1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
(Mark One)
[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                 For the quarterly period ended: March 31, 2001

                                       OR

[  ]    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 0-9992

                             KLA-TENCOR CORPORATION
             (Exact name of registrant as specified in its charter)

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


                                 160 Rio Robles
                              San Jose, California
                                      95134
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (408) 875-3000
              (Registrant's telephone number, including area code)


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


        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 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
                                      -----     -----


        As of April 30, 2001 there were 185,385,846 shares of the Registrant's
Common Stock, $0.001 par value, outstanding.


   2

                                      INDEX



                                                                           Page
                                                                          Number
                                                                          ------
                                                                       
PART I   FINANCIAL INFORMATION

Item 1   Financial Statements (unaudited)

            Condensed Consolidated Unaudited Balance Sheets at
            June 30, 2000 and March 31, 2001 ...............................   3

            Condensed Consolidated Unaudited Statements of Operations
            for the Three- and Nine-Month Periods Ended March 31, 2000
            and 2001 .......................................................   4

            Condensed Consolidated Unaudited Statements of Cash Flows
            for the Nine-Month Periods Ended March 31, 2000 and 2001 .......   5

            Notes to Condensed Consolidated Unaudited Financial Statements..   6


Item 2   Management's Discussion and Analysis of Financial Condition
         and Results of Operations..........................................  11


Item 3   Quantitative and Qualitative Disclosures About Market Risk.........  18



PART II  OTHER INFORMATION

Item 1   Legal Proceedings..................................................  19

Item 6   Exhibits and Reports on Form 8-K...................................  20


SIGNATURES        ..........................................................  21











                                       2
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                          PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

                             KLA-TENCOR CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)




                                                         June 30,         March 31,
(in thousands)                                             2000             2001
-----------------------------------------------------------------------------------
                                                                   
ASSETS

Current assets:
  Cash and cash equivalents                             $  478,212       $  437,380
  Short-term investments                                   119,932           73,459
  Accounts receivable, net                                 481,950          538,173
  Inventories                                              282,489          416,122
  Other current assets                                     189,171          199,951
-----------------------------------------------------------------------------------
        Total current assets                             1,551,754        1,665,085

Land, property and equipment, net                          199,719          263,556
Marketable securities                                      366,239          424,970
Other assets                                                85,791           86,900
-----------------------------------------------------------------------------------
        Total assets                                    $2,203,503       $2,440,511
===================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                      $   55,016       $   58,739
  Other current liabilities                                439,811          493,514
-----------------------------------------------------------------------------------
        Total current liabilities                          494,827          552,253
-----------------------------------------------------------------------------------


Stockholders' equity:
  Common stock and capital in excess of par value          718,165          604,801
  Retained earnings                                        976,846        1,283,380
  Accumulated other comprehensive income                    13,665               77
-----------------------------------------------------------------------------------
        Total stockholders' equity                       1,708,676        1,888,258
-----------------------------------------------------------------------------------
        Total liabilities and stockholders' equity      $2,203,503       $2,440,511
===================================================================================



See accompanying notes to condensed consolidated financial statements.




                                       3
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                             KLA-TENCOR CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)





                                                     Three months ended         Nine months ended
                                                          March 31,                 March 31,
(In thousands, except per share data)                  2000        2001         2000        2001
---------------------------------------------------------------------------------------------------
                                                                             
Revenues                                          $  413,017   $  528,790    $1,016,763  $1,636,436

Costs and operating expenses:
    Costs of goods sold                              181,372      242,693       470,862     715,205
    Engineering, research and development             67,498       89,828       169,840     266,705
    Selling, general and administrative               71,700       83,916       185,262     269,321
    Non-recurring acquisition, restructuring
        and other charges                              1,300          ---        (4,638)        ---
---------------------------------------------------------------------------------------------------
        Total costs and operating expenses           321,870      416,437       821,326   1,251,231
---------------------------------------------------------------------------------------------------

Income from operations                                91,147      112,353       195,437     385,205

Interest income and other, net                        10,722       14,606        30,278      40,539
---------------------------------------------------------------------------------------------------

Income before income taxes                           101,869      126,959       225,715     425,744

Provision for income taxes                            28,522       35,549        63,617     119,210
---------------------------------------------------------------------------------------------------
Net income                                        $   73,347   $   91,410    $  162,098  $  306,534
===================================================================================================


Earnings per share:
    Basic                                         $     0.40   $     0.50    $     0.90  $     1.65
                                                  ==========   ==========    ==========  ==========
    Diluted                                       $     0.38   $     0.48    $     0.85  $     1.59
                                                  ==========   ==========    ==========  ==========

Weighted average number of shares:
    Basic                                            184,026      184,510       180,890     185,661
                                                   =========   ==========    ==========  ==========
    Diluted                                          195,236      191,717       191,529     192,954
                                                   =========   ==========    ==========  ==========



See accompanying notes to condensed consolidated financial statements.






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                             KLA-TENCOR CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)



                                                                            Nine Months Ended
                                                                               March 31,
 (in thousands)                                                           2000             2001
-----------------------------------------------------------------------------------------------
                                                                                 
Cash flows from operating activities:
  Net income                                                           $ 162,098       $ 306,534
  Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation and amortization                                      45,431          44,969
       Deferred income taxes                                                (457)          2,378
       Restructuring charges                                              (7,838)            ---
       Non-recurring acquisition charges                                   3,200             ---
       Net gain on sale of marketable securities                          (1,937)         (6,073)
       Changes in assets and liabilities:
           Accounts receivable, net                                     (106,467)        (85,247)
           Inventories                                                   (64,963)       (139,492)
           Other assets                                                  (66,473)        (16,224)
           Accounts payable                                               11,332           4,644
           Other current liabilities                                     126,712          60,667
------------------------------------------------------------------------------------------------
           Net cash provided by operating activities                     100,638         172,156
------------------------------------------------------------------------------------------------

Cash flows from investing activities:
  Purchase of property and equipment, net                                (49,636)       (105,922)
  Acquisition of assets and technology                                   (19,925)            ---
  Purchase of available for sale securities and long-term investments   (507,968)       (595,720)
  Proceeds from sale of available for sale securities                    523,238         581,488
------------------------------------------------------------------------------------------------
           Net cash used in investing activities                         (54,291)       (120,154 )
------------------------------------------------------------------------------------------------

Cash flows from financing activities:
  Issuance of common stock                                                91,286          40,265
  Stock repurchases                                                      (16,406)       (153,629)
  Net borrowings (payments) under short term debt obligations             (3,217)          1,096
------------------------------------------------------------------------------------------------
           Net cash provided by (used in) financing activities            71,663        (112,268)
------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash
   and cash equivalents                                                   (9,838)         19,434
------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                     108,172         (40,832)

Cash and cash equivalents at beginning of period                         271,488         478,212
------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                             $ 379,660       $ 437,380
================================================================================================

Supplemental cash flow disclosures:
  Income taxes paid, net of refunds                                    $   7,772       $ 126,948
                                                                       =========       =========
  Interest paid                                                        $     476       $     742
                                                                       =========       =========



See accompanying notes to condensed consolidated financial statements.



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                             KLA-TENCOR CORPORATION
                     NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE 1 - BASIS OF PRESENTATION

        The condensed consolidated financial statements have been prepared by
KLA-Tencor Corporation ("KLA-Tencor" or the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the unaudited interim financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods indicated. These financial
statements and notes, however, should be read in conjunction with the Company's
audited consolidated financial statements and notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2000, filed with
the SEC on September 28, 2000.

        The results of operations for the three- and nine- month periods ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for any other interim period or for the full fiscal year ending June
30, 2001.

        Certain items previously reported in specific financial statement
captions have been reclassified to conform to the presentation of the three- and
nine-month periods ended March 31, 2001.


NOTE 2 - INVENTORIES

        Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out basis) or market. The components of inventories are as
follows:



                                                   June 30,          March 31,
(in thousands)                                       2000               2001
------------------------------------------------------------------------------
                                                              
Inventories
    Customer service parts                       $   54,442         $   86,939
    Raw materials                                    83,103            152,633
Work-in-process                                      82,922             94,332
    Demonstration equipment                          50,817             63,141
    Finished goods                                   11,205             19,077
------------------------------------------------------------------------------
                                                 $  282,489         $  416,122
==============================================================================



NOTE 3 - STOCK REPURCHASE PROGRAM

        The Company has adopted a plan to repurchase shares of its Common Stock
on the open market for the purpose of partially offsetting dilution created by
employee stock options and stock purchase plans. During the nine-month period
ended March 31, 2001, the Company repurchased 4,580,000 shares of its Common
Stock at a cost of approximately $154 million.




                                       6
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NOTE 4  - COMPREHENSIVE INCOME

The components of comprehensive income, net of tax, are as follows:



                                             Three months ended        Nine months ended
                                                  March 31,                March 31,
(in thousands)                                 2000        2001         2000         2001
------------------------------------------------------------------------------------------
                                                                     
Net Income                                 $   73,347    $ 91,410    $ 162,098   $ 306,534
------------------------------------------------------------------------------------------
Other comprehensive income (loss)
    Change in unrealized gain (loss)
      on investments, net                        (696)      1,188        2,876      (3,870)
    Currency translation adjustments              693      (3,871)      (4,301)     (9,718)
------------------------------------------------------------------------------------------
        Other comprehensive loss                   (3)     (2,683)      (1,425)    (13,588)
------------------------------------------------------------------------------------------
        Total Comprehensive Income         $   73,344    $ 88,727    $ 160,673   $ 292,946
==========================================================================================



NOTE 5 - EARNINGS PER SHARE

        Basic earnings per share has been determined using the weighted-average
number of shares of common stock outstanding during the period. Diluted earnings
per share has been determined in the same manner but also includes all dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consisted of stock options.

        During the three- and nine-month periods ended March 31, 2000, options
to purchase approximately 0 and 57,000 shares, respectively, at an average
exercise price of $61.44 were not included in the computation of diluted EPS
because the exercise price was greater than the average market price of common
shares. During the three- and nine- month periods ended March 31, 2001, options
to purchase approximately 502,000 and 4,835,000 shares at an average exercise
price of $58.49 and $46.28, respectively, were not included in the computation
of diluted EPS because the exercise price was greater than the average market
price of common shares.

        The reconciling difference between the computation of basic and diluted
earnings per share for the periods presented is the inclusion of the dilutive
effect of stock options issued to employees under employee stock option plans.


NOTE 6 - NONRECURRING ACQUISITION, RESTRUCTURING AND OTHER COSTS

ACQUISITIONS

        On February 1, 2000, KLA-Tencor Corporation acquired software developer
FINLE Technologies, Inc. (FINLE). FINLE supplies lithography modeling and data
analysis software which enables semiconductor manufacturers to speed development
of advanced lithography processes required to develop and produce integrated
circuits with 0.13 micron and smaller geometries.

        On March 23, 2000, KLA-Tencor Corporation acquired Fab Solutions, a
division of ObjectSpace. Fab Solutions is a leading provider of advanced process
control software solutions for semiconductor manufacturing which enables yield
and process engineers to respond to the major yield-impacting parametric data in
a fab in near-real time.

Both acquisitions were accounted for as purchases. Accordingly, the estimated
fair value of assets acquired and liabilities assumed were included in
KLA-Tencor's condensed consolidated balance


                                       7
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sheet as of March 31, 2000 and the results of operations from the respective
dates of purchase through March 31, 2000 were included in the Company's
condensed consolidated statement of operations.

        KLA-Tencor acquired FINLE and Fab Solutions for $5.0 and $8.0 million in
cash, respectively. The total purchase prices were allocated to the estimated
fair values of assets acquired and liabilities assumed for the respective
companies based on management estimates. The FINLE acquisition agreement
includes certain additional annual installment contingency payments.

        The total in-process research and development charges for FINLE and Fab
Solutions of $1.3 million were determined by KLA-Tencor management, utilizing
valuation methodologies approved by the SEC. However, there can be no assurance
that the SEC will not take issue with assumptions used in KLA-Tencor's valuation
model and require KLA-Tencor to revise the amounts allocated to in-process
research and development.

        To determine the value of the in-process technology, the expected future
cash flow attributable to the in-process technology was discounted, taking into
account the percentage of completion, utilization of pre-existing technology,
risks related to the characteristics and applications of the technology,
existing and future markets, and technological risk associated with completing
the development of the technology. The valuation approach used was a form of
discounted cash flow approach commonly known as the "percentage of completion"
approach whereby the cash flows from the technology are multiplied by the
percentage of completion of the in-process technology.

RESTRUCTURING AND OTHER CHARGES

        During the six-month period ended December 31, 1999, the Company
determined that $7.8 million of a $35.0 million restructuring reserve
established during the three-month period ended December 31, 1998 would not be
utilized because of a change in management's plans for utilization of certain
facilities resulting from an increase in demand for the Company's products.
Accordingly, the restructuring reserve reversal was included in the
determination of income from operations for the nine-month period ended March
31, 2000.


NOTE 7 - COMMITMENTS AND CONTINGENCIES

        The Company is currently a party to various legal proceedings, including
those outlined in Part II, Item 1, "Legal Proceedings," in this Quarterly Report
on Form 10-Q. While management currently believes the ultimate outcome of these
proceedings, both individually and in the aggregate, will not have a material
adverse effect on the Company's financial position or operating results, the
results of complex legal proceedings are difficult to predict. However, the
Company believes that it has defenses in each of the pending claims and is
vigorously contesting each of these matters.


NOTE 8 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

        On July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138 "Accounting for Certain Derivative
Instruments and Hedging Activities - An Amendment of FASB Statement No. 133."
SFAS No. 133 requires that all derivatives, including foreign currency exchange
contracts, be recognized on the balance sheet at fair value. Derivatives that do
not qualify as hedges must be recorded at fair value through earnings. If a
derivative is a qualifying hedge, depending on the nature of the hedge, changes
in the fair value of the derivative are either offset against the change in fair
value of the underlying assets or liabilities through earnings or recognized in
Accumulated other comprehensive income until the underlying hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value is immediately recognized in earnings.


                                       8
   9

        In accordance with the transition provisions of SFAS No. 133, the
Company recorded the fair value of derivatives designated as fair value hedges
on the balance sheet with an offset to earnings. The Company also recorded the
change in the fair value of the hedged firm commitments on the balance sheet
with an offset to earnings. The net impact on the Company's financial statements
of the adjustment for fair value hedges was not material.

        DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company's activities
expose it to a variety of market risks, including the effects of changes in
foreign currency exchange rates and interest rates. The financial exposures are
monitored and managed by the Company as an integral part of its overall risk
management program. The Company's risk management program seeks to reduce the
potentially adverse effects that the volatility of the markets may have on its
operating results.

        The Company maintains a foreign currency risk management strategy that
uses derivative instruments to protect its interests from unanticipated
fluctuations in earnings and cash flows caused by volatility in currency
exchange rates.

        By using derivative financial instruments to hedge exposures to changes
in exchange rates, the Company exposes itself to credit risk and market risk.
The Company manages exposure to counterparty credit risk by entering into
derivative financial instruments with highly rated institutions that can be
expected to fully perform under the terms of the agreement. Market risk is the
adverse effect on the value of a financial instrument that results from a change
in currency exchange rates. The Company manages exposure to market risk
associated with foreign exchange contracts by establishing and monitoring
parameters that limit the types and degree of market risk that may be
undertaken.

        The Company enters into foreign currency forward exchange contracts to
hedge against certain future movements in foreign exchange rates that affect
certain foreign currency denominated sales transactions. The Company attempts to
match the forward contracts with the underlying items being hedged in terms of
currency, amount and maturity. These forward contracts have a duration of no
longer than one year.

        ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES All derivatives are
recognized on the balance sheet at their fair value. Changes in the fair value
of a derivative that is highly effective as a fair value hedge, along with the
gain or loss on the hedged item are recorded in current period Interest income
and other, net.

        The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge items. This process includes linking all
derivatives that are designated as fair value hedges to specific assets,
liabilities and firm commitments. The Company also formally assesses, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in the
fair value of hedged items.

        The Company discontinues hedge accounting prospectively when (1) it is
determined that a derivative is no longer effective in offsetting changes in the
fair value of a hedged item; (2) the derivative expires or is sold, terminated,
or exercised; (3) the derivative is discontinued as a hedge instrument, because
it is unlikely that a transaction will occur; (4) a hedged firm commitment no
longer meets the definition of a firm commitment; or (5) management determines
that designation of the derivative as a hedge instrument is no longer
appropriate. In all situations in which hedge accounting is discontinued, the
derivative will be carried at its fair value on the balance sheet, with
subsequent changes in its fair value recognized in current period earnings. When
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the related amounts that were accumulated in other
comprehensive income are recognized immediately in earnings. For the three- and
nine-month periods ending March 31, 2001, the amount of hedge ineffectiveness
and the gain on hedged commitments no longer qualifying as fair value hedges was
immaterial.


                                       9
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NOTE 9 - SUBSEQUENT EVENTS

        On April 20, 2001, the Company acquired substantially all of the assets
of Phase Metrics, Inc. ("Phase Metrics"), a privately-held company, for a total
of approximately $21 million in cash. Phase Metrics is a supplier of
inspection/certification technologies to the data storage industry. The
transaction will be accounted for as a purchase and the purchase price will be
allocated to the estimated fair value of assets acquired and liabilities assumed
based on management estimates.


NOTE 10 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In June 2000, the SEC issued Staff Accounting Bulletin ("SAB") No. 101B,
"Second Amendment: Revenue Recognition in Financial Statements." SAB No. 101B
amends SAB No. 101 "Revenue Recognition in Financial Statements," to defer the
implementation date of SAB No. 101 for registrants until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB No.
101 summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements of all
public companies. The Company is required to adopt SAB No. 101 in the fourth
quarter of its fiscal year ending June 30, 2001. Accordingly, any shipments
previously reported as revenue, including revenue reported for the first three
quarters of fiscal 2001, that do not meet SAB No. 101's guidance will be
recorded as revenue in future periods. Changes in the Company's revenue
recognition policy resulting from the interpretation of SAB No. 101 would not
involve the restatement of prior fiscal year statements but would, to the extent
applicable, be reported as a change in accounting principle in the fiscal year
ending June 30, 2001, with the appropriate restatement of interim periods as
required by SFAS No. 3 "Reporting Accounting Changes in Interim Financial
Statements." The Company's reported results of operations for the 12 months
ending June 30, 2001 will include a cumulative adjustment for all prior annual
and interim periods as if SAB No. 101 had been adopted on July 1, 2000.
Management believes that SAB Nos. 101 and 101B, to the extent that they impact
the Company, will not affect the underlying strength or weakness of the
Company's business operations as measured by the dollar value of the Company's
product shipments and cash flows.

        In September 2000, the FASB issued SFAS No. 140 "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to the securitization transactions and collateral for
fiscal years ending after December 15, 2000. It is not expected that SFAS No.
140 will have a significant impact on our financial position or results of
operation.








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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS


FORWARD-LOOKING STATEMENTS

        This report contains certain forward-looking statements. All statements
included in or incorporated by reference in this Quarterly Report on Form 10-Q,
other than statements of historical fact, are forward-looking statements. Such
forward-looking statements include, among others, those statements regarding our
future financial results; the future results of our operations; technological
trends in the semiconductor industry; our future product offerings and product
features; anticipated revenue from various domestic and international regions;
success of our product offerings; completion of backlog; creation of development
and engineering programs for research and development; the completion of any
acquisitions of third parties, or the technology or assets thereof; benefits
received from any acquisitions; the outcome of any litigation to which we are a
party; results of our investment in leading edge technologies, enhancements of
current products and strategic acquisitions; our future income tax rate;
sufficiency of our existing cash balance, investments and cash generated from
operations to meet our liquidity and working capital requirements; and the
effects of hedging transactions.

        Our actual results may differ significantly from those projected in the
forward-looking statements in this report. The following discussion and analysis
should be read in conjunction with the section entitled "Factors Affecting
Results, Including Risks and Uncertainties," as well as the condensed
consolidated financial statements and the notes thereto included in Item 1 in
this Quarterly Report, our most recent Annual Report on Form 10-K filed by the
Company with the SEC, and our other filings with the SEC made from time to time.


RESULTS OF OPERATIONS

        KLA-Tencor Corporation is the world's leading supplier of process
control and yield management solutions for the semiconductor and related
microelectronics industries. Our comprehensive portfolio of products, software,
analysis, services and expertise is designed to help integrated circuit
manufacturers manage yield throughout the entire wafer fabrication process -
from research and development to final mass production yield analysis.

        Despite a strong first half of fiscal 2001, a worldwide softening in
demand for semiconductors resulted in excess capacity and reduced demand for
semiconductor manufacturing equipment in the third fiscal quarter. As a result,
we experienced declines in both revenue and bookings in the third fiscal quarter
compared to the prior quarter.

        Revenues were $529 million and $1,636 million for the three- and
nine-month periods ended March 31, 2001, compared to $413 million and $1,017
million for the same periods of the prior fiscal year, representing an increase
of 28% and 61% for the respective periods. We experienced increased revenues
across nearly all product lines as a result of the increased capital spending by
major semiconductor manufacturers.

        Gross margins were 54% and 56% of revenues for the three- and nine-month
periods ended March 31, 2001, compared to 56% and 54% of revenues for the same
periods in the prior fiscal year. Gross margins decreased during the current
quarter when compared to the prior year quarter primarily due to lower than
expected shipment volumes and new product introduction costs. Gross margin for
the nine months ended March 31, 2001 increased when compared to the same period
of the prior fiscal year primarily due to increased capacity utilization
resulting from higher unit volume, as well as faster growth of higher margin
product revenue compared to lower margin service revenue.


                                       11
   12

        Engineering, research and development (R&D) expenses were $90 million
and $267 million for the three- and nine-month periods ended March 31, 2001,
compared to $67 million and $170 million for the same periods in the prior
fiscal year. As a percentage of revenues, R&D expenses were 17% and 16% for the
three- and nine-month periods ended March 31, 2001, compared to 16% and 17% for
the same periods in the prior fiscal year. The aggregate amount for R&D
investment increased, representing our continued commitment to product
development in new and emerging market segments and enhancements to existing
products for 0.13 micron, copper development and 300mm wafers.

        Selling, general and administrative expenses were $84 million and $269
million for the three- and nine-month periods ended March 31, 2001, compared to
$72 million and $185 million for the same periods in the prior fiscal year. As a
percentage of revenues, selling, general and administrative expenses were 16%
for both the three- and nine-month periods ended March 31, 2001, compared to 17%
and 18% for the same periods in the prior fiscal year. Aggregate selling,
general and administrative expenses increased, but at a slower rate than the
increase in revenues. The aggregate increase was primarily due to increases in
our sales and marketing infrastructure and the high level of new product
activity during the last nine months.

        During the six-month period ended December 31, 1999, the Company
determined that $7.8 million of a $35.0 million restructuring reserve
established during the three-month period ended December 31, 1998 would not be
utilized because of a change in management's plans for utilization of certain
facilities resulting from an increase in demand for the Company's products.
Accordingly, the restructuring reserve reversal was included in the
determination of income from operations for the nine-month period ended March
31, 2000.

        Non-recurring acquisition charges were $1.3 million and $3.2 million for
the three- and nine-month periods ended March 31, 2000, as a result of the
acquisition of ACME Systems, Inc., FINLE Technologies, Inc. and Fab Solutions.
Accordingly, the non-recurring acquisition charges were included in the
determination of income from operations for the three- and nine- month periods
ended March 31, 2000.

        Interest income and other, net, were $15 million and $41 million for the
three- and nine-month periods ended March 31, 2001, compared to $11 million and
$30 million in the same periods in the prior fiscal year. The increase was due
to gains realized on sales of marketable securities and settlements of certain
foreign currency contracts.

        Our effective tax rate for the three- and nine-month periods ended March
31, 2001 was 28% on pretax income. This rate is consistent with the effective
rate applied to income from operations excluding the impact of non-recurring
acquisition, restructuring and other charges during the same periods in the
prior fiscal year. The tax rate on the restructuring reserve reversal in the
three- and nine-month periods ended March 31, 2000 was 35%, which is consistent
with the tax rate applied when the restructuring reserve was recorded during the
three-month period ended December 31, 1998. Currently we anticipate an overall
tax rate of approximately 28% for the balance of the fiscal year ending June 30,
2001.


LIQUIDITY AND CAPITAL RESOURCES

        During the nine-month period ended March 31, 2001, cash, cash
equivalents, short-term investments and marketable securities balances decreased
to $936 million from $964 million at June 30, 2000. Net cash provided by
operating activities for the nine-month period ended March 31, 2001 was $172
million, compared to $101 million of net cash from operating activities for the
same period of the prior fiscal year. This change primarily resulted from
increased net income before non-cash charges offset by an increase in inventory.
We increased our net purchases of both available-for-sale securities and
long-term investments and property and equipment in the nine-month period ended
March 31, 2001 as compared to the same period of the prior fiscal year.


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        Capital expenditures for the nine-month period ended March 31, 2001 of
$106 million included $15 million for the purchase of 31 acres of land in
Livermore, California to build a new campus and $10 million in construction
costs. The remaining capital expenditures were for manufacturing and engineering
equipment and leasehold improvements necessary for our operations. We received
$40 million through common stock issued through our employee stock purchase
program and through stock option exercises during the nine-month period ended
March 31, 2001, and we repurchased $154 million of our common stock under our
stock repurchase program during the same period.

        Working capital increased to $1,113 million as of March 31, 2001,
compared to $1,057 million at June 30, 2000. We believe that existing liquid
capital resources and funds generated from operations combined with the ability,
if necessary, to borrow funds will be adequate to meet our business requirements
for the foreseeable future, including potential acquisitions or strategic
investments, capital expenditures for the expansion or upgrading of
manufacturing capacity and working capital requirements. However, we can give no
assurances that we will continue to generate sufficient funds from operations or
that we will be able to borrow funds on reasonable terms in the future, if
necessary.


FACTORS AFFECTING RESULTS, INCLUDING RISKS AND UNCERTAINTIES

Fluctuations in Operating Results and Stock Price

        Our operating results have varied widely in the past, and our future
operating results will continue to be subject to quarterly variations based upon
a wide variety of factors including those listed in this section and throughout
this Quarterly Report on Form 10-Q for the period ending March 31, 2001. In
addition, future operating results may not follow any past trends. We believe
the factors that make our results fluctuate and difficult to predict include:

        o  the cyclical nature of the semiconductor industry;

        o  the reduction in the price and the profitability of our products;

        o  our timing of new product introductions;

        o  our ability to develop and implement new technologies;

        o  the change in customers' schedules for fulfillment of orders;

        o  the cancellation of contracts by major customers;

        o  the shortage of qualified workers in the areas we operate; and

        o  our ability to manage our manufacturing requirements.

        Operating results also could be affected by sudden changes in customer
requirements, currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or more of the
global markets in which we do business. As a result of these or other factors,
we could fail to achieve our expectations as to future revenues, gross profit
and income from operations. Our failure to meet the performance expectations set
and published by external sources could result in a sudden and significant drop
in the price of our stock, particularly on a short-term basis, and could
negatively affect the value of any investment in our stock.




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Semiconductor Equipment Industry Volatility

        The semiconductor equipment industry is highly cyclical. The purchasing
decisions of our customers are highly dependent on the economies of both the
local markets in which they are located and the semiconductor industry
worldwide. The timing, length and severity of the up-and-down cycles in the
semiconductor equipment industry are difficult to predict. This cyclical nature
of the industry in which we operate affects our ability to accurately predict
future revenues and, thus, future expense levels. When cyclical fluctuations
result in lower than expected revenue levels, operating results may be adversely
affected and cost reduction measures may be necessary in order for us to remain
competitive and financially sound. During a down cycle, we must be in a position
to adjust our cost and expense structure to prevailing market conditions and to
continue to motivate and retain our key employees. In addition, during periods
of rapid growth, we must be able to increase manufacturing capacity and
personnel to meet customer demand. We can provide no assurance that these
objectives can be met in a timely manner in response to industry cycles. If we
fail to respond to industry cycles, our business could be seriously harmed.

        During industry down cycles, the semiconductor industry typically
experiences excess production capacity that causes semiconductor manufacturers
to decrease capital spending. We generally do not have long-term volume
production contracts with our customers, and we do not control the timing or
volume of orders placed by our customers. Whether and to what extent our
customers place orders for any specific products, as well as the mix and
quantities of products included in those orders, are factors beyond our control.
Insufficient orders, especially in our down cycles, will result in
under-utilization of our manufacturing facilities and infrastructure and will
negatively affect our operating results and financial condition.

International Trade and Economic Conditions

        Ours is an increasingly global market. A majority of our revenues are
derived from outside the United States, and we expect that international
revenues will continue to represent a substantial percentage of our revenues.
Our international revenues and operations are affected by economic conditions
specific to each country and region. Because of our significant dependence on
international revenues, a decline in the economies of any of the countries or
regions in which we do business could negatively affect our operating results.

        Managing global operations and sites located throughout the world
presents challenges associated with, among other things, cultural diversity and
organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic local or international economic downturns, trade balance issues,
political instability and fluctuations in interest and currency exchange rates
could negatively affect our business and results of operations. Although we
attempt to manage near-term currency risks through the use of hedging
instruments, there can be no assurance that such efforts will be adequate.

Competition

        Our industry includes large manufacturers with substantial resources to
support customers worldwide. Our future performance depends, in part, upon our
ability to continue to compete successfully worldwide. Some of our competitors
are diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products and services, some of which
compete with the products and services that we offer. These competitors may
bundle their products in a manner that may discourage customers from purchasing
our products. In addition, we face competition from smaller emerging
semiconductor


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equipment companies whose strategy is to provide a portion of the products and
services which we offer, using innovative technology to sell products into
specialized markets. Loss of competitive position could negatively impact our
prices, customer orders, revenues, gross margins, and market share, any of which
would negatively affect our operating results and financial condition. Our
failure to compete successfully with these other companies would seriously harm
our business.

Technological Change and Customer Requirements

        Success in the semiconductor equipment industry depends, in part, on
continual improvement of existing technologies and rapid innovation of new
solutions. For example, the semiconductor industry continues to shrink the size
of semiconductor devices and has begun to commercialize the process of
copper-based interconnects. These and other evolving customer needs require us
to respond with continued development programs and to cut back or discontinue
older programs which may no longer have industry-wide support. Technical
innovations are inherently complex and require long development cycles and
appropriate professional staffing. Our competitive advantage and future business
success depend on our ability to accurately predict evolving industry standards,
to develop and introduce new products which successfully address changing
customer needs, to win market acceptance of these new products and to
manufacture these new products in a timely and cost-effective manner. If we do
not develop and introduce new products and technologies in a timely manner in
response to changing market conditions or customer requirements, our business
could be seriously harmed.

        In this environment, we must continue to make significant investments in
research and development in order to enhance the performance and functionality
of our products, to keep pace with competitive products and to satisfy customer
demands for improved performance, features and functionality. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements or that we will be able to secure the financial resources necessary
to fund future development. Substantial research and development costs typically
are incurred before we confirm the technical feasibility and commercial
viability of a product, and not all development activities result in
commercially viable products. In addition, we cannot ensure that these products
or enhancements will receive market acceptance or that we will be able to sell
these products at prices that are favorable to us. Our business will be
seriously harmed if we are unable to sell our products at favorable prices or if
our products are not accepted by the market in which we operate.

Key Suppliers

        We use a wide range of materials in the production of our products,
including custom electronic and mechanical components, and we use numerous
suppliers to supply materials. We generally do not have guaranteed supply
arrangements with our suppliers. Because of the variability and uniqueness of
customers' orders, we do not maintain an extensive inventory of materials for
manufacturing. We seek to minimize the risk of production and service
interruptions and/or shortages of key parts by selecting and qualifying
alternative suppliers for key parts, monitoring the financial stability of key
suppliers and maintaining appropriate inventories of key parts. Although we make
reasonable efforts to ensure that parts are available from multiple suppliers,
key parts may be available only from a single supplier or a limited group of
suppliers. There can be no assurance that our business will not be harmed if we
do not receive sufficient parts to meet our production requirements in a timely
and cost-effective manner.

        Operations at our primary manufacturing facilities and our assembly
subcontractors are subject to disruption for a variety of reasons, including
work stoppages, fire, earthquake, flooding or other natural disasters. Such
disruption could cause delays in shipments of products to our customers. We
cannot ensure that alternate production capacity would be available if a major
disruption were to occur or that, if it were available, it could be obtained on
favorable terms. Such a disruption could result in cancellation of orders or
loss of customers and could seriously harm our business.



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Intellectual Property Obsolescence and Infringement

        Our success is dependent in part on our technology and other proprietary
rights. We own various United States and international patents and have
additional pending patent applications relating to some of our products and
technologies. The process of seeking patent protection is lengthy and expensive,
and we cannot be certain that pending or future applications will actually
result in issued patents or that issued patents will be of sufficient scope or
strength to provide meaningful protection or commercial advantage to us. Other
companies and individuals, including our larger competitors, may develop
technologies that are similar or superior to our technology or may design around
the patents we own.

        We also maintain trademarks on certain of our products and services and
claim copyright protection for certain proprietary software and documentation.
However, we can give no assurance that our trademarks and copyrights will be
upheld or successfully deter infringement by third parties.

        While patent, copyright and trademark protection for our intellectual
property is important, we believe our future success in highly dynamic markets
is most dependent upon the technical competence and creative skills of our
personnel. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, suppliers, employees and
consultants and through other security measures. We also rely on trade secret
protection for our technology, in part through confidentiality agreements with
our employees, consultants and third parties. We also maintain exclusive and
non-exclusive licenses with third parties for strategic technology used in
certain products. However, these employees, consultants and third parties may
breach these agreements, and we may not have adequate remedies for wrongdoing.
In addition, the laws of certain territories in which we develop, manufacture or
sell our products may not protect our intellectual property rights to the same
extent as do the laws of the United States.

        As is typical in the semiconductor equipment industry, from time to time
we have received communications from other parties asserting the existence of
patent rights, copyrights, trademark rights or other intellectual property
rights which they believe cover certain of our products, processes, technologies
or information. Our customary practice is to evaluate such assertions and to
consider whether to seek licenses where appropriate. However, we cannot ensure
that licenses can be obtained or, if obtained, will be on acceptable terms or
that litigation or other administrative proceedings will not occur. The
inability to obtain necessary licenses or other rights on reasonable terms could
seriously harm our operating results and financial condition.

Key Employees

        Our employees are vital to our success, and our key management,
engineering and other employees are difficult to replace. We generally do not
have employment contracts with our key employees. Further, we do not maintain
key person life insurance on any of our employees. The expansion of high
technology companies worldwide has increased demand and competition for
qualified personnel. We may not be able to attract, assimilate or retain
additional highly qualified employees in the future. These factors could
seriously harm our business.

Acquisitions

        We seek to develop new technologies from both internal and external
sources. As part of this effort, we may make acquisitions of, or significant
investments in, businesses with complementary products, services and/or
technologies. Acquisitions involve numerous risks, including management issues
and costs in connection with the integration of the operations and personnel,
technologies and products of the acquired companies, the possible write-downs of
impaired assets, and the potential loss of key employees of the acquired
companies. The inability to manage these risks effectively could seriously harm
our business.


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Litigation

        From time to time we are involved in litigation of various types,
including litigation that alleges infringement of intellectual property rights
and other claims. Litigation tends to be expensive and requires significant
management time and attention. If we lose in a dispute concerning intellectual
property, a court could require us to pay substantial damages and/or royalties
or could issue an injunction prohibiting us from using essential technologies.
For these and other reasons, this type of litigation could have a material
adverse effect on our business, financial condition and results of operations.
Also, although we may seek to obtain a license under a third party's
intellectual property rights in order to bring an end to certain claims or
actions asserted against us, we may not be able to obtain such a license on
reasonable terms or at all.

Regional Electric Shortages

        Recently, California has been experiencing a shortage of electric power
supply that has resulted in intermittent loss of power in some areas in the form
of rolling blackouts. While we have not experienced any power failures to date,
a blackout may affect our ability to manufacture products and meet scheduled
deliveries. If blackouts were to interrupt our power supply, we would be
temporarily unable to continue operations at some of our facilities. Any such
interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations.

Euro Conversion

        A new European currency was implemented commencing in January 1999 to
replace the separate currencies of eleven western European countries. This
requires changes in our operations as we modify systems and commercial
arrangements to deal with the new currency. Modifications are necessary in
operations such as payroll, benefits and pension systems, contracts with
suppliers and customers, and internal financial reporting systems. During the
three-year transition period in which transactions may also be made in the old
currencies, we must maintain dual currency processes for our operations. We have
identified the issues created by this problem, and the cost of this effort is
not expected to have a material effect on our business or results of operations.
We cannot be certain, however, that all problems will be foreseen and corrected
or that no material disruption of our business will occur as a result of this
currency change.








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EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In June 2000, the SEC issued Staff Accounting Bulletin ("SAB") No. 101B,
"Second Amendment: Revenue Recognition in Financial Statements." SAB No. 101B
amends SAB No. 101 "Revenue Recognition in Financial Statements," to defer the
implementation date of SAB 101 for registrants until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. SAB No. 101
summarizes certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements of all public
companies. The Company is required to adopt SAB No. 101 in the fourth quarter of
its fiscal year ending June 30, 2001. Accordingly, any shipments previously
reported as revenue, including revenue reported for the first three quarters of
fiscal 2001, that do not meet SAB No. 101's guidance will be recorded as revenue
in future periods. Changes in the Company's revenue recognition policy resulting
from the interpretation of SAB No. 101 would not involve the restatement of
prior fiscal year statements but would, to the extent applicable, be reported as
a change in accounting principle in the fiscal year ending June 30, 2001, with
the appropriate restatement of interim periods as required by SFAS No. 3
"Reporting Accounting Changes in Interim Financial Statements." The Company's
reported results of operations for the 12 months ending June 30, 2001 will
include a cumulative adjustment for all prior annual and interim periods as if
SAB No. 101 had been adopted on July 1, 2000. Management believes that SAB Nos.
101 and 101B, to the extent that they impact the Company, will not affect the
underlying strength or weakness of the Company's business operations as measured
by the dollar value of the Company's product shipments and cash flows.

        In September 2000, the FASB issued SFAS No. 140 "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for
disclosures relating to the securitization transactions and collateral for
fiscal years ending after December 15, 2000. It is not expected that SFAS No.
140 will have a significant impact on our financial position or results of
operation.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to financial market risks, including changes in interest
rates and in foreign currency exchange rates. To mitigate these risks, we
utilize derivative financial instruments. We do not use derivative financial
instruments for speculative or trading purposes. All of the potential changes
noted below are based on sensitivity analyses performed on our financial
position at June 30, 2000 and at March 31, 2001. Actual results may differ
materially.

        As of June 30, 2000 and March 31, 2001, we had an investment portfolio
of fixed income securities of $446 million and $450 million, respectively,
excluding securities classified as cash equivalents. These securities, as with
all fixed income instruments, are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels as of June 30, 2000 and
March 31, 2001, the fair market value of our portfolio would decline by $5
million and $4 million, respectively.

        As of June 30, 2000 and March 31, 2001, we had forward contracts to sell
$204 million and $296 million, respectively, in foreign currency in order to
hedge currency exposures. The fair market value of these contracts on June 30,
2000 and March 31, 2001, based on prevailing exchange rates on those dates, was
$199 million and $267 million, respectively. A 10% adverse change in currency
exchange rates affecting the contracts from their June 30, 2000 and March 31,
2001 levels would decrease the fair market value of the contracts by $20 million
and $30 million, respectively. However, if this occurred, the fair market value
of the underlying exposures hedged by the contracts would increase by similar
amounts, which we believe would result in little or no material impact on our
income or cash flows.




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                           PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

        A discussion regarding certain pending legal proceedings is included in
Part I, Item 3, "Legal Proceedings," included in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2000. Since the fiscal year ended
June 30, 2000, certain material developments have occurred with respect to the
legal proceedings described in the Company's Annual Report and the Company has
been named as a party in certain additional matters as follows:

ADE Corporation

        On October 11, 2000, ADE Corporation ("ADE"), a competitor, filed a
patent infringement lawsuit against the Company in the U.S. District Court in
Delaware. ADE claimed damages and sought an injunction under a wafer inspection
patent it holds. The Company filed a counterclaim in the same court alleging
that ADE has infringed three of its patents. The Company claimed damages and a
permanent injunction against ADE. In addition, the Company is seeking a
declaration from the District Court that ADE's patent is invalid and not
infringed by the Company. While these matters are in a preliminary stage and we
cannot predict the outcome, the Company believes it has valid defenses and
further believes that its counterclaims have merit.

        Although we cannot predict the outcome of these claims, management does
not believe that any of these legal matters will have a material adverse effect
on the Company. Were an unfavorable ruling to occur in one or more of the
pending claims, there exists the possibility of a material impact on the
Company's operating results for the period in which the ruling occurred.

Therma-Wave, Inc.

        On April 10, 2001, the Company settled all pending litigation with
Therma-Wave, Inc. As part of the settlement, the Company has granted Therma-Wave
a license on the Company's U.S. Patent No. 4,899,055 entitled "Thin Film
Thickness Measuring Method." In exchange, Therma-Wave has granted the Company a
license on Therma-Wave's U.S. Patent No. 5,596,406, entitled "Sample
Characteristic Analysis Utilizing Multi Wavelength And Multi Angle Polarization
And Magnitude Change Detection;" and U.S. Patent Nos. 5,798,837 and 5,900,939,
both entitled "Thin Film Optical Measurement System and Method With Calibrating
Ellipsometer." In addition, Therma-Wave agreed to modify its products to avoid
using certain technology patented by the Company and both parties agreed to a
moratorium on any patent litigation for a period of time.


Schlumberger, Inc. and Rigg Systems, Inc.

        On August 30,1999, we were named as a defendant in a lawsuit in which
Schlumberger, Inc. alleges trade secret misappropriation, unfair competition and
trade slander. On July 21, 2000, the court granted our motion for summary
judgment dismissing the case. Schlumberger, Inc. subsequently filed a motion for
reconsideration of that dismissal and its request for reconsideration was
denied. Schlumberger has now appealed. Although the outcome of these claims
cannot be predicted with certainty, we do not believe that this legal matter
will have a material adverse effect on our financial condition even if plaintiff
prevails. On January 26, 2000, we filed a complaint against Philip Rigg, RIGG
Systems and Schlumberger, Inc. for misappropriation of trade secrets, breach of
contract, breach of fiduciary duty, interference with contract, and unfair
competition. The defendants filed cross-complaints on June 5, 2000 asserting
various statutory and common law theories. Although the outcome of these claims
cannot be


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predicted with certainty, we do not believe that this legal matter will have a
material adverse effect on our financial condition or results of operations even
if the plaintiff prevails.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

        (a)    Exhibits

               None.

        (b)    Form 8-K

               On March 21, 2001, the Company filed a current report on Form
               8-K, dated March 19, 2001, to report a press release announcing
               it expects its financial results for the 3rd Quarter ending March
               31, 2001 to be below the expectations provided in its earnings
               conference call on January 17, 2001.








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                                   SIGNATURES


Pursuant to the requirements 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.


                                                 KLA-TENCOR CORPORATION
                                                         (Registrant)




May 14, 2001                                           /s/ JOHN H. KISPERT
--------------------------                       -------------------------------
        (Date)                                           John H. Kispert
                                                    Executive Vice President
                                                   and Chief Financial Officer








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