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 or 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, investment portfolio and policies 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 historically have been 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 net losses for the three and six months ended April 26, 2009, and management expects that industry conditions will remain extremely challenging for the remainder of fiscal 2009. Credit constraints in the financial markets and the weak global economy are compounding the impact of the highly cyclical markets in which Applied operates. Negative trends in consumer spending and pervasive economic uncertainty led some customers to significantly reduce factory operations and to reduce their projected spending plans during the first half of fiscal 2009, which severely impacted demand for manufacturing equipment and services. Factory utilization rates among a number of semiconductor and display manufacturers began to increase in the second quarter of fiscal 2009. However, a meaningful improvement in the equipment sector will depend on a sustainable recovery in customers' end markets that can keep factories running at higher utilization and encourage investments in new capacity, as well as advanced technologies. In this uncertain macroeconomic and industry climate, Applied's ability to forecast customer demand and the Company's future performance is extremely limited. Applied currently expects that orders and net sales will be down overall in fiscal 2009.

The following table presents certain significant measurements for the three and six months ended April 26, 2009 and April 27, 2008:

                                      Three Months Ended                                          Six Months Ended
                                 April 26,          April 27,                               April 26,          April 27,
                                   2009               2008             % Change                2009              2008             % Change
                                                          (In millions, except per share amounts and percentages)

New orders                      $       649        $     2,414                (73 )%       $      1,552       $     4,914                (68 )%
Net sales                       $     1,020        $     2,150                (53 )%       $      2,353       $     4,237                (44 )%
Gross margin                    $       156        $       967                (84 )%       $        547       $     1,902                (71 )%
Gross margin percent                   15.2 %             45.0 %       (30 points )                23.2 %            44.9 %       (22 points )
Net income (loss)               $      (255 )      $       303               (184 )%       $       (388 )     $       565               (169 )%
Earnings (loss) per share       $     (0.19 )      $      0.22               (186 )%       $      (0.29 )     $      0.41               (171 )%

Financial results for the second quarter of fiscal 2009 reflected significantly reduced demand for manufacturing equipment and services due to unfavorable global economic and industry conditions. Total orders decreased significantly from the second quarter of fiscal 2008, primarily due to reduced demand for semiconductor and display products and services. Lower demand resulted in lower sales and gross margin. Net sales decreased during the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008, due to reduced demand for semiconductor equipment and services, partially offset by increased sales of solar manufacturing products. In addition, Applied recorded certain pre-tax charges of $166 million during the second quarter of fiscal 2009 that were associated with the poor economic and industry environment. These pre-tax charges consisted of equity investment impairments of: $77 million related to Applied's equity method investment in Sokudo Co., Ltd. (Sokudo) and other strategic investments; additional inventory-related charges of $47 million; restructuring and asset impairment charges of $27 million; and bad debt provisions of $15 million.

Financial results for the first six months of fiscal 2009 similarly reflected significantly reduced demand for manufacturing equipment and services due to poor economic and industry conditions. Total orders decreased significantly from the first six months of fiscal 2008, primarily due to reduced demand for semiconductor and display products and services. Net sales decreased during the first six months of fiscal 2009 compared to the first six months 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 six months of fiscal 2009 also reflected lower net sales and included restructuring charges of $145 million associated with a restructuring program announced on November 12, 2008; an impairment of equity method investment and other strategic investments of $77 million; inventory-related charges of $67 million; and bad debt provisions of $63 million.

Results of Operations

Applied received new orders of $649 million for the second quarter of fiscal 2009, down 73 percent from the second quarter of fiscal 2008. The decrease in new orders was across all segments and was primarily attributable to a decline in demand for equipment and services from semiconductor customers and lower demand by LCD equipment customers. New orders of $1.6 billion for the first six months of fiscal 2009 were down 68 percent from the first six months of fiscal 2008. The decrease in new orders for the first six months of fiscal 2009 was primarily attributable to declines in demand for equipment and services from semiconductor customers and decreased demand for LCD equipment.

New orders by geographic region (determined by the location of customers' facilities) for the three and six months ended April 26, 2009 and April 27, 2008 were as follows:

                                     Three Months Ended                          Six Months Ended
                               April 26,            April 27,             April 26,             April 27,
                                 2009                 2008                  2009                  2008
                             ($)       (%)        ($)        (%)        ($)        (%)        ($)        (%)
                                                    (In millions, except percentages)

 North America*               128        20         291        12         365        24         797        16
 Taiwan                       127        19         538        22         146         9       1,333        27
 Europe                       124        19         300        13         471        30         578        12
 Japan                        101        16         305        13         255        16         597        12
 Southeast Asia and China      86        13         442        18         166        11         709        15
 Korea                         83        13         538        22         149        10         900        18

 Total                        649       100       2,414       100       1,552       100       4,914       100

* Primarily the United States.

Applied's backlog for the most recent three fiscal quarters was as follows:
$3.2 billion at April 26, 2009, $4.1 billion at January 25, 2009, and $4.8 billion at October 26, 2008. Backlog decreased 22 percent for the second quarter of 2009 compared to the first quarter of fiscal 2009, primarily due to financial debookings and cancellations. Financial debookings, which result from order push-outs beyond Applied's 12 month recognition window, totaled $307 million for the second quarter of fiscal 2009. Cancellations for the second quarter of fiscal 2009 totaled $202 million. 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 SunFabtm thin film solar 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 and order cancellations, Applied's backlog at any particular time is not necessarily indicative of actual sales for any future periods.

Net sales of $1.0 billion for the second quarter of fiscal 2009 decreased 53 percent from the second quarter of fiscal 2008. Net sales of $2.4 billion for the first six months of fiscal 2009 decreased 44 percent from the first six months of fiscal 2008. Net sales for the first half of fiscal 2009 reflected significantly lower sales of equipment and services to semiconductor and display customers, partially offset by increased sales of solar manufacturing products.

Net sales by geographic region (determined by the location of customers' facilities) for the three and six months ended April 26, 2009 and April 27, 2008 were as follows:

                                                   Three Months Ended                               Six Months Ended
                                           April 26,               April 27,               April 26,               April 27,
                                              2009                    2008                    2009                    2008
                                         ($)         (%)         ($)         (%)         ($)         (%)         ($)         (%)
                                                                   (In millions, except percentages)

North America*                             212         21          341         16          594         25          829         20
Europe                                     231         23          165          8          429         18          381          9
Southeast Asia and China                   164         16          332         15          370         16          578         13
Taiwan                                     162         16          519         24          306         13        1,135         27
Japan                                      155         15          363         17          371         16          681         16
Korea                                       96          9          430         20          283         12          633         15

Total                                    1,020        100        2,150        100        2,353        100        4,237        100

* Primarily the United States.

Gross margin was 15.2 percent for the second quarter of fiscal 2009, down from 45.0 percent for the second quarter of fiscal 2008. The decrease in the gross margin percentage was due to lower net sales, lower-margin product mix, reduced factory absorption due to lower build volumes, and inventory charges. Gross margin during the second quarter of each of fiscal 2009 and 2008 included $8 million of equity-based compensation expense.

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 totaled of $422 million for the second quarter of fiscal 2009, compared to $529 million for the second quarter of fiscal 2008. G&A expenses decreased 17 percent to $101 million for the second quarter of fiscal 2009, primarily due to lower controllable spending, which was partially offset by a provision for doubtful accounts receivable of $15 million. RD&E and M&S expenses decreased 21 percent to $321 million for the second quarter of fiscal 2009 due to cost control initiatives (including multi-week shutdowns) and lower headcount.

Expenses related to RD&E, M&S and G&A totaled $877 million for the first six months of fiscal 2009 compared to $1 billion for the first six months of fiscal 2008. G&A expenses increased 2 percent to $242 million for the first six months of fiscal 2009, primarily due to a bad debt provision of $63 million, partially offset by lower controllable spending. RD&E and M&S expenses decreased 21 percent to $635 million for the first six months of fiscal 2009 due to cost control initiatives (including multi-week shutdowns) and lower headcount.

Operating expenses for the second quarter of fiscal 2009 included fixed asset impairment charges of $15 million related to certain equipment to be sold, and restructuring charges of $12 million primarily associated with the program announced on November 12, 2008. Operating expenses for the second quarter of fiscal 2008 included restructuring and asset impairment charges of $0.5 million.

Operating expenses for the first six months of fiscal 2009 included restructuring charges of $145 million, primarily associated with the restructuring program announced on November 12, 2008, and asset impairment charges of $15 million related to certain fixed assets to be sold. Operating expenses for the first six months of fiscal 2008 included restructuring charges of $50 million associated with a global cost reduction plan and ceasing development of beamline implant products. (See Note 10 of Notes to Consolidated Condensed Financial Statements.)

During the second quarter of fiscal 2009, Applied recognized $77 million in impairment charges, consisting of $45 million associated with its equity method investment in Sokudo, a Japanese joint venture company, and $32 million in impairment charges associated with certain strategic investments.

Net interest income was $7 million for the second quarter of fiscal 2009, down from $26 million for the second quarter of fiscal 2008. Net interest income was $16 million for the first six months of fiscal 2009, down from $52 million for the first six months of fiscal 2008. Lower net interest income for the three and six months ended April 26, 2009 was primarily due to a reduction in the average short term investment balance, a decrease in interest rates, and an increase in net realized losses.

Applied's effective income tax rate for the second quarter of fiscal 2009 was a benefit of 33.3 percent and included the effect of impairment and restructuring charges. Applied's effective income tax rate was a provision of 33.4 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 effective income tax rate accordingly.

Segment Information

Applied reports financial results in four 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 16 of Notes to Consolidated Condensed Financial Statements. Applied does not allocate to its reportable segments certain operating expenses that 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. Applied also does not allocate to its reportable segments restructuring and asset impairment charges or costs 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                 Six Months Ended
                              April 26,         April 27,      April 26,         April 27,
                                2009              2008            2009             2008
                                                     (In millions)

   New orders                $       259       $     1,061     $      505       $     2,137
   Net sales                         260             1,268            806             2,505
   Operating income (loss)           (96 )             448            (62 )             893

New orders were down 76 percent to $259 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008, and similarly decreased 76 percent to $505 million for the first six months of fiscal 2009 compared to the first six months of fiscal 2008. The decline in orders for the three and six months ended April 26, 2009 primarily reflected low demand from memory customers.

Net sales decreased 79 percent to $260 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. Net sales decreased 68 percent to $806 million for the first six months of fiscal 2009 compared to the first six months of fiscal 2008. The decrease in net sales for the three and six months ended April 26, 2009 was primarily due to decreased investment by memory customers. More than half of net sales in the Silicon segment during the second quarter of fiscal 2009 were attributable to three customers who are moving to new technology nodes for manufacturing chips.

For the second quarter of fiscal 2009, the Silicon segment reported an operating loss of $96 million compared to operating income of $448 million in the second quarter of fiscal 2008. For the first six months of fiscal 2009, the operating loss was $62 million compared to operating income of $893 million for the first six months of fiscal 2008. The decrease in operating income for the three and six months ended April 26, 2009 was due to significantly lower sales resulting in lower factory absorption, and an increase in bad debt expense, partially offset by lower operating expenses from cost control initiatives, including headcount reductions, multi-week shutdowns 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                Six Months Ended
                              April 26,        April 27,      April 26,         April 27,
                                 2009             2008           2009             2008
                                                     (In millions)

    New orders                $      236       $      602     $      546       $     1,212
    Net sales                        319              599            664             1,194
    Operating income (loss)           (1 )            159             25               307

New orders decreased 61 percent to $236 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. New orders decreased 55 percent to $546 million for the first six months of fiscal 2009

compared to the first six months of fiscal 2008. The decline in orders for the three and six months ended April 26, 2009 was primarily from lower demand for spares and refurbished equipment as customers' factory utilization reached historically low levels.

Net sales decreased 47 percent to $319 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. Net sales decreased 44 percent to $664 million for the first six months of fiscal 2009 compared to the first six months of fiscal 2008. The decrease in net sales for the three and six months ended April 26, 2009 reflected lower sales of spares and refurbished equipment, although the spares volumes showed improvement in the latter half of the second quarter of fiscal 2009.

For the second quarter of fiscal 2009, the Applied Global Services segment incurred an operating loss of $1 million compared to operating income of $159 million in the second quarter of fiscal 2008. Operating income decreased 92 percent to $25 million for the first six months of fiscal 2009 compared to the first six months of fiscal 2008. The decrease in operating income for the three and six months ended April 26, 2009 reflected lower sales volumes, higher manufacturing costs, 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
growth 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                Six Months Ended
                              April 26,        April 27,      April 26,         April 27,
                                 2009             2008           2009             2008
                                                     (In millions)

    New orders                $       13       $      493     $       39       $     1,048
    Net sales                         84              198            233               331
    Operating income (loss)            1               59             27                94

New orders decreased 97 percent to $13 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. New orders decreased 96 percent to $39 million for the first six months of fiscal 2009 compared to the first six months of fiscal 2008. The decline in orders for the three and six months ended April 26, 2009 reflected the slowdown in the display industry from comparable 2008 periods when display manufacturers added capacity.

Net sales decreased 58 percent to $84 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. Net sales decreased 30 percent to $233 million for the first six months of fiscal 2009 compared to the first six months of fiscal 2008. The decrease in net sales for the three and six months ended April 26, 2009 reflected lower orders.

Operating income decreased 98 percent to $1 million for the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. Operating income decreased 71 percent to $27 million for the first six months of fiscal 2009 compared to the first six months of fiscal 2008. The decrease in operating income for the three and six months ended April 26, 2009 was due to significantly lower revenue, partially offset by lower operating expenses due to cost control initiatives, including headcount reductions, multi-week shutdowns and lower controllable spending.

Energy and Environmental Solutions Segment

The Energy and Environmental Solutions segment includes products for fabricating thin film and crystalline silicon (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.

. . .