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; and (7) savings from restructuring activities.

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 statements 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.

Our net sales of $286.6 million for the three months ended September 25, 2009 decreased by $70.2 million, or 20%, from our net sales of $356.8 million for the three months ended September 26, 2008. Our net sales of $830.4 million for the nine months ended September 25, 2009 decreased by $222.3 million, or 21%, from our net sales of $1,052.7 million for the nine months ended September 26, 2008. The year-over-year decrease in net sales was due to lower demand arising from the current worldwide economic downturn.

Sales by Product Category

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 (including E, GX and 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.

Net sales by product category were as follows:

                                                 Three Months Ended                            Year-                                       Nine Months Ended                    Year-
                                September 25,         September 26,         June 26,         Over-Year         Sequential         September 25,         September 26,         Over-Year
                                    2009                  2008                2009            Change             Change               2009                  2008               Change
New                                        60 %                  46 %             58 %               5 %                7 %                  57 %                  43 %               5 %
Mainstream                                 20 %                  25 %             21 %             -36 %               -5 %                  22 %                  26 %             -35 %
Mature and Other                           20 %                  29 %             21 %             -45 %               -2 %                  21 %                  31 %             -45 %

Net Sales                                 100 %                 100 %            100 %             -20 %                3 %                 100 %                 100 %             -21 %

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-                                       Nine Months Ended                    Year-
                                 September 25,         September 26,         June 26,         Over-Year         Sequential         September 25,         September 26,         Over-Year
                                     2009                  2008                2009            Change             Change               2009                  2008               Change
Telecom & Wireless                          40 %                  38 %             48 %             -16 %              -15 %                  44 %                  37 %              -3 %
Industrial Automation,
Military & Auto                             23 %                  25 %             21 %             -23 %               16 %                  22 %                  23 %             -26 %
Networking, Computer &
Storage                                     16 %                  14 %             13 %             -11 %               27 %                  15 %                  16 %             -29 %
Other                                       21 %                  23 %             18 %             -28 %               16 %                  19 %                  24 %             -38 %

Net Sales                                  100 %                 100 %            100 %             -20 %                3 %                 100 %                 100 %             -21 %

Due to the current worldwide economic downturn, net sales in all segments declined for the three and nine months ended September 25, 2009 compared with the same periods in 2008. However, net sales to end customers outside the Telecom & Wireless segment improved for the quarter ended September 25, 2009 versus the quarter ended June 26, 2009, primarily as a result of improved business conditions in the third quarter.

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-                                       Nine Months Ended                    Year-
                               September 25,         September 26,         June 26,         Over-Year         Sequential         September 25,         September 26,         Over-Year
                                   2009                  2008                2009            Change             Change               2009                  2008               Change
FPGA                                      77 %                  75 %             76 %             -17 %                4 %                  77 %                  74 %             -18 %
CPLD                                      15 %                  17 %             16 %             -30 %                0 %                  15 %                  18 %             -34 %
Other Products                             8 %                   8 %              8 %             -25 %               -7 %                   8 %                   8 %             -22 %

Net Sales                                100 %                 100 %            100 %             -20 %                3 %                 100 %                 100 %             -21 %

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-                                       Nine Months Ended                    Year-
                               September 25,         September 26,         June 26,         Over-Year         Sequential         September 25,         September 26,         Over-Year
                                   2009                  2008                2009            Change             Change               2009                  2008               Change
North America                             23 %                  23 %             20 %             -20 %               18 %                  20 %                  24 %             -31 %
Asia Pacific                              38 %                  35 %             43 %             -15 %              -11 %                  40 %                  34 %              -8 %
Europe                                    21 %                  23 %             21 %             -25 %                3 %                  22 %                  23 %             -24 %
Japan                                     18 %                  19 %             16 %             -21 %               22 %                  18 %                  19 %             -28 %

Net Sales                                100 %                 100 %            100 %             -20 %                3 %                 100 %                 100 %             -21 %

Price Concessions and Product Returns from Distributors

We sell the majority of our products to 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 $2.4 billion and $3.0 billion for the nine months ended September 25, 2009 and September 26, 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 $153.9 million and $89.7 million for the nine months ended September 25, 2009 and September 26, 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                                Nine Months Ended
                                 September 25,        September 26,        June 26,        September 25,        September 26,
                                     2009                 2008               2009              2009                 2008
Gross Margin Percentage                   67.3 %               67.1 %          66.5 %               66.1 %               66.5 %

Our gross margin percentage for the three months ended September 25, 2009 increased by 0.8 points and 0.2 points compared with the three months ended June 26, 2009 and September 26, 2008, respectively, primarily as a result of manufacturing cost reductions and efficiencies on certain of our new products. Our gross margin percentage declined by 0.4 points for the nine months ended September 25, 2009 compared with the same period in 2008. Gross margin rates are heavily influenced by both market segment mix, and the amount and the timing of material cost improvements. In addition, our gross margin percentage for the nine months ended September 25, 2009 was adversely affected by a disproportionate decrease in revenue from our smaller, higher margin customer base, compared with the same period in 2008. During the nine months ended September 25, 2009, 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 nine months ended September 25, 2009 and September 26, 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-                                       Nine Months Ended                     Year-
                                          September 25,          September 26,          June 26,         Over-Year        Sequential         September 25,           September 26,         Over-Year
(In millions)                                 2009                   2008                 2009            Change            Change                2009                   2008               Change
Research and Development Expense         $          70.1        $          64.1        $     65.0                9 %               8 %      $          193.3        $         188.9                2 %
Percentage of Net Sales                             24.5 %                 18.0 %            23.3 %                                                     23.3 %                 17.9 %

Research and development expense for the three months ended September 25, 2009 increased by $6.0 million, or 9%, when compared with the three months ended September 26, 2008. The increase was primarily attributable to a $1.0 million increase in labor costs due to $3.9 million of restructuring charges incurred in the three months ended September 25, 2009, partially offset by $2.9 million of cost savings from the resulting lower headcount in the third quarter of 2009 compared with the same period in 2008, a $5.9 million increase in spending on masks and wafers as a result of tape-outs of various new products during the three months ended September 25, 2009, and a $2.3 million increase in stock-based compensation expense resulting from higher awards in 2009 and a change in estimate of our expected forfeiture rate. These increases were partially offset by a $0.3 million decrease in variable compensation expense based on lower 2009 operating results and a combined $1.8 million decrease in spending on prototype and consulting services. See Note 11 - Stock-Based Compensation to our condensed consolidated financial statements for more information on the change in our expected forfeiture rate and Note 14 - Restructuring Charges for further information about our restructuring activities during the three months ended September 25, 2009.

Research and development expense for the nine months ended September 25, 2009 increased by $4.4 million, or 2%, when compared with the nine months ended September 26, 2008. The increase was primarily attributable to a $0.6 million increase in labor costs due to $4.1 million of restructuring charges incurred in 2009, substantially offset by $3.5 million of cost savings from the resulting lower headcount in 2009, an $18.7 million increase in spending on masks and wafers as a result of tape-outs of various new products in 2009, and a $3.6 million increase in stock-based compensation expense resulting from higher awards in 2009 and a change in estimate of our expected forfeiture rate. These increases were partially offset by a gain of $3.6 million from the substantive termination of our retiree medical plan, a $6.3 million decrease in variable compensation expense based on lower 2009 operating results, a $4.0 million decrease in spending on prototype and

package tooling and a combined $3.5 million decrease in rental, travel and consulting expenses. See Note 11 - Stock-Based Compensation to our condensed consolidated financial statements for more information on the change in our expected forfeiture rate, Note 13 - Employee Benefit Plans 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 nine months ended September 25, 2009.

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-                                       Nine Months Ended                     Year-
                                           September 25,          September 26,          June 26,         Over-Year        Sequential         September 25,           September 26,         Over-Year
(In millions)                                  2009                   2008                 2009            Change            Change                2009                   2008               Change
Selling, General and Administrative
Expense                                   $          56.3        $          65.3        $     53.7              -14 %               5 %      $          170.7        $         192.6              -11 %
Percentage of
Net Sales                                            19.7 %                 18.3 %            19.2 %                                                     20.6 %                 18.3 %

Selling, general, and administrative expense for the three months ended September 25, 2009 decreased by $9.0 million, or 14%, when compared with the three months ended September 26, 2008. The decrease was primarily due to a $1.2 million decrease in labor costs as a result of cost savings from our restructuring activities initiated in 2009, a $0.4 million decrease in variable compensation expense based on lower 2009 operating results, a benefit of $2.3 million from a change in estimate of our allowance for doubtful accounts, a $5.3 million decrease in commission expenses due to the lower sales for the three months ended September 25, 2009 and a combined $2.4 million decrease in consulting, travel and legal expenses due to our ongoing efforts to improve operating efficiency. These decreases were partially offset by a $4.2 million increase in stock-based compensation expense resulting from higher awards in 2009 and a change in estimate of our expected forfeiture rate. See Note 3 - Accounts Receivable, Net and Significant Customers to our condensed consolidated financial statements for a detailed discussion of the change in estimate of our allowance for doubtful accounts, Note 11 - Stock-Based Compensation for more information on the change in our expected forfeiture rate and Note 14 - Restructuring Charges for further information about our restructuring activities during the three months ended September 25, 2009.

Selling, general, and administrative expense for the nine months ended September 25, 2009 decreased by $21.9 million, or 11%, when compared with the nine months ended September 26, 2008. The decrease was primarily due to a gain of $2.6 million from the substantive termination of our retiree medical plan, a $6.4 million decrease in variable compensation expense based on lower 2009 operating results, a benefit of $2.3 million from a change in estimate of our allowance for doubtful accounts, a $10.1 million decrease in commission expenses due to the lower sales for the nine months ended

September 25, 2009 and a combined $7.1 million decrease in maintenance, travel, advertising and legal expenses due to our ongoing efforts to improve operating efficiency. These decreases were partially offset by an $8.9 million increase in stock-based compensation expense resulting from higher awards in 2009 and a change in estimate of our expected forfeiture rate. Labor costs for the nine . . .