This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto of MEMC Electronic Materials, Inc. included herein.

OVERVIEW

We are a vertically integrated, global leader in the manufacture and sale of wafers. Our customers include semiconductor device and solar cell manufacturers. We provide wafers in sizes ranging from 100 millimeters (4 inch) to 300 millimeters (12 inch) for semiconductor applications and 156 millimeter wafers for solar applications. Depending on market conditions, we also sell intermediate products such as polysilicon, silane gas, ingots and scrap wafers to semiconductor device and equipment makers, solar cell and module manufacturers, flat panel and other industries.

We have continued to see increases in semiconductor demand from the 2009 second quarter to the third quarter and expect to see that trend continue into the fourth quarter as well. We have also seen a moderation of price declines in semiconductor applications from the 2009 second quarter. While the overall demand for wafers for solar applications continued to improve in the third quarter, the downward pricing pressure experienced in recent quarters for solar applications persisted. Pricing over the course of the fourth quarter is uncertain, but demand for solar applications is expected to improve slightly over the third quarter. We continue to diversify our customer base by serving additional solar wafer customers beyond our long-term solar wafer supply agreements. Polysilicon revenues continued to decline as a percent of total revenue in the first nine months of 2009 due to lower volumes and pricing compared to 2008. Polysilicon sales were approximately 4% and 21% of revenue for the nine months ended September 30, 2009 and 2008, respectively.

The company experienced a disruption in production at its polysilicon facility in Pasadena, Texas due to an equipment failure in early August 2009, requiring a large portion of the facility to be shut down. Although the failed equipment has been replaced, subsequent rebuild and restart difficulties delayed the resumption of normal operations at this facility until late in the quarter.

While the higher product volumes helped increase our factory utilization rates in the quarter, our factories were still running at less than optimal manufacturing rates. Since the beginning of 2009, we have announced the termination or eventual termination of just over 1,000 manufacturing employees at our St. Peters, Missouri and Sherman, Texas facilities and our Japanese and Korean subsidiaries. The purpose of the workforce reductions was to better align our costs with short and long-term demand, as well as strategically position our manufacturing facilities geographically closer to a number of our customers.

During the third quarter, we further amended two of our long-term solar wafer supply agreements. Under the amendments, the potential aggregate revenues to MEMC under the agreements in 2009 and over the remaining term of the contracts remain unchanged, but volume increases and price reductions for 2009 were effectuated. The subsequent amendments also provide a deferral mechanism for a potential 2009 purchase shortfall by the customers (from the increased volume commitment), by allowing the customers to make up the purchase shortfall in subsequent years. Such deferred volume amounts will be added to the customers' minimum purchase requirements for future contract years.

On October 22, 2009, MEMC reached a definitive merger agreement to acquire privately held Sun Edison LLC ("Sun Edison"), a developer of solar power projects. The acquisition is expected to close by the end of 2009, subject to customary closing conditions and receipt of regulatory approvals.

RESULTS OF OPERATIONS



                                 Three Months Ended            Nine Months Ended
                                    September 30,                September 30,
         Net Sales               2009           2008         2009           2008
         Dollars in millions
         Net Sales             $   310.0       $ 546.0      $ 806.9       $ 1,578.8
         Percentage Change         (43.2 )%       15.5 %      (48.9 )%         13.9 %

The decrease in sales in the three months ended September 30, 2009, compared to the same period in the prior year, was the result of pricing decreases of $234.5 million and volume decreases of $3.4 million. The nine month year-to-date change was also due to price and volume decreases of $505.2 million and $268.0 million, respectively. Price and volume declines occurred in nearly all products, except for 156mm wafers where we experienced increases of approximately 45% in volumes for both the three and nine month periods compared to the prior year periods. Our overall wafer average selling prices for the three and nine months ended September 30, 2009 were approximately 50% and 51% lower than the overall wafer average selling prices for the same periods in 2008. This was due to price decreases for all wafers, and to a lesser extent, increases in volumes for 156 millimeter wafers, which have a lower average selling price per wafer. The decrease in sales also resulted from a decrease in polysilicon selling prices which were lower in the current period by approximately 85% compared to the average polysilicon selling prices for the third quarter of 2008. While we have recently seen increases in short-term semiconductor demand, demand is still below historically normal levels. Short-term pricing for solar applications is expected to continue to decline sequentially in the 2009 fourth quarter.

                                    Three Months Ended           Nine Months Ended
                                       September 30,               September 30,
        Gross Profit                2009           2008          2009          2008
        Dollars in millions
        Cost of Goods Sold        $   289.5       $ 276.3      $   731.8      $ 767.0
        Gross Profit                   20.5         269.7           75.1        811.8
        Gross Margin Percentage         6.6 %        49.4 %          9.3 %       51.4 %

The decline in gross profit dollars and gross margin percentage for the three and nine month periods ended September 30, 2009 were primarily due to decreased wafer and polysilicon volumes and pricing discussed above. During the nine months ended September 30, 2009, decreases in gross profit were due to increased costs compared to the same period in the prior year totaling $43.1 million related to unallocated fixed overheads recorded as period expenses and a lower of cost or market adjustment on our inventory. We also incurred increased charges for an adverse annual long-term purchase obligation of $16.0 million in the nine months ended September 30, 2009 compared to $10.0 million in the prior year same period. Additionally, higher product volumes in the second and third quarters of 2009 compared to the first quarter of 2009 helped increase our factory utilization rates, although our factories were still running at less than optimal manufacturing rates, resulting in higher per unit costs compared to the prior year periods.

                                      Three Months Ended           Nine Months Ended
                                         September 30,               September 30,
     Marketing and Administration     2009            2008          2009          2008
     Dollars in millions
     Marketing and Administration   $    37.2        $ 31.5      $    109.5      $ 89.2
     As a Percentage of Net Sales        12.0 %         5.8 %          13.6 %       5.6 %

The increase in marketing and administration expenses for the three and nine months ended September 30, 2009 resulted from pre-operating start-up costs related to a new manufacturing facility in Ipoh, Malaysia of $4.5 million and $8.7 million, respectively, and increased legal professional services costs of $2.3 million and $3.7 million, respectively. Additional year-to-date increases include an $8.8 million accrual for a lawsuit we recorded in the second quarter of 2009 compared to net favorable legal settlements in the prior year same period of $4.5 million. Bad debt expenses also increased $2.8 million in the nine month period compared to the prior year. These increases were slightly offset by decreases in stock compensation expense, including a lower forfeiture rate adjustment in the first quarter of 2009 compared to 2008, and a decrease in shipping and logistics expenses consistent with the decline in sales.

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                                      Three Months Ended           Nine Months Ended
                                         September 30,               September 30,
     Research and Development         2009            2008         2009           2008
     Dollars in millions
     Research and Development       $    10.3        $ 10.3      $    29.8       $ 30.6
     As a Percentage of Net Sales         3.3 %         1.9 %          3.7 %        1.9 %

R&D consisted mainly of product and process development efforts to increase our capability in the areas of flatness, particles, crystal defectivity and directional solidification for the manufacture of solar wafers. R&D expenditures were consistent with the same period in the prior year.

                                         Three Months Ended           Nine Months Ended
                                            September 30,               September 30,
  Restructuring and Impairment Costs     2009            2008         2009           2008
  Dollars in millions
  Restructuring and Impairment Costs   $    39.7        $  0.4      $    52.0        $ 3.6
  As a Percentage of Net Sales              12.8 %         0.1 %          6.4 %        0.2 %

In order to better align manufacturing capabilities to projected manufacturing needs, MEMC committed to workforce reductions during the second quarter of 2008 (the "2008 Plan") and again in the first and second quarters of 2009 (the "2009 Global Plan"). In September 2009, MEMC committed to actions to reduce manufacturing costs by shifting manufacturing from our St. Peters, Missouri and Sherman, Texas facilities to other locations which are closer to a number of MEMC's customers (the "2009 US Plan").

The 2009 Global Plan actions reduced our workforce by 500 employees, from 4,800, prior to the reductions. We expect that these reductions in force will result in annualized cost savings of approximately $30 million, primarily in cost of goods sold, because a majority of those affected are manufacturing facility employees. We began realizing some of these savings in the second quarter of 2009. The 2009 US Plan actions are expected to affect approximately 540 employees in the United States. MEMC will provide severance benefits to those employees who will be terminated and expects to incur total severance charges related to the terminations of approximately $19 million. We recorded $15 million of these charges in the third quarter of 2009 and expect to make the related severance payments at the time of the final production dates for the facilities through the second quarter of 2011. We also anticipate charges of approximately $41 million for contract terminations and other related move costs associated with the closings will be expensed as incurred starting in the fourth quarter of 2009 until the final production date. In total, we estimate we will incur approximately $73 million in cash costs associated with these announcements. We estimate that the facility closings will result in an annualized savings beginning in the third quarter of 2010 of approximately $10 million, rising to approximately $55 million of annualized savings beginning in the second quarter of 2011.

Due to the significance of the actions announced as part of the 2009 US Plan discussed above, we performed an asset impairment analysis of our St. Peters, Missouri and Sherman, Texas long-lived manufacturing asset groups during the third quarter of 2009. Accordingly, we recorded asset impairment charges of $24.6 million in the third quarter of 2009 related to these long-lived manufacturing asset groups. These charges were recorded in restructuring and impairment costs in our condensed consolidated statements of income (loss).

                                         Three Months Ended       Nine Months Ended
                                           September 30,            September 30,
      Non-operating (Income) Expense     2009         2008        2009          2008
      Dollars in millions
      Non-operating (Income) Expense   $     2.0    $     5.8   $   (23.0 )    $ 208.0

The change in nonoperating (income) expense for the three months ended September 30, 2009 compared to the prior year quarter was primarily due to a decrease in interest rates and the amount of outstanding balances of our cash and investment balances. For the nine months ended September 30, 2009 we recorded a gain for the mark-to-market adjustment for a warrant received from a customer (Suntech) of $3.7 million compared to a loss of $231.3 million for the same period in 2008. Changes in the value of the warrant are mainly a result of changes in the price of Suntech's ordinary shares underlying the warrant. The price of Suntech's ordinary shares was $15.20, $11.70, $35.87 and $82.32 at September 30, 2009, December 31, 2008, September 30, 2008 and December 31, 2007, respectively.

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                                                  Three Months Ended             Nine Months Ended
                                                     September 30,                 September 30,
Income Taxes                                      2009            2008          2009           2008
Dollars in millions
Income Tax (Benefit) Expense                    $    (6.3 )      $ 38.1       $   (34.9 )     $ 160.0
Income Tax Rate as a % of Income (Loss)
before Income Taxes                                   9.2 %        17.2 %          37.4 %        33.3 %

During the three months ended September 30, 2009, we recorded an income tax benefit of $6.3 million and an effective tax rate of 9.2%, compared to income tax expense of $38.1 million and an effective tax rate of 17.2% during the same period in the prior year. The income tax benefit for the 2009 third quarter primarily resulted from tax losses in higher rate jurisdictions offset by taxable income in lower rate jurisdictions. Our income tax benefit was reduced in the three months ended September 30, 2009 by the unrecognized benefit recognized as discussed below. During the nine months ended September 30, 2009, we recorded an income tax benefit of $34.9 million compared to an income tax expense of $160.0 million for the nine months ended September 30, 2008. The effective tax rate was 37.4% and 33.3% for the nine months ended September 30, 2009 and 2008, respectively.

We recorded a tax benefit on all available tax losses that can be carried back under local law because there is sufficient taxable income in the allowable carry-back period to absorb those losses. There was no valuation allowance of deferred tax assets attributable to subsidiaries with tax loss carryforwards due to anticipated taxable income within the tax loss carryforward period allowable under the law in the respective countries of five to seven years.

We are currently under examination by the Internal Revenue Service ("IRS") for the 2006 and 2007 tax years. During the quarter ended September 30, 2009, we received proposed adjustments from the IRS related to various cost allocations and taxable income adjustments attributable to our foreign operations during the periods under audit. We disagree with these adjustments and intend to vigorously contest them. We believe it is reasonably possible that the examination could be completed within the next twelve months. The amount of adjustment, if any, and the timing of such adjustment, however, are not reasonably estimable at this time.

We believe our tax positions are in compliance with applicable tax laws and regulations. We routinely review our estimate for our uncertain tax positions and during the quarter ended September 30, 2009 increased the unrecognized benefit by $19.2 million, including amounts related to interest and penalties for previously identified issues. There is a risk that the amounts ultimately resolved could be materially different from the amounts previously included or reserved for in our income tax liabilities and could therefore have a material impact on our tax provision, net income, tax liabilities and cash flows in future periods.

During the nine months ended September 30, 2009, we recorded additional tax expense of approximately $3.4 million primarily related to interest and penalties assessed by taxing authorities related to exams for the 2006 and 2007 tax years.

                                                     Three Months Ended         Nine Months Ended
                                                       September 30,              September 30,
Equity in Earnings of Joint Venture, Net of Tax      2009            2008       2009           2008
Dollars in millions
Equity in earnings of joint venture, net of tax   $     (2.5 )       $  -    $     (5.8 )      $  -

As more fully described in Liquidity and Capital Resources below, in August 2009, we entered into a formal joint venture agreement with Q-Cells SE, a major solar cell producer, to form a joint venture for the purpose of constructing and selling solar power plants. We sold solar wafers to the solar cell producer during the second and third quarters and have eliminated our pro rata share of the profit on these sales, which has been recorded to equity in earnings of joint venture, net of tax in the income statement. We expect to recognize the profit on these sales once the solar project is sold to a third party.

FINANCIAL CONDITION

Cash and cash equivalents decreased $196.1 million from $988.3 million at December 31, 2008 to $792.2 million at September 30, 2009. See additional discussion in Liquidity and Capital Resources below.

Short-term and long-term investments of $443.8 million at September 30, 2009 increased $10.7 million from $433.1 million at December 31, 2008. This increase was due to the funding of the joint venture of $69.0 million, unrealized gains on our available for sale and trading investments of $66.2 million and purchases of investments of $12.9 million, offset by sales and maturities of investments of $139.3 million during the first nine months of 2009.

Accounts receivable of $188.3 million at September 30, 2009 decreased $9.0 million from $197.3 million at December 31, 2008. The decrease was primarily attributable to the decrease in sales of $115.7 million, offset by an increase in past due amounts and a decrease of sales with cash in advance terms. Days' sales outstanding was 55 days at September 30, 2009 compared to 42 days at December 31, 2008 based upon annualized sales. This increase was also due to the increase in past due amounts and change in cash in advance terms discussed above.

Our inventories increased $28.7 million to $110.0 million at September 30, 2009 from $81.3 million at December 31, 2008. Inventories increased primarily due to higher production volumes, more continuous production cycles and our decision to build inventories

Prepaid and other current assets increased $60.2 million to $99.1 million over the prior year. The increase was primarily due to net operating losses that can be carried back, resulting in expected future refunds for tax amounts previously paid.

Our net property, plant and equipment increased $24.2 million to $1,065.4 million over the prior year. The increase was primarily due to capital expenditures of approximately $151.8 million for the nine months ended September 30, 2009 related to expansions at our plants in Hsinchu, Taiwan, Pasadena, Texas and Merano, Italy, offset by decreases due to depreciation expense and unfavorable foreign currency exchange rates.

Accounts payable decreased $11.2 million to $151.2 million at September 30, 2009, compared to $162.4 million at the end of 2008. The decrease was a result of decreased payables related to capital expenditures at September 30, 2009, slightly offset by an increase in payables related to timing of payments.

Accrued liabilities increased from $67.5 million at December 31, 2008 to $87.6 million at September 30, 2009. This amount increased $15.1 million due to the restructuring accrual for the plant closures announced in the third quarter of 2009, $8.8 million due to the accrual for a lawsuit and $6.1 million for the deferral of profit related to a joint venture. These increases were partially offset by a $12.8 million payment for accrued withholding taxes.

Short-term customer deposits decreased $103.4 million to $83.6 million at September 30, 2009, primarily due to repayments of refundable customer deposits related to long-term supply agreements of $36.0 million, the application of $44.1 million of deposits against outstanding accounts receivable balances and a reclassification to long-term liabilities based on the amendment of one of our long-term customer contracts. Under the amendment, we will now retain an additional $11.6 million of previously refundable deposits as deferred revenue. In addition, deposits of $12.3 million previously due on January 1, 2010 are no longer due within twelve months of September 30, 2009. These decreases were all slightly offset by a reclassification from other long-term liabilities for the current portion of the refundable customer deposits that are scheduled to be repaid in January 2010.

Income taxes payable decreased $11.6 million to $6.3 million over the prior year. The decrease was primarily due to net operating losses that can be carried back, resulting in refunds for tax amounts previously paid that are recorded in prepaid and other current assets.

Other long-term liabilities increased $31.8 million to $217.9 million over the prior year end. The increase was primarily due to an increase of $12.3 million due to a reclassification of customer deposits discussed above and an increase of $19.2 million in unrecognized tax benefits related to revised estimates and interest.

Accumulated other comprehensive income increased to $7.2 million at September 30, 2009 from a loss of $55.6 million at December 31, 2008. This increase was mainly due to unrealized appreciation on available-for-sale securities of $50.4 million with the remaining difference resulting from changes in exchange rates, mainly the Korean Won and the Euro.

LIQUIDITY AND CAPITAL RESOURCES

In the nine months ended September 30, 2009, cash provided by operating activities was $13.6 million compared to $517.5 million in the nine months ended September 30, 2008. This decrease was a result of a decrease in operating income and changes in working capital. The change in working capital was primarily attributable to a buildup of inventories and payments for accrued liabilities and accounts payable. The decrease was offset by the application of $44.1 million of refundable deposits against outstanding receivables related to supply agreements in the first nine months of 2009 and $11.6 million of previously refundable deposits that are no longer refundable due to a solar wafer supply agreement amended in the third quarter of 2009.

Cash used in investing activities was $101.8 million in the nine months ended September 30, 2009 compared to $313.6 million in the nine months ended September 30, 2008, primarily as a result of a decrease in purchases of available for sale investments, net of redemptions and maturities of approximately $192.2 million and in capital expenditures of $90.5 million, slightly offset by purchases of cost and equity method investments of $71.0. Capital expenditures in 2009 primarily relate to increasing our polysilicon capacity and expanding capability for our next generation products.

Cash used in financing activities was $108.3 million in the nine months ended September 30, 2009 compared to $114.8 million in the nine months ended September 30, 2008. The decrease in cash used in financing activities was mainly due to a reduction in repurchases of our common stock to $15.8 million for the nine months ended September 30, 2009 compared to $285.5 million for the same period in 2008. This decrease was partially offset by approximately $90.2 million of net repayments of customer deposits which includes $11.6 million of previously refundable deposits that are no longer refundable due to a solar wafer supply agreement amended in the third quarter of 2009.

We have short-term loan agreements renewable annually of approximately $18.1 million at September 30, 2009, of which there were no short-term borrowings outstanding. Of the $18.1 million committed short-term loan agreements, $6.0 million is unavailable because it relates to the issuance of third party letters of credit. Interest rates are negotiated at the time of the borrowings. We have long-term committed loan agreements of approximately $265.2 million at September 30, 2009, of which $28.9 million is outstanding. Of the $265.2 million committed long-term loan agreements, $83.8 million is unavailable because it relates to the issuance of third party letters of credit.

On July 21, 2005, we entered into a Revolving Credit Agreement with National City Bank of the Midwest (now a part of PNC Bank) ("National City Bank"), US Bank National Association, and such other lending institutions as may from time to time become lenders (the "National City Agreement"). The National City Agreement was amended on December 20, 2006 to reduce the commitment fee and the interest spread on loans bearing interest at a rate determined by reference to the applicable LIBOR rate, as set forth in the agreement. Additionally, our obligations and the guaranty obligations of our subsidiaries are no longer secured by a pledge of the capital stock of certain of our domestic and foreign subsidiaries. The National City Agreement provides for a $200.0 million revolving credit facility and has a term of five years. Interest on borrowings under the National City Agreement would be payable based on our election at LIBOR plus an applicable margin (currently 0.34%) or at a defined prime rate plus an applicable margin (currently 0.00%). The National City Agreement also provides for us to pay various fees, including a commitment fee (currently 0.08%) on the lenders' commitments. The National City Agreement contains . . .