KLA INSTRUMENTS CORP, 424B1, 1995-04-28

KLA INSTRUMENTS CORP
424B1, 1995-04-28
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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<PAGE> 1

PROSPECTUS

Filed Pursuant to Rule 424(b)
Registration Statement No. 33-58707

1,500,000 Shares

KLA Instruments Corporation

COMMON STOCK
------------------------

ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
THE COMPANY'S COMMON STOCK IS TRADED IN THE OVER-THE-COUNTER MARKET UNDER
THE NASDAQ NATIONAL MARKET SYMBOL "KLAC." THE LAST SALE PRICE FOR THE
COMMON STOCK ON APRIL 25, 1995, AS REPORTED ON THE NASDAQ NATIONAL
MARKET, WAS $64 1/4 PER SHARE. SEE "PRICE RANGE OF COMMON
STOCK."

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

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------

PRICE $63 1/2 A SHARE

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

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share..................................... $63.50 $2.76 $60.74
Total(3)...................................... $95,250,000 $4,140,000 $91,110,000
</TABLE>

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

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."

(2) Before deducting expenses estimated at $400,000.

(3) The Company has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to 225,000 additional
Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$109,537,500, $4,761,000, and $104,776,500, respectively. See
"Underwriters."

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

The Shares are offered subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Morrison & Foerster, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about
May 3, 1995 at the offices of Morgan Stanley & Co. Incorporated, New York, N.Y.,
against payment therefor in New York funds.

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

MORGAN STANLEY & CO.
Incorporated

PAINEWEBBER INCORPORATED

SMITH BARNEY INC.

April 26, 1995

<PAGE> 2

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN
OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by Reference............................................ 2
Prospectus Summary......................................................................... 3
The Company................................................................................ 4
Recent Quarterly Results................................................................... 5
Risk Factors............................................................................... 6
Use of Proceeds............................................................................ 9
Price Range of Common Stock................................................................ 9
Dividend Policy............................................................................ 9
Capitalization............................................................................. 10
Selected Consolidated Financial Data....................................................... 11
Business................................................................................... 13
Description of Capital Stock............................................................... 21
Underwriters............................................................................... 23
Legal Matters.............................................................................. 24
Experts.................................................................................... 24
Available Information...................................................................... 24
</TABLE>

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

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents heretofore filed by the Company with the Securities
and Exchange Commission (the "Commission") pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), are incorporated herein by
reference: (1) the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1994; (2) the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994; (3) the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1994; and (4) the Company's Registration
Statement on Form 8-A filed with the Commission on October 26, 1981 (including
all amendments in respect thereof).

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Common Stock hereunder shall be deemed to
be incorporated by reference herein and to be a part hereof from the date of the
filing of such reports and documents. The Company will provide without charge to
each person to whom this Prospectus is delivered, upon written or oral request,
a copy of any or all of the foregoing documents incorporated by reference in
this Prospectus. Requests for such documents should be directed to KLA
Instruments Corporation, 160 Rio Robles, San Jose, CA 95161, Attn: Investor
Relations, telephone (408) 434-4200.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITERS."

2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this prospectus.
THE COMPANY

KLA is the leader in the 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
optical metrology inspection equipment markets. 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 Company sells to virtually all of the
world's semiconductor manufacturers and has achieved very high market shares in
its principal businesses.

RECENT QUARTERLY RESULTS. The Company reported net sales of $118.1 million,
net income of $20.8 million and earnings per share of $.86 for the quarter ended
March 31, 1995 compared to net sales of $62.7 million, net income of $9.0
million and earnings per share of $.40 for the same quarter in 1994. See "Recent
Quarterly Results."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered..................................... 1,500,000 shares(1)
Common Stock to be outstanding after the offering........ 24,724,000 shares(1)(2)
Use of proceeds.......................................... For the retirement of indebtedness and for general
corporate purposes. The Company may use a portion of the
net proceeds to acquire businesses, products or
technologies complementary to the Company's current
businesses. See "Use of Proceeds."
The Nasdaq National Market symbol........................ KLAC
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------------- ----------------
1990 1991 1992 1993 1994 1993 1994
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................. $161.6 $148.4 $156.0 $167.2 $243.7 $109.0 $187.9
Gross profit.......................................... 75.5 65.6 56.0 59.8 110.7 45.4 98.9
Write-off of acquired in-process technology(3)........ -- -- -- -- -- -- (25.2)
Income (loss) from operations......................... 17.7 5.0 (13.6) 11.5 40.1 14.4 18.5
Income (loss) from continuing operations(4)........... 12.2 2.4 (16.6) 7.0 30.2 10.5 13.8
Income (loss) per share from continuing operations.... .67 .13 (.90) .35 1.37 .50 .58
Weighted average common and dilutive common
equivalent shares................................... 18.0 18.6 18.5 19.7 22.0 20.9 24.0
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
-------------------------
AS
ACTUAL ADJUSTED(5)
-------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...................................... $125.5 $ 196.2
Working capital........................................................................ 191.0 281.7
Marketable securities.................................................................. 17.0 17.0
Total assets........................................................................... 365.4 436.2
Notes payable and current portion of long-term debt.................................... 22.6 2.6
Long-term debt......................................................................... -- --
Stockholders' equity................................................................... 245.4 336.1
</TABLE>

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

(1) Assumes the Underwriters' over-allotment option to purchase 225,000 shares
is not exercised. See "Underwriters."

(2) Based on the number of shares outstanding at December 31, 1994. Excludes
4,161,000 shares of Common Stock reserved for issuance under the Company's
stock option and employee stock purchase plans, including 2,739,000 shares
issuable upon the exercise of options outstanding as of December 31, 1994,
at a weighted average exercise price of $21.47 per share.

(3) Represents a charge for the write-off of in-process technology related to
the Company's acquisition of Metrologix, Inc. in December 1994. The
after-tax charge was $16.2 million, or $.67 per share.

(4) Income (loss) from operations less interest expense and other, net, plus
interest income, less provision for income taxes.

(5) Gives effect to the sale of the 1,500,000 shares offered hereby by the
Company and the anticipated use of a portion of the net proceeds therefrom
as set forth under "Use of Proceeds."

3
<PAGE> 4

THE COMPANY

KLA is the leader in the 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
optical metrology inspection equipment markets. KLA's systems are used to
analyze product and process quality at critical steps in the manufacture of
integrated circuits, and to provide 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 Company sells to virtually all of the
world's semiconductor manufacturers and has achieved very high market shares in
its principal businesses.

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.

Several years ago, the Company recognized the industry's need for in-line
monitoring to provide real-time process management capability. 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. 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. As a result of these advantages, most of the Company's customers are
adopting the KLA methodology of installing multiple systems directly monitoring
critical steps in the integrated circuit manufacturing process. The Company
believes that the market for in-line monitoring systems is several times larger
than its traditional market for engineering analysis systems.

The Company's technological strength has enabled it to develop and
introduce major new product families in the past two years for the following
three business units: WISARD, which addresses semiconductor wafer inspection;
RAPID, which addresses reticle inspection; and Metrology, which addresses
overlay registration and linewidth measurement. The Company believes that its
WISARD and RAPID product families incorporate proprietary technologies which
provide greater sensitivity to defects than any competing systems. KLA's
strategy is to leverage its technology leadership to develop new hardware and
software yield management tools. The Company has committed significant resources
to internally developing emerging yield management technologies. KLA has also
acquired technologies that it believes will be critical to enhancing its
long-term competitive position. In fiscal 1995, the Company has expanded its
position in the market for yield management and process monitoring systems by
expanding its product offerings to include yield management software, through
its recently formed PRISM division, and electron beam ("E-Beam") metrology
applications through the December 1994 acquisition of Metrologix, Inc. The
Company's long-term strategy is to link information from its new and existing
products, as well as from measurement systems manufactured by others, to form an
integrated network of detection and analysis systems.

KLA sells its 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

4
<PAGE> 5

a significant competitive advantage in its served markets. Sales, service and
applications operations throughout the world employ over 400 sales, service and
applications engineers. 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 20% of the
Company's workforce is engaged in engineering, research and development. 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.

KLA was incorporated in Delaware in July 1975. The Company's principal
offices are located at 160 Rio Robles, San Jose, California 95161, and its
telephone number is (408) 434-4200.

RECENT QUARTERLY RESULTS

The Company reported net sales of $118.1 million, net income of $20.8
million and earnings per share of $.86 for the quarter ended March 31, 1995
compared to net sales of $62.7 million, net income of $9.0 million and earnings
per share of $.40 for the same quarter in 1994. Sales of Company products
increased in all product divisions while gross margin increased to 54.1% in the
1995 quarter compared to 46.8% in the prior year period. A favorable product
mix, cost reductions and improving overhead absorption accounted for the
improvement in gross margin.

5
<PAGE> 6

RISK FACTORS

Prospective purchasers of Shares offered hereby should carefully consider
the following risk factors in addition to the other information presented in
this Prospectus.

Potential Fluctuations in Quarterly Results. The Company has experienced
and expects to continue to experience significant fluctuations in its quarterly
operating results. The Company's expense levels are based, in part, on
expectations of future revenues. If revenue levels in a particular quarter do
not meet expectations, operating results will be adversely affected, which may
have an adverse impact on the market price of the Company's Common Stock. Since
in a typical quarter the Company sells a relatively small number of high priced
systems, the sale by the Company of fewer systems than anticipated in any
quarter may have a substantial impact on the operating results for the quarter.

New product introductions may also contribute to fluctuations in quarterly
operating results, especially since customers may defer ordering products from
the Company's existing product lines. The Company's results also will be
affected by strategic decisions made by management regarding whether to continue
particular product lines, new product introductions by the Company's
competitors, the 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.

Volatility of Semiconductor Industry. The Company's business depends in
large part upon the capital expenditures of semiconductor manufacturers, which
in turn depend on the current and anticipated market demand for integrated
circuits and products utilizing integrated circuits. The semiconductor industry
is highly cyclical and has historically experienced periodic downturns, which
often have had a severe effect on the semiconductor industry's demand for yield
management and process monitoring systems. Semiconductor industry downturns have
adversely affected the Company's results of operations. For example, the Company
believes that depressed capital expenditures by semiconductor manufacturers in
Japan have adversely affected the Company's revenues and operating results in
the past. Any future weakness in demand in the semiconductor industry is likely
to have a material adverse effect on the Company's business and results of
operations. In addition, the need for continued investment in engineering,
research and development and extensive ongoing customer service and support
requirements worldwide will limit the Company's ability to reduce expenses in
response to any such downturn. Further, there can be no assurance that
developments in the semiconductor industry or the semiconductor equipment
industry will occur at the rate or in the manner expected by the Company.

Dependence on Introduction of New Products and Product Enhancements. The
Company believes that its continued success will depend on its ability to
continuously develop and manufacture new products and product enhancements and
to introduce them into the market in response to demands for higher performance
yield management and process monitoring systems. Failure to develop and
introduce new products and product enhancements or to gain customers' acceptance
of such products in a timely fashion could harm the Company's competitive
position. Furthermore, 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. If new
products have reliability or quality problems, reduced orders, higher
manufacturing costs, delays in collecting accounts receivable and additional
service and warranty expense may result. In the past, the Company has
experienced some delays as well as reliability and quality problems in
connection with product introductions, resulting in some of these consequences.
The Company plans to introduce several new products in fiscal 1996. There can be
no assurance that the Company will successfully develop and manufacture new
products, or that new products introduced by the Company will be accepted in the
marketplace. If the Company does not successfully introduce new products, the
Company's results of operations will be materially adversely affected.

Competition and Rapid Technological Change. The semiconductor equipment
industry is highly competitive and is characterized by rapidly advancing
technology. In each of the markets it serves, the Company increasingly faces
competition and the threat of competition from established and potential
competitors, some of which may have greater financial, engineering,
manufacturing and marketing resources than the Company. Development of new
technologies that have price/performance characteristics superior to the
Company's technologies could adversely affect the Company's results of
operations. There can be no assurance that the Company will be able to develop
and market new products successfully or that the products

6
<PAGE> 7

introduced by others will not render the Company's products or technologies
non-competitive or obsolete. See "Business -- Competition."

Limited Protection of Intellectual Property. The Company's success depends
in part on its proprietary technology. While the Company attempts to protect its
proprietary technology through patents, copyrights and trade secrets, it
believes that its success will depend more upon technological expertise,
continuing development of new systems, market penetration and installed base and
the ability to provide comprehensive support and service to customers. There can
be no assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently. The
Company currently has a number of United States and foreign patents and patent
applications. There can be no assurance that the claims allowed on any patents
held by the Company will be sufficiently broad to protect the Company's
technology, or that any patents will issue from any application pending or filed
by the Company. In addition, there can be no assurance that any patents issued
to the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.

The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. In addition, the
Company and its customers from time to time receive letters from third parties,
including some of the Company's competitors, alleging infringement of such
parties' rights by the Company's products. See "-- Notice of Patent Infringement
Received by Customers." Such letters are prevalent in the Company's industry and
there can be no assurance that the Company would prevail in any litigation
seeking damages or expenses from the Company or to enjoin the Company from
selling its products on the basis of such alleged infringement, or that the
Company would be able to license any valid and infringed patents held by third
parties on reasonable terms. In the event of litigation to determine the
validity of any third-party claims, such litigation could result in significant
expense to the Company or other adverse consequences to the Company and divert
the efforts of the Company's technical and management personnel, whether or not
such litigation is determined in favor of the Company.

Notice of Patent Infringement Received by Customers. Some customers using
certain products of the Company have received a notice of infringement from
Technivision Corporation and Jerome H. Lemelson, alleging that equipment used in
the manufacture of semiconductor products infringes patents issued to Mr.
Lemelson relating to "computer image analysis" or "digital signal generation and
analysis." Certain of these customers have notified the Company that they may
seek indemnification from the Company for any damages and expenses resulting
from this matter. Certain of the Company's customers are engaged in litigation
with Mr. Lemelson involving a number of Mr. Lemelson's patents, and are
challenging the validity of these patents and whether these patents are
infringed. It is possible that the Company's direct participation in this
litigation may be required. The Company is likely to incur costs if such
participation is required. Although management of the Company believes that this
matter will not have a material adverse effect on the Company, the Company
cannot predict the outcome of this or similar litigation or its effect upon the
Company.

Dependence on Japanese Market. The future performance of the Company will
be dependent, in part, upon its ability to continue to compete successfully in
the Japanese market, one of the largest markets for yield management and process
monitoring equipment. The Company's ability to compete in this market in the
future is dependent upon continuing free trade between Japan and the United
States in this industry, the continuing ability of the Company to develop
products in a timely manner that meet the technical requirements of its Japanese
customers, and the continuing ability of the Company and its Japanese
distributor, Tokyo Electron, Limited ("TEL"), to maintain satisfactory
relationships with leading companies in the Japanese semiconductor industry. The
Company's sales to Japan will also be affected by the overall health of the
Japanese economy, including the effects of currency exchange rate fluctuations
on the global competitiveness of Japanese semiconductor manufacturers. In
addition, any adverse developments in the Company's relationship with TEL could
adversely affect the Company's operating results. Over the last three years, the
Company significantly increased its customer service organization in Japan in
order to assume service and support responsibilities from TEL.

Importance of International Sales. International sales accounted for 57%,
62% and 65% of the Company's net sales for fiscal years 1992, 1993 and 1994,
respectively. The Company expects that international sales will continue to
represent a significant percentage of net sales. International sales and
operations may be adversely affected by the imposition of governmental controls,
export license requirements,

7
<PAGE> 8

restrictions on the export of technology, political instability, trade
restrictions, changes in tariffs and difficulties in staffing and managing
international operations. The net sales and earnings from the Company's
international business may be affected by fluctuations in currency exchange
rates. Although the Company attempts to manage near term currency risks through
"hedging," there can be no assurance that such efforts will be adequate in each
case. These factors could have a material adverse effect on the Company's future
sales and operating results.

Dependence on Key Employees. The future success of the Company is
dependent, in part, on its ability to retain certain key personnel. The Company
also needs to attract additional skilled personnel in all areas of its business
to continue to grow. Competition for such personnel is intense. There can be no
assurance that the Company will be able to retain its existing key management,
engineering, and sales personnel or attract additional qualified employees in
the future.

Dependence on Suppliers. Certain of the components and subassemblies
included in the Company's systems are obtained from a single source or a limited
group of suppliers. Although the Company seeks to reduce 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.

Potential Volatility of Common Stock Price. The market price of the Common
Stock could be subject to significant fluctuations in response to variations in
quarterly operating results, shortfalls in revenues or earnings from levels
expected by securities analysts and other factors such as announcements of
technological innovations or new products by the Company or by the Company's
competitors, government regulations, developments in patent or other proprietary
rights, and developments in the Company's relationships with parties to
collaborative agreements. In addition, the stock market has in recent years
experienced significant price fluctuations. These fluctuations often have been
unrelated to the operating performance of the specific companies whose stocks
are traded. Broad market fluctuations, as well as economic conditions generally
and in the semiconductor industry specifically, may adversely affect the market
price of the Company's Common Stock.

Potential Anti-Takeover Effects. Certain provisions of the Company's
stockholder rights plan, its Certificate of Incorporation and Delaware law could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. Such provisions could diminish the opportunities for
a stockholder to participate in tender offers, including tender offers at a
price above the then current market value of the Common Stock. Such provisions
may also inhibit increases in the market price of the Common Stock that could
result from takeover attempts. See "Description of Capital Stock." In addition,
the Board of Directors has the authority to issue up to 1,000,000 shares of
Preferred Stock and 1,000,000 shares of Junior Common Stock without any further
vote or action by the stockholders. The issuance of Preferred Stock or Junior
Common Stock may have the effect of delaying, deferring or preventing a change
in control of the Company without further action by the stockholders and could
adversely affect the rights and powers, including voting rights, of the holders
of Common Stock. Such effects could result in a decrease in the market price of
the Company's Common Stock.

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<PAGE> 9

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby are estimated to be $90,710,000 ($104,376,500 if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use $20 million of the net proceeds to retire outstanding bank indebtedness,
bearing interest at 7.6% per annum, at its maturity in August 1995 and to use
the remainder of such net proceeds for general corporate purposes. In addition,
the Company may use a portion of the net proceeds to acquire businesses,
products or technologies complementary to the Company's current businesses,
although it has no such commitments and no such acquisitions are currently being
negotiated or planned. Pending such uses, the net proceeds of this offering will
be invested in short-term and medium-term, interest-bearing investments.

PRICE RANGE OF COMMON STOCK

The following table sets forth the range of high and low closing sales
prices of the Company's Common Stock for the indicated periods, as reported by
The Nasdaq National Market. On April 25, 1995, the last reported sale price for
the Common Stock on The Nasdaq National Market was $64 1/4 per share.

<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1993: HIGH LOW
---- ----
<S> <C> <C>
First Quarter.................................................... $ 9 $7 1/8
Second Quarter................................................... 12 1/4 7 3/4
Third Quarter.................................................... 14 3/4 10 5/8
Fourth Quarter................................................... 19 1/2 11 1/4
Fiscal Year Ended June 30, 1994:
First Quarter.................................................... 26 1/2 17
Second Quarter................................................... 28 19
Third Quarter.................................................... 43 25 7/8
Fourth Quarter................................................... 43 1/4 32 1/4
Fiscal Year Ending June 30, 1995:
First Quarter.................................................... 51 3/4 37 1/4
Second Quarter................................................... 53 44 3/4
Third Quarter.................................................... 65 46 1/2
Fourth Quarter (through April 25, 1995).......................... 65 1/8 60
</TABLE>

DIVIDEND POLICY

To date the Company has not declared or paid cash dividends on its Common
Stock. The Board of Directors of the Company presently intends to retain all
earnings for use in the Company's business and therefore does not anticipate
declaring or paying any cash dividends on its Common Stock in the foreseeable
future. The Company's bank credit agreement prohibits the payment of cash
dividends of more than 25% of earnings available therefor and earned during the
immediately preceding fiscal year.

9
<PAGE> 10

CAPITALIZATION

The following table sets forth the unaudited short-term debt and
capitalization of the Company as of December 31, 1994, and as adjusted to give
effect to the sale by the Company of the 1,500,000 shares of Common Stock
offered hereby and the anticipated application of the net proceeds as set forth
in "Use of Proceeds."

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
----------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Notes payable to banks.......................................... $ 2,631 $ 2,631
Mortgage loan due August 1995................................... 20,000 --
-------- -----------
Total short-term debt................................... $ 22,631 $ 2,631
======== =========
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000 shares authorized,
none outstanding............................................. $ -- $ --
Common Stock, $.001 par value, 75,000,000 shares authorized(1),
23,224,000 shares issued and outstanding, and 24,724,000
shares issued and outstanding, as adjusted................... 23 25
Capital in excess of par value.................................. 151,441 242,149
Retained earnings............................................... 94,119 94,119
Treasury stock.................................................. (581) (581)
Cumulative translation adjustment............................... 423 423
-------- -----------
Total stockholders' equity.............................. 245,425 336,135
-------- -----------
Total capitalization.................................... $245,425 $ 336,135
======== =========
</TABLE>

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

(1) Excludes 4,161,000 shares of Common Stock reserved for issuance under the
Company's stock option and employee stock purchase plans, including
2,739,000 shares issuable upon the exercise of options outstanding as of
December 31, 1994, at a weighted average exercise price of $21.47 per share.

10
<PAGE> 11

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for, and as of the
end of, each of the years in the five-year period ended June 30, 1994 have been
derived from the consolidated financial statements of the Company, which have
been audited by Price Waterhouse LLP, independent accountants. The selected
consolidated financial data presented below as of December 31, 1994, for the six
month periods ended December 31, 1993 and 1994 and for each of the six quarters
in the period ended December 31, 1994 have been derived from unaudited
consolidated financial statements of the Company. In the opinion of management,
the unaudited interim financial information has been prepared on the same basis
as the audited consolidated financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary to state fairly the
information set forth therein. Such interim results are not necessarily
indicative of future results of operations. This data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information incorporated by reference herein. See "Incorporation of
Certain Documents by Reference."

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------------ ---------------
1990 1991 1992 1993 1994 1993 1994
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................ $161.6 $148.4 $156.0 $167.2 $243.7 $109.0 $187.9
Gross profit......................... 75.5 65.6 56.0 59.8 110.7 45.4 98.9
Engineering, research and development
expense............................ 26.3 27.1 25.9 16.3 22.4 9.7 17.0
Selling, general and administrative
expense............................ 31.5 33.5 35.5 32.7 48.2 21.2 38.2
Other charges........................ -- -- 8.2 (.7) -- -- 25.2(1)
------ ------ ------ ------ ------ ------ ------
</TABLE>

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from operations........ 17.7 5.0 (13.6) 11.5 40.1 14.5 18.5
Interest income and other, net....... 1.8 1.8 1.2 1.2 2.2 .5 3.0
Interest expense..................... (.6) (3.3) (3.9) (3.4) (2.0) (1.0) (1.1)
------ ------ ------ ------ ------ ------ ------
Income (loss) from continuing
operations before income taxes..... 18.9 3.5 (16.3) 9.3 40.3 14.0 20.4
Provision for income taxes........... 6.7 1.1 .3 2.3 10.1 3.5 6.6
------ ------ ------ ------ ------ ------ ------
Income (loss) from continuing
operations......................... 12.2 2.4 (16.6) 7.0 30.2 10.5 13.8
Loss (recovery) from discontinued
operations...................... 2.8 13.0 (2.8) -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net income (loss).................... $ 9.4 $(10.6) $(13.8) $ 7.0 $ 30.2 $ 10.5 $ 13.8
====== ====== ====== ====== ====== ====== ======
Income (loss) per share from
continuing operations.............. $ .67 $ .13 $ (.90) $ .35 $ 1.37 $ .50 $ .58
Net income (loss) per share.......... $ .52 $ (.57) $ (.75) $ .35 $ 1.37 $ .50 $ .58
Weighted average common and dilutive
common equivalent shares........... 18.0 18.6 18.5 19.7 22.0 20.9 24.0
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
---------------------------------------------- DECEMBER 31,
1990 1991 1992 1993 1994 1994
------ ------ ------ ------ ------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ 42.1 $ 31.3 $ 23.7 $ 52.4 $139.1 $125.5
Working capital....................... 99.2 91.1 84.0 93.6 212.9 191.0
Marketable securities................. -- -- -- -- -- 17.0
Total assets.......................... 179.3 198.0 188.5 199.1 321.6 365.4
Notes payable and current portion of
long-term debt...................... 3.6 4.4 5.0 6.5 4.7 22.6
Long-term debt........................ -- 24.0 24.0 20.0 20.0 --
Stockholders' equity.................. 122.1 113.2 103.0 114.1 227.4 245.4
</TABLE>

- ---------------
(1) During the quarter ended December 31, 1994, the Company wrote off the
in-process technology acquired in the acquisition of Metrologix, Inc.
resulting in a pretax charge of $25.2 million ($16.2 million after tax).

11
<PAGE> 12

SELECTED CONSOLIDATED FINANCIAL DATA--(CONTINUED)

The following table presents unaudited quarterly results in dollar amounts
and as a percentage of net sales for the last six quarters.

<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995
----------------------------------------- -------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Net sales.................................. $ 51.9 $57.1 $62.6 $72.1 $ 83.2 $ 104.7
Gross profit............................... 20.7 24.7 29.4 35.9 42.6 56.3
Engineering, research and development expenses... 4.9 4.8 5.5 7.2 8.2 8.8
Selling, general and administrative
expenses................................. 9.9 11.3 12.0 15.0 16.5 21.7
Write-off of acquired in-process
technology............................... -- -- -- -- -- 25.2
-------- ------- ------- ------- -------- -------
Income from operations..................... 5.9 8.6 11.9 13.7 17.9 .6
Interest income and other, net............. .2 .3 .6 1.1 1.5 1.5
Interest expense........................... (.5) (.5) (.5) (.5) (.5) (.6)
-------- ------- ------- ------- -------- -------
Income before income taxes................. 5.6 8.4 12.0 14.3 18.9 1.5
Provision for income taxes................. 1.4 2.1 3.0 3.6 6.1 .5
-------- ------- ------- ------- -------- -------
Net income................................. $ 4.2 $ 6.3 $ 9.0 $10.7 $ 12.8 $ 1.0
====== ====== ====== ====== ====== ======
Net income per share....................... $ .20 $ .30 $ .40 $ .45 $ .54 $ .04
Weighted average common and dilutive common
equivalent shares........................ 20.8 20.9 22.7 23.7 23.9 24.1
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............................... 39.9 43.3 47.0 49.8 51.2 53.8
Engineering, research and development
expenses................................. 9.4 8.4 8.8 10.0 9.9 8.4
Selling, general and administrative
expenses................................. 19.1 19.8 19.2 20.8 19.8 20.7
Write-off of acquired in-process
technology............................... -- -- -- -- -- 24.1
-------- ------- ------- ------- -------- -------
Income from operations..................... 11.4 15.1 19.0 19.0 21.5 .6
Interest income and other, net............. .4 .5 1.0 1.5 1.8 1.4
Interest expense........................... (1.0) (.9) (.8) (.7) (.6) (.6)
-------- ------- ------- ------- -------- -------
Income before income taxes................. 10.8 14.7 19.2 19.8 22.7 1.4
Provision for income taxes................. 2.7 3.7 4.8 5.0 7.3 .4
-------- ------- ------- ------- -------- -------
Net income................................. 8.1% 11.0% 14.4% 14.8% 15.4% 1.0%
====== ====== ====== ====== ====== ======
</TABLE>

RECENT QUARTERLY RESULTS

12
<PAGE> 13

BUSINESS

KLA is the leader in the 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
optical metrology inspection equipment markets. KLA's systems are used to
analyze product and process quality at critical steps in the manufacture of
integrated circuits, and to provide 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 Company sells to virtually all of the
world's semiconductor manufacturers and has achieved very high market shares in
its principal businesses.

YIELD MANAGEMENT

Semiconductor factories are increasingly expensive to build and equip.
Yield management and process monitoring systems, which typically represent a
small percentage 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:

- 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.

- 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.

- 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.

13
<PAGE> 14

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:

- 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 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.

- Expansion of In-Line Monitoring Market. Several years ago, the Company
recognized the industry's need for in-line monitoring to provide
real-time process management capability. 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. 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. As a result of these advantages, most of the Company's
customers are adopting the KLA methodology of installing multiple systems
directly monitoring critical steps in the integrated circuit
manufacturing process. The Company believes that the market for in-line
monitoring systems is several times larger than its traditional market
for engineering analysis systems.

- Development of New Technologies for Integrated Yield Management. KLA's
strategy is to leverage its technology leadership to develop new hardware
and software yield management tools. The Company has committed
significant resources to the internal development of yield management
technologies. KLA has also acquired technologies that it believes will be
critical to enhancing its long-term competitive position. In fiscal 1995,
the Company expanded its product offerings to include yield management
software, through its recently formed PRISM division, and E-Beam
metrology applications through the December 1994 acquisition of
Metrologix, Inc. The Company's long-term strategy is to link information
from its new and existing products, as well as from measurement systems
manufactured by others, to form an integrated network of detection and
analysis systems.

YIELD MANAGEMENT AND PROCESS MONITORING SYSTEMS

KLA's systems are developed to work together to offer its customers
integrated yield management solutions rather than stand-alone tools. 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. The Company's software productivity and
analysis systems collect, store and analyze data collected by test equipment
manufactured both by the Company and by others to provide semiconductor
manufacturers with an integrated yield management application. The Company's
principal business units are: Wafer Inspection Systems (WISARD); Reticle
Inspection Systems

14
<PAGE> 15

(RAPID); Metrology, including Optical Metrology and E-Beam Metrology; Wafer
Probing Systems (ATS); Software Productivity and Analysis Systems (PRISM); and
Scanning Electron Microscope Inspection Systems (SEMSpec).

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 ten 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 2552, 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 2131 model for all pattern inspection which operates at
up to twice the speed of the KLA 2130 and with higher 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 2552 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 2552 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 2552 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.

15
<PAGE> 16

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. This dedicated image processor employs
a flexible system architecture which permits future upgrades and enhancements
through software, rather than hardware changes. Further, the KLA 331's optics
include a rotating telescope turret to provide three sensitivities in one
system. The KLA 331 offers flexibility for users who need a versatile inspection
system to address the inspection needs of both the most demanding and the more
routine semiconductor manufacturing processes. Users may select lower
sensitivity inspections in return for higher throughput.

The KLA 331 incorporates a reference database generator and data
preparation system which give full die-to-database functionality to the
inspection, permitting reticle inspection against the ideal schematic as
specified by the user's circuit design CAD program. The Company is continuing to
develop enhancements to the KLA 331 inspection system to improve serviceability
and reliability.

The Company recently introduced a new reticle inspection product,
STARlight, which uses reflected and transmitted light detection techniques
simultaneously to identify reticle contaminants, including particles. STARlight
permits users to identify defects which had previously not been detectable. The
Company believes STARlight will be applied both by mask manufacturers and
semiconductor manufacturers. STARlight is offered both as an option on the KLA
331 inspection system and as a stand-alone unit.

The average selling prices of the KLA 331 inspection systems range from
approximately $1.4 million to approximately $2.6 million.

METROLOGY DIVISION

Optical Metrology 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.

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 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.

The average selling prices of KLA's optical metrology systems for the
semiconductor industry range from approximately $300,000 to approximately
$550,000 and systems for the disk drive industry range from approximately
$500,000 to approximately $900,000.

16
<PAGE> 17

E-Beam Metrology Systems. KLA broadened its portfolio of metrology
products in December 1994 with the acquisition of Metrologix, Inc., a
manufacturer of advanced electron beam measurement equipment. With this
acquisition, KLA's E-Beam Metrology business gained an established position in
the CD SEM inspection market, a market which KLA believes is larger than the
optical overlay market, and one which it believes will grow as semiconductor
manufacturers continue to produce more complex semiconductor devices.

KLA's first generation E-Beam metrology system features high throughput and
automated setup. One major U.S. memory manufacturer and two major U.S.
microprocessor manufacturers have purchased multiple systems for use in both
production and research and development. KLA anticipates increasing its
expenditures for engineering and manufacturing to enhance the capabilities of
the E-Beam metrology system.

The average selling prices of KLA's E-Beam metrology systems range from
approximately $1.1 million to approximately $1.4 million.

ATS DIVISION -- WAFER PROBING SYSTEMS

The ATS division sells and services a family of automated wafer probers and
accessories 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
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 average selling prices of KLA's basic wafer prober systems range from
approximately $130,000 to approximately $600,000.

PRISM DIVISION -- SOFTWARE PRODUCTIVITY AND ANALYSIS SYSTEMS

The PRISM division was formed in April 1994 to address the market for
software products that can be utilized in semiconductor fabrication applications
for yield management and productivity improvement. The PRISM division is
developing and marketing two software product lines, Discovery and CIMA.
Discovery is an enterprise-wide yield management system that collects, stores
and correlates yield information from multiple data sources in a fabrication
facility. This product was the result of a cooperative development project with
Motorola. The Company expects to release production versions of Discovery in
early fiscal 1996. CIMA is a test floor automation product that was developed by
the Company and introduced in August 1994. CIMA collects test data from, and
automates the operation of, the wafer test floor. CIMA is currently in
production and is installed in several modern fabrication facilities. PRISM has
formed a client services organization to provide system integration and
consulting services to assist its customers in the integration of its software
products into the facility's information systems.

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 wafer and
x-ray mask inspection. The development of these systems was funded in part by
customer-sponsored research and development programs.

17
<PAGE> 18

KLA has sold four of these systems to customers. KLA expects the market for
these inspection systems to emerge slowly.

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 been a pioneer in 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. 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 15 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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<PAGE> 19

CUSTOMERS

The Company believes that it is one of the few suppliers that 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. During the nine months ended March 31, 1995, Samsung
accounted for approximately 10% of the Company's revenues. Set forth below is a
list of some of the Company's customers:

<TABLE>
<S> <C> <C>
AMD IDT Rockwell
AT&T Intel Rohm
Bosch Matsushita Samsung
Cypress Micron SGS-Thomson
Digital Equipment Mitsubishi Sharp
DNP Micro Motorola Siemens
Du Pont National Semiconductor Sony
Fujitsu NEC TEL
Goldstar NKK Texas Instruments
Hewlett-Packard Nippon Denso Toppan
Hitachi NTT Toshiba
Hoya Oki TSMC
Hyundai Photronics UMC
IBM Ricoh
</TABLE>

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,
Europe and Korea, 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 three 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 120 local employees in its
Yokohama headquarters and four regional service centers.

In Singapore and Taiwan, the Company sells its systems through local sales
representatives.

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 20% of the Company's workforce is engaged in
engineering, research and development.

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

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<PAGE> 20

subassemblies which are acquired from third party vendors and then integrated
into the Company's finished products. In April 1995, the Company began
construction of an additional manufacturing facility on undeveloped land at its
San Jose campus facility. The Company is also evaluating the lease of additional
facilities adjacent to its San Jose campus. 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 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.

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<PAGE> 21

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 75,000,000 shares of
common stock, $.001 par value ("Common Shares"), 74,000,000 of which are
designated "Common Stock" and 1,000,000 of which are designated "Junior Common
Stock," and 1,000,000 shares of preferred stock, $.001 par value ("Preferred
Stock"). As of December 31, 1994, there were 23,224,000 shares of Common Stock,
no shares of Junior Common Stock, and no shares of Preferred Stock outstanding.

COMMON STOCK

The holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Stockholders are not entitled to
cumulative voting for the election of directors. Subject to preferences
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends as may be declared from time to time
by the Board of Directors out of funds legally available therefor and in the
event of liquidation, dissolution, or winding up of the Company, the holders of
Common Stock are entitled to share in all assets remaining after payment of
liabilities. The Common Stock has no preemptive or conversion rights and is not
subject to further calls or assessments by the Company. There are no redemption
or sinking fund provisions applicable to the Common Stock. The Common Stock
currently outstanding is, and the Common Stock offered hereby will be, validly
issued, fully paid, and non-assessable.

JUNIOR COMMON STOCK

The Board of Directors of the Company has the authority to issue the Junior
Common Stock in one or more series and to fix the rights, preferences and
privileges, including dividend rights, conversion rights, liquidation rights,
voting rights, and the number of shares constituting any series or the
designation of such series of Junior Common Stock, without any further vote or
action by the stockholders. As of the date of this Prospectus, there are no
outstanding shares of Junior Common Stock, or options to purchase Junior Common
Stock. Although it has no present intention to do so, the Board of Directors of
the Company may, without stockholder approval, issue Junior Common Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of Junior Common Stock may have the
effect of delaying, deferring, or preventing a change of control of the Company.

PREFERRED STOCK

The Board of Directors of the Company has the authority to issue the
Preferred Stock in one or more series and to fix the rights, preferences and
privileges, including dividend rights, conversion rights, liquidation rights,
voting rights, and the number of shares constituting any series or the
designation of such series of Preferred Stock, without any further vote or
action by the stockholders. As of the date of this Prospectus, there are no
outstanding shares of Preferred Stock, or options to purchase Preferred Stock.
Although it has no present intention to do so, the Board of Directors of the
Company may, without stockholder approval, issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring, or preventing a change of control of the Company.

STOCKHOLDER RIGHTS PLAN

KLA has a stockholder rights plan (the "Plan") to protect the value of KLA
stockholders' investment in the Company. Pursuant to the Plan, the Board has
declared a dividend distribution of one Common Stock purchase right (a "Right"),
at an exercise price of $100.00, on each outstanding share of its Common Stock.
In the event of certain hostile efforts to acquire control of the Company, the
Plan would entitle holders of each Right to purchase stock in KLA or an acquiror
of KLA with a market value equal to twice the exercise price of the Right. The
Rights have certain anti-takeover effects as they will cause substantial
dilution to a person or group that attempts to acquire the Company on terms or
in a manner not approved by the Company's Board of Directors, except pursuant to
an offer conditioned upon the negation, purchase or redemption of the Rights.

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<PAGE> 22

The Board may redeem the Rights for $.01 per Right at any time prior to the
day a person or group acquires 20% or more of the Company's stock without Board
approval. After such date, the Board may redeem the Rights prior to the
consummation of a business combination in which all holders of Common Stock are
treated equally and which does not involve such 20% stockholder. The Company
may, except with respect to the redemption price, amend the Rights in any
manner. After a person becomes a 20% stockholder, the Company may amend the
Rights in any manner which does not adversely affect the interests of the
holders of the Rights.

DELAWARE TAKEOVER STATUTE

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from engaging in any "business combination" with an "interested stockholder" for
three years following the date that such stockholder became an interested
stockholder, unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding, those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66-2/3% of the outstanding voting
stock not owned by the interested stockholder.

Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the stockholders. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior did own) 15% or more of the
corporation's voting stock.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is First National
Bank of Boston, Mail Stop 45-02-16, Blue Hills Office Park, 150 Royale Street,
Canton, Massachusetts 02021.

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<PAGE> 23

UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, each of the Underwriters named below has
severally agreed to purchase, and the Company has agreed to sell to them, the
respective number of shares of Common Stock set forth opposite their respective
names below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated................................................. 500,000
PaineWebber Incorporated.......................................................... 500,000
Smith Barney Inc. ................................................................ 500,000
---------
Total................................................................... 1,500,000
========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.

The Underwriters initially propose to offer part of the shares directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price that represents a concession not in excess of
$1.66 per share under the public offering price.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 225,000
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
made in connection with this offering. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number set forth next to such Underwriter's name in the preceding table bears to
the total number of Shares offered hereby.

The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933, as amended (the "Securities Act").

Certain officers and directors of the Company have agreed with the
Underwriters that, for a period of 90 days after the date of this Prospectus,
they will not directly or indirectly (i) offer, sell or otherwise dispose of
more than an aggregate of 100,000 shares of Common Stock, or securities
convertible into or exchangeable for, or rights to purchase or acquire, shares
of Common Stock, or (ii) individually offer, sell or otherwise dispose of more
than 50,000 such shares, securities or rights, in each case without the prior
written consent of Morgan Stanley & Co. Incorporated. In addition, the Company
has agreed in the Underwriting Agreement that, for a period of 90 days after the
date of this Prospectus, it will not, without the prior written consent of
Morgan Stanley & Co. Incorporated, offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable for Common Stock, except pursuant to existing options or warrants
or the conversion of existing securities.

In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on The Nasdaq National Market, may engage in passive market making
transactions in the Common Stock on The Nasdaq National Market in accordance
with Rule 10b-6A under the Exchange Act during the two business day period
before commencement of offers or sales of the Common Stock. The passive market
making transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest independent bid for the security; if all
independent bids are lowered below the passive market maker's bid, however, such
bid must then be lowered when certain purchase limits are exceeded.

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<PAGE> 24

LEGAL MATTERS

Gray Cary Ware & Freidenrich, a Professional Corporation, Palo Alto,
California, counsel to the Company, will render an opinion that the shares
offered hereby will be duly authorized, validly issued, fully paid and
nonassessable. Certain legal matters in connection with the Offering, will be
passed upon for the Underwriters by Morrison & Foerster, San Francisco,
California.

EXPERTS

The consolidated financial statements as of June 30, 1993 and 1994 and for
each of the three years in the period ended June 30, 1994 incorporated by
reference in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-3 (referred to herein, together with all amendments and exhibits, as the
"Registration Statement") under the Securities Act, with respect to the
securities offered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract or other
document referred to herein are not necessarily complete and, in each instance
in which a copy of such contract is filed as an exhibit to the Registration
Statement, reference is made to such copy and each such statement shall be
deemed qualified in all respects by such reference. Copies of the Registration
Statement may be inspected, without charge, at the offices of the Commission, or
obtained at prescribed rates from the Public Reference Section of the Commission
at the address set forth below.

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities of the Commission located at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices at Seven
World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Company's Common Stock is quoted for trading on The Nasdaq
National Market and reports, proxy statements and other information concerning
the Company may be inspected at the offices of the National Association of
Securities Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850.

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