<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark one)
[ X ]     ANNUAL report pursuant to Section 13 or 15 (d) of the Securities
          Exchange Act of 1934 (fee required).

For the fiscal year ended DECEMBER 31, 1996

[   ]     TRANSITION report pursuant to Section 13 or 15 (d) of the Securities
          Exchange Act of 1934.

For the transition period from _____________ to ____________

COMMISSION FILE NUMBER 0-20007

                               TENCOR INSTRUMENTS
             (exact name of registrant as specified in its charter)

CALIFORNIA               94-2464767
(State of Incorporation)                (I.R.S. Employer Identification No.)

ONE TECHNOLOGY DRIVE, MILPITAS, CALIFORNIA               95035
(Address of principal executive offices)          (zip code)

Registrant's telephone number                     (408) 571-3000

Securities registered pursuant to Section 12(b) of the Act:
     Title of Class                Name of each exchange on which registered
     --------------                -----------------------------------------
         None                      None

Securities registered pursuant to Section 12(g) of the Act:      COMMON STOCK

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

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

Aggregate market value of the voting stock held by non affiliates of the
registrant as of February 28, 1997:     $953,727,955 (1)

Number of shares outstanding of each of the issuer's classes of common stock, as
of February 28, 1997:    31,246,903



(1)  Excludes 1,789,901 shares held by directors and officers at February 28,
     1997 and 5,651,000 shares held by shareholders at December 31, 1996 whose
     ownership exceeded 5% of the outstanding shares at December 31, 1996.
     Exclusion of such shares should not be construed as indicating that the
     holders thereof possess the power, direct or indirect, to direct the
     management or policies of the registrant, or that such person is controlled
     by or under common control with the registrant.





                         Exhibit Index at page    49
                         Total pages              59

<PAGE>

PART I

ITEM 1: BUSINESS


MERGER WITH KLA

On January 14, 1997, Tencor and KLA Instruments (KLA) jointly announced a 
definitive merger agreement to create a combined company.  Under the terms of 
the merger agreement, shares and options for KLA common stock will be 
exchanged for all  outstanding shares and options of the Company on the basis 
of one share of KLA Instruments for each share of the Company. The transaction 
is intended to qualify as a pooling of interests for financial reporting 
purposes and structured to qualify as a tax-free reorganization.  The 
transaction is conditioned on obtaining both companies' shareholder approval, 
regulatory clearance and other customary closing conditions, and is 
anticipated to close during the quarter ending June 30, 1997.

BUSINESS

Tencor Instruments ("Tencor" or the "Company"), a California corporation,
designs, manufactures, markets and services wafer inspection, film measurement,
metrology systems yield measurement and physical measurement standards,
primarily for the semiconductor industry. Tencor's systems are used to assist in
the start-up of new semiconductor manufacturing facilities and new processes and
to monitor semiconductor wafers and processes during production. Certain of
Tencor's metrology systems also are sold to the data storage and flat panel
display industries.  Tencor uses its technical expertise and understanding of
customer needs to create what it believes is one of the broadest lines of high
performance laser scanning-based wafer inspection, thin film measurement and
metrology systems used in the semiconductor industry.  Since its founding in
1976, Tencor's products all have shared a common development philosophy: systems
and instruments must be user-friendly, generate results that are accurate and
easy to interpret, and provide the user with a rapid return on investment
resulting in a low cost of ownership.  To date, Tencor has introduced over 112
different products for use in the semiconductor and other industries and has
shipped more than 10,000  systems, ranging from bench top instruments to complex
automated systems.

Tencor markets its products worldwide to virtually all of the major
semiconductor manufacturers.  International sales accounted for approximately
64% of Tencor's revenues in 1996. The Company expects that international sales
will continue to represent a significant percentage of revenues.

Tencor's operating results have fluctuated in the past and the Company's
operating results may fluctuate in the future.  The Company's operating results
are dependent on many factors, including the economic conditions in the
semiconductor industry, the size and timing of the receipt of orders from
customers, customer cancellations or delays of shipments, the Company's ability
to develop, introduce and market new and enhanced products on a timely basis,
the introduction of new products by its competitors, changes in average selling
prices and product mix, and exchange rate fluctuations, among others.  In
addition, 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 could be adversely affected.  The Company's
results of operations for a particular quarter could be adversely affected if
anticipated orders are not received in time to enable shipment during the
quarter, if anticipated shipments are delayed or canceled by one or more
customers or if shipments are delayed due to manufacturing difficulties.  The
slowdown in the semiconductor industry and in the construction of new wafer
fabrication facilities has resulted in Tencor experiencing a reduction in new
orders as well as rescheduled and canceled orders in 1996.  There can be no
assurance that this slowdown will not continue.  There can be no assurance that
these and other factors will not materially adversely affect the Company's
future business and financial results.

Tencor's business depends upon the capital equipment expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits.  In addition, the Company's business depends upon new construction of
semiconductor fabrication facilities and, as to existing fabrication facilities,
                                        2

<PAGE>

enhancements to improve yields.  The semiconductor industry has been cyclical in
nature and historically has experienced periodic downturns.  The semiconductor
industry is presently experiencing a slowdown in terms of product demand and
volatility in terms of product pricing.  This slowdown and volatility has caused
the semiconductor industry to reduce purchases of semiconductor manufacturing
equipment and construction of new fabrication facilities.  These conditions have
adversely affected Tencor and may continue to adversely affect the Company's
aggregate bookings, revenues and operating results, and no assurance can be
given that the Company's bookings, revenue and operating results will not be
adversely affected by future downturns in the semiconductor industry.  Even
during periods of reduced revenues, in order to remain competitive Tencor will
be required to continue to invest in research and development and to maintain
extensive ongoing worldwide customer service and support capability which could
adversely affect its financial results.


WAFER  INSPECTION SYSTEMS

The Wafer Inspection Division products include unpatterned wafer inspection,
patterned wafer inspection, and yield management and defect data analysis
systems.  Wafer inspection systems are used to find, count and characterize
particles and other pattern defects on wafers both in engineering applications
and in-line at various stages during the semiconductor and wafer manufacturing
processes. Semiconductor manufacturers use wafer inspection systems to monitor
their manufacturing processes and to refine those processes to increase the
yield of acceptable integrated circuits.  Accordingly, semiconductor
manufacturers base their purchase of wafer inspection systems on a variety of
criteria, including sensitivity, throughput, total cost of ownership, ease of
use, degree of automation, system repeatability and correlation, and ability to
be integrated into overall yield management systems.

Tencor is a recognized leader in the wafer inspection market with its Surfscan
family of laser-scanning products.  Surfscans are widely used for wafer
qualification, process monitoring and equipment monitoring.  They provide the
high sensitivity, fast throughput and low cost of ownership required in a
production environment and are used in virtually all semiconductor manufacturing
processes in use today.  Surfscans are key components of the defect reduction
strategies of many leading semiconductor manufacturers.  The systems use a
standardized Tencor File Format which allows defect location data to be easily
transferred to off-line review stations for defect classification.   Surfscans
help Tencor's customers transition new designs from engineering to manufacturing
and to control manufacturing processes and improve yields of acceptable
integrated circuits.

The Wafer Inspection Division also produces yield management and defect data
analysis software systems.  These software systems integrate defect data from
multiple sources throughout a fab, providing comprehensive defect data
management for advanced excursion monitoring, yield correlation and reporting.
The software systems identify data sources, show defect trends and help
semiconductor manufacturers develop long-term yield improvement strategies.  The
division has also partnered with Uniphase Corporation to OEM Uniphase's confocal
review station or CRS to provide advanced two- and three-dimensional imaging and
defect classification to automate the time-consuming and error-prone procedure
of locating and classifying defects.  The CRS interfaces with the Company's
inspection systems to collect, store and analyze defect data generated by the
Surfscan systems.

Tencor's sales of wafer inspection systems accounted for approximately 51%, 47%
and 45% of total revenues in 1996, 1995 and 1994, respectively.


FILM MEASUREMENT SYSTEMS

Tencor's Film Measurement Division produces both film thickness and resistivity
measurement tools.  The Company's film thickness products are used to measure a
variety of optical properties of thin films,  while the resistivity products
measure the resistivity of the various layers used to make integrated circuits.
These products are used to control a wide range of wafer fabrication steps,

                                        3

<PAGE>

where within-wafer and wafer-to-wafer uniformity of the process is of paramount
importance to semiconductor manufacturers achieving high yields at the lowest
possible cost.

These systems incorporate pattern recognition for automatically positioning the
wafer for measurement, communications protocols such as SECSII, contamination-
free designs and performance measurement over a wide range of applications.
Whenever possible, Tencor also has been able to provide additional benefits to
its customers by incorporating multiple measurement capabilities in a single
system, thus reducing the number of steps and unnecessary handling of wafers.

Tencor uses software technology to enhance the productivity of its Film
Measurement systems.  These products offer automated wafer mapping utilizing
computer-controlled positioning stages that can move the wafer rapidly to
hundreds of user programmed measurement locations.  In addition, these products
are built on the proprietary StatTrax and Summit software platforms, which
provide an operator-friendly environment for operation, setup and utilization of
all products.

Sales of these products  accounted for approximately 30%, 32% and 33% of total
revenues in 1996, 1995 and 1994, respectively.


METROLOGY SYSTEMS

Metrology Division systems measure key dimensions and physical properties on
wafers.  Stylus profilers are used to  measure the surface topography of films
and etched surfaces and are used in production, R&D and quality control areas.
Stress measurement systems detect reliability related problems  such as film
cracking, voiding and lifting. This division also produces wafer
characterization instruments which are used to determine resistivity, thickness
and dopant types for a variety of substrates. In recent years the use of surface
profiling systems and stress measurement systems has expanded from the
engineering laboratory into the production environment.  Tencor believes that
the automation capabilities of its metrology systems are key strengths for their
use in the production setting. Tencor primarily markets metrology systems to the
semiconductor industry but also sells to other markets, including data storage
and flat panel display markets.

Tencor's sales of metrology systems accounted for approximately 12%, 14% and 13%
of total revenues in 1996, 1995 and 1994, respectively.


PHYSICAL MEASUREMENT STANDARDS

Physical measurement standards are used by semiconductor manufacturers and
semiconductor equipment manufacturers to calibrate inspection tools and
metrology systems. Tencor, through its wholly owned subsidiaries, VLSI
Standards, Inc., currently offers a broad line of standards which are traceable,
whenever possible, to the standards set by the National Institute for Standards
Technology (NIST).  The physical measurement standards product line includes
surface particle contamination, step height, resistivity, film thickness,
linewidth, surface roughness and surface topography standards.

VLSI Standards, Inc. also manufactures physical deposition systems.  These
systems deposit polystyrene spheres that have controlled diameters onto
substrates in order to calibrate defect inspection systems, such as Tencor's
Surfscan systems.


MARKETING, SALES AND SERVICE

Tencor sells products through a combination of direct sales and distribution
channels.  The Company maintains 34 sales and service offices worldwide, with 14
of those in the United States,  7 in Japan, 7 in Europe, 2  in Korea, 1 in
Singapore and 1 in Taiwan. International sales accounted for 64% of the
Company's revenue for 1996, up from 62% in 1995.  The Company's principle
customers in 1996 were IBM Corporation, LG International, Samsung, Texas
Instruments and Motorola,  which
                                        4

<PAGE>

accounted for 5.2%, 4.7%, 4.6%, 4.1% and 3.8% respectively.  The Company's
principal customers in 1995 were Motorola, Siemens, Intel, Micron Technology and
Mitsubishi, which accounted for 8.3%,  5.1%,  4.3%,  4.2% and 4.2% of total
revenues, respectively.  During 1994, the Company's principal customers were
Motorola, Texas Instruments, Intel, Samsung and Hyundai who accounted for 7.2%,
5.5% 5.3%, 5.2% and 5.0% of total revenues, respectively.  The Company does not
consider its business to be seasonal in nature, but it is cyclical with respect
to the capital equipment procurement practices of major semiconductor
manufacturers.


INTERNATIONAL REVENUES

International revenues accounted for 64%, 62% and 51% of Tencor's revenues for
the years 1996, 1995 and1994, respectively.  Tencor expects that international
sales will continue to represent a significant percentage of net sales of the
Company.  The future performance of the Company will be dependent, in part, upon
its ability to continue to compete successfully in Asia, one of the largest
areas for the sale of yield management in process monitoring equipment.  The
Company's ability to compete in this area in the future is dependent upon the
continuation of favorable trading relationships between the region (especially
Japan and Korea) and the United States and the continuing ability of the Company
to maintain satisfactory relationships with leading semiconductor companies in
the region.  International sales and operations may be adversely affected by
imposition of governmental controls, restrictions on export technology,
political instability, trade restrictions, changes in tariffs and the
difficulties associated with staffing and managing international operations.  In
addition, international sales may be adversely affected by the economic
conditions in each country.  The net sales and income from the Company's
international business may be affected by fluctuations in currency exchange
rates.  Although Tencor attempts to manage near term currency risks through
"hedging," there can be no assurance that such efforts will be adequate.  These
factors could have a material adverse effect on the Company's future business
and financial results.


BACKLOG

At December 31, 1996, the Company's firm backlog totaled $132.5 million,
compared to $175.5 million at December 31, 1995.  The Company expects to fill
the present backlog of orders during fiscal 1997.  All orders are subject to
cancellation or delay by the customer with limited or no penalty.

Tencor, from time to time, has experienced and expects to continue to experience
fluctuations in its orders and in its results of operations, particularly on a
quarterly basis. Expense levels are based, in part, on expectations of future
revenues. If revenue levels in a particular period do not meet expectations,
operating results will be affected adversely, which may have an adverse impact
on the market price of the Company's Common Stock. A variety of factors have an
influence on the Company's orders and operating results in a particular period.
These factors include specific economic conditions in the semiconductor
industry, the timing of the receipt of orders from major customers, customer
cancellations or delays of shipments, specific feature requests by customers,
production delays or manufacturing inefficiencies, exchange rate fluctuations,
management decisions to commence or discontinue product lines, the Company's
ability to design, introduce and manufacture new products on a cost effective
and timely basis, the introduction of new products by the Company or its
competitors, the selection of the Company's or its competitors' products by
semiconductor manufacturers for new generations of fabrication facilities, the
lengthening or shortening of order cycle times for the Company's products, the
timing of research and development expenditures, and expenses attendant to
acquisitions, strategic alliances and the further development of marketing and
service capabilities. As a result of fluctuations in orders, backlog as of the
end of successive quarters may vary significantly.


                                        5

<PAGE>

RESEARCH AND DEVELOPMENT

Rapid technological changes in semiconductor manufacturing processes subject the
semiconductor equipment manufacturing industry to  increased pressure to
maintain technological parity with deep submicron process technology. Tencor
believes that continued and timely development of new products and enhancements
to existing products is necessary to maintain its competitive position.
Accordingly, Tencor 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 product needs.   New
product introductions may contribute to fluctuations in operating results, since
customers may defer ordering products from existing product lines. If new
products have reliability or quality problems, reduced orders, higher
manufacturing costs, delays in acceptance of and payment for new products and
additional service and warranty expense may result. On occasion, Tencor has
experienced reliability and quality problems in connection with certain product
introductions, resulting in some of these consequences. There can be no
assurance that the Company will successfully develop and manufacture new
hardware and software products or that new hardware and software products
introduced by the Company will be accepted in the marketplace. If the Company
does not successfully introduce new products, its results of operations will be
affected adversely.

Research and development expenses were $44.3 million, or 11.0% of revenues in
1996, $33.4 million, or 10.1% of revenues in 1995 and $25.3, or 15.6% of
revenues in 1994.  Research and development expenses consist primarily of
salaries, project materials, purchased R&D technologies and other costs
associated with Tencor's ongoing efforts of product development and
enhancements.


MANUFACTURING, RAW MATERIALS AND SUPPLIES

In 1996, Tencor's principal manufacturing activities took place in Mountain View
and Santa Clara, California. In early 1997, the Company began to occupy the new
facility constructed for its use in Milpitas, California.  The construction and
the related move to the Milpitas Facility are scheduled for completion at the
end of March 1997 at which time substantially all of the Company's manufacturing
operations  will be consolidated at the Milpitas facility.  Manufacturing
activities consist primarily of assembling and testing components and
subassemblies which are acquired from third party vendors and then integrated
into Tencor's finished products.  Many of the components and subassemblies are
standard products, although certain items are made to Tencor specifications.
Certain of the components and subassemblies included in Tencor's systems are
obtained from a single source or a limited group of suppliers.  These specific
parts are monitored by management to ensure that adequate supplies are available
to maintain manufacturing schedules, should supply for any part be interrupted.
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. Further, a significant increase in the price of one or
more of these components could adversely affect the Company's results of
operations. Tencor's physical measurement standards are manufactured in an
additional facility in San Jose, California.


COMPETITION

The semiconductor equipment industry is highly competitive.  Tencor has
experienced and expects to continue to experience substantial competition
throughout the world.  The Company believes that to remain competitive, it will
require significant financial resources in order to offer a broad range of
products, to maintain customer service and support centers worldwide, and to
invest in product and process research and development.  Tencor believes that
the semiconductor equipment industry is becoming increasingly dominated by large
manufacturers such as Applied Material, Inc. ("Applied Materials"), which
recently entered the wafer defect inspection market, Hitachi Electronics
Engineering Co., LTD. and Tokyo Electron Limited, who have the resources to
support customers on a worldwide basis.  Many of these competitors have
substantially greater financial resources and more extensive engineering,
manufacturing, marketing and customer service and support capabilities than
Tencor.  In addition, there are smaller emerging semiconductor equipment
companies which
                                        6

<PAGE>

provide innovative technology.  The Company expects its competitors to continue
to improve the design and performance of their current products and processes
and to introduce new products and processes with improved price and performance
characteristics.  No assurance can be given that the Company will be able to
continue to compete successfully against its competitors.

In addition, in configuring their fabrication plants, semiconductor
manufacturers increasingly tend to select specific items of manufacturing
equipment for all of the fabrication facilities used to produce each generation
of integrated circuits. As a result of this process, the Company's failure to
have one or more of its products selected by a semiconductor manufacturer for
use in its facilities for a particular generation of integrated circuits may
effectively eliminate sales of that product for all of that manufacturer's
fabrication plants used for that generation of integrated circuits. The failure
to have one or more of Tencor's products selected by a major semiconductor
manufacturer, especially one that is a significant customer of Tencor, for a
particular generation of its integrated circuit products could have a
significant and long-term adverse effect on the Company's results of operations.
Although the Company has been relatively successful to date in these selection
decisions, not all of the Company's products have been selected by each of its
customers for fabrication facilities for each generation of integrated circuits.
Further, there can be no assurance that Tencor's products will be selected in
the future, or that Tencor will continue to be as successful in connection with
selection processes as it has been to date.


PATENTS AND LICENSES

Tencor's continued success will depend in part on its proprietary technology.
While Tencor has attempted to protect its proprietary technology through
patents, copyrights and trade secrets, it believes that success will depend more
upon the technical expertise,  continuing development of new systems, market
penetration, 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.  Tencor currently holds 69 U.S. patents and
has applied for 17 additional patents in the United States.  In addition, Tencor
has 21 foreign patents and has applied for 44 additional foreign patents.  From
time to time the Company acquires license rights under U.S. and foreign patents
and other proprietary rights of third parties. No assurance can be given that
patents will be issued on any of the applications, that license assignments will
be made as anticipated or that the Company's patents, licenses or other
proprietary rights will be sufficiently broad to protect its technology. In
addition, no assurance can be given that any patents issued to or licensed by
the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to Tencor.

The Company and its customers from time to time receive letters from third
parties, including competitors, alleging infringement of such parties' patent
rights by the Company's products.  However, no such letters were received in
1996.  Such letters are prevalent in the industry and the Company believes that
generally, it is possible to negotiate licenses on commercially reasonable
terms.  However, there can be no assurance that the Company would prevail in any
litigation seeking damages or expenses 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 on reasonable terms, if at all.


ENVIRONMENTAL MATTERS

Tencor has learned that the soil and groundwater beneath its leased facilities
in Mountain View, California, are contaminated by certain chemicals.  Tencor
understands that all or most of the contamination occurred prior to the time
Tencor began to occupy the premises and resulted either from the activities on
the property of a long-time tenant (unaffiliated with Tencor) or from an off-
site source.  Tencor has a right to indemnification from the owner of the
property as to claims brought by third parties with respect to this
contamination. There is no assurance, however, that Tencor will not incur
investigative costs or other expenses with respect to the property
contamination, or that a regulatory agency or third party will not seek to
compel Tencor to undertake remedial action, resulting
                                        7

<PAGE>

in further costs and expenses, with no assurance that such expenses are
recoverable under the indemnity agreement with the owner.


EMPLOYEES

At December 31, 1996, the Company employed 1,357  full-time and temporary
persons worldwide.  None of these employees is represented by a union and Tencor
has never experienced a work stoppage, slowdown or strike.  Tencor considers its
employee relations to be good.

The future success of the Company is dependent, in part, on its ability to
retain certain key personnel.  To continue to grow the Company will also need to
attract additional skilled personnel in all areas of its business on a worldwide
basis.  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.
This could be particularly significant if the Company needs to hire, train and
assimilate a large number of new employees.  A failure to retain or attract
qualified employees could materially adversely affect the business and financial
results of the Company.



ITEM 2: PROPERTIES

Certain information concerning the Company's principal properties at December
31, 1996, is set forth below:
<TABLE>
<CAPTION>

                                                                              Square
Location            Type                Principal use                         footage           Ownership
--------            ----                -------------                         -------           ---------

<S>                 <C>                 <C>                                   <C>                <C>
Mountain View, CA   Office, plant       Research and Engineering,             133,025            leased
                                        Marketing, Manufacturing,
                                        Sales and Service

Santa Clara, CA     Office, plant       Corporate Headquarters,               189,280            leased
                                        Marketing, Research and
                                        Engineering, Manufacturing,
                                        Sales and Service

Milpitas, CA        Office              Training facility                      18,500            leased

Naruse, Japan       Office              Sales, service and                     28,417            leased
                                        applications support
</TABLE>

The Company also leases office space for 32 additional sales and service offices
throughout the world: 7 offices are located in Europe, 6 offices are in Japan,
13 offices are in the United States, 2 offices are located in Korea, 1 office is
in Singapore and 1 office is in Taiwan.  In addition, the company is in the
process of opening a sales and service office in Thailand.

As a result of the Company's desire to consolidate substantially all of its
Silicon Valley operations into a single facility, the Company, in late 1995,
entered into two seven year operating lease transactions for land, office and
manufacturing facilities to be constructed for its use in Milpitas, California.
As of March 7, 1997, construction of the facility has virtually been completed
and occupancy is scheduled to be concluded by the end of the first quarter of
1997.  As a result, the Company allowed certain of its California leased space
to expire in December 1996, with the remainder of leaseholds expiring at various
times through September 1998.  $6.5 million of estimated future costs, such as
rents and utilities, related to unoccupied leased space was reserved for at
September 30, 1996.  Rent on the Company's new facility will commence on April
1, 1997.

                                        8

<PAGE>

The Company believes that its existing leased facilities and the Milpitas
facility will be adequate to meet the Company's office and plant space
requirements for at least the next twelve months.


ITEM 3: LEGAL PROCEEDINGS


None


ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH QUARTER OF
       1996


None



PART II


ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

QUARTERLY COMMON STOCK MARKET PRICE:


1996 Quarter ended    March 31     June 30     September 30      December 31
------------------    --------     -------     ------------      -----------

High                  29            26 1/2        19 5/8            28 3/8
Low                   16 1/2        17            14 3/4            17 5/8


1995 Quarter ended    March 31     June 30     September 30      December 31
------------------    --------     -------     ------------      -----------

High                  31 5/8        43 1/2        47 1/8            46
Low                   17 7/8        28 9/16       39 1/4            24 3/4


The preceding table sets forth the high and low sales prices as reported on the
Nasdaq National Market system during the last two years.  As of February 28,
1997 there were approximately 842 shareholders of record of the Company's Common
Stock.  The price for the Company's Common Stock as of the close of business on
February 28, 1997 was $40.06 per share.  The Company has paid no cash dividends
to its shareholders during the past ten years.  The Company does not plan to pay
cash dividends in the foreseeable future.


                                        9

<PAGE>

ITEM 6: SELECTED FINANCIAL DATA

FIVE YEAR FINANCIAL HIGHLIGHTS
IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>

Year ended December 31,                       1996           1995           1994           1993           1992
----------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>            <C>             <C>
OPERATIONS
Net Revenues                              $403,170       $330,197       $182,330       $107,874        $85,054
Net income                                 $61,288 (2)    $65,324        $24,316 (1)     $7,158         $2,402
Net income per share                         $1.93 (2)      $2.09           $.90 (1)      $0.30          $0.12
Weighted average number
of common shares                            31,763         31,212         27,162         23,492         20,270

YEAR END STATUS
Total assets                              $484,419       $395,040       $184,549        $91,340        $64,487
Shareholders' equity                      $365,033       $288,145       $144,729        $70,192        $49,236
Working capital                           $274,238       $241,082       $122,392        $55,590        $37,759
Current ratio                                3.3:1          3.3:1          4.2:1          3.7:1          4.2:1
</TABLE>


(1)  Includes $2.3 million of expenses related to Tencor's acquisition of
     Prometrix Corporation.
(2)  Includes a restructuring charge of $8.5 million.


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Other than statements of historical fact, statements made herein, such as
statements regarding financial projections, information or expectations about
the Company's products or markets of the Company, or statements about future
events, are forward-looking and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from the
statements made.  These include, among others, uncertainties associated with
meeting product delivery timetables, acceptance of new products, costs
associated with new product introductions and the proposed merger with KLA, as
well as other factors described herein, including those uncertainties identified
under the heading "Other Factors Affecting Company Results," as well as the
matters identified in the discussion of the Company's business in Item 1 hereof.


OVERVIEW.  The Company finished 1996 with revenues of $403,170,000 an increase
of 22% over 1995 revenues of  $330,197,000 and 1994 revenues of  $182,330,000.
During 1996, the Company received net new orders of $360,240,000 and at the end
of 1996 had backlog of $132,535,000 compared to backlog at the end of 1995 of
$175,465,000.  Income from operations was $91,950,000 in 1996 compared to
$104,396,000 and $39,476,000 in 1995 and 1994, respectively. The current year's
decline in operating income was due primarily to an increase in the Company's
product costs, including warranty and installation, resulting in a decline in
gross margins as a percentage of revenues, and a restructuring charge of
$8,500,000 for costs related to downsizing its worldwide operations and
relocating to its new Milpitas facility.

The Company's principal market is the semiconductor industry.  The Company's
revenues are derived primarily from product sales, principally through its
direct sales force and, to a lesser extent, through distributors.  The Company
markets its products to virtually all of the major semiconductor manufacturers
worldwide and its level of sales to individual semiconductor manufacturers may
vary significantly from period to period depending on a variety of factors.
These factors include the amount

                                       10

<PAGE>

of manufacturing capacity being added or modernized by a particular manufacturer
and the Company's success in having its systems selected to be utilized in
connection with such additional or modernized capacity.

Revenues from sales of products in 1996, 1995 and 1994 were $379,560,000,
$312,450,000 and $170,955,000, respectively.  In addition, revenues derived from
non-warranty service were $23,610,000, $17,747,000 and $11,375,000 in 1996, 1995
and 1994, respectively.  Principal customers in 1996 included IBM, LG
International, Samsung, Texas Instruments and Motorola, compared with the
Company's principal customers in 1995, Motorola, Siemens, Intel, Micron
Technology and  Mitsubishi.  In 1994, the Company's principal customers included
Motorola, Texas Instruments, Intel, Samsung and Hyundai.  The Company expects
that it will, in the future, continue to experience significant fluctuations
from period to period in its level of activity with individual semiconductor
manufacturers.

The Company has three wholly-owned foreign subsidiaries in Europe, one in Japan
and one in Korea for marketing, sales and service of products.  In early 1996,
the Company established wholly-owned subsidiaries in Singapore and Taiwan for
sales and support activities. International sales accounted for 64%, 62% and 51%
of the Company's revenues for the years 1996, 1995 and 1994, respectively.  The
Company believes that foreign sales will continue to account for a significant
percentage of revenues.

As a participant in the semiconductor industry, the Company operates in a
technologically advanced, highly competitive environment.  In addition, the
Company depends in large part on the capital expenditures of semiconductor
manufacturers worldwide, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits.  The semiconductor industry has historically been highly cyclical and
has experienced periodic downturns, which have had an adverse effect on the
level of capital expenditures.  While the Company cannot predict what effect
these various factors will have on the operating results, the effect of these
and other factors could significantly affect the Company's future operating
results and stock market value.


                                       11

<PAGE>

RESULTS OF OPERATIONS.  The following table sets forth certain financial data
for the periods indicated as a percentage of revenues:

Percentage of Net Revenues                    1996           1995           1994
--------------------------------------------------------------------------------

Revenues                                    100.0%         100.0%         100.0%
Cost of sales                                41.2%          36.8%          40.2%
--------------------------------------------------------------------------------
Gross margin                                 58.8%          63.2%          59.8%
--------------------------------------------------------------------------------

Operating expenses:
  Research and development                   11.0%          10.1%          13.9%
  Marketing and selling                      15.7%          16.1%          17.3%
  General and administrative                  7.2%           5.4%           5.7%
  Restructuring/merger charges                2.1%            ---           1.3%
--------------------------------------------------------------------------------
Total operating expenses                     36.0%          31.6%          38.2%
--------------------------------------------------------------------------------

Income from operations                       22.8%          31.6%          21.6%

Other income, net                             1.7%           1.9%            .7%
--------------------------------------------------------------------------------
Income before income taxes                   24.5%          33.5%          22.3%

Provision for income taxes                    9.3%          13.7%           9.0%
--------------------------------------------------------------------------------

Net income                                   15.2%          19.8%          13.3%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                               1996         CHANGE           1995         CHANGE           1994
-----------------------------------------------------------------------------------------------
IN THOUSANDS,
EXCEPT PER SHARE DATA

<S>                        <C>                 <C>       <C>                 <C>       <C>
Revenues                   $403,170            22 %      $330,197             81%      $182,330
Gross profit                237,047            14 %       208,675             91%       109,087
Operating expenses          145,097            39 %       104,279             50%        69,611
Net income                   61,288            (6)%        65,324            169%        24,316
Net  income per share          1.93            (8)%          2.09            132%          0.90
</TABLE>


YEARS ENDED DECEMBER 31, 1996 AND 1995.

REVENUES.  Revenues increased by $72,973,000 or 22%, in 1996 versus 1995.  The
increase in revenues was primarily attributable to increased unit volumes of
existing products and increased sales of newer products with higher average
selling prices. Products with higher average selling prices include the Surfscan
AIT and the UV-1270SE film thickness system.

Geographically, the Company's revenue growth in 1996 compared to 1995 was driven
by a 56% increase in Korea and a 123% increase in Southeast Asia, principally
Singapore and Taiwan.  Domestic revenues increased $21,119,000, or 17% in 1996
over 1995.  The future performance of the Company will be dependent, in part, on
the Company's ability to compete successfully overseas, and in particular, in
Asia Pacific, the largest market for semiconductor capital equipment.  Factors
affecting the Company's ability to compete in foreign markets include continuing
free trade between foreign countries and the U.S. and changes in interest and
foreign currency rates.  Other than for revenues generated in Japan, which in
1996 represented $94,744,000 sales contracts are generally denominated in U.S.
dollars.  The Company limits its exposures to fluctuations between the U.S.
dollar and the yen by purchasing forward contracts and borrowing in yen.


                                       12

<PAGE>

GROSS MARGIN.  Gross margin decreased to 58.8% in 1996 from 63.2% in 1995.  The
decrease during the period was due in part to an increase in costs related to
new product introductions and in part to an increase in support related costs as
the Company continued to add infrastructure to its worldwide customer
satisfaction organization to support its growth. The Company anticipates a
modest percentage decrease in gross margins in 1997 due, in part, to increased
competition in the market place.

RESEARCH AND DEVELOPMENT.  Research and development expenses were $44,258,000
and $33,427,000 in 1996 and 1995, respectively, or 11.0% and 10.1% of revenues,
respectively.  The increase in absolute dollars is due primarily to increases in
salaries and benefits expenses resulting from a net increase in headcount during
the period and increases in new product development spending, particularly
related to the Company's Surfscan AIT (Advanced Inspection Technology); Surfscan
SP1, the industry's first unpatterned wafer inspection system designed for 300mm
wafer and device technologies of 0.25 micron; and HRP-200 High Resolution
Profiler, a fully-automated surface profiling system which provides complete,
high-resolution global and local analysis of wafer surface topography during
development and in-line monitoring of processes such as Chemical-Mechanical
Polishing (CMP).  The percentage increase was attributable to the Company's
32.4% growth in research and development spending compared to a 22.1% growth in
revenues. The Company is committed to technology leadership in the semiconductor
equipment industry and expects to increase its research and development
expenditures in the coming year.

MARKETING AND SELLING.  Marketing and selling expenses were $63,478,000 and
$53,156,000 in 1996 and 1995, or 15.7% and 16.1% of revenues, respectively.
Compared to 1995, in 1996, marketing and selling expenses increased in absolute
dollars.  This increase can be attributed in part to greater product marketing
efforts tied to new product introductions and higher employee compensation-
related costs as a result of a net increase in worldwide headcount, and higher
commission expense as a result of the increase in revenues.   The Company
established sales and support operations in both Singapore and Taiwan during
1996, and expects to continue to increase its presence in Asia both through the
addition of  personnel and the establishment of new sales and support
operations.  The Company anticipates marketing and selling spending will
increase in absolute dollars in 1997.

GENERAL AND ADMINISTRATIVE.  General and administrative expenses were
$28,861,000 and $17,696,000 in 1996 and 1995, or 7.2% and  5.4% of revenues,
respectively. The increase in absolute dollars was due in part to increases in
expenses resulting from the significant efforts involved with enhancements to
the Company's information systems infrastructure including the implementation of
the Company's new worldwide information system. The Company anticipates that
general and administrative costs will decline in absolute dollars in 1997.

RESTRUCTURING COSTS.  During the quarter ended September 30, 1996, the Company
recorded a charge for restructuring costs of $8.5 million.  This charge consists
of $2.0 million in employee severance and related costs as a result of
downsizing its worldwide operations through a reduction in force of
approximately 10% of the Company's regular employees.  The restructuring charge
also includes costs aggregating $6.5 million associated with the relocation from
the Company's current leased facilities to the facility constructed for its use
in Milpitas, California.  The Company expects complete occupation of its new
facility in Milpitas, California, in the early part of 1997.  The Company has
additional facilities with leases that expire on various dates through September
1998, and as a result of the Company's move to its new facility in Milpitas,
certain of these facilities will become unoccupied during the first quarter of
1997.  Due to the relatively short terms remaining on certain of these leases,
the Company may be unable to sublease all of its unoccupied facilities.
Accordingly, the Company has included in its restructuring charge an amount
equal to the remaining costs (including rent) due under those leases which are
unlikely to be subleased.  The Company has also included in its lease exit cost,
amounts for estimated leasehold refurbishment costs (net of existing

                                       13

<PAGE>

reserves) to return the facilities to their original condition as required by
the lease agreements, the decline in net book value of certain of the Company's
furniture and fixtures, and various other costs associated with the exit from
its current facilities.  Of the $8.5 million total restructuring costs,
approximately $1.3 million was used as of December 31, 1996 with the majority of
the remaining balance of $7.2 million expected to be utilized during the next
nine months.

OTHER INCOME, NET.  Other income, net consisted primarily of interest income on
short-term investments less interest expense on bank borrowings.  Also included
were gains and losses on foreign currency transactions.

PROVISION FOR INCOME TAXES.  Income taxes as a percentage of income before 
income taxes were 38.0% in 1996 and 41.0% in 1995, respectively.  The 
decrease was due primarily to a decrease in profits in foreign jurisdictions 
with higher relative tax rates.  The Company expects the income tax rate to 
decline modestly in 1997.

YEARS ENDED DECEMBER 31, 1995 AND 1994.

REVENUES.  Revenues increased $147,867,000, or 81%, in 1995 versus 1994. The
increase in revenues was primarily attributable to increased unit volumes of
existing products and sales of newer products with higher average selling
prices. Products with higher average selling prices included the Surfscan 6420
bare wafer inspection system, the Surfscan 7700 patterned wafer inspection
system, the Prometrix UV-1250SE film thickness system and the Tencor P12 surface
profiler.

Geographically, the Company's revenue growth in 1995 compared to 1994 was driven
by a  210% increase in Europe, principally Germany, a 108% increase in Japan, a
33% increase in Korea and a 41% increase in the U.S. The rest of the world,
principally Singapore and Taiwan, increased 212%.

GROSS MARGIN.  Gross margin increased to 63.2% in 1995 from 59.8% in 1994. The
increase during the period was due in part to a shift in  product mix to new,
higher margin products, and lower costs of sales resulting from direct sales of
the Company's thin film and resistivity products in Japan and Europe,
manufacturing efficiencies and increased production volumes resulting in better
capacity utilization.

RESEARCH AND DEVELOPMENT.  Research and development expenses were $33,427,000
and $25,325,000 in 1995 and 1994 or 10.1% and 13.9% of revenues, respectively.
The increase in absolute dollars is due primarily to increases in salaries and
benefits expenses resulting from increased headcount during the period and
increases in project material costs associated with new product development,
particularly the recently introduced Surfscan AIT and SP1.  The percentage
decrease  was attributable to the Company's 32% growth in research and
development spending compared to an  81% growth in revenues.

MARKETING AND SELLING.  Marketing and selling expenses were $53,156,000 and
$31,620,000 in 1995 and 1994, respectively or 16.1% and 17.3% of revenues,
respectively.  In 1995,  compared to 1994, marketing and selling expenses
increased in absolute dollars due primarily to increased foreign distributor
commissions stemming from increased foreign distributor sales in new markets
such as Singapore and Taiwan, offset in part by selling the Company's film
measurement products direct in Japan, increased marketing and selling headcount
and increased domestic commissions stemming from increased domestic sales.  The
decline as a percentage of revenues was attributable to the Company's 68% growth
in marketing and selling spending compared to an 81% growth in revenues.


                                       14

<PAGE>

GENERAL AND ADMINISTRATIVE.  General and administrative expenses were
$17,696,000 and $10,366,000 in 1995 and 1994 or 5.4% and 5.7% of revenues,
respectively. While general and administrative expenses grew in absolute
dollars, they declined as a percentage of revenues  primarily attributable to
the Company's 71% growth in general and administrative spending compared to an
81% growth in revenues.

OTHER INCOME, NET.  Other income, net consisted primarily of interest income on
short-term investments less interest expense on bank borrowings.  Also included
were gains and losses on foreign currency transactions.

PROVISION FOR INCOME TAXES.  Income taxes as a percentage of income before
income taxes were 41.0% in 1995 and 40.4% in 1994, respectively.  The increase
was due primarily to increased foreign sales in jurisdictions with higher
relative tax rates.


LIQUIDITY AND CAPITAL RESOURCES.

The Company has financed its growth primarily through cash flows from 
operations and amounts, net of offering costs, raised in connection with 
equity offerings in March 1993 ($10,867,000), September 1994 ($38,187,000) 
and April 1995 ($65,865,000). Net cash provided by operations was $93,685,000 
in 1996, an increase of $77,313,000 from cash provided by operations in 1995. 
The primary factor contributing to the increase in cash generated from 
operations was the decrease in accounts receivable of $25,180,000 during 
1996. This decrease is due in part to improved collections and a decline in 
revenues in the second half of 1996 compared to the same period in 1995.  In 
addition, collection times in Japan were reduced, partly as a result of the 
factoring agreement with a local bank to sell, with recourse, certain trade 
receivables which the Company accounted for as an off-balance sheet 
arrangement.

Working capital was $274,238,000 and $241,082,000 as of December 31, 1996 and
1995, respectively.  At December 31, 1996, the Company had $223,777,000 in cash
and cash equivalents and short-term investments.

For investing activities, the Company's capital requirements typically consist
of computers, manufacturing equipment and cleanrooms.  Capital expenditures in
1996 and 1995 were $32,788,000 and $16,493,000, respectively.  The increase in
capital expenditures in 1996 represents the Company's investment in equipment
and software for its new information system and improvements of its Milpitas-
based training facility and cleanrooms located in the U.S. and Japan.

In November 1995, the Company entered into a seven year operating lease
transaction for the office and manufacturing facility in Milpitas, California.
The Company's obligations under the lease may be collateralized at the Company's
option by cash and/or investments in order to reduce its monthly payments. At
December 31, 1996, cash and securities collateralized under the lease was
$71,300,000 and is expected to reach approximately $90,000,000 upon completion
scheduled for early 1997.

At December 31, 1996, the Company's principal sources of liquidity consisted of
$223,777,000 in cash, cash equivalents and short-term investments and
$15,291,000 available under its multi-currency revolving line of credit
agreement. Capital expenditures are expected to approximate $29,000,000 in 1997.
This amount includes funds for the continuation and completion of facilities
expansions, investments in equipment and software for its new information
systems and other capital expenditures.  The Company believes that the existing
cash balances and short-term investments, along with cash generated from
operations, will be sufficient to meet the Company's working capital
requirements through 1997.


                                       15

<PAGE>

The Company believes that success in its industry requires substantial capital
in order to maintain the flexibility to take advantage of opportunities as they
may arise.  The Company may, from time to time, as market and business
conditions warrant, invest in or acquire complementary businesses, products or
technologies.  The Company may effect additional equity or debt financings to
fund such activities.  The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's shareholders.


OTHER FACTORS AFFECTING COMPANY RESULTS

The Company, from time to time, has experienced, and expects to continue to
experience, significant fluctuations in its results of operations, particularly
on a quarterly basis.  The Company's expense levels are based, in part, on
expectations of future revenues.  If revenue levels in a particular period do
not meet expectations, operating results will be adversely affected.  A variety
of factors have an influence on the Company's operating results in a particular
period.  These factors include specific economic conditions in the semiconductor
industry, the timing of the receipt of orders from major customers, customer
cancellations or delays of shipments, specific feature requests by customers,
production delays or manufacturing inefficiencies, exchange rate fluctuations,
management decisions to commence or discontinue product lines, the Company's
ability to design, introduce and manufacture new products on a cost effective
and timely basis, the introduction of new products by the Company or its
competition, the selection of the Company's products by semiconductor
manufacturers for new generations of fabrication facilities, the timing of
research and development expenditures, and expenses attendant to restructuring,
acquisitions, strategic alliances and the further development of marketing and
service capabilities.


                                       16

<PAGE>


ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  Index to Financial Statements

Financial Statements:
  Consolidated Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . .18

  Consolidated Statements of Income - December 31, 1996, 1995 and 1994 . . . .19

  Consolidated Statements of Shareholder's Equity -
  December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . .20

  Consolidated Statements of Cash Flows - December 31, 1996, 1995 and 1994 . .21

  Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . .22

  Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . .36

  Financial Statement Schedules:


    All schedules are omitted because they are either not applicable or the 
    required information is shown in the financial statements or notes thereto.


                                       17

<PAGE>

TENCOR INSTRUMENTS
CONSOLIDATED BALANCE SHEETS

December 31,                                                1996           1995
-------------------------------------------------------------------------------
In thousands

ASSETS
Current assets:
     Cash and cash equivalents                          $141,407      $  86,944
     Short-term investments                               82,370         76,889
     Accounts receivable, net                             87,623        118,857
     Inventories                                          51,668         46,725
     Deferred income taxes                                19,056          8,869
     Prepaid expenses and other assets                    10,165          6,666
-------------------------------------------------------------------------------
          Total current assets                           392,289        344,950
-------------------------------------------------------------------------------

Property and equipment, net                               41,601         22,447
Other assets                                              50,529         27,643
-------------------------------------------------------------------------------
          Total assets                                  $484,419       $395,040
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Bank borrowings                                   $  28,162      $  34,123
     Accounts payable                                     11,936         16,858
     Accrued compensation                                 21,496         16,526
     Other accrued expenses                               33,029         22,816
     Income taxes payable                                 23,428         13,545
-------------------------------------------------------------------------------
          Total current liabilities                      118,051        103,868
-------------------------------------------------------------------------------

Long-term obligations                                      1,335          3,027
-------------------------------------------------------------------------------

Commitments and contingencies  (Notes 2, 4, 8 and 10)

Shareholders' equity:
     Common stock, no par value: 60,000 shares
          authorized;  31,053 and 30,751 shares
          issued and outstanding                         152,756        151,675
     Retained earnings                                   200,024        138,736
     Accumulated unrealized gain on investments, net      14,602            ---
     Cumulative translation adjustment                    (2,349)        (2,266)
-------------------------------------------------------------------------------
          Total shareholders' equity                     365,033        288,145
-------------------------------------------------------------------------------

          Total liabilities and shareholders' equity    $484,419       $395,040
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------




          See accompanying notes to consolidated financial statements.


                                       18

<PAGE>

TENCOR INSTRUMENTS
CONSOLIDATED STATEMENTS OF INCOME


Year ended December 31,                      1996           1995           1994
-------------------------------------------------------------------------------
In thousands, except per share data


Revenues                                 $403,170       $330,197       $182,330
Cost of goods sold                        166,123        121,522         73,243
-------------------------------------------------------------------------------
Gross profit                              237,047        208,675        109,087
-------------------------------------------------------------------------------

Operating expenses:
     Research and development              44,258         33,427         25,325
     Marketing and selling                 63,478         53,156         31,620
     General and administrative            28,861         17,696         10,366
     Restructuring/merger charges           8,500            ---          2,300
-------------------------------------------------------------------------------
          Total operating expenses        145,097        104,279         69,611
-------------------------------------------------------------------------------

Income from operations                     91,950        104,396         39,476
Other income, net                           6,901          6,322          1,294
-------------------------------------------------------------------------------

Income before income taxes                 98,851        110,718         40,770

Provision for income taxes                 37,563        45,394          16,454
-------------------------------------------------------------------------------

Net income                               $ 61,288       $ 65,324       $ 24,316
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------


Net income per share                     $   1.93       $   2.09       $   0.90
Weighted average common shares
     and equivalents                       31,763         31,212         27,162




          See accompanying notes to consolidated financial statements.


                                       19


<PAGE>

TENCOR INSTRUMENTS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                           Common Stock                          Accum.    Cumulative
                                                       --------------------                     Retained   Unrealized  Translation
                                                        Shares      Amount      Earnings          Gain     Adjustment    Totals
--------------------------------------------------------------------------------------------------------------------------------
In thousands

<S>                                                     <C>         <C>          <C>               <C>        <C>        <C>
Balances at December 31, 1993                           22,990      $21,107      $49,446           ---        $(361)     $70,192

     Adjustment to conform fiscal year
         of  Prometrix                                     ---          ---         (350)          ---          ---         (350)
     Net issuance under employee stock plans             1,428        5,511          ---           ---          ---        5,511
     Equity offering, net of offering costs              2,466       38,187          ---           ---          ---       38,187
     Release of FleXus escrowed shares                     178        3,422          ---           ---          ---        3,422
     Release of Prometrix escrowed shares                  394          ---          ---           ---          ---          ---
     Tax benefits of stock option transactions             ---        3,150          ---           ---          ---        3,150
     Cumulative translation adjustment                     ---          ---          ---           ---          301          301
     Net income                                            ---          ---       24,316           ---          ---       24,316
--------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994                           27,456       71,377       73,412           ---          (60)     144,729

      Net issuance under employee stock plans              965        5,630          ---           ---          ---        5,630
      Equity offering, net of offering costs             2,330       65,865          ---           ---          ---       65,865
      Tax benefits of stock option transactions            ---        8,803          ---           ---          ---        8,803
      Cumulative translation adjustment                    ---          ---          ---           ---       (2,206)      (2,206)
      Net income                                           ---          ---       65,324           ---          ---       65,324
--------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995                           30,751      151,675      138,736           ---       (2,266)     288,145

      Net issuance under employee stock plans              552        5,570          ---           ---          ---        5,570
      Repurchase of  common stock                         (250)      (5,456)         ---           ---          ---       (5,456)
      Tax benefits of stock option transactions            ---          967          ---           ---          ---          967
      Cumulative translation adjustment                    ---          ---          ---           ---          (83)         (83)
      Accum. unrealized gain on investments, net           ---          ---          ---       $14,602          ---       14,602
      Net income                                           ---          ---       61,288           ---          ---       61,288
--------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996                           31,053     $152,756     $200,024       $14,602      $(2,349)    $365,033
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>





          See accompanying notes to consolidated financial statements.


                                       20

<PAGE>

TENCOR INSTRUMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

Year ended December 31,                                                1996           1995           1994
---------------------------------------------------------------------------------------------------------
In thousands

<S>                                                              <C>              <C>            <C>
Cash flows from operating activities:
   Net income                                                     $  61,288      $  65,324       $ 24,316
   Adjustments to reconcile net income to net
   cash provided by (used in) operating activities:
      Depreciation and amortization                                  16,459          7,635          3,120
      Deferred income taxes                                         (12,425)        (4,231)        (4,262)
      Adjustment to conform Prometrix fiscal year                       ---            ---           (350)
      Non-cash acquisition of in-process R&D                            ---            ---          1,200
      Changes in assets and liabilities:
         Accounts receivable, net                                    25,180        (67,271)       (32,709)
         Inventories                                                 (6,483)       (25,200)        (5,010)
         Prepaid expenses and other assets                           (1,771)        (4,400)           (72)
         Accounts payable                                            (4,830)         8,956          3,318
         Accrued compensation                                         5,204          7,028          4,881
         Other accrued expenses                                       7,963         12,170          3,586
         Income taxes payable                                         3,100         16,361          6,546
---------------------------------------------------------------------------------------------------------
      Net cash provided by operating activities                      93,685         16,372          4,564
---------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
   Purchase of property and equipment                               (32,788)       (16,493)        (6,972)
   Purchases of short-term investments                              (90,255)       (48,061)       (56,391)
   Proceeds from sale of short-term investments                      84,632          7,876         38,104
   Long-term equity investment                                          ---        (10,732)           ---
---------------------------------------------------------------------------------------------------------
      Net cash used in investing activities                         (38,411)       (67,410)       (25,259)
---------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
   Issuance of common stock, net                                      5,570          5,630          7,203
   Proceeds from equity offerings, net                                  ---         65,865         38,187
   Stock repurchases                                                 (5,456)           ---            ---
   Payments under debt obligations                                  (44,436)           ---            ---
   Borrowings under debt obligations                                 41,403         29,693            ---
---------------------------------------------------------------------------------------------------------
      Net cash provided by (used in) financing activities            (2,919)       101,188         45,390
---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents          2,108           (327)          (706)
---------------------------------------------------------------------------------------------------------

Net increase in cash and cash equivalents                            54,463         49,823         23,989
Cash and cash equivalents at beginning of period                     86,944         37,121         13,132
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                        $ 141,407      $  86,944       $ 37,121
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------

Supplemental cash flow disclosures:
   Income taxes paid                                              $  47,849      $  34,712       $ 12,425
   Interest paid                                                  $   1,325      $     437       $    197

Supplemental non-cash investing cash flow disclosures:
   Tax benefits from stock option transactions                    $     967      $   8,803       $  3,150
   Accumulated unrealized gain on investment, net                 $  14,602            ---            ---
</TABLE>


See accompanying notes to consolidated financial statements.


                                       21

<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of Tencor
Instruments and its wholly owned subsidiaries (the "Company").  All significant
intercompany transactions and accounts have been eliminated.

MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

STOCK BASED COMPENSATION PLANS
The Company accounts for its employee stock option plans and employee stock
purchase plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees".  In 1995,
the Financial Accounting Standards Board released FAS 123, "Accounting for
Stock-Based Compensation".  FAS 123 provides an alternative to APB 25 requiring
additional disclosure effective for fiscal years beginning after December 15,
1995.  The Company continues to account for its employee stock plans in
accordance with APB 25 and provides additional disclosure required by FAS 123.
Accordingly, FAS 123 did not have any impact on the Company's financial position
or results of operations.  Refer to Note 7 of Notes to Consolidated Financial
Statements.

CASH EQUIVALENTS
Cash equivalents are highly liquid investments which are valued at cost, which
approximates market, and have original maturity  dates of three months or less.
Cash equivalents generally consist of treasury notes and money market deposits.

INVESTMENTS
Investments in debt and equity securities are classified as "available-for-
sale."  Short-term investments consist primarily of U.S. government and
municipal bonds and corporate notes which are recorded at fair market value.
The long-term equity investments consist of an investment in common stock which
is recorded at fair market value.  Net unrealized gains and losses are recorded
as a separate component of shareholders' equity.  Interest income is accrued as
earned.

REVENUE RECOGNITION
Revenue is generally recognized upon shipment.  Revenues from distributors are
recognized upon shipment as no right of return, stock rotation or price
protection is given.  A provision for the estimated costs of fulfilling
warranty and installation obligations is recorded at the time the related
revenue is recognized.  Service and maintenance contract revenues are deferred
and recognized ratably over the period of the related contract.

INVENTORIES
Inventories are stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market.  Self-constructed
demonstration units are stated at their manufacturing costs and reserves are
recorded to state the demonstration units at their net realizable value.


                                       22

<PAGE>

PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost.  Depreciation of property and
equipment is based on the straight-line method over the shorter of the estimated
lives of the assets, generally three to seven years, or the lease terms.

INTANGIBLE ASSETS
Purchased patents and licenses are amortized over their remaining estimated
useful lives on a straight-line basis.  Purchased product technologies are
amortized over their estimated useful lives of three to seven years on a
straight-line basis.  Goodwill is amortized over ten years on a straight-line
basis.  The Company periodically reviews the recoverability of intangible assets
based upon the present value of estimated future cash flows.

CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents, short-term investments and marketable equity
securities, accounts receivable and financial instruments used in hedging
activities.

Cash equivalents and short-term investments are maintained with high quality
institutions, the composition and maturities of which are regularly monitored by
management.  Generally, these securities maintain a highly liquid market and may
be redeemed upon demand and, therefore, bear minimal risk.  The Company has not
experienced any material losses on its investments.

A majority of the Company's trade receivables are derived from sales to large
multinational semiconductor manufacturers.  Concentration of credit risk with
respect to trade receivables are considered to be limited due to its customer
base and the diversity of its geographic sales areas.  The Company performs
ongoing credit evaluations of its customers' financial condition.  The Company
maintains a provision for potential credit losses.  The write-offs related to
credit losses have been insignificant.

OFF-BALANCE SHEET RISK
The Company enters into foreign currency forward exchange contracts to reduce
the impact of currency fluctuations of intercompany balance sheet positions.
The objectives of these contracts is to neutralize the impact of foreign
currency exchange rate movements on the Company's operating results.  The gains
and losses on forward exchange contracts are included in earnings when the
underlying foreign currency denominated transaction is recognized.  The cash
flows related to gains and losses on these contracts are classified in the same
category as the hedged transactions in the Consolidated Statements of Cash
Flows.

The foreign exchange forward contracts described above generally require the
Company to sell foreign currencies for U.S. dollars at rates agreed to at the
inception of the contracts.  The forward contracts generally have maturities of
three months or less. These contracts generally do not subject the Company to
significant market risk from exchange rate movements because the contracts are
designed to offset gains and losses on the balances and transactions being
hedged. At December 31, 1996, the Company had forward contracts to sell
approximately $6.4 million in Japanese Yen. The fair value of forward exchange
contracts, based upon current market rates, totaled approximately $6.2 million
at December 31, 1996.  The Company does not anticipate any material adverse
effect on its financial position resulting from the use of these instruments.

FAIR VALUE OF DISCLOSURES OF FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial instruments
using available market information and valuation methodologies.  The amounts
reported for cash and cash equivalents, investments and bank borrowings
reasonably estimate their fair value.


                                       23


<PAGE>

INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences related to temporary differences between the tax bases of the
assets and liabilities and the amounts reported in the Company's financial
statements.  In estimating future tax consequences, the Company generally
considers all expected future events other than enactment of changes in the tax
law or rates.

NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common and
common equivalent shares, ("weighted average shares") outstanding during the
period, which includes net shares issuable upon the exercise of stock options,
when dilutive.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company has several foreign subsidiaries.  The functional currencies of the
Company's foreign subsidiaries are the local currencies.  Accordingly, all
assets and liabilities of the foreign operations are translated to U.S. dollars
at the current exchange rates, and revenues and expenses are translated to U.S.
dollars using weighted average exchange rates in effect during the period.  The
gains and losses from foreign currency translation of these subsidiaries'
financial statements are recorded directly into a separate component of
shareholders' equity under the caption "cumulative translation adjustment."
Foreign currency transaction gains and losses have not been significant.


NOTE 2 - MERGER

On January 14, 1997, the Company and KLA Instruments Corporation jointly 
announced a definitive merger agreement to create a combined company.  Under 
the terms of the merger agreement, shares and options for KLA Instruments 
common stock will be exchanged for all outstanding shares and options of the 
Company on the basis of one share of KLA Instruments for each share of the 
Company. The transaction is intended to qualify as pooling of interests for 
financial reporting purposes and structured to qualify as a tax-free 
reorganization.  The transaction is conditioned on obtaining both companies' 
shareholder approval, regulatory clearance and other customary closing 
conditions. The merger is expected to close during the June 30, 1997 quarter.

                                       24

<PAGE>

NOTE 3 -  BALANCE SHEET COMPONENTS

December 31,                                            1996           1995
---------------------------------------------------------------------------
(in thousands)


Short-term investments available for sale:
     U.S. government notes and bonds                 $33,904        $40,040
     Municipal notes and bonds                        48,466         31,762
     Corporate notes and bonds                           ---          5,087
                                                     ----------------------
                                                     $82,370        $76,889
                                                     ----------------------
                                                     ----------------------

Short-term investments of $38,905 mature in less than one year, $30,952 have
maturities between one and five years and $12,513 have maturities greater than
five years.

Inventories:
     Raw materials                                   $26,010        $24,829
     Work-in-process                                  15,100         12,948
     Finished goods                                   10,558          8,948
                                                     ----------------------
                                                     $51,668        $46,725
                                                     ----------------------
                                                     ----------------------

Property and equipment:
     Machinery and equipment                         $54,617        $28,845
     Office furniture and fixtures                     7,228          5,705
     Leasehold improvements                           11,385          8,035
     Less: accumulated depreciation
        and amortization                             (31,629)       (20,138)
                                                     ----------------------
                                                     $41,601        $22,447
                                                     ----------------------
                                                     ----------------------

Other assets:
     Long-term equity investments                    $34,355        $10,732
     Purchased patents and technology, net             5,537          7,492
     Goodwill, net                                     3,084          3,485
     Deferred income taxes                             4,183          1,946
     Other                                             3,370          3,988
                                                     ----------------------
                                                     $50,529        $27,643
                                                     ----------------------
                                                     ----------------------

Other accrued expenses:
     Warranty and retrofit                          $  9,215       $  6,685
     Representative sales commissions                  4,650          4,597
     Restructuring charges                             7,179            ---
     Other accrued expenses                           11,985         11,534
                                                     ----------------------
                                                     $33,029        $22,816
                                                     ----------------------
                                                     ----------------------

NOTE 4 - BORROWING ARRANGEMENTS AND OTHER LIABILITIES

The Company has a $20.0 million unsecured multi-currency revolving line of
credit agreement with a bank which expires in June 1997. As of December 31,
1996, borrowings under the line of credit were $4.3 million and incur interest
charges at the London Interbank Offering Rate (LIBOR) plus 1.0%, or
approximately 7% at December 31, 1996. The line of credit requires compliance
with certain financial covenants.

The Company's Japanese subsidiary has loan arrangements with local banks.  As of
December 31, 1996 the aggregate bank borrowings are the Yen equivalent of $24.1
million.  These borrowings


                                       25

<PAGE>

incur interest charges at the LIBOR plus bank premium, which, during 1996,
ranged from 1.1% to 1.6%.

The Company's Japanese subsidiary has an agreement with a local bank to sell,
with recourse, certain of its trade receivables.  The total amount of the
facility is three billion yen, or approximately $25.9 million at December 31,
1996.  The Company has accounted for the sale of certain of these receivables,
for which the related product has been technologically accepted by its
customers, as an off balance sheet financing arrangement.  During 1996, a total
of the yen equivalent of approximately $42.4 million of receivables were sold
under this arrangement.  As of December 31, 1996, the yen equivalent of $23.2
million remains uncollected.  Of the total amount uncollected, the yen
equivalent of $20.9 million was accounted for as an off-balance sheet financing
arrangement and the yen equivalent of $2.3 million has been treated as a
borrowing.  The Company does not believe it is materially at risk for any losses
as a result of this agreement.

The Company also has obligations of approximately $3.2 million related primarily
to the purchase of certain product technology.  Future payments under these
obligations are as follows:

Year ending December 31,
(in thousands)
          1997                                            $  1,867
          1998                                               1,272
          1999                                                  32
          2000                                                  31
                                                          --------
             Total minimum payments                          3,202
                Less: current portion                       (1,867)
                                                          --------
          Long-term obligations, less current portion     $  1,335
                                                          --------
                                                          --------





                                       26

<PAGE>

NOTE  5  - RESTRUCTURING COSTS

During the quarter ended September 30, 1996, the Company recorded a charge for
restructuring costs of $8.5 million.  This charge consists of $2.0 million in
employee severance and related costs as a result of downsizing its worldwide
operations through a reduction in force of approximately 10% of the Company's
regular employees.  The restructuring charge also includes costs aggregating
$6.5 million associated with the relocation from the Company's current leased
facilities to the facility constructed for its use in Milpitas, California.  The
Company expects complete occupation of its new facility in Milpitas, California,
in the early part of 1997.  The Company maintains facilities with leases that
expire on various dates through September 1998.  As a result of the Company's
move to its new facility in Milpitas, certain of these leased facilities will
become unoccupied during the first quarter of 1997.  Due to the relatively short
terms remaining on certain of these leases, the Company may be unable to
sublease all of its unoccupied facilities.  Accordingly, the Company has
included in its restructuring charge an amount equal to the remaining costs
(including rent) due under those leases which are unlikely to be subleased.  The
Company has also included in its lease exit cost, amounts for the decline in net
book value of certain of the Company's furniture and fixtures, estimated
leasehold refurbishment costs (net of existing reserves) to return the
facilities to their original condition as required by the lease agreements, and
various other costs associated with the exit from its current facilities.  Of
the $8.5 million total restructuring costs, approximately $1.3 million was used
as of December 31, 1996 with the majority of the remaining balance of $7.2
million expected to be utilized during the next nine months.  A summary of
charges for restructuring costs along with the respective remaining reserves
which are included in accrued liabilities, follows (in thousands):

                     Charge Recorded                    Remaining Reserves
                   September 30, 1996      Payments      December 31, 1996
                   -------------------------------------------------------

Downsizing                $1,983           $( 1,151)           $   832
Lease exit costs           6,517            (   170)             6,347
                          ------           --------            -------
Total                     $8,500           $( 1,321)           $ 7,179
                          ------           --------            -------
                          ------           --------            -------


                                       27

<PAGE>

NOTE 6 - INCOME TAXES

December 31,                                      1996        1995        1994
------------------------------------------------------------------------------
(in thousands)

The components of income before
  income taxes are as follows:
  Domestic income before income taxes          $96,202    $101,116     $28,221
  Foreign income before income taxes             2,649       9,602      12,549
                                               -------------------------------
                                               $98,851    $110,718     $40,770
                                               -------------------------------
                                               -------------------------------

The provision (benefit) for income taxes is comprised of the following:
  Current:
    Federal                                    $39,503   $  37,704     $15,771
    State                                        5,752       6,194       2,357
    Foreign                                      2,898       5,727       2,572
                                               -------------------------------
                                                48,153      49,625      20,700
                                               -------------------------------
  Deferred:
    Federal                                     (9,310)     (3,100)     (2,601)
    State                                         (761)       (264)     (1,645)
    Foreign                                       (519)       (867)        ---
                                               -------------------------------
                                               (10,590)     (4,231)    ( 4,246)
                                               -------------------------------
  Provision for income taxes                   $37,563   $  45,394     $16,454
                                               -------------------------------
                                               -------------------------------

The significant components of deferred income tax assets are as follows:

  Inventories and other reserves               $ 5,373   $   2,755
  Warranty and employee benefit accruals         6,186       4,105
  Depreciation and amortization                  3,504         360
  Other                                          6,342       3,595
                                               -------------------
                                               $21,405   $  10,815
                                               -------------------
                                               -------------------

The reconciliation of the United States federal statutory income tax rate to the
Company's effective income tax rate is as follows:

  Federal statutory rate                          35.0%     35.0%       35.0%
  State income taxes, net of federal benefit       3.8       3.6         3.8
  Effect of foreign operations taxed at
  various rates                                    2.0       3.1         2.6
  Benefit from foreign sales corporation          (3.5)     (3.1)       (3.0)
  Research and development tax credit              ---       ---        (0.2)
  Merger costs                                     ---       ---         1.7
  Other                                            0.7       2.4         0.5
                                                  ----      ----        ----
                                                  38.0%     41.0%       40.4%
                                                  ----      ----        ----
                                                  ----      ----        ----

NOTE 7 - SHAREHOLDERS' EQUITY

In February 1996, the Company repurchased 250,000 shares of its Common Stock for
$5.5 million.

In June 1996, employees holding options to purchase shares of the Company's 
Common Stock were offered the opportunity to exchange their existing options 
ranging in prices from $17.875 per share to $46.875 per share for options at 
the then current market price of $17.625 per share.  The Company granted new 
replacement stock options of 831,171 shares in exchange for the cancellation 
of the entire unexercised portion of the options being replaced.

                                       28

<PAGE>

STOCK OPTION AND INCENTIVE PLANS.  The Company has various stock option and
management incentive plans for selected employees, officers, directors, and
consultants.  The plans provide for awards in the form of stock options, stock
appreciation rights, stock purchase rights, and performance shares.  As of
December 31, 1996, only stock options have been awarded under the plans.
Options to purchase Common Stock have been granted at no less than 85% of their
fair market value on the date of grant.

The activity under the option plans, combined, was as follows:

<TABLE>
<CAPTION>




                                          Option                                                      Weighted-
                                         Available            Options               Price              Average
                                         For Grant          Outstanding           per Share        Exercise Price
                                         ---------          -----------           ---------        --------------

<S>                                     <C>                 <C>               <C>                      <C>
Balances at December 31, 1993            1,267,664           3,005,096        $  1.13 - $  6.00        $  3.37
Additional shares reserved               1,000,000                 ---                      ---            ---
Options granted                         (1,316,690)          1,316,690           4.83 -   23.57          11.71
Options canceled                           130,252            (130,252)          1.13 -   13.32           4.33
Options exercised                              ---          (1,314,774)          1.13 -    5.88           3.20
Options expired                           (623,928)                ---                      ---            ---
                                        ----------          ----------

Balances at December 31, 1994              457,298           2,876,760        $  1.29 -  $23.57         $ 7.19
Additional shares reserved                 800,000                 ---                      ---            ---
Options granted                           (974,477)            974,477          17.88 -   46.89          37.01
Options canceled                            94,051             (94,051)          1.29 -   38.25          19.10
Options exercised                              ---            (811,796)          1.29 -   13.31           4.46
Options expired                            (12,921)                ---                      ---            ---
                                        ----------          ----------

Balances at December 31, 1995              363,951           2,945,390        $  1.29 -  $46.89         $17.43
Additional shares reserved               1,550,000                 ---                      ---            ---
Options granted                         (1,787,420)          1,787,420          15.94 -   29.00          18.33
Options canceled                         1,196,776          (1,196,776)          1.45 -   46.89          31.88
Options exercised                              ---            (310,683)          1.29 -   22.31           5.62
Options expired                            (14,547)                ---                      ---            ---
                                        ----------          ----------

Balances at December 31, 1996            1,308,760           3,225,351        $  1.45 -  $40.00         $13.70
                                        ----------          ----------
                                        ----------          ----------
</TABLE>


                                       29

<PAGE>

The options outstanding at December 31, 1996 have been segregated into ranges
for additional disclosure as follows:
<TABLE>
<CAPTION>

                                   Options Outstanding                           Options Vested and Exercisable
                      -------------------------------------------------      ------------------------------------
                        Number      Weighted-Average        Weighted-          Number Vested 
     Range of         Outstanding       Remaining            Average          and Exercisable   Weighted-Average
  Exercise Prices     at 12/31/96   Contractual Life     Exercise Price         at 12/31/96      Exercise Price
  ---------------     -----------   ----------------     --------------         -----------      --------------
 <S>                    <C>                     <C>              <C>              <C>                   <C>
 $  1.45 - $ 5.88         639,429               4.38             $ 3.81             549,049             $ 4.07
 $  6.00 - $ 8.50         326,096               7.25               7.16             279,709             $ 7.16
 $ 13.31 - $13.31         598,527               7.61              13.31             372,404             $13.31
 $ 15.94 - $17.06          10,800               9.54              16.45                   0             $ 0.00
 $ 17.63 - $17.63         958,912               9.49              17.63                 850             $17.63
 $ 17.75 - $40.00         691,887               9.62              20.78              48,173             $29.75
 -------------------------------------------------------------------------------------------------------------
 $  1.45 - $40.00       3,225,351               7.93             $13.70           1,250,185             $ 8.51
 -------------------------------------------------------------------------------------------------------------
 -------------------------------------------------------------------------------------------------------------
</TABLE>

The weighted average fair value of options granted in 1996 and 1995 is $9.11 
and $18.53, respectively.

EMPLOYEE STOCK PURCHASE PLAN.  The Company's employee stock purchase plan 
provides that eligible employees may contribute up to 10% of their base 
earnings towards the quarterly purchase of the Company's Common Stock. The 
employee's purchase price is derived from a formula based on the fair market 
value of the Common Stock.  No compensation expense is recorded in connection 
with the plan. In 1996 and 1995, 242,713 and 159,042 shares, respectively, 
had been purchased by employees.  At December 31, 1996, 522,919 shares were 
reserved and available for issuance under this plan.

PRO FORMA INFORMATION.  As of December 31, 1996, the Company has various stock-
based compensation plans which are discussed above.  The Company has elected to
follow APB 25 and related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock options and employee stock
purchase plans.  Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.

Pro forma information regarding net income and net income per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock purchase plan and employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123.  The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model for the single option approach with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rate of
approximately 5.7% for both years; volatility factor of the expected market
price of the Company's Common Stock of .58 for both years and a weighted-average
expected life of the options of approximately 3.5 for both years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable.  In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.  Because
the Company's employee stock options and employee stock purchase plan have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
employee stock options and the employee stock purchase plan.


                                       30

<PAGE>

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.  The Company's pro
forma information follows (in thousands except for earnings per share
information):

                                    1996           1995
                                    ----           ----
Net income:
     Historical                   61,288         65,324
     Pro forma                    55,355         63,764
Earnings per share:
     Historical                  $  1.93        $  2.09
     Pro forma                   $  1.79        $  2.06

OTHER EMPLOYEE BENEFIT PLANS.  The Company has a profit sharing program for
eligible employees. The program accumulates and distributes, on a six-month
basis, a percentage of pretax profits, as determined by the Board of Directors.
In addition, the Company has an employee savings plan (the Savings Plan) that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code.  During 1996, the Company matched dollar-for-dollar up to $1,500
of an eligible employee's contribution.  The total charge to operations under
the profit sharing and 401(k) programs aggregated approximately $6.6 million,
$6.3 million and $2.5 million in 1996, 1995 and 1994, respectively.


NOTE 8 - COMMITMENTS AND CONTINGENCIES

The Company leases its principal facilities under non-cancelable operating
leases.  The leases expire at various times beginning in December 1996 through
November 2004, with renewal options at fair market value for additional periods.
The Company also leases equipment and other facilities under operating leases.

In late 1995, the Company entered into two seven-year operating leases for land,
office and manufacturing facilities being constructed for its use in Milpitas,
California. As of December 31, 1996, the lessor has funded a total of  $71.3
million and has committed to fund up to $90.0 million.  The leases provide for
monthly payments which vary based upon the total constructed costs of the
properties and the London Interbank offering rate (LIBOR).  The Company's lease
obligations under the leases may be collateralized at the Company's option in
order to reduce the monthly payments.  Payments under these leases will commence
upon the Company's occupation and completion of the buildings in the second
quarter of 1997.  The leases provide the Company with the option at the end of
each lease of either acquiring the properties at their original cost or
arranging for the properties to be acquired.  If the Company does not purchase
the properties at the end of the leases, the Company will be contingently liable
to the lessor for residual value guarantees aggregating $72.9 million.  In
addition, under the terms of the leases, the Company must maintain compliance
with certain financial covenants.  As of December 31, 1996, the Company was in
compliance with these covenants.  Management believes that the contingent
liability relating to the residual value guarantees does not currently have a
material adverse effect on the Company's financial position or results of
operations.

Total operating lease expense was $5.3 million, $5.2 million and $3.3 million
for the years ended December 31, 1996, 1995 and 1994, respectively.


                                       31

<PAGE>

Future minimum lease payments under non-cancelable operating leases, which
include estimated lease payments for its Milpitas, California facilities using a
LIBOR rate of approximately 6.0% and total construction costs of $90.0 million,
are as follows (in thousands):
     1997                                       $ 9,782
     1998                                         8,648
     1999                                         7,513
     2000                                         7,209
     2001                                         6,778
     Thereafter                                  17,243
                                                -------
     Total net minimum lease payments           $57,173
                                                -------
                                                -------

Because a large number of patents exist in the semiconductor field and new
patents are issued frequently, the Company from time to time, in the normal
course of business, receives and makes inquiries with regard to possible patent
infringement.  The Company believes that it is unlikely that the outcome of
these inquiries will have a material adverse effect on the Company's financial
position.  The Company intends to be active in the protection of its
intellectual property, including its patents.



                                       32

<PAGE>

NOTE 9 -  INDUSTRY AND GEOGRAPHIC INFORMATION

No single customer accounted for more than 10% of net revenues in 1996 and 1995.
International sales accounted for 64%, 62% and 51% of the Company's revenues in
1996, 1995 and 1994, respectively.  The Company designs, manufactures, markets
and services wafer defect inspection systems, thin film measurement and
metrology systems used primarily in the manufacture of integrated circuits by
the semiconductor industry.

The following is a summary of the Company's geographic operations:

<TABLE>
<CAPTION>

Year ended December 31,                                      1996           1995           1994
-----------------------                                      ----           ----           ----
(In thousands)

<S>                                                      <C>            <C>           <C>
Revenues:
   Sales to unaffiliated customers:
      Domestic                                           $147,197       $126,078       $ 89,269
      International:
         Japan                                             94,744         86,112         41,482
         Korea                                             49,063         31,481         23,699
         Taiwan                                            29,194         16,937            ---
         Singapore                                         13,957          2,461            ---
         Europe                                            54,521         60,871         19,649
         ROW                                               14,494          6,257          8,231
                                                         --------------------------------------
            Total sales to unaffiliated customers         403,170        330,197        182,330
      Intercompany sales among geographic areas:
         United States                                      3,615          2,868          1,244
         Japan                                             67,785         52,350         17,292
         Singapore                                          1,727            ---            ---
         Europe                                            39,404         37,740          8,448
         Consolidation eliminations                      (112,531)       (92,958)       (26,984)
                                                         --------------------------------------
            Revenues                                     $403,170       $330,197       $182,330
                                                         --------------------------------------
                                                         --------------------------------------

   Income from operations:
      United States                                      $  5,856       $ 12,985       $ 26,913
      Japan                                                32,614         37,884          8,755
      Korea                                                13,160         11,204            755
      Taiwan                                                9,998          7,610            ---
      Singapore                                             4,279          1,121            ---
      Europe                                               26,043         33,592          3,053
                                                         --------------------------------------
            Income from operations                       $ 91,950       $104,396       $ 39,476
                                                         --------------------------------------
                                                         --------------------------------------

   Identifiable assets at December 31:
      United States                                      $210,496       $153,717       $ 81,019
      Japan                                                27,817         51,397         23,183
      Korea                                                 3,029          1,958            378
      Taiwan                                                  402            ---            ---
      Singapore                                               887            ---            ---
      Europe                                               18,011         24,135          6,143
      General corporate assets consisting of cash,
        cash equivalents and short-term investments       223,777        163,833         73,826
                                                         --------------------------------------
          Total assets                                   $484,419       $395,040       $184,549
                                                         --------------------------------------
                                                         --------------------------------------
</TABLE>


Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.

                                       33

<PAGE>

At December 31, 1996, 1995 and 1994, total foreign liabilities (excluding
intercompany balances) were $35.9 million, $42.6 million and $10.6 million,
respectively.  For fiscal years 1996, 1995 and 1994, foreign capital
expenditures and depreciation expense were $3.3 million and $542,000, $1.4
million and $331,000 and $642,000 and $299,000, respectively.

Certain reclassifications have been made to amounts in 1995 in order to be
comparative to the presentation in 1996.


NOTE 10 - CERTAIN TRANSACTIONS

UNIPHASE.  In November 1995, the Company entered into agreements with Uniphase
Corporation (Uniphase) to license certain technology, provide partial funding
for research and development and purchase 665,568 shares of Uniphase's common
stock (adjusted to reflect a two for one stock split in June 1996) and, as a
result, became the exclusive OEM reseller of Uniphase's laser imaging defect
review station and automatic defect classification (ADC) software.  The Company
recorded the license as acquired product technology and is amortizing the cost
over its estimated useful life of three years.  The research and development
funding is charged to research and development expense over the term of the
funding agreement and the Company has recorded the purchase of Uniphase common
stock as a long-term marketable equity investment at its fair value at the time
of the purchase.  Included under the caption "Accumulated unrealized gain on
investments, net" is $14.3 million related to the increase in fair market value
of the Company's investment in Uniphase common stock as of  December 31, 1996.

ACQUISITIONS.  On February 25, 1994, a subsidiary of the Company completed its
merger with Prometrix Corporation ("Prometrix). As a result of conforming
Prometrix's fiscal year to that of  the Company's,  Prometrix's loss for the two
months ended December 31, 1993 of $350,000 was charged to retained earnings
effective January 1, 1994.  Also, in connection with the merger, $2.3 million of
merger costs and expenses were incurred and charged to merger expense in 1994.

On March 3, 1992, the Company acquired FleXus, Inc. (FleXus) .  A portion of the
stock was escrowed pending revenues from FleXus products achieving agreed upon
levels, and in 1994, the Company recorded the release of escrowed common stock
at a value of $3.4 million.


PARK SCIENTIFIC LICENSE.  The Company expensed the purchase of an in-process R&D
technology licensing agreement with Park Scientific (PSI) in the amount of $1.2
million to R&D expense in 1994.


                                       34

<PAGE>

NOTE 11 - QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)

                           March 31       June 30     September 30   December 31
1996:
   Revenues                $106,283       $109,417       $ 96,986       $ 90,484
   Gross profit              65,436         65,193         55,774         50,644
   Income from operations    31,369         28,393         13,214(1)      18,974
   Net income                20,251         18,546          9,603(1)      12,888
   Net income per share    $   0.64       $   0.59       $   0.30(1)    $   0.40
1995:
   Revenues                $ 67,608       $ 78,664       $ 88,003       $ 95,922
   Gross profit              42,558         50,229         55,502         60,386
   Income from operations    20,831         24,565         29,150         29,850
   Net income                12,876         15,495         18,174         18,779
   Net income per share    $   0.44       $   0.49       $   0.57       $   0.59


(1) Includes an $8.5 million restructuring charge.

                                       35

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Tencor Instruments

In our opinion, the accompanying consolidated balance sheets and the related 
consolidated statements of income, of shareholders' equity and of cash flows 
present fairly, in all material respects, the financial position of Tencor 
Instruments and its subsidiaries at December 31, 1996 and 1995, and the 
results of their operations and their cash flows for each of the three years 
in the period ended December 31, 1996, in conformity with generally accepted 
accounting principles.  These financial statements are the responsibility of 
the Company's management; our responsibility is to express an opinion on 
these financial statements based on our audits.  We conducted our audits of 
these statements in accordance with generally accepted auditing standards 
which require that we plan and perform the audit to obtain reasonable 
assurance about whether the financial statements are free of material 
misstatement.  An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the financial statements, assessing 
the accounting principles used and significant estimates made by management, 
and evaluating the overall financial statement presentation.  We believe that 
our audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
San Jose, California
February 7, 1997
_________________________________


                                       36

<PAGE>

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None


PART III


ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The following table sets forth certain information as of March 7, 1997, with
respect to the Company's Board of Directors:

    NAME                       AGE            POSITION
    ----                       ---            --------
    Jon D. Tompkins             56  Chairman of the Board, President and Chief
                                    Executive Officer
    Richard J. Elkus, Jr.       62  Vice Chairman of the Board
    James W. Bagley             58  Director
    Dean O. Morton              64  Director
    Dr. Calvin F. Quate         73  Director
    Lida Urbanek                53  Director
    Renn Zaphiropoulos          70  Director


JON D. TOMPKINS   Mr. Tompkins was appointed President and Chief Executive
Officer of Tencor in April 1991. He has served on Tencor's Board of Directors
since May 1991 and was appointed Chairman of the Board of Directors in
November 1993. Mr. Tompkins also serves on the Boards of Directors of Fusion
Systems, Varian and SEMI/SEMATECH, a private research and development consortium
of U.S. semiconductor equipment and materials companies.

RICHARD J. ELKUS, JR.   Mr. Elkus has been Vice Chairman of the Board of Tencor
since February 1994 to the present. Mr. Elkus is currently serving on the Board
of Directors of OnTrak Systems, Inc. and Voyan Technology.  Mr. Elkus was
Executive Vice President of Tencor from February 1994 to September 1996, and was
one of the founders of Prometrix Corporation, which was acquired by Tencor in
February 1994. Mr. Elkus was the Chairman of the Board and Chief Executive
Officer of Prometrix from 1983 until February 1994.

JAMES W. BAGLEY   Mr. Bagley has been a director of Tencor since June 1993.  Mr.
Bagley is Chairman and Chief Executive Officer of OnTrak Systems, Inc.
Previously, Mr. Bagley was Vice Chairman of Applied Materials, Inc., the largest
supplier of wafer fabrication systems to the semiconductor industry, until May,
1996. Prior to joining Applied Materials, Mr. Bagley was with Texas Instruments
Incorporated for more than 15 years. Mr. Bagley also serves on the Board of
Directors of Teradyne, Inc., Kulicke & Soffa Industries, Inc., and Extraction
Systems, Inc.

DEAN O. MORTON  Mr. Morton has been a director of Tencor since June 1993.
Mr. Morton retired in October 1992 as Executive Vice President and Chief
Operating Officer and as a director of Hewlett- Packard Company, a computer and
instruments manufacturer, where he had held various positions since 1960.
Mr. Morton is a director of ALZA Corporation, Centigram Communications
Corporation, The Clorox Company and Raychem Corporation. He is also a director
of the Metropolitan Series Fund and


                                       37

<PAGE>

MetLife Portfolios, a trustee of the MetLife State Street and State Street
Research funds and a director of the Kaiser Foundation Health Plan and
Hospitals. Mr. Morton also serves on the Board of Associates, Harvard Business
School and is a Trustee of the David and Lucille Packard Foundation.

DR. CALVIN F. QUATE   Dr. Quate has been a director of Tencor since 1989. Dr.
Quate has been a Professor of Applied Physics and Teaching Research at Stanford
University since 1960. Since 1981, he has also served as Senior Research Fellow
at the Xerox Palo Alto Research Center. From May 1992 to July 1992 Dr. Quate
served as a consultant to SEMATECH, a semiconductor research consortium equally
funded by the U.S. Government and a group of United States semiconductor
manufacturers.

LIDA URBANEK   Mrs. Urbanek has been a director of Tencor since August 1991.
Mrs. Urbanek is the widow of Dr. Karel Urbanek, founder of the Company and its
president from November 1976 until April 1991.

RENN ZAPHIROPOULOS   Mr. Zaphiropoulos has been a director of Tencor since 1988.
Mr. Zaphiropoulos was President and Chief Executive Officer of Versatec, Inc.
(a Xerox Company) from 1969 until his retirement in 1988, and Corporate Vice
President of Xerox Corporation from 1984 until his retirement in 1988.
Mr. Zaphiropoulos is currently a director of Optical Coating Laboratory, Inc.
and various privately-held corporations and holds executive seminars in
management worldwide.

 EXECUTIVE OFFICERS

The following table and notes thereto identify and set forth certain information
with respect to the  Company's executive officers:

Name of Individual            Age       Position
------------------            ---       --------

Jon D. Tompkins (1)           56        Chairman of the Board, President and
                                          Chief Executive Officer

Dr. Graham J. Siddall (2)     50        Executive Vice President and Chief
                                          Operating Officer
Bruce R. Wright (3)           48        Senior Vice President, Finance and
                                          Administration, and Chief Financial
                                          Officer
Woody Spedden (4)             59        Senior Vice President, Field Operations
Gary Bultman (5)              40        Vice President, Corporate Marketing
Dr. David Alles (6)           57        Vice President and Chief Technical
                                          Officer
Dr. Michael E. Kahn (7)       58        Vice President, Film Measurement
                                          Division
Dennis J. Fortino (8)         50        Vice President, Metrology Division
William A. Colby (9)          51        Vice President, Customer Satisfaction
Dr. Seiji Yoshii (10)         59        Vice President, President, Tencor Japan
Frederick A. Ball (11)        34        Vice President, Corporate Controller and
                                          Secretary


( 1)      See the information about Mr. Tompkins under "Directors and Executive
          Officers of the Registrant", above.

( 2)      Dr. Siddall was appointed Executive Vice President and Chief Operating
          Officer in December 1995. Previously Dr. Siddall served as Senior Vice
          President for the Wafer Inspection Division from November 1994 to
          December 1995 and has been a Vice President since joining Tencor in
          1988.  Prior to joining Tencor, Dr. Siddall served in a number of key
          roles at GCA corporation, Hewlett Packard Laboratories and Rank Taylor
          Hobson.

( 3)      Mr. Wright was appointed Senior Vice President Finance and 
          Administration and Chief Financial Officer in November 1994. 
          Mr. Wright joined Tencor in December 1991 as Vice President and 
          Chief Financial Officer. Prior to joining Tencor, from 1988 to 1991, 
          Mr. Wright served as Chief Financial Officer of Teknekron, a 
          Nevada-based venture capital holding company.

( 4)      Mr. Spedden was appointed senior vice president of worldwide sales in
          July 1996.  His role was expanded in October 1996 to encompass the
          worldwide customer satisfaction organization including customer
          service and support.  Prior to joining Tencor, he most recently served
          as president and chief executive officer of Credence Systems from 1991
          through 1995. Prior to joining Credence in 1989, Spedden spent 18
          years in a variety of sales


                                       38
<PAGE>

          and marketing management roles at Teradyne, Inc.  His background also
          includes sales and engineering roles at Hewlett-Packard and the
          Applied Physics Laboratory of Johns Hopkins University. He serves on
          the board of directors for Advanced Energy Industries, Inc. and
          Integrated Sensor Solutions, a privately held company.

( 5)      Mr. Bultman was appointed Vice President of Corporate Marketing in May
          1995. Prior to that time, Mr. Bultman was Vice President of Marketing
          for the Film Measurement Division of the Company and for Prometrix
          Corporation prior to its acquisition in February 1994.  Prior to
          joining Prometrix Corporation in 1993, Mr. Bultman spent 10 years with
          Applied Materials in a variety of technical, marketing and sales
          roles, including head of marketing for Applied Materials HTCVD
          division.

( 6)      Dr. Alles was appointed to the newly created post of chief technical
          officer in July 1996.  Working closely with the research and
          engineering groups in Tencor's three divisions, he is responsible for
          driving strategic technical and advanced research initiatives company-
          wide.  Alles joined Tencor from AT&T Bell Labs where he spent nearly
          25 years in a variety of engineering and managerial roles, most
          recently as director of the R&D Planning and Administration Center.
          Alles' work at Bell Labs was instrumental in the development of the
          electron beam exposure system (EBES), which remains the dominant
          technology for photomask production.


( 7)      Dr. Kahn was appointed Vice President and General Manager, Film
          Measurement Division in September 1995.  Dr. Kahn joined Tencor as
          Vice President in May 1993.  Prior to joining Tencor, Dr. Kahn was
          President and Chief Executive Officer of Gamma MicroWave, Inc., a
          manufacturer of microwave components and systems, from April 1991
          until January 1993, and President of Teradyne Laser Systems, a
          manufacturer of semiconductor manufacturing equipment, from February
          1989 until March 1990.

( 8)      Mr. Fortino was appointed Vice President, Metrology Division in
          November 1995.  Prior to joining Tencor, Mr. Fortino spent four years
          with Spectra-Physics Lasers, Inc. as Vice President of the Laser
          Systems Business Unit.  Prior to that he served in a variety of
          executive positions including Division General Manager of Spectra
          Physics' Industrial laser division and president of Rofin-Sinar,Inc.
          (a division of Siemens).

( 9)      Mr. Colby joined Tencor in June 1995 and was appointed Vice President,
          Customer Satisfaction in December 1995.  Prior to joining Tencor, Mr.
          Colby  was the Director of service for Nikon Precision, a leading
          supplier of semiconductor wafer steppers. Mr. Colby also has nine
          years of experience with Ultratech Stepper in a variety of management
          positions.

(10)      Dr. Yoshii was appointed a Vice President of Tencor in May 1991.  He
          joined Tencor in May 1990 as President of Tencor Japan.  From October
          1989 to April 1990, Dr. Yoshii served as Vice President and General
          Manager of Applied Materials Japan, the Japanese subsidiary of the
          largest supplier of wafer fabrication systems to the semiconductor
          industry.  From February 1987 to October 1989, he was Managing
          Director and General Manager of the Implant Product Division of
          Applied Materials Japan.

(11)      Mr. Ball joined Tencor as corporate controller in March 1995 and was
          promoted to corporate vice president in January of 1996.  At that
          time, he also added the role of corporate secretary to his
          responsibilities which include all accounting functions within the
          company.  Mr. Ball joined the company from Price Waterhouse LLP, where
          he worked with a number of high technology companies.  During his 10
          years with Price Waterhouse he held a succession of management
          positions, both in the United States and abroad.


                                       39
<PAGE>

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
outstanding shares of the Company's Common Stock, to file with the Securities
and Exchange Commission initial reports of ownership (Form 3) and changes in
ownership of such stock (Forms 4 and 5).

To the Company's knowledge, based solely upon review of the copies of such
reports and certain representations furnished to it, all Section 16(a) filing
requirements applicable to its executive officers and directors were complied
with during the year ended December 31, 1994.



                                       40
<PAGE>

ITEM 11: EXECUTIVE COMPENSATION

BOARD COMPENSATION

Non-management directors currently are compensated at a rate of $15,000 per
year, payable quarterly, plus $1,000 per Board meeting attended and $500 per
Board committee meeting attended separate from Board meetings. Directors also
are reimbursed for their reasonable expenses incurred in attending Board and
committee meetings. Non- management directors are also entitled to receive a
mandatory initial option grant of 10,000 shares and mandatory annual option
grants of 5,000 shares pursuant to Tencor's 1993 Non-employee Directors Stock
Option Plan.

EXECUTIVE COMPENSATION

The following table sets forth the total compensation for 1996, 1995, and 1994
of the Chief Executive Officer and each of the other four most highly
compensated executive officers of Tencor whose total salary and bonus for 1996
exceeded $100,000:

                                                     SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>

                                                                                             LONG-TERM
                                                                                               COMP.
                                                         ANNUAL COMPENSATION                  AWARDS
                                                         -------------------                  ------
                                                                                            SECURITIES
                                                                                            UNDERLYING     ALL OTHER
 NAME AND PRINCIPAL POSITION                      YEAR       SALARY ($)      BONUS($)       OPTIONS (#)    COMP. ($)
 ---------------------------                      ----       -----------     --------       -----------    ---------
 <S>                                              <C>        <C>             <C>            <C>            <C>
 Jon D. Tompkins                                  1996         352,067        381,562          71,999       12,291(1)
 Chief Executive Officer                          1995         307,475        422,115          40,000       12,582(1)
                                                  1994         284,900        217,308         100,000       13,373(1)


 Dr. Graham Siddall                               1996         292,062        214,132          87,999        1,500(2)
 Senior Vice President, Wafer                     1995         191,580        242,074           5,000        1,000(2)
 Inspection Division                              1994         162,540        125,953          90,000        1,000(2)


 Bruce R. Wright                                  1996         195,417        157,810          58,999        1,500(2)
 Senior Vice President, Finance and               1995         179,175        207,505          30,000        1,000(2)
 Administration, and Chief                        1994         159,775         84,916          80,000        1,000(2)
 Financial Officer

 Dr. Seiji Yoshii                                 1996         298,127        152,800          40,999           _
 Vice President, President of                     1995         278,360        192,677          20,000           _
 Tencor Japan                                     1994         241,990        101,381          28,000           _


 Dennis Fortino                                   1996         187,589        132,295         139,999        1,500(2)
 Vice President, Metrology                        1995          31,667         62,000          50,000        1,000(2)
 Division                                         1994            _              _               _             _

</TABLE>


(1)       Includes $12,373 in 1994, $11,582 in 1995 and $10,879 in 1996 of
          forgiveness of principal and interest due under a loan made by Tencor
          in connection with Mr. Tompkins' employment which was being retired
          over a five-year period which ended in 1996. Includes $1,500 of
          matching contributions made by Tencor to Tencor's 401(k) Plan on
          behalf of Mr. Tompkins.

(2)       Matching contributions made by Tencor to Tencor's 401(k) Plan on
          behalf of the Participant.


                                       41
<PAGE>

     The following table sets forth certain information with respect to the
options granted to the executive officers named in the Summary Compensation
Table during 1996:


<TABLE>
<CAPTION>

                                                  OPTION GRANTS IN LAST FISCAL YEAR



                                     Individual Grants
                                    ------------------                          Potential Realizable Value
                      Number of         % of Total                                at Assumed Annual Rates
                     Securities           Options                               of Stock Price Appreciation
                     Underlying         Granted to     Exercise or                  for Option Term(2)
                       Options         Employees In    Base Price   Expiration  ---------------------------
Name               Granted (#)(1)       Fiscal Year      ($/sh)        Date        5% ($)        10% ($)
----              -----------------------------------------------------------------------------------------
<S>               <C>                 <C>             <C>           <C>          <C>          <C>
Jon D. Tompkins        71,999               4.1%         $17.625      6/27/06     $798,056     $2,022,431
Dr. Graham Siddall     87,999               5.0%         $17.625      6/27/06     $975,404     $2,471,866
Bruce R. Wright        58,999               3.3%         $17.625      6/27/06     $653,960     $1,657,264
Dr. Seiji Yoshii       40,999               2.3%         $17.625      6/27/06     $454,443     $1,151,650
Dennis Fortino         39,999               2.3%         $17.625      6/27/06     $443,360     $1,123,560

</TABLE>

(1)  The options granted in June 1996, with terms of 10 years, vest at the rate
     of 25% per year beginning one year   after grant. Payments by the optionees
     on exercise (including any taxes Tencor is required to withhold) may be
     made in cash, by a full recourse promissory note or by the tender of
     shares.  All options were granted at the fair market value of Tencor's
     Common Stock on the date of grant.

(2)  Potential realizable value is based on certain assumed rates of
     appreciation over the term of the option.  The   amounts are calculated
     based on rules of the Securities and Exchange Commission and do not
     represent the Company's estimate of future stock price growth.



The following table sets forth certain information with respect to the options
exercised by the executive officers named in the Summary Compensation Table
during 1996 and options outstanding at fiscal year end.


                                       42

<PAGE>


<TABLE>
<CAPTION>

            AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES



                                                                              Value of Unexercised
                        Shares             Value    Number of Unexercised     In-the-Money Options
                      Acquired on        Realized   Options at FY-End (#)         at FY-End ($)
 Name                Exercise (#)         ($)(1)       Vested/Unvested         Vested/Unvested (2)
 ----                ------------          -----       ---------------         -------------------
 <S>                 <C>                  <C>          <C>                   <C>
 Jon D. Tompkins           --                 --       113,121 / 122,001     $2,321,643 / $1,283,142
 Dr. Graham Siddall      10,955           $155,099      65,823 / 110,201     $1,193,834 / $1,105,005
 Bruce R. Wright           --                 --       131,498 /  80,001     $2,620,349 / $  828,080
 Dr. Seiji Yoshii         2,070           $ 27,945      53,466 /  55,001     $1,067,312 / $  541,642
 Dennis Fortino            --                 --          --   /  39,999           --   / $  349,991

</TABLE>

_________

(1)  Market value of underlying securities at exercise date less the exercise
     price.

(2)  Market value of underlying securities at fiscal year-end minus the exercise
     price of "in the money" options.



                                       43
<PAGE>

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of Tencor's Common Stock as of January 31, 1997: (i) by each person
who is known by Tencor to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) by each of Tencor's directors; (iii) by each of
Tencor's executive officers named in the Summary Compensation Table herein; and
(iv) by all directors and executive officers as a group. Except as otherwise
indicated, Tencor believes that the beneficial owners of the securities listed
below, based on information furnished by such owners, have sole investment and
voting power with respect to the Common Stock shown as being beneficially owned
by them.

                                                          Shares Beneficially
                                                                 Owned
                                                    ----------------------------
Name of Beneficial Owner                                Number (1)     Percent
------------------------                            ----------------------------
Pioneering Management Corporation (2)                   2,940,000       9.5%
    60 State Street
     Boston MA 02109
J.W. Seligman & Co. Incorporated (2)                    2,711,000       8.7%
     100 Park Avenue - 8th Floor
     New York NY 10006
Jon D. Tompkins (3)                                       119,751         *
Richard Elkus                                              75,000         *
James Bagley (4)                                           14,443         *
Dean O. Morton (5)                                         13,243         *
Calvin Quate (6)                                           31,415         *
Lida Urbanek (7)                                          812,897       2.6%
Renn Zaphiropoulos (8)                                      5,138         *
Graham Siddall (9)                                         93,197         *
Bruce R. Wright (10)                                      147,995         *
Dr. Seiji  Yoshii (11)                                     55,536         *
Dennis Fortino                                              1,185         *
All executive officers and directors
as a group (21 persons) (12)                            1,789,901       5.8%

*  Less than 1%.



(1)  The number of shares of Common Stock and calculation of percent of
     ownership takes into account those underlying stock options held by the
     named individual or group that are vested and exercisable within 60 days of
     January 31, 1997.
(2)  The number of shares is as of December 31, 1996, and is based on Schedule
     13G filed by each of the named shareholders.
(3)  Includes 113,121 shares issuable upon exercise of outstanding options.
(4)  Consists of 14,443 shares issuable upon exercise of outstanding options.
(5)  Includes 10,835 shares issuable upon exercise of outstanding options.
(6)  Includes 14,165 shares issuable upon exercise of outstanding options.
(7)  Includes 647,232 shares held by a trust of which Mrs. Urbanek is a trustee.
     Also includes 14,165 shares issuable upon exercise of outstanding options.
(8)  Consists of 5,138 shares issuable upon exercise of outstanding options.
(9)  Includes 73,023 shares issuable upon exercise of outstanding options.
(10) Includes 137,498 shares issuable upon exercise of outstanding options.
(11) Includes 53,466 shares issuable upon exercise of outstanding options.
(12) Includes 619,624 shares issuable upon exercise of outstanding options.


                                       44
<PAGE>

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In June 1993, Tencor loaned Bruce Wright, its Senior Vice President, Finance and
Administration and Chief Financial Officer, $400,000 pursuant to a promissory
note secured by his principal residence, which bears interest at 5.5% per annum
and is due in May 2002.

In November 1996, Tencor loaned David Alles, its Vice President and Chief
Technology Officer, $200,000 pursuant to a promissory note secured by his
principal residence, which bears interest at 6.52% per annum and is due October
2003.


                                       45
<PAGE>


PART IV


ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 (a) (1, 2)  See item 8.

     (3)  Exhibits.  See Exhibit Index on page 49 of this report.  The following
          exhibits are filed as part of this Form 10-K.

           2.1   Agreement and Plan of Reorganization dated January 14, 1997,
                 among Registrant, KLA Instruments Corporation and Tiger
                 Acquisition Corporation. (9)

           3.1   Copy of Registrant's Articles of Incorporation as amended (7)

           3.2   Copy of Registrant's Bylaws, as amended (8)

          10.1   Registrant's Second Amended and Restated 1984 Stock Option Plan
                 (2)*

          10.2   Registrant's Form of Option Agreement*

          10.5   Master Lease for the premises at 2400-2476 Charleston Road
                 dated July 5, 1988 between the Company and Meridian Point
                 Realty
                 Trust '83 (1)

          10.6   Lease for the premises at 2370 Charleston Road dated October 7,
                 1983 between the Company and E&K Properties, as amended by
                 Addendum No.1 dated October 31,1983 and letters dated May 12,
                 1987 and June 30, 1988 (1)

          10.8   Form of indemnification Agreement between the Company and its
                 officers and directors, as amended. (1)

          10.11  Registrant's 401(k) Plan (1)

          10.12  Prometrix Corporation's 401(k) Plan (8)

          10.15  Description of Registrant's Senior Executive Incentive Program
                 (5)*

          10.16  Registrant's 1993 Equity Incentive Plan, as amended (4)*

          10.17  Registrant's 1993 Nonemployee Directors Stock Option Plan (4)*

          10.18  Registrant's Employee Stock Purchase Plan (4)

          10.19  Registrant's Foreign Employee Stock Purchase Plan (2)

          10.20  Prometrix 1983 Employee Incentive Stock Option Plan, as
                 amended (6)*

          10.21  Prometrix 1993 Employee Incentive Stock Option Plan (6)*

          10.25  Leases for the premises at 3233 Scott Blvd., Santa Clara,
                 California (8)

          10.26  Multi-currency loan agreement with Bank of Boston dated
                 June 15, 1995 (10)

                                       46
<PAGE>

          10.27  Phase IIA and Phase IIB Leases for Milpitas Facility dated
                 December 29, 1995 (10)

          21.1   Subsidiaries of the Registrant

          23.1   Consent of Price Waterhouse LLP, Independent Accountants


                 (1)   In addition to the Amendment to Indemnification Agreement
                       attached hereto as Exhibit 10.8, previously filed as an
                       exhibit, with corresponding exhibit number, to
                       Registration Statement on Form S-1 (33-46799) filed March
                       27, 1992, as amended.

                 (2)   Previously filed as exhibit to Registration Statement on
                       Form S-8 (33-62986) filed May 20, 1993.

                 (3)   Previously filed as exhibit 28 to Registration Statement
                       on Form S-8 (33-60690) filed April 8, 1993.

                 (4)   Previously filed as exhibit to Registration Statement on
                       Form S-8 (333-08785) filed July 25, 1996.

                 (5)   Previously filed as an exhibit, with corresponding
                       exhibit number, to Registrant's Annual report on Form 10-
                       K for the fiscal year ended December 31, 1993.

                 (6)   Previously filed as an exhibit, with corresponding
                       exhibit number, to Registration Statement on Form S-4
                       (33-73586) filed December 30, 1993, as amended.

                 (7)   In addition to the Certificate of Amendment to Articles
                       of Incorporation filed with the California Secretary of
                       State on May 31, 1995, a copy of which is attached hereto
                       as Exhibit 3.1 previously filed as an exhibit 3.1 to the
                       Registration Statement identified in footnote (1) above,
                       except for a Certificate of Amendment thereto filed as
                       exhibit 3.3 to the Annual Report on Form 10-K identified
                       in footnote (5) above and a Certificate of Amendment
                       filed as exhibit 3.1 to Registration Statement on Form S-
                       3 (33-83014) filed August 19, 1994, as amended.

                 (8)   Previously filed as an exhibit, with corresponding
                       exhibit number, to Registration Statement on Form S-3
                       identified in footnote (7) above.

                 (9)   Previously filed as an exhibit, with corresponding
                       exhibit number, to current report on Form 8-K filed
                       January 22, 1997.

                (10)   Previously filed as an exhibit, with corresponding 
                       exhibit number, to Registrant's Annual Report on Form 
                       10-K for the fiscal year ended December 31, 1995.

     *  Management contract or compensatory plans.

(b)  No reports on Form 8-K were filed during the Company's fiscal quarter ended
     December 31, 1996.

     On January 22, 1997, the Company filed a report on Form 8-K related to the
     proposed merger between the Company and KLA Instruments Corp.

(c)  Exhibits:  The exhibits listed in Item (a)(3) above, if not noted as
     previously filed, are submitted  as a separate section of this report.

(d)  The individual financial statements of the registrant have been omitted
     since the registrant is primarily an operating company and all subsidiaries
     are included in the consolidated financial statements.

                                       47
<PAGE>


                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 7, 1997.

                       TENCOR INSTRUMENTS


                       By  /s/ Bruce R. Wright
                           -------------------------------
                           Bruce R. Wright
                              Senior Vice President and
                                Chief Financial Officer

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

         Title                     Date

/s/ Jon D. Tompkins        Chairman of the Board, President        March 7, 1997
-------------------------  and Chief Executive Officer
Jon D. Tompkins            (Principal Executive Officer)

/s/ Bruce R. Wright        Senior Vice President, Chief Financial  March 7, 1997
-------------------------  Officer (Principal Financial Officer)
Bruce R. Wright

/s/ Frederick A. Ball      Vice President, Corporate Controller
-------------------------  and Secretary (Principal                March 7, 1997
Frederick A. Ball          Accounting Officer)


/s/ Richard J. Elkus, Jr.  Vice Chairman of the Board              March 7, 1997
-------------------------
Richard J. Elkus, Jr.


/s/ James W. Bagley        Director                                March 7, 1997
-------------------------
James W. Bagley


/s/ Dean O. Morton         Director                                March 7, 1997
-------------------------
Dean O. Morton


/s/ Dr. Calvin F. Quate    Director                                March 7, 1997
-------------------------
Dr. Calvin F, Quate


/s/ Lida Urbanek           Director                                March 7, 1997
-------------------------
Lida Urbanek


/s/ Renn Zaphiropoulos     Director                                March 7, 1997
-------------------------
Renn Zaphiropoulos


                                       48
<PAGE>


                                INDEX TO EXHIBITS



 3.1  Certificate of Amendment to Articles of Incorporation

10.2  Registrants' Form of Option Agreements

10.8  Registrants' Form of Amendment to Indemnification Agreement

21.1  Subsidiaries of Registrant

23.1  Consent of Price Waterhouse LLP, Independent Accountants




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