The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in "Overview" regarding Inotera's transition to the Company's stack process technology and anticipated margins and operating expenses for the Imaging segment in future periods; in "Net Sales" regarding DRAM production received from Inotera in 2010, future increases in NAND Flash production, and future Imaging revenue under an imaging wafer supply agreement with Aptina; in "Gross Margin" regarding future charges from Inotera for underutilized capacity, future charges for inventory write-downs, gross margins from the Company's imaging wafer supply agreement with Aptina; in "Selling, General and Administrative" regarding future legal expenses; in "Research and Development" regarding reductions of future research and development expenses in connection with the sale of a majority interest in Aptina; in "Restructure" regarding future levels of employees; in "Stock-based Compensation" regarding future costs to be recognized; in "Liquidity and Capital Resources" regarding capital spending in 2010, future distributions from IM Flash to Intel and capital contributions to TECH; and in "Recently Issued Accounting Standards" regarding the impact from the adoption of new accounting standards. The Company's actual results could differ materially from the Company's historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in "Item 1A. Risk Factors." This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended September 3, 2009. All period references are to the Company's fiscal periods unless otherwise indicated. The Company's fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. All tabular dollar amounts are in millions. The Company's fiscal 2009, which ended on September 3, 2009, contained 53 weeks and its fiscal 2008 and fiscal 2007 both contained 52 weeks. All production data includes production of the Company and its consolidated joint ventures and the Company's supply from Inotera.

Overview

The Company is a global manufacturer and marketer of semiconductor devices, principally DRAM and NAND Flash memory. In addition the Company manufactures CMOS image sensor products under a wafer foundry arrangement. The Company operates in two reportable segments: Memory and Imaging. Its products are used in a broad range of electronic applications including personal computers, workstations, network servers, mobile phones and other consumer applications including Flash memory cards, USB storage devices, digital still cameras, MP3/4 players and in automotive applications. The Company markets its products through its internal sales force, independent sales representatives and distributors primarily to original equipment manufacturers and retailers located around the world. The Company's success is largely dependent on the market acceptance of a diversified portfolio of semiconductor products, efficient utilization of the Company's manufacturing infrastructure, successful ongoing development of advanced process technologies and generation of sufficient return on research and development investments.

The Company has made significant investments to develop proprietary product and process technology that is implemented in its worldwide manufacturing facilities and through its joint ventures to enable the production of semiconductor products with increasing functionality and performance at lower costs. The Company generally reduces the manufacturing cost of each generation of product through advancements in product and process technology such as its leading-edge line-width process technology and innovative array architecture. The Company continues to introduce new generations of products that offer improved performance characteristics, such as higher data transfer rates, reduced package size, lower power consumption and increased memory density. To leverage its significant investments in research and development, the Company has formed various strategic joint ventures under which the costs of developing memory product and process technologies are shared with its joint venture partners. In addition, from time to time, the Company has also sold and/or licensed technology to other parties. The Company is pursuing additional opportunities to recover its investment in intellectual property through partnering and other arrangements.

The semiconductor memory industry is experiencing a severe downturn due to a significant oversupply of products. The downturn has been exacerbated by global economic conditions which have adversely affected demand for semiconductor memory products. Average selling prices per gigabit for the Company's DRAM and NAND Flash products declined 52% and 56%, respectively, for 2009 as compared to 2008, after declining 51% and 67%, respectively, for 2008 as compared to 2007, and declining 23% and 56%, respectively, for 2007 as compared to 2006. These declines significantly outpaced the long-term historical pricing trend. As a result of these market conditions, the Company and other semiconductor memory manufacturers reported substantial losses in recent periods. The Company reported a net loss of $1.8 billion for 2009 after reporting net losses of $1.6 billion for 2008 and $320 million for 2007.

Inotera Memories, Inc. ("Inotera"): In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera, a publicly-traded entity in Taiwan, from Qimonda AG ("Qimonda") for $398 million. The interest in Inotera was acquired for cash, a portion of which was funded from loan proceeds of $200 million received from Nan Ya Plastics Corporation and $85 million received from Inotera. Nan Ya Plastics is an affiliate of Nanya Technology Corporation ("Nanya"), a then 35.6% shareholder in Inotera. The loans were recorded at their fair values which reflect an aggregate discount of $31 million from their face amounts. This aggregate discount was recorded as a reduction of the Company's basis in its investment in Inotera. The Company also capitalized $10 million of costs and other fees incurred in connection with the acquisition. As a result of the above transactions, the initial carrying value of the Company's investment in Inotera was $377 million. On August 3, 2009, Inotera issued shares in a public offering for approximately $310 million that reduced the Company and Nanya's ownership in Inotera to 29.8% and 29.9%, respectively. As a result of Inotera's public offering, the Company will recognize a gain of $59 million in the first quarter of 2010.

In connection with the acquisition of the shares in Inotera, the Company and Nanya entered into a supply agreement with Inotera (the "Inotera Supply Agreement") pursuant to which Inotera will sell trench and stack DRAM products to the Company and Nanya. The Company has rights and obligations to purchase up to 50% of Inotera's wafer production capacity. Inotera's actual wafer production will vary from time to time based on market and other conditions. Inotera's trench production is expected to transition to the Company's stack process technology. Inotera charges the Company and Nanya for a portion of the costs associated with its underutilized capacity, if any. The cost to the Company of wafers purchased under the Inotera Supply Agreement is based on a margin sharing formula among the Company, Nanya and Inotera. Under such formula, all parties' manufacturing costs related to wafers supplied by Inotera, as well as the Company's and Nanya's selling prices for the resale of products from wafers supplied by Inotera, are considered in determining costs for wafers from Inotera. Under the Inotera Supply Agreement. The Company's purchase obligation includes purchasing Inotera's trench DRAM capacity (less any trench DRAM products sold to Qimonda pursuant to a separate supply agreement between Inotera and Qimonda (the "Qimonda Supply Agreement")). Under the Qimonda Supply Agreement, Qimonda was obligated to purchase trench DRAM products resulting from wafers started for it by Inotera through July 2009 in accordance with a ramp down schedule specified in the Qimonda Supply Agreement. In the second quarter of 2009, Qimonda filed for bankruptcy protection and defaulted on its obligations to purchase products from Inotera. Pursuant to the Company's obligations under the Inotera Supply Agreement, the Company recorded $95 million of charges to cost of goods sold in 2009 for underutilized capacity.

The Company's results of operations for 2009 also include losses of $130 million for the Company's share of Inotera's losses from the acquisition date through the second calendar quarter of 2009. The Company accounts for its interest in Inotera under the equity method and does not consolidate Inotera. The Company recognizes its share of earnings or losses from Inotera for a period that lags the Company's fiscal periods by two months. As of September 3, 2009, the Company had recorded $3 million to accumulated other comprehensive income in the accompanying consolidated balance sheet for cumulative translation adjustments for its investment in Inotera. During the third quarter of 2009, the Company received $50 million from Inotera pursuant to the terms of a technology transfer agreement. As of September 3, 2009, the carrying value of the Company's equity investment in Inotera was $229 million.

(See "Item 8. Financial Statements - Notes to Consolidated Financial Statements
- Supplemental Balance Sheet Information - Equity Method Investments - DRAM joint ventures with Nanya")

Aptina Imaging Corporation ("Aptina"): On July 10, 2009, the Company sold a 65% interest in Aptina, previously a wholly-owned subsidiary of the Company and a significant component of the Company's Imaging segment, to Riverwood Capital ("Riverwood") and TPG Capital ("TPG"). In connection with the transaction, the Company received approximately $35 million in cash and retained a 35% interest in Aptina. A portion of the 65% interest held by Riverwood and TPG are convertible preferred shares and have a liquidation preference over the common shares. As a result, the Company's interest represents 64% of Aptina's common stock. The Company also retained all cash held by Aptina and its subsidiaries. The Company recorded a loss of $41 million in connection with the sale. Under the equity method, the Company will recognize its share of Aptina's results of operations based on its 64% share of Aptina's common stock on a two-month lag beginning in 2010. As of September 3, 2009, the Company's investment in Aptina was $44 million. The Company's Imaging segment continues to manufacture products for Aptina under a wafer supply agreement. The Company anticipates that pricing under the Aptina wafer supply agreement will generally result in lower gross margins than historically realized on sales of Imaging products to end customers. The Company also anticipates that the sale of majority interest in Aptina will significantly reduce the Imaging segment's research and development costs and other operating expenses. (See "Item 8. Financial Statements - Notes to Consolidated Financial Statements - Supplemental Balance Sheet Information - Equity Method Investments - Aptina")

Inventory write-downs: The Company's results of operations for the second and first quarters of 2009 included charges of $234 million and $369 million, respectively, to write down the carrying value of work in process and finished goods inventories of memory products (both DRAM and NAND Flash) to their estimated market values. For the fourth, second and first quarters of 2008, the Company recorded inventory charges of $205 million, $15 million and $62 million, respectively.

Results of Operations

                              2009                           2008                           2007
                                          (in millions and as a percent of net sales)

Net sales:
Memory               $   4,290            89    %   $   5,188            89    %   $   5,001            88    %
Imaging                    513            11    %         653            11    %         687            12    %
                     $   4,803           100    %   $   5,841           100    %   $   5,688           100    %

Gross margin:
Memory               $    (521 )         (12 )  %   $    (241 )          (5 )  %   $     845            17    %
Imaging                     82            16    %         186            28    %         233            34    %
                     $    (439 )          (9 )  %   $     (55 )          (1 )  %   $   1,078            19    %

Selling, general
and administrative   $     354             7    %   $     455             8    %   $     610            11    %
Research and
development                647            13    %         680            12    %         805            14    %
Restructure                 70             1    %          33             1    %          19             0    %
Goodwill
impairment                  58             1    %         463             8    %          --            --
Other operating
(income) expense,
net                        107             2    %         (91 )          (2 )  %         (76 )          (1 )  %
Net income (loss)       (1,835 )         (38 )  %      (1,619 )         (28 )  %        (320 )          (6 )  %

The Company's fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.

Net Sales

Total net sales for 2009 decreased 18% as compared to 2008 primarily due to a 17% decrease in Memory sales and a 21% decrease in Imaging sales. Memory sales for 2009 reflect significant declines in per gigabit average selling prices partially offset by significant increases in gigabits sold as compared to 2008. Memory sales were 89% of total net sales for 2009 and 2008 and 88% for 2007. The 21% decrease in Imaging sales for 2009 was primarily due to lower sales volume and average sales prices. Total net sales for 2008 increased 3% as compared to 2007 primarily due to a 4% increase in Memory sales partially offset by a 5% decrease in Imaging sales.

In response to adverse market conditions, the Company shut down production of NAND for IM Flash at the Company's Boise fabrication facility beginning in the second quarter of 2009 and phased out the remainder of its 200mm DRAM production at the Boise fabrication facility in the second half of 2009. In addition, the Company implemented production slowdowns at some of its manufacturing facilities during 2009. Production of Memory and Imaging products in 2009 was affected by the shutdown of the Boise fabrication facility and slowdowns at other facilities. The Company will adjust utilization of 200mm wafer processing capacity as product demand varies.

The Company has formed partnering arrangements under which it has sold and/or licensed technology to other parties. The Company's Memory segment recognized royalty and license revenue of $135 million in 2009 and $58 million in 2008.

Memory: Memory sales for 2009 decreased 17% from 2008 primarily due to a 23% decrease in sales of DRAM products and a 10% decrease in sales of NAND Flash products.

Sales of DRAM products for 2009 decreased from 2008 primarily due to a 52% decline in average selling prices mitigated by a 56% increase in gigabits sold. Gigabit production of DRAM products increased 52% for 2009 despite the shutdown of the Boise fabrication facility and production slowdowns at other 200mm wafer fabrication facilities. The DRAM production increase was primarily due to production efficiencies achieved primarily through transitions to higher density, advanced geometry devices. In the fourth quarter of 2009, the Company began receiving trench DRAM products from Inotera. The Company expects that in 2010 its DRAM production will increase as a result of increases in stack and trench DRAM production purchased from Inotera. Sales of DDR2 and DDR3 DRAM, the Company's highest volume products, were 29% of the Company's total net sales for 2009 and 2008 and were 32% for 2007.

The Company sells NAND Flash products in three principal channels: 1) to Intel Corporation ("Intel") through its IM Flash consolidated joint venture at long-term negotiated prices approximating cost, 2) to original equipment manufacturers ("OEM's") and other resellers and 3) to retail customers. Aggregate sales of NAND Flash products for 2009 decreased 10% from 2008 and represented 39% of the Company's total net sales for 2009 as compared to 35% for 2008 and 23% for 2007

Sales through IM Flash to Intel were $886 million for 2009, $1,037 million for 2008 and $497 million for 2007. For 2009, average selling prices for IM Flash sales to Intel decreased significantly due to a 61% reduction in costs per gigabit. However, gigabit sales to Intel were 110% higher in 2009 as compared to 2008 primarily due to an 85% increase in gigabit production of NAND Flash products over the same period as a result of the Company's continued transition to higher density 34 nanometer (nm) NAND Flash products and other improvements in product and process technologies. The increase in NAND Flash production was achieved despite the shutdown of 200mm NAND Flash production which began in the second quarter of 2009. The Company expects that its gigabit production of NAND Flash products will continue to increase in 2010 but at a slower rate than in 2009.

Aggregate sales of NAND Flash products to the Company's OEM, resellers and retail customers were 4% lower for 2009 as compared to 2008 primarily due a 52% decline in average selling prices, partially offset by a 100% increase in gigabit sales. Average selling prices to the Company's OEM and reseller customers for 2009 decreased approximately 41% compared to 2008, while average selling prices of the Company's Lexar brand, directed primarily at the retail market, decreased approximately 62% for 2009 compared to 2008.

Memory sales for 2008 increased 4% from 2007 primarily due to a 55% increase in sales of NAND Flash products offset by a 15% decrease in sales of DRAM products. Sales of NAND Flash products for 2008 increased from 2007 primarily due to an increase of approximately 370% in gigabits sold as a result of production increases partially offset by a decline of 67% in average selling prices per gigabit. Gigabit production of NAND Flash products increased approximately 350% for 2008 as compared to 2007, primarily due to the continued ramp of NAND Flash products at the Company's 300mm fabrication facilities and transitions to higher density, advanced geometry devices. Sales of DRAM products for 2008 decreased from 2007 primarily due to a decline of 51% in average selling prices (which included the effects of a $50 million charge to revenue in the first quarter of 2007 as a result of a settlement agreement with a class of direct purchasers of certain DRAM products), mitigated by an increase in gigabits sold of approximately 70%. Gigabit production of DRAM products increased approximately 70% for 2008, primarily due to production efficiencies from improvements in product and process technologies, including TECH's conversion to 300mm wafer fabrication.

Imaging: Imaging sales for 2009 decreased by 21% from 2008 primarily due to decreased unit sales and declines in average selling prices. Demand for Imaging products in 2009 was adversely impacted by weakness in the mobile phone markets. Imaging sales for 2009 were also negatively impacted by the Company's sale of a 65% interest in Aptina on July 10, 2009. After the sale of the Company's 65% interest in Aptina, Imaging's revenue is derived entirely from sales of Imaging wafers to Aptina under a wafer supply agreement. The Company anticipates that pricing under the wafer supply agreement will generally result in lower revenue than historically realized on sales by the Company of Imaging products to end customers. Imaging sales for 2008 decreased 5% from 2007 primarily due to significant declines in average selling prices by product type partially offset by a shift in product mix from products with 1-megapixel or lower resolution to products with 3-megapixel or higher resolution, which had higher average selling prices per unit. Imaging sales were 11% of the Company's total net sales for 2009 and 2008 and 12% for 2007.

Gross Margin

The Company's overall gross margin percentage declined from negative 1% for 2008 to negative 9% for 2009 due to declines in the gross margins for both Memory and Imaging primarily as a result of severe pricing pressure mitigated by cost reductions. The Company's overall gross margin percentage declined from 19% for 2007 to negative 1% for 2008 primarily due to a decrease in the gross margin percentage for Memory as a result of significant declines in average selling prices. Production slowdowns implemented at some of the Company's 200mm manufacturing facilities during 2009 adversely affected per gigabit costs of Memory products and per unit costs of Imaging products.

Memory: The Company's gross margin percentage for Memory products declined from negative 5% for 2008 to negative 12% for 2009 primarily due to declines in the gross margin for DRAM products partially offset by improvements in the gross margin for NAND Flash products. Gross margins for 2009 were positively affected by significant cost reductions for DRAM and NAND Flash products and the effects of selling memory products that were subject to inventory write-downs in 2008, as discussed in more detail below. Gross margins for Memory products in 2009 were adversely affected by $187 million of costs associated with underutilized capacity, primarily from Inotera and IM Flash's Singapore facility. The Company expects that underutilized capacity costs from Inotera will decrease substantially in 2010 as Inotera increases its utilization of production capacity.

The Company's gross margins for Memory in 2009, 2008 and 2007 were impacted by charges to write down inventories to their estimated market values as a result of the significant decreases in average selling prices for both DRAM and NAND Flash products. As charges to write down inventories are recorded in advance of when inventories are sold, gross margins in subsequent reporting periods are higher than they otherwise would be. The impact of inventory write-downs on gross margins for all periods reflects inventory write-downs less the estimated net effect of prior period write-downs. The effects of inventory write-downs on gross margin by period were as follows:

                                                      2009       2008      2007

Inventory write-downs                                $ (603 )   $ (282 )   $ (20 )
Estimated effect of previous inventory write-downs      767         98        --
Net effect of inventory write-downs                  $  164     $ (184 )   $ (20 )

In future periods, the Company will be required to record additional inventory write-downs if estimated average selling prices of products held in finished goods and work in process inventories at a quarter-end date are below the manufacturing cost of those products.

Declines in gross margins on sales of DRAM products for 2009 as compared to 2008 were primarily due to the 52% decline in average selling prices mitigated by 40% reduction in costs per gigabit. The reduction in DRAM costs per gigabit was primarily due to production efficiencies achieved through transitions to higher-density, advanced-geometry devices. DRAM production costs for 2009 were adversely impacted by $95 million of underutilized capacity costs from Inotera.

The Company's gross margin on sales of NAND Flash products for 2009 improved from 2008, despite a 56% decrease in overall average selling prices per gigabit, primarily due to a 61% reduction in costs per gigabit. The reduction in NAND Flash costs per gigabit was primarily due to lower manufacturing costs as a result of increased production of higher-density, advanced-geometry devices, in particular from the Company's transition to 34nm process technology. Gross margins on sales of NAND Flash products reflect sales of approximately half of IM Flash's output to Intel at long-term negotiated prices approximating cost.

Imaging: The Company's gross margin percentage for Imaging declined from 28% for 2008 to 16% for 2009 primarily due to declines in average selling prices and costs associated with underutilized production capacity. The decrease in the gross margin percentage for 2009 was mitigated by a shift in product mix to products with 3-megapixels or more, which realized higher margins. Imaging gross margins subsequent to the Company's sale of a 65% interest in Aptina on July 10, 2009, are affected by the transition to a wafer foundry manufacturing model where Imaging sells all of its output to Aptina under a wafer supply agreement. The Company anticipates that pricing under the wafer supply agreement will generally result in lower gross margins than historically realized by the Company on sales of Imaging products to end customers. The Company's gross margin for Imaging declined to 28% for 2008 from 34% for 2007 primarily due to declines in average selling prices mitigated by cost reductions and a shift to higher resolution products that realized better gross margins.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses for 2009 decreased 22% from 2008, primarily due to lower payroll expenses and other costs related to the Company's restructure initiatives and lower legal expenses. Lower payroll . . .