All statements in this Quarterly Report on Form 10-Q and those made by the management of Applied, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Applied's future financial results, operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies, projected costs, products, competitive positions, management's plans and objectives for future operations, research and development, acquisitions and joint ventures, growth opportunities, customers, working capital, liquidity, investments and legal proceedings, as well as industry trends and outlooks. These forward-looking statements are based on management's estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" and "continue," the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, "Risk Factors," below and elsewhere in this report. Other risks and uncertainties may be disclosed in Applied's prior Securities and Exchange Commission (SEC) filings. These and many other factors could affect Applied's future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Applied undertakes no obligation to revise or update any forward-looking statements.

Overview

Applied provides Nanomanufacturing Technologytm solutions for the global semiconductor, flat panel display, solar and related industries, with a broad portfolio of innovative equipment, service and software products. Applied's customers are primarily manufacturers of semiconductors, flat panel liquid crystal displays (LCDs), solar photovoltaic cells and modules (solar PVs), flexible electronics and energy-efficient glass. Applied operates in four reportable segments: Silicon, Applied Global Services, Display, and Energy and Environmental Solutions. Product development and manufacturing activities occur primarily in North America, Europe, Israel and Asia. Applied's broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.

Applied's results are driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand for electronic products. Each of Applied's businesses is subject to cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, LCDs, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and technological advances in fabrication processes.

Applied incurred a net loss for the first quarter of fiscal 2009 and expects an unusually challenging environment for the remainder of fiscal 2009. The turmoil in the financial markets and weakening global economy are compounding the impact of the highly cyclical markets in which Applied operates. Negative trends in consumer spending and pervasive economic uncertainty have led some customers to significantly reduce factory operations and to reassess their projected spending plans. Due to poor economic conditions and difficulties in obtaining financing during the global credit crisis, customers may continue to reduce demand, which in turn will affect Applied's future operating results. In this uncertain macroeconomic and industry climate, the ability to forecast customer demand and Applied's future performance is extremely limited. Applied currently expects that orders and revenue will be down overall in fiscal 2009.

The following table presents certain significant measurements for the three months ended January 25, 2009 and January 27, 2008:

                                                                    Three Months Ended
                                                           January 25,               January 27,
                                                              2009                       2008                 Change
                                                           (In millions, except per share amounts and percentages)

New orders                                             $               903        $            2,500                (64 )%
Net sales                                              $             1,333        $            2,087                (36 )%
Gross margin                                           $               392        $              935                (58 )%
Gross margin percent                                                  29.4 %                    44.8 %       (15 points )
Net income (loss)                                      $              (133 )      $              262               (151 )%
Earnings (loss) per share                              $             (0.10 )      $             0.19               (153 %)

Financial results for the first quarter of fiscal 2009 reflected significantly reduced demand for manufacturing equipment and services due to unfavorable global economic and industry conditions, and also included restructuring charges of $133 million associated with the cost reduction program announced on November 12, 2008. Total orders decreased significantly from the first quarter of fiscal 2008, primarily due to deteriorating demand for semiconductor and display products and services. Net sales decreased during the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008, due primarily to a decrease in demand from semiconductor equipment and spares customers, partially offset by increased sales of solar manufacturing products. The net loss for the first quarter of fiscal 2009 reflected lower net sales and included the restructuring charges noted above.

Results of Operations

Applied received new orders of $903 million for the first quarter of fiscal 2009, down 64 percent from the first quarter of fiscal 2008. The decrease in new orders for the first quarter of fiscal 2009 was primarily attributable to a decline in demand for products and services from memory and foundry customers. In addition, demand for LCD equipment decreased substantially in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 due to display manufacturers' lower factory utilization.

New orders by geographic region (determined by the location of customers' facilities) for the three months ended January 25, 2009 and January 27, 2008 were as follows:

                                                   Three Months Ended
                                           January 25,           January 27,
                                               2009                 2008
                                          ($)        (%)        ($)        (%)
                                                 (Dollars in millions)

              Europe                        346        39         278        11
              North America*                237        26         506        20
              Japan                         154        17         292        12
              Southeast Asia and China       81         9         267        11
              Korea                          66         7         362        14
              Taiwan                         19         2         795        32

              Total                         903       100       2,500       100

* Primarily the United States.

Applied's backlog for the most recent three fiscal quarters was as follows:
$4.1 billion at January 25, 2009, $4.8 billion at October 26, 2008, and $4.7 billion at July 27, 2008. Backlog decreased 16 percent for the first quarter of 2009 compared to the fourth quarter of fiscal 2008 primarily due to financial debookings. Financial debookings resulting from order push-outs beyond Applied's 12 month recognition window totaled $278 million for the first quarter of 2009. Backlog consists of: (1) orders for which written authorizations have been accepted and assigned

shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; (2) contractual service revenue and maintenance fees to be earned within the next 12 months; and (3) orders for SunFab production lines that are anticipated to be recognized as revenue within the next 12 months. Due to the potential for customer changes in delivery schedules or cancellation of orders, Applied's backlog at any particular time is not necessarily indicative of actual sales for any future periods.

Net sales of $1.3 billion for the first quarter of fiscal 2009 decreased 36 percent from the first quarter of fiscal 2008. Net sales for the first quarter of fiscal 2009 reflected lower sales to memory and foundry customers, partially offset by increased sales of crystalline silicon (c-Si) solar manufacturing products.

Net sales by geographic region (determined by the location of customers' facilities) for the three months ended January 25, 2009 and January 27, 2008 were as follows:

                                                   Three Months Ended
                                            January 25,           January 27,
                                               2009                  2008
                                           ($)        (%)        ($)        (%)
                                                  (Dollars in millions)

              North America*                 383        29         488        23
              Japan                          216        16         318        15
              Southeast Asia and China       206        15         246        12
              Europe                         197        15         216        10
              Korea                          187        14         203        10
              Taiwan                         144        11         616        30

              Total                        1,333       100       2,087       100

* Primarily the United States.

Gross margin percentage was 29.4 percent for the first quarter of fiscal 2009, down from 44.8 percent for the first quarter of fiscal 2008. The decrease in the gross margin percentage for the first quarter of fiscal 2009 was principally attributable to lower net sales and lower margin product mix, offset in part by cost control initiatives, including shutdowns, and a favorable adjustment of $8 million associated with fiscal 2008 variable compensation. Gross margin during the first quarters of fiscal 2009 and 2008 included $7 million and $6 million of equity-based compensation expense, respectively.

Operating expenses included expenses related to research, development and engineering (RD&E), marketing and selling (M&S), and general and administrative (G&A). Expenses related to RD&E, M&S and G&A were a total of $455 million for the first quarter of fiscal 2009 compared to $513 million for the first quarter of fiscal 2008. G&A expenses increased 22 percent to $141 million, principally due to a provision of $48 million for doubtful accounts receivable related to certain customers' deteriorating financial condition. RD&E and M&S expenses decreased 21 percent to $314 million for the first quarter of fiscal 2009 due to cost control initiatives (including multi-week shutdowns) and a reduction in variable compensation that included a variable compensation adjustment of $30 million associated with fiscal 2008.

Operating expenses for the first quarter of fiscal 2009 included restructuring charges of $133 million associated with a program that was announced in November 2008. Operating expenses for the first quarter of fiscal 2008 included restructuring charges of $49 million. (See Note 8 of Notes to Consolidated Condensed Financial Statements.)

Net interest income was $9 million for the first quarter of fiscal 2009, down from $26 million for the first quarter of fiscal 2008. Lower net interest income during the first quarter of fiscal 2009 was primarily due to a reduction in short-term investments, a decrease in interest rates, and an increase in net realized losses.

Applied's effective income tax rate for the first quarter of fiscal 2009 was a benefit of 34.4 percent and included the effect of restructuring charges. Applied's effective income tax rate was a provision of 32.6 percent for the comparable quarter of fiscal 2008. Applied's future effective income tax rate depends on various factors, such as tax

legislation, the geographic composition of Applied's pre-tax income, and the tax rate on equity compensation. Management carefully monitors these factors and timely adjusts the interim income tax rate accordingly.

Segment Information

Applied has financial results in four reportable segments: Silicon, Applied Global Services, Display, and Energy and Environmental Solutions. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 13 of Notes to Consolidated Condensed Financial Statements. Applied does not allocate to its reportable segments certain operating expenses, which it manages separately at the corporate level. These unallocated costs include those for equity-based compensation and certain components of variable compensation, the global sales organization, corporate functions (certain management, finance, legal, human resources, marketing, and RD&E), and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions.

The results for each reportable segment are discussed below.

Silicon Segment

The Silicon segment includes semiconductor capital equipment for deposition, etch, rapid thermal processing, chemical mechanical planarization, and metrology and inspection. Development efforts are focused on solving customers' key technical challenges, including transistor performance and nanoscale patterning, and on improving chip manufacturing productivity to reduce costs.

                                           Three Months Ended
                                     January 25,         January 27,
                                        2009                2008
                                              (In millions)

                 New orders         $         246       $       1,075
                 Net sales          $         546       $       1,237
                 Operating income   $          34       $         445

Silicon new orders decreased 77 percent to $246 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. The decline in orders was primarily from memory and foundry customers and reflected low demand for semiconductor equipment, other than advanced technologies.

Net sales decreased 56 percent to $546 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. The decrease in net sales was due to decreased investment by memory and foundry customers.

Operating income decreased 92 percent to $34 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. The decrease in operating income was due to a significantly lower revenue level resulting in lower factory absorption and an increase in bad debt expense, partially offset by lower operating expenses as a result of cost control initiatives, including headcount reductions, shutdown savings and lower controllable spending.

Applied Global Services Segment

The Applied Global Services segment encompasses technically differentiated products, including spares, services, certain earlier generation equipment products, and remanufactured equipment, to improve operating efficiency, reduce operating costs, and lessen the environmental impact of semiconductor, display and solar customers' factories. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.

                                           Three Months Ended
                                     January 25,         January 27,
                                        2009                2008
                                              (In millions)

                 New orders         $         310       $         610
                 Net sales          $         345       $         595
                 Operating income   $          26       $         149

New orders decreased 49 percent to $310 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, due primarily to lower demand for spares and refurbished equipment, as customers reduced factory utilization to historically low levels.

Net sales decreased 42 percent to $345 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, reflecting lower sales primarily of spares and refurbished equipment.

Operating income decreased 83 percent to $26 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, reflecting lower revenue levels for spares and fab-wide services, higher manufacturing costs for refurbished equipment, and an increase in bad debt expense.

Display Segment

The Display segment encompasses products for manufacturing LCDs for TVs,
personal computers and other video-enabled devices. The business is focused on
expanding market share by differentiation with larger-scale substrates, entry
into new markets, and development of products to enable cost reductions through
productivity and uniformity.


                                           Three Months Ended
                                     January 25,         January 27,
                                        2009                2008
                                              (In millions)

                 New orders         $          26       $         555
                 Net sales          $         149       $         133
                 Operating income   $          26       $          34

New orders decreased 95 percent to $26 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. The decrease reflected the slowdown in the display industry as manufacturers cut production levels in response to weak end-use demand, following a period of strong equipment demand in fiscal 2008 when display manufacturers expanded capacity.

Net sales increased 12 percent to $149 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. The increase in net sales was attributable to the volume of orders received in fiscal 2008.

Operating income decreased 24 percent to $26 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, due to RD&E investment to develop new products.

Energy and Environmental Solutions Segment

The Energy and Environmental Solutions segment includes products for fabricating thin film and c-Si solar PVs, high throughput roll-to-roll coating systems for flexible electronics and web products, and systems used in the manufacture of energy-efficient glass. This business is focused on delivering solutions to generate and conserve energy, with an emphasis on lowering the cost to produce solar power by providing equipment to enhance manufacturing scale and efficiency.

                                          Three Months Ended
                                    January 25,         January 27,
                                       2009                2008
                                             (In millions)

                  New orders       $         321       $         260
                  Net sales        $         293       $         122
                  Operating loss   $          65       $          48

New orders increased 24 percent to $321 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, due to increased orders for SunFab tm and c-Si products. Net sales more than doubled to $293 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, reflecting an increase in revenue from c-Si and SunFab products. During the first quarter of fiscal 2009, Applied recognized revenue from the second and third SunFab Thin Film Lines.

The operating loss increased 35 percent to $65 million for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008, attributable to product mix and RD&E expenses, offset in part by higher net sales.

Financial Condition, Liquidity and Capital Resources

During the three months ended January 25, 2009, cash, cash equivalents and
investments decreased by $340 million, from $3.5 billion as of October 26, 2008.

Cash, cash equivalents and investments consisted of the following:


                                                    January 25,       October 26,
                                                       2009              2008
                                                            (In millions)

    Cash and cash equivalents                      $       1,366     $       1,412
    Short-term investments                                   551               689
    Long-term investments                                  1,211             1,367

    Total cash, cash equivalents and investments   $       3,128     $       3,468

Applied used $185 million of cash in operating activities for the three months ended January 25, 2009 primarily due to a decrease in accounts payable and accrued expenses, in addition to an increase in inventories. The net loss was offset by the effect of non-cash charges including restructuring and asset impairments, depreciation, amortization, provision for bad debts, and equity-based compensation. Applied sold accounts receivable and discounted certain letters of credit totaling $17 million for the three months ended January 25, 2009. Discounting of letters of credit depends on many factors, including the willingness of financial institutions to discount the letters of credit and the cost of such arrangements. For further details regarding discounting of letters of credit, see Note 4 of Notes to Consolidated Condensed Financial Statements. Days sales outstanding for the first quarter of fiscal 2009 increased to 87 days, compared to 75 days in the fourth quarter of fiscal 2008, primarily due to regional mix.

Applied generated $241 million of cash from investing activities during the three months ended January 25, 2009. Proceeds from sales and maturities of investments, net of purchases of investments, totaled $314 million. Capital expenditures were $73 million for the first quarter of fiscal 2009 and included investment in the implementation of a global business software system.

Applied used $102 million of cash for financing activities during the three months ended January 25, 2009, consisting primarily of $80 million in cash dividends paid to stockholders and $23 million in common stock

repurchases. Since November 2008, Applied has temporarily suspended stock repurchases in order to maintain financial flexibility in light of uncertain global economic and market conditions.

In December 2008, Applied's Board of Directors declared a quarterly cash dividend in the amount of $0.06 per share that will be paid on March 5, 2009 to stockholders of record as of February 12, 2009. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied's financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied's stockholders.

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.2 billion, of which $1.0 billion is comprised of a 5-year revolving credit agreement with a group of banks that is scheduled to expire in January 2012. The agreement provides for borrowings at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at January 25, 2009. No amounts were outstanding under this agreement at January 25, 2009. Of the remaining credit facilities, $170 million are with Japanese banks at rates indexed to their prime reference rate denominated in Japanese yen. (See Note 11 of Notes to Consolidated Condensed Financial Statements.)

In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either Applied or its subsidiaries. As of January 25, 2009, the maximum potential amount of future payments that Applied could be required to make under these guarantee arrangements was $128 million. Applied has not recorded any liability in connection with these guarantee arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements.

Applied expects that changes in its business will affect its working capital components, primarily related to its Energy and Environmental Solutions segment, which includes products for manufacturing solar PVs. Applied has entered into contracts with multiple customers for its SunFab Thin Film Line, for projects of varying scale. Fulfillment of these contracts requires Applied to invest in inventory, particularly work in process, and Applied may obtain customer deposits that reduce the associated effect on other working capital components.

Applied's investment portfolio consists principally of investment grade municipal bonds, money market mutual funds, U.S. Treasury and agency securities, corporate bonds, equity securities, and mortgage-backed and asset-backed securities. Applied regularly monitors the credit risk in its investment portfolio and takes appropriate measures, which may include the sale of certain securities, to manage such risks prudently in accordance with its investment . . .