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. Credit constraints in the financial markets and the weak global economy are compounding the impact of the highly cyclical markets in which Applied operates.

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

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

New orders                        $        1,072            $        2,030                (47 )%       $        2,624         $        6,943                (62 )%
Net sales                         $        1,134            $        1,848                (39 )%       $        3,487         $        6,086                (43 )%
Gross margin                      $          325            $          742                (56 )%       $          872         $        2,644                (67 )%
Gross margin percent                        28.7 %                    40.2 %       (12 points )                  25.0 %                 43.4 %       (18 points )
Net income (loss)                 $          (55 )          $          165               (133 )%       $         (443 )       $          730               (161 )%
Earnings (loss) per share         $        (0.04 )          $         0.12               (134 )%       $        (0.33 )       $         0.53               (163 )%

Applied incurred net losses for the three and nine months ended July 26, 2009. Negative trends in consumer spending and pervasive economic uncertainty led some customers to significantly reduce factory operations and to reduce their spending during the first half of fiscal 2009, which severely impacted demand for manufacturing equipment and services. In the third quarter of fiscal 2009, demand for semiconductor and display equipment increased, but was still down significantly from fiscal 2008 levels. Net sales remained relatively flat across the first three quarters of fiscal 2009 and were also down significantly from fiscal 2008 levels. While Applied began to see positive trends in its business in the third quarter of fiscal 2009, a meaningful improvement in the equipment sector will depend on a sustainable recovery in customers' end markets to support factories running at higher utilization and to encourage customers' 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 limited. Applied currently anticipates that orders and net sales will increase in the fourth quarter of fiscal 2009 from the third quarter of fiscal 2009 but will be lower overall for the full fiscal year as compared to fiscal 2008.

Results of Operations

Applied received new orders of $1.1 billion for the third quarter of fiscal 2009, down 47 percent from the third quarter of fiscal 2008. The decrease in new orders was across all segments and reflected the challenging economic and industry conditions. New orders of $2.6 billion for the first nine months of fiscal 2009 were down 62 percent from the first nine months of fiscal 2008. The decrease was primarily attributable to reduced 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 nine months ended July 26, 2009 and July 27, 2008 were as follows:

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

Southeast Asia and China                   269         25          338         17          435         17        1,047         15
Taiwan                                     261         24          203         10          407         15        1,536         22
Japan                                      151         14          425         21          407         15        1,022         15
North America(*)                           147         14          393         19          511         20        1,189         17
Europe                                     130         12          319         16          601         23          897         13
Korea                                      114         11          352         17          263         10        1,252         18

Total                                    1,072        100        2,030        100        2,624        100        6,943        100

* Primarily the United States.

Applied's backlog for the most recent three fiscal quarters was as follows:
$3.0 billion at July 26, 2009, $3.2 billion at April 26, 2009, and $4.1 billion at January 25, 2009. Backlog decreased 6 percent for the third quarter of fiscal 2009 compared to the second quarter of fiscal 2009, primarily due to customer cancellations which totaled $146 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 $1.1 billion for the third quarter of fiscal 2009 decreased 39 percent from the third quarter of fiscal 2008 due to decreased demand for semiconductor equipment and services, partially offset by increased sales of solar manufacturing equipment. Net sales of $3.5 billion for the first nine months of fiscal 2009 decreased 43 percent from the first nine months of fiscal 2008. Net sales for the first nine months of fiscal 2009 reflected

significantly lower sales of equipment and services to semiconductor and display customers, partially offset by increased sales of solar manufacturing equipment.

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

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

Taiwan                                     393         35          316         17          699         20        1,451         24
Europe                                     174         15          204         11          603         17          585         10
Southeast Asia and China                   169         15          442         24          539         16        1,020         17
North America(*)                           139         12          276         15          733         21        1,106         18
Japan                                      130         12          262         14          501         14          943         15
Korea                                      129         11          348         19          412         12          981         16

Total                                    1,134        100        1,848        100        3,487        100        6,086        100

* Primarily the United States.

Gross margin was 28.7 percent for the third quarter of fiscal 2009, down from 40.2 percent for the third quarter of fiscal 2008. Gross margin was 25.0 percent for the first nine months of fiscal 2009, down from 43.4 percent for the first nine months of fiscal 2008. The decrease in the gross margin percentage for the three and nine months ended July 26, 2009 was due to lower net sales, lower-margin product mix, and reduced factory absorption, offset in part by cost control initiatives. The decrease in gross margin percentage for the nine months ended July 26, 2009 was also due to inventory-related charges of $67 million resulting from lower than anticipated demand. Gross margin during the third quarter of both fiscal 2009 and 2008 included $9 million of equity-based compensation expense. Gross margin during the first nine months of both fiscal 2009 and 2008 included $23 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 $402 million for the third quarter of fiscal 2009, down from $514 million for the third quarter of fiscal 2008. RD&E and M&S expenses decreased 18 percent to $314 million for the third quarter of fiscal 2009. G&A expenses decreased 32 percent to $88 million for the third quarter of fiscal 2009. The decrease in RD&E, M&S and G&A for the third quarter of fiscal 2009 was due to cost control initiatives, including headcount reductions, multi-week shutdowns and lower controllable spending.

Expenses related to RD&E, M&S and G&A totaled $1.3 billion for the first nine months of fiscal 2009 compared to $1.6 billion for the first nine months of fiscal 2008. RD&E and M&S expenses decreased 20 percent to $948 million for the first nine months of fiscal 2009 due to cost control initiatives. G&A expenses decreased 10 percent to $331 million for the first nine months of fiscal 2009, primarily due to cost control initiatives, partially offset by a bad debt provision of $63 million.

Operating expenses for the first nine 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 nine months of fiscal 2008 included restructuring charges of $50 million, principally 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 three months ended July 26, 2009 Applied recognized $2 million in impairment charges associated with certain strategic investments. During the first nine months of fiscal 2009, Applied recognized $79 million in impairment charges, consisting of $45 million associated with its equity method investment in Sokudo, a Japanese joint venture company, and $34 million in impairment charges associated with certain strategic investments.

Net interest income was $5 million for the third quarter of fiscal 2009, down from $21 million for the third quarter of fiscal 2008. Net interest income was $21 million for the first nine months of fiscal 2009, down from $73 million for the first nine months of fiscal 2008. Lower net interest income for the three and nine months ended July 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 third quarter of fiscal 2009 was a benefit of 26.0 percent as compared to a provision of 32.1 percent for the third quarter of fiscal 2008. Applied's effective income tax rate for the first nine months of fiscal 2009 was a benefit of 32.8 percent as compared to a provision of 32.8 percent for the first nine months of fiscal 2008. The change in the fiscal 2009 tax rate from the fiscal 2008 rate was principally attributable to the net loss before taxes incurred in fiscal 2009. 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 15 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              Nine Months Ended
                                July 26,         July 27,       July 26,       July 27,
                                  2009             2008           2009           2008
                                      (In millions)                  (In millions)

     New orders                $      542       $      793     $    1,047     $    2,929
     Net sales                        498              756          1,304          3,261
     Operating income (loss)           56              172             (6 )        1,065

New orders were down 32 percent to $542 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, and decreased 64 percent to $1.0 billion for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decline in orders for the three and nine months ended July 26, 2009 reflected lower demand, primarily from memory customers.

Net sales decreased 34 percent to $498 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, and decreased 60 percent to $1.3 billion for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decrease in net sales for the three and nine months ended July 26, 2009 was due to decreased investments, primarily by memory customers.

Operating income decreased 67 percent to $56 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. For the first nine months of fiscal 2009, the Silicon segment reported an operating loss of $6 million compared to operating income of $1.1 billion for the first nine months of fiscal 2008. The decrease in operating income for the three and nine months ended July 26, 2009 was due to significantly lower sales resulting in

lower factory absorption, partially offset by lower operating expenses from cost control initiatives. Operating income for the first nine months of fiscal 2009 also included an increase in bad debt expense.

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              Nine Months Ended
                             July 26,         July 27,       July 26,       July 27,
                               2009             2008           2009           2008
                                   (In millions)                  (In millions)

         New orders         $      298       $      541     $      844     $    1,753
         Net sales                 343              607          1,007          1,801
         Operating income           24              145             48            452

New orders decreased 45 percent to $298 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, and decreased 52 percent to $844 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decline in orders for the three and nine months ended July 26, 2009 was primarily due to decreased demand for spares and refurbished equipment reflecting semiconductor manufacturers' lower wafer production volumes.

Net sales decreased 44 percent to $343 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, and similarly decreased 44 percent to $1.0 billion for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decrease in net sales for the three and nine months ended July 26, 2009 reflected lower sales of spares and refurbished equipment.

Operating income decreased 83 percent to $24 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. Operating income decreased 89 percent to $48 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decrease in operating income for the three and nine months ended July 26, 2009 reflected lower sales volumes resulting in lower infrastructure cost absorption, partially offset by lower operating expenses from cost control initiatives. Operating income for the first nine months of fiscal 2009 also included 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              Nine Months Ended
                                July 26,         July 27,      July 26,         July 27,
                                  2009             2008          2009             2008
                                      (In millions)                  (In millions)

     New orders                $        96       $     374     $     135       $    1,422
     Net sales                          69             311           302              642
     Operating income (loss)            (5 )           103            22              197

New orders decreased 74 percent to $96 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, and decreased 91 percent to $135 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decline in orders for the three and nine months ended July 26, 2009 reflected the slowdown in the display industry from comparable 2008 periods when display manufacturers added capacity.

Net sales decreased 78 percent to $69 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, and decreased 53 percent to $302 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decrease in net sales for the three and nine months ended July 26, 2009 reflected lower orders.

The Display segment reported an operating loss of $5 million for the third quarter of fiscal 2009 compared to operating income of $103 million for the third quarter of fiscal 2008. Operating income decreased 89 percent to $22 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decrease in operating income for the three and nine months ended July 26, 2009 was due to significantly lower revenue, partially offset by lower operating expenses due to cost control initiatives.

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.

                                   Three Months Ended              Nine Months Ended
                                July 26,         July 27,      July 26,         July 27,
                                  2009             2008          2009             2008
                                      (In millions)                  (In millions)

     New orders                $      136       $      322     $     598       $      839
     Net sales                        224              174           874              382
     Operating income (loss)          (53 )            (85 )        (211 )           (204 )

New orders decreased 58 percent to $136 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, and decreased 29 percent to $598 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decline in orders for the three and nine months ended July 26, 2009 was primarily due to decreased demand from SunFab customers and reflected the challenging global economic environment and solar manufacturers' difficulties in obtaining affordable capital.

Net sales increased 29 percent to $224 million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, and more than doubled to $874 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The increase in net sales for the three and nine months ended July 26, 2009 reflected an increase in sales recognized for SunFab and c-Si products. During the third quarter of fiscal 2009, Applied recognized revenue on its sixth SunFab thin film production line.

The operating loss in the Energy and Environmental Solutions segment decreased . . .