STOCKREPORTS

KLA-Tencor Corporation

Nasdaq Symbol KLAC

Recent Price 48.88 52 Wk Range 50.38 - 18.00

Yield Nil 12-Mo. P/E 25.6

Quantitative Evaluation: Outlook (1 Lowest - 5 Highest) 3- Fair Value 52.60 Risk HIGH Earn/Div Rank B-
Technical Evaluation: BULLISH since 11/96 Rel. Strength Rank (1 Lowest - 99 Highest) 61 Insider Activity UnFavorable

Overview 06-MAY-97

Revenues (as adjusted to reflect the recent merger) should increase 15% to 20% in FY 98 (Jun). KLA-Tencor holds a dominant market share in yield monitoring and process control systems, and its orders and backlog continue to increase now that a brief slump has passed. In addition, the company is not as dependent on the construction of new fabrication facilities as other semiconductor equipment manufacturers, so it has much better near-term visibility than many of its peers. Margins will widen on the increased volume and favorable changes in the product mix. In addition, profitability will be aided by the elimination of commissions related to orders previously taken by the company's former representative in Japan. Overall, we look for EPS to increase to $2.35 in FY 98 from the $1.72 projected for FY 97. Our estimate for FY 97 excludes a $40 million charge the company will take in the fourth quarter related to completion of the merger.

Valuation 06-MAY-97

We are maintaining our "hold" rating on the shares. Although the merger has created a powerhouse that will dominate its segment of the industry, KLAC is fully valued at approximately 21X our FY 98 EPS estimate. While KLA will continue to realize solid revenue and earnings gains, the long-term rate of growth will likely be somewhat slower than in recent years, and earnings will be sensitive to the cyclical swings of the semiconductor industry. Still, the shares are an attractive holding for aggressive investors. Yield monitoring systems will remain one of the fastest-growing segments of the semiconductor capital equipment industry, because of the cost savings they can provide to chip manufacturers.

Key Stock Statistics

Fiscal Year Ending Jun. 30

Dividend Data: No cash has been paid.

Business Summary 06-MAY-97

KLA-Tencor was formed through the April 1997 merger of Tencor Instruments and KLA Instruments. The company is a leading manufacturer of yield management and process monitoring systems for the semiconductor industry. Maximizing yields, or the number of good die per wafer, is a key goal in manufacturing integrated circuits (ICs). Higher yields increase revenues obtained for each semiconductor wafer processed. As IC linewidths decrease, yields become more sensitive to the size and density of defects. The company's systems are used to improve yields by identifying defects, 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 often takes place at several points in the fabrication process, as wafers move through a production cycle consisting of hundreds of processing steps.

The Wafer Inspection Business (WISARD) Unit provides the KLA 2100 series, which performs defect inspection on wafers. Combined with a dedicated defect data gathering and analysis workstation (KLA 2552), the series 2100 is sensitive enough for engineering analysis and fast enough for in-line monitoring of the fabrication process. With this system, corrections can be made while the wafer is still in the production line, rather than waiting days for end-of-process testing and feedback.

The Reticle Inspection Business (RAPID) Unit's KLA 351 Inspection System manages the quality of photomasks and reticles (used in copying circuit designs onto an IC during the photolithography process) throughout their useful lives.

The Metrology division's products measure the widths of circuit lines and the alignment of patterns from layer to layer in the process. The optical metrology product line is known as the KLA 5000 series. To meet the need for measuring sub-half micron features, KLA has introduced an electron-beam metrology system, the KLA 8100. Production shipments of this product began in June 1996.

The ATS Watcher division develops and manufacturers the image processing electronics and optical subsystems sold to Tokyo Electron, Limited (TEL) for inclusion in TEL's wafer probers. TEL manufactures the prober's mechanical chassis and incorporates the KLA electronics and subsystems.

Important Developments

Apr. '97 KLA Instruments completed its merger with Tencor Instruments to form KLA-Tencor. Under terms of the agreement, each TNCR share was exchanged for one KLA share, which increased the number of KLA shares outstanding by approximately 32.8 million. A related charge of approximately $40 million will be taken in the fourth quarter of FY 97 (Jun.).

Capitalization

Long Term Debt: None (3/97).

Curr. Ratio	2.9	2.7	4.2	2.6	2.7	2.8	3.2	3.0	3.3	3.2
% LT Debt of Cap.	NM	NM	7.8	14.2	17.4	16.2	Nil	Nil	Nil	Nil
% Net Inc.of Revs.	17.5	13.2	12.3	4.2	NM	1.6	5.6	7.1	7.8	8.5
% Ret. on Assets	19.2	13.5	11.5	3.5	NM	1.3	5.5	7.9	7.0	6.9
% Ret. on Equity	25.7	18.5	17.6	6.3	NM	2.0	8.0	11.2	9.5	9.1

Data as orig. reptd.; bef. results of disc. opers. and/or spec. items. Per share data adj. for stk. divs. as of ex-div. date. E-Estimated. NA-Not Available. NM-Not Meaningful. NR-Not Ranked.

Office--160 Rio Robles, San Jose, CA 95134. Tel--(408) 434-4200. Chrmn & CEO--K. Levy. Pres & COO--K. L. Schroeder. VP-Fin & CFO--R. J. Boehlke. Secy--P. E. Kreutz. Dirs--E. W. Barnholt, L. J. Chamberlain, K. Levy, R. E. Lorenzini, Y. Nishi, S. Rubinovitz, K. L. Schroeder, D. Tellefsen. Transfer Agent & Registrar--First National Bank of Boston. Incorporated--in Delaware in 1975. Empl-- 2,500. S&P Analyst: Stephen T. Madonna, CFA

This report is for information purposes and should not be considered a solicitation to buy or sell any security. Neither S&P nor any other party guarantee its accuracy or make warranties regarding results from its usage. Redistribution is prohibited without written permission. Copyright © 1997