The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in the risk factors described in Item 1A of this report and elsewhere in this report, contains forward-looking statements, which are provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will," "may," "should," "could," "expect," "suggest," "believe," "anticipate," "intend," "plan," or other similar words. Forward-looking statements include statements regarding (1) our gross margins and factors that affect gross margins; (2) trends in our future sales; (3) our research and development expenditures and efforts; (4) our capital expenditures;
(5) our provision for tax liabilities and other critical accounting estimates;
(6) our exposure to market risks related to changes in interest rates, equity prices and foreign currency exchange rates.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information that is currently available to us and expectations and assumptions that we deemed reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks described in Part II Item 1A of this report and those risks described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2008.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make judgments and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our management believes that we consistently apply these judgments and estimates and the condensed consolidated financial statements and accompanying notes fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our condensed consolidated statement of income and financial position. Critical accounting estimates, as defined by the Securities and Exchange Commission (SEC), are those that are most important to the portrayal of our consolidated financial condition and results of operations and require our management's most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition, (2) valuation of inventories,
(3) income taxes, and (4) stock-based compensation. For a discussion of our critical accounting estimates, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2008.

RESULTS OF OPERATIONS

Sales Overview

We design, manufacture, and market high-performance, high-density programmable logic devices, or PLDs; HardCopy® ASIC devices; pre-defined software design building blocks known as intellectual property cores, or IP cores; and associated development tools.

We classify our products into three categories: New, Mainstream, and Mature and Other Products. The composition of each product category is as follows:

• New Products include the Stratix® II (and GX), Stratix III, Stratix IV (and GX/GT), Arria®, Arria II GX®, Cyclone® II, Cyclone III, MAX ® II, HardCopy®, and HardCopy II devices;

• Mainstream Products include the Stratix (and GX), Cyclone, and MAX 3000A devices; and

• Mature and Other Products include the Classic™, MAX 7000, MAX 7000A, MAX 7000B, MAX 7000S, MAX 9000, FLEX® series, APEX™ series, Mercury™, Excalibur™, configuration and other devices, intellectual property cores, and software and other tools.

The product categories above have been constructed to approximate the relative life cycle stages of our products. The product categories' compositions are adjusted approximately every two to three years. New Products are primarily comprised of our most advanced products. Customers typically select these products for their latest generation of electronic systems. Demand is generally driven by prototyping and production needs. Mainstream Products are somewhat older products that are generally no longer design-win vehicles. Demand is driven by customers' later stage production-based needs. Mature Products are yet older products with demand generated by the oldest customer systems still in production. This category also includes sales of software, intellectual property, and other miscellaneous devices.

Our net sales of $279.2 million for the three months ended June 26, 2009 decreased by $80.7 million, or 22%, from our net sales of $359.9 million for the three months ended June 27, 2008. Our net sales of $543.8 million for the six months ended June 26, 2009 decreased by $152.1 million, or 22%, from our net sales of $695.9 million for the six months ended June 27, 2008. The year-over-year decrease in net sales was due to lower demand arising from the current worldwide economic downturn.

Net sales by product category were as follows:

                                              Three Months Ended                    Year-                             Six Months Ended             Year-
                                    June 26,       June 27,       March 27,       Over-Year       Sequential       June 26,       June 27,       Over-Year
                                      2009           2008           2009           Change           Change           2009           2008          Change
New                                       58 %           42 %            53 %             6 %             16 %           55 %           41 %             5 %
Mainstream                                21 %           27 %            24 %           -39 %             -6 %           23 %           27 %           -34 %
Mature and Other                          21 %           31 %            23 %           -47 %             -5 %           22 %           32 %           -46 %

Net Sales                                100 %          100 %           100 %           -22 %              6 %          100 %          100 %           -22 %

Sales by Market Segment

During 2009, we modified market segment classifications to more closely align with end customer products and product requirements. In addition, we refined our methodology for assigning net sales to market segments to better align distributor price discounts with end customer markets. Accordingly, prior year data has been adjusted to conform to the current year presentation. The following market segment data is derived from data that is provided to us by our distributors and end customers. With a broad base of customers, who in some cases manufacture end products spanning multiple market segments, the assignment of net sales to a market segment requires the use of estimates, judgment, and extrapolation. As such, actual results may differ from those reported.

                                                    Three Months Ended                    Year-                             Six Months Ended             Year-
                                          June 26,       June 27,       March 27,       Over-Year       Sequential       June 26,       June 27,       Over-Year
                                            2009           2008           2009           Change           Change           2009           2008          Change
Telecom & Wireless                              48 %           37 %            46 %             1 %             10 %           47 %           36 %             4 %
Industrial Automation, Military & Auto          21 %           22 %            21 %           -28 %              7 %           21 %           22 %           -27 %
Networking, Computer & Storage                  13 %           16 %            15 %           -39 %            -10 %           14 %           17 %           -36 %
Other                                           18 %           25 %            18 %           -42 %              7 %           18 %           25 %           -43 %

Net Sales                                      100 %          100 %           100 %           -22 %              6 %          100 %          100 %           -22 %

In the three and six months ended June 26, 2009, net sales in the Telecom & Wireless segment advanced versus the comparable periods in 2008, primarily as a result of strong sales to wireless equipment customers, including those targeting new 3G deployments in China. Net sales to end customers outside the Telecom & Wireless segment declined for the three and six months ended June 26, 2009 versus the comparable periods in 2008, primarily as a result of lower demand resulting from the current worldwide economic downturn.

Sales of FPGAs and CPLDs

Our PLDs consist of field-programmable gate arrays, or FPGAs, and complex programmable logic devices, or CPLDs. FPGAs consist of our Stratix, Cyclone, Arria, APEX, FLEX, and ACEX series, as well as our Excalibur and Mercury families. CPLDs consist of our MAX, MAX II, and Classic families. Our other products consist of HardCopy, HardCopy II and other masked programmed logic devices, configuration devices, software and other tools and IP cores (collectively, "Other Products").

Our net sales of FPGAs and CPLDs, and Other Products were as follows:

                                             Three Months Ended                    Year-                             Six Months Ended             Year-
                                   June 26,       June 27,       March 27,       Over-Year       Sequential       June 26,       June 27,       Over-Year
                                     2009           2008           2009           Change           Change           2009           2008          Change
FPGA                                     76 %           74 %            77 %           -20 %              4 %           76 %           74 %           -18 %
CPLD                                     16 %           18 %            14 %           -33 %             14 %           15 %           18 %           -37 %
Other Products                            8 %            8 %             9 %           -20 %              3 %            9 %            8 %           -20 %

Net Sales                               100 %          100 %           100 %           -22 %              6 %          100 %          100 %           -22 %

Sales by Geography

The following table is based on the geographic location of the original equipment manufacturers or the distributors who purchased our products. The geographic location of distributors may be different from the geographic location of the ultimate end users.

Net sales by geography were as follows:

                                             Three Months Ended                    Year-                             Six Months Ended             Year-
                                   June 26,       June 27,       March 27,       Over-Year       Sequential       June 26,       June 27,       Over-Year
                                     2009           2008           2009           Change           Change           2009           2008          Change
North America                            20 %           24 %            19 %           -37 %             13 %           19 %           24 %           -37 %
Asia Pacific                             43 %           35 %            38 %            -2 %             19 %           41 %           33 %            -4 %
Europe                                   21 %           23 %            24 %           -29 %             -6 %           23 %           23 %           -24 %
Japan                                    16 %           18 %            19 %           -34 %            -14 %           17 %           20 %           -32 %

Net Sales                               100 %          100 %           100 %           -22 %              6 %          100 %          100 %           -22 %

Price Concessions and Product Returns from Distributors

We sell each item in our product catalog to all of our distributors worldwide at a list price. However, distributors resell our products to end customers at a very broad range of individually negotiated prices based on a variety of factors, including customer, product, quantity, geography and competitive differentiation. The majority of our distributors' sales to their customers are priced at a discount from our list price. Under these circumstances, we remit back to the distributor a portion of its original purchase price after the resale transaction is completed and we validate the distributor's resale information, including end customer, device, quantity and price, against the distributor price concession that we have approved in advance. To receive price concessions, distributors must submit the price concession claims to us for approval within 60 days of the resale of the product to an end customer. Primarily because of the uncertainty related to the final price, we defer revenue recognition on sales to distributors until our products are sold from the distributor to the end customer, which is when our price is fixed or determinable. Accordingly, these pricing uncertainties impact our results of operations, liquidity and capital resources. Total price concessions paid to distributors were $1.6 billion and $2.0 billion for the six months ended June 26, 2009 and June 27, 2008, respectively. See Note 6 - Deferred Income and Allowances on Sales to Distributors to our condensed consolidated financial statements. Average aggregate price concessions typically range from 65% to 75% of our list price on an annual basis, depending upon the composition of our sales, volume and factors associated with timing of shipments to distributors or payment of price concessions.

Our distributors have certain rights under our contracts to return defective, overstocked, obsolete and discontinued products. Our stock rotation program generally allows distributors to return unsold product to Altera, subject to certain contract limits, based on a percentage of sales occurring over various periods prior to the stock rotation. Products resold by the distributor to end customers are no longer eligible for return, unless specifically authorized by us. In addition, we generally warrant our products against defects in material, workmanship and non-conformance to our specifications. Returns from distributors totaled $109.5 million and $57.9 million for the six months ended June 26, 2009 and June 27, 2008, respectively. See Note 6 - Deferred Income and Allowances on Sales to Distributors and Note 10 - Commitments and Contingencies to our condensed consolidated financial statements.

Gross Margin



                                   Three Months Ended                   Six Months Ended
                          June 26,      June 27,      March 27,      June 26,      June 27,
                            2009          2008          2009           2009          2008
Gross Margin Percentage       66.5 %        67.1 %         64.5 %        65.5 %        66.1 %

Our gross margin percentage increased by 2.0 points during the three months ended June 26, 2009 from 64.5% for the three months ended March 27, 2009, primarily as a result of manufacturing cost reductions and efficiencies on certain of our new products. Our gross margin percentage decreased by 0.6 points for each of the three and six months ended June 26, 2009 compared with the same periods in 2008. Gross margin rates are heavily influenced by both market segment mix and the timing of material cost improvements. In addition, our gross margin percentage in the three and six months ended June 26, 2009 was adversely affected by a disproportionate decrease in revenue from our smaller, higher margin customer base, compared with the same periods in 2008. We also experienced a more pronounced decline in our highest margin market segments. While these variables will continue to fluctuate on a quarterly basis, we continue to target a 65% gross margin over the long term. We believe the 65% gross margin target affords us the right mix of growth opportunities across all served markets.

Stock-based compensation expense included in Cost of sales during the three and six months ended June 26, 2009 and June 27, 2008 did not have a significant impact on our gross margin.

Research and Development Expense

Research and development expense includes costs for compensation and benefits (including stock-based compensation), development masks, prototype wafers, and depreciation and amortization. These expenditures are for the design of new PLD and ASIC families, the development of process technologies, new package technology, software to support new products and design environments, and IP cores.

We will continue to make significant investments in the development of new products and focus our efforts on the development of new programmable logic devices that use advanced semiconductor wafer fabrication processes, as well as related development software. We are currently investing in the development of future silicon products, as well as our Quartus ® II software, our library of IP cores, and other future products.

                                                   Three Months Ended                         Year-                                  Six Months Ended                 Year-
                                      June 26,          June 27,          March 27,         Over-Year        Sequential         June 26,           June 27,         Over-Year
(In millions)                           2009              2008              2009             Change            Change             2009               2008            Change
Research and Development Expense     $     65.0        $     63.6        $      58.2                2 %              12 %      $     123.2        $    124.8               -1 %
Percentage of Net Sales                    23.3 %            17.7 %             22.0 %                                                22.6 %            17.9 %

Research and development expense for the three months ended June 26, 2009 increased by $1.4 million, or 2%, when compared to the three months ended June 27, 2008. The increase was primarily due to a $9.3 million increase in spending on masks and wafers as a result of tape-outs of various new products during the three months ended June 26, 2009, substantially offset by a $3.0 million decrease in variable compensation expense based on lower 2009 operating results, a $3.8 million decrease in spending on prototype and package tooling and a $0.7 million decrease in rental expense.

Research and development expense for the six months ended June 26, 2009 decreased by $1.6 million, or 1%, when compared to the six months ended June 27, 2008. The decrease was primarily due to a gain of $3.6 million from the substantive termination of our retiree medical plan, a $6.0 million decrease in variable compensation expense based on lower 2009 operating results, a $3.0 million decrease in spending on prototype and package tooling and a total of $2.0 million decrease in rental, travel and consulting expenses. These decreases were substantially offset by a $12.8 million increase in spending on masks and wafers as a result of tape-outs of various new products in 2009 and a $1.3 million increase in stock-based compensation expense. See Note 13 - Employee Benefit Plans to our condensed consolidated financial statements for a detailed discussion of the substantive termination of our retiree medical plan.

Selling, General, and Administrative Expense

Selling, general, and administrative expense primarily includes compensation and
benefits (including stock-based compensation) related to sales, marketing, and
administrative employees, commissions and incentives, depreciation, legal,
advertising, facilities, and travel expenses.




                                                    Three Months Ended                         Year-                                  Six Months Ended                 Year-
                                       June 26,          June 27,          March 27,         Over-Year        Sequential         June 26,           June 27,         Over-Year
(In millions)                            2009              2008              2009             Change            Change             2009               2008            Change
Selling, General and
Administrative Expense                $     53.7        $     64.2        $      60.7              -16 %             -12 %      $     114.3        $    127.3              -10 %
Percentage of Net Sales                     19.2 %            17.8 %             22.9 %                                                21.0 %            18.3 %

Selling, general, and administrative expense for the three months ended June 26, 2009 decreased by $10.5 million, or 16%, when compared to the three months ended June 27, 2008. The decrease was primarily due to a $1.1 million decrease in labor costs as a result of cost savings from our restructuring plan implemented during the three months ended March 27, 2009, a $3.0 million decrease in variable compensation expense based on lower 2009 operating results, a $5.1 million decrease in commission expenses due to the lower sales for the three months ended June 26, 2009 and a total of $3.0 million decrease in rental, travel and advertising expenses due to our ongoing efforts to improve operating efficiency. These decreases were partially offset by a $2.4 million increase in stock-based compensation expense.

Selling, general, and administrative expense for the six months ended June 26, 2009 decreased by $13.0 million, or 10%, when compared to the six months ended June 27, 2008. The decrease was primarily due to a gain of $2.6 million from the substantive termination of our retiree medical plan, a $6.0 million decrease in variable compensation expense based on lower 2009 operating results, a $4.8 million decrease in commission expenses due to the lower sales for the six months ended June 26, 2009 and a total of $7.3 million decrease in recruiting, rental, travel, advertising and legal expenses due to our ongoing efforts to improve operating efficiency. These decreases were partially offset by a $5.0 million restructuring charge incurred in the three months ended March 27, 2009 and a $4.6 million increase in stock-based compensation expense. See Note 13 - Employee Benefit Plans to our condensed consolidated financial statements for a detailed discussion of the substantive termination of our retiree medical plan and Note 14 - Restructuring Charges for further information about our restructuring activities during the six months ended June 26, 2009.

Deferred Compensation Plan

We allow our U.S.-based officers and director-level employees to defer a portion of their compensation under the Altera Corporation Non-Qualified Deferred Compensation Plan ("NQDC Plan"). Since the inception of the NQDC Plan, we have not made any contributions to the NQDC Plan and we have no commitments to do so in the future. There are no NQDC Plan provisions that provide for any guarantees or minimum return on investments. Investment income or loss earned by the NQDC Plan is recorded as Loss (gain) on deferred compensation plan securities in our condensed consolidated statements of income. We reported a net investment gain of $3.6 million on NQDC Plan assets for each of the three and six months ended June 26, 2009. For the three and six months ended June 27, 2008, we reported a net investment gain of $0.3 million and a net investment loss of $4.7 million on NQDC Plan assets, respectively. These amounts resulted from the overall market performance of the underlying securities. The investment loss (gain) also represents a decrease (increase) in the future payout to employees and is recorded as Compensation expense (benefit) - deferred compensation plan in our condensed consolidated statements of income. The compensation expense (benefit) associated with our deferred compensation plan obligations is offset by losses
(gains) from related securities. The net effect of the investment income or loss and related compensation expense or benefit has no impact on our income before income taxes, net income, or cash balances. See Note 13 - Employee Benefit Plans to our condensed consolidated financial statements for a detailed discussion of our NQDC Plan.

Interest Income and Other

Interest income and other decreased by $5.8 million and $11.6 million for the three and six months ended June 26, 2009 when compared to the same periods in 2008, respectively. Interest income and other consists mainly of interest income generated from investments in high-quality fixed income securities. The decrease in Interest income and other was primarily due to a decrease in interest income as a result of lower returns on our money market funds.

Interest Expense

Interest expense decreased by $2.6 million and $4.4 million for the three and six months ended June 26, 2009 when compared to the same periods in 2008, respectively. The year-over-year decrease in Interest expense was due primarily to the decrease in borrowing costs under our long term credit facility. The decrease in borrowing costs primarily reflects a significant reduction in LIBOR rates, which represents the principal basis of our interest rate. The impact of lower LIBOR rates was partially offset by higher weighted average outstanding borrowings in the six months ended June 26, 2009. See Note 9 - Long-term Credit Facility to our condensed consolidated financial statements.

Income Tax Expense

Our effective tax rate for the three months ended June 26, 2009 was 29.6%, compared with 16.5% for the three months ended June 27, 2008. The significant . . .