nishi
Director
Research & Development Center
Hewlett-Packard

Samuel Rubinovitz
Retired
Executive Vice President
EG&G, Inc.

Dag Tellefsen
General Partner
Glenwood Venture Management

CORPORATE OFFICE

KLA Instruments Corporation
160 Rio Robles
P.O. Box 49055
San Jose, California 95161-9055
(408) 434-4200

INTERNATIONAL OFFICES
KLA Instruments Ltd.
4 The Business Center
Molly Millars Lane
Wokingham, Berkshire
RG11 2QZ, United Kingdom
44-734-890666

KLA Instruments GmbH
Leonrodstrasse 58
80636 Muenchen, Germany
49-89-121561-0

KLA Instruments France, S.A.
25 Rue Michael Faraday
78180 Montigny-le-Bretonneux
France
33.1.30.45.30.03

KLA Instruments Israel Corporation
4 Science Avenue
North Industrial Center
P.O. Box 143
Migdal Ha'Emek 10500, Israel
972-65-42987

KLA Instruments Malaysia Sd Bhd
60 Jalan Timah 7
Taman Sri Putri
81300 Skudai
Johor Bahru, Malaysia
607-571-946

KLA Japan, Ltd.
Endo Dai-Ni Building
1-31-11 Akebono-Cho
Tachikawa City
Tokyo 190, Japan
81-425-23-2181

KLA Acrotec Company, Ltd.
20-16 Hikawadai
Nerima-Ku 3-Chome
Tokyo 179, Japan
81-359-20-3611

KLA Instruments, S.A.
Chemin de Buchaux 38
CH-2022 Bevaix
Switzerland
41-38-462090

KLA Instruments Korea
4th Floor Chunil Building
961-1 Daechi 3-Dong
Kangnam-Ku, Seoul 135-283
Republic of Korea
822-563-0552

KLA Instruments Taiwan
Fifth Floor
115 Ming Sheng Road
Hsinchu City, Taiwan
Republic of China
886-35-335163

INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP
San Jose, California

GENERAL LEGAL COUNSEL
Gray Cary Ware & Freidenrich
Palo Alto, California

REGISTRAR AND TRANSFER AGENT
First National Bank of Boston
Boston, Massachusetts

Additional copies of this report, as well as copies of SEC Form 10K, for the
year ended June 30, 1994, may be obtained from the Company without charge by
writing to:

KLA Instruments Corporation
Attn:  Investor Relations
P.O. Box 49055
San Jose, CA  95161-9055


                                      25

<PAGE>   27
                                      KLA
                        (C) KLA Instruments Corporation
                          Printed in U.S.A.  1094-15M



<PAGE>   1




                                   EXHIBIT 21



                            LIST OF SUBSIDIARIES OF

                          KLA INSTRUMENTS CORPORATION





<TABLE>
<CAPTION>
                                                                             STATE OR OTHER
                                                                             JURISDICTION OF
NAME                                                                         INCORPORATION
- - ----                                                                         -------------

<S>                                                                          <C>
KLA Building Corporation                                                     California

KLA Instruments International Corporation                                    California

KLA Management Corporation                                                   Delaware

KLA Instruments PCBI Corporation                                             California

KLA Instruments Limited                                                      United Kingdom

KLA Instruments GmbH                                                         Germany

KLA Instruments France S.A.                                                  France

KLA Japan Limited                                                            Japan

KLA Instruments Sales Corporation                                            U.S. Virgin Islands

KLA Instruments (Israel) Corporation                                         Israel

KLA Holding Company Limited                                                  Israel

KLA (Israel) Service Limited                                                 Israel

KLA Instruments (Cayman) Limited                                             Cayman Islands

KLA Instruments KLINNIK Corporation                                          California

KLA Instruments S.A.                                                         Switzerland

KLA Instruments (Malaysia) SdnBdh                                            Malaysia

</TABLE>


The aforesaid subsidiaries do business only under their own names.





<PAGE>   1




                                  EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS


<PAGE>   2




                                  EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS

   We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-15784, 2-71584, 2-75314 , 33-26002, 33-42973,
33-42982, 33-42975 and 33-55362) of KLA Instruments Corporation of our report
dated July 26, 1994, appearing on page 24 of the 1994 Annual Report to
Stockholders which is incorporated in this Annual Report on Form 10-K.  We also
consent to the incorporation by reference of our report on the Financial
Statement Schedules, which appears on page 20 of this Form 10-K.





Price Waterhouse LLP

San Jose, California
September 27, 1994