*     Primarily the United States.
^**   Includes China

In fiscal 2000, the semiconductor and semiconductor manufacturing equipment industries were in a period of expansion, and Applied achieved record levels of new orders, net sales and net income for this period. However, during

	*	Primarily the United States.

**	Includes China.

     During the first fiscal quarter of 2001, slowing worldwide demand for semiconductors resulted in a rapid decline in demand for semiconductor manufacturing equipment. Inventory buildups in telecommunication products, slower than expected personal computer sales and slower global economic growth caused semiconductor companies to reevaluatereduce their capital spending and reschedule or cancel existing orders. This decline in demand deepened sequentially throughout fiscal 2001 and the first fiscal quarter of 2002 into a severe industry downturn due to continued weakness in the macro-economic climate and consumption of electronic goods, which resulted in further capital spending cutbacks by Applied'sApplied’s customers. As a result of these factors, net sales declined 23 percent from $9.6 billion for fiscal 2000 to $7.3 billion for fiscal 2001. Also includedIncluded in fiscal 2001 net sales waswere $642 million of revenue that was recognized as part of the cumulative effect of implementing the Securities and Exchange Commission'sSEC’s Staff Accounting Bulletin No. 101 (SAB 101), "Revenue“Revenue Recognition in Financial Statements."”

Net sales declined 31 percent from $7.3 billion for fiscal 2001 to $5.1 billion for fiscal 2002. The decline in demand for Applied'sApplied’s products continued into the first fiscal quarter of 2002. In the second fiscal quarter of 2002, customers began to orderordered equipment for 200mm advanced capacity to satisfy demand driven by consumer-related and wireless devices. Customers ordered 200mm capacity for this demand increase in demand as their transition to 300mm equipment was not yet complete. Customers also continued to place technology orders to invest in 300mm wafer processing, copper and smaller line-width technologies. However, second quarter demand levels proved to be unsustainable as the global economic environment weakened through the middle of the year, and customers reduced their level of capacity spending accordingly while maintaining advanced technology spending. Net sales peaked in the third fiscal quarter of 2002 and flattened in the fourth fiscal quarter of 2002. Included in fiscal 2002 net sales was the remaining $9 million of revenue that was recognized as part of the cumulative effect of implementing SAB 101.

Gross Margin
Net sales declined 12 percent from $5.1 billion for fiscal 2002 to $4.5 billion for fiscal 2003. Orders declined from $1.6 billion for the fourth fiscal quarter of 2002 to $1.0 billion for the first and second fiscal quarters of 2003, reflecting the continued and prolonged downturn in the semiconductor industry. However, orders increased to $1.1 billion for the third fiscal quarter and $1.3 billion for the fourth fiscal quarter of 2003, reflecting customers’ continued investments in memory and logic and their transition to 300mm, along with the increased capacity utilization in both advanced and established technologies. Following the new order trends, net sales decreased to approximately $1.1 billion for each of the first three fiscal quarters of 2003, reflecting the impact of the prolonged industry downturns and increased to $1.2 billion for the fourth fiscal quarter of 2003, indicating the beginning of an industry recovery.

     In response to the continuing difficult business conditions, Applied implemented a series of activities to better align Applied’s cost structure with prevailing economic conditions during early fiscal 2003. Realignment activities consisted of consolidation of facilities, reductions in workforce, and refocused product efforts, such as the electron-beam mask pattern product line and implementation of the global spare parts distribution system (which included a closure of a central warehouse). As a result of the realignment activities, Applied vacated approximately two million square feet and reduced approximately 3,800 positions. Realignment activities resulted in charges across multiple categories, as incurred, including cost of products sold, research, development and engineering expenses, and restructuring and asset impairment charges, as discussed below.

17

Gross margin as a percentage of net sales decreased from 50.8 percent for fiscal 2000 to 44.3 percent for fiscal 2001 and to 40.6 percent for fiscal 2002. During2002, and to 35.8 percent for fiscal 1999 and2003. In fiscal 2000, Applied experienced unprecedented new order and revenue growth. Accordingly, Applied expanded its manufacturing facilities during these periods to accommodate current and anticipated growth. The decreased business volume forin fiscal 2001, 2002 and 20022003, due to the industry downturn, was insufficient to fully absorb the overhead costs of these facilities, resulting in lower gross margins for fiscal 2001 and 2002.all respective periods. The decreasecontinued decline in fiscal 2002 gross margin for fiscal 2003 was alsoprincipally attributable to customerunder absorption of manufacturing and field service costs as a result of prolonged lower business volumes, and support activities, primarily startup costsinventory writeoffs and charges associated with a newrefocused product efforts, including an electron-beam mask pattern product and implementation of the global spare parts distribution system and excess overhead resulting from the decline in system installations.system.

Research, Development and Engineering
Applied's     Applied’s future operating results depend, to a considerable extent, on its ability to maintain a competitive advantage in the products and services it provides. Applied believes that it is critical to continue to make substantial investments in RD&Eresearch, development and engineering (RD&E) to assure the availability of innovative technology that meets the current and projected requirements of its customers'customers’ most advanced chipsemiconductor designs. Applied has historically maintained its commitment to investing in RD&E especially during industry downturns, in order to continue to offer new products and technologies. As a result, RD&E expenses remained relatively flat at $1.1 billion (11.6 percent of net sales) for fiscal 2000,were $1.2 billion (16.3(16 percent of net sales) for fiscal 2001, and $1.1 billion (20.8(21 percent of net sales) for fiscal 2002. Product development2002, and $921 million (21 percent of net sales) for fiscal 2003. Development cycles range from 12 to 36 months depending on whether the tool developmentproduct is an enhancement of existing technology or a new product area.product. Most of Applied'sApplied’s existing product lines are the result of internal product development activities. In certain instances, Applied acquires technologies either in either existing areas of development or through new product opportunities to complement its existing technology capabilities and to reduce time to market for market entry and penetration. Throughout the periods covered by this report, Applied has been investing in its new Process Moduledeveloped products to provide customers with a qualified, integrated and optimized production process flow for building microstructures on advanced chips. Process modules are designed to link certain Applied equipmentenable our customers to deliver an integrated process application to the customer for wafer processing.fabricate chips with 65nm and below feature sizes and new materials such as copper and low k dielectrics.

During fiscal 2001, Applied continued its development of technologies for copper and lowk-based k-based chips and 300mm wafers, as well as focused efforts on the core technologies that willwould be required for chipmakerscustomers to begin development of 100nm and below generation devices. Areas of increased investment included maskmaking technology, metrology and inspection, ion implantation, and products for depositing and etching new materials.

In fiscal 2002, Applied invested in critical development activities to meet customers'its customers’ rapid move to sub-100nm dimensions in their most advanced designs, which are expectedwere anticipated to begin entering production in fiscal 2003. This difficult and challenging dimensional shift is matchedwas compounded by the need to provide much of the technology for both 200mm and 300mm wafers, requiring additional process and hardware development. For the sub-100nm chip generations, inspection and metrology tools have becomebecame more important to assure enhanced device performance as well as adequate manufacturing yields. Accordingly, Applied focused its RD&E resources on these technologies. In addition, development of new technologiesinnovations such as advanced wafer wet cleaning and atomic layer deposition, which deposits materials in increasingly smaller structures, addressesaddressed new market opportunities for Applied in coming years.Applied. Within virtually all of the technology areas, including fab and yield management, Applied invested in more advanced software capabilities.

Marketing, Selling, GeneralIn fiscal 2003, Applied refocused product efforts and Administrative
made investments in strategic products. Applied focused on the development of several important processing technologies to enable the production of new chips using copper and low k dielectric materials, as well as to meet the challenges of smaller, 65nm and below, feature sizes. In addition to interconnect solutions, Applied continued to invest resources in the development of systems for advanced transistor designs with smaller gate structures that enable faster signal propagation and reduced power. Applied also continued the development of its process diagnostic and control capabilities with systems to inspect and measure smaller dimensions and defects.

Marketing, selling, general and administrative expenses decreased from $961 million (10.0 percent of net sales) for fiscal 2000 to $902 million (12.3(12 percent of net sales) for fiscal 2001 and to $709 million (14.0(14 percent of net sales) for fiscal 2002.2002, and to $626 million (14 percent of net sales) for fiscal 2003. The decreases forfrom fiscal 2001 to 2002 and 20022003 were due primarily to headcount reductions and cost reduction activities, limiting discretionary expenditures and to align costs to a lower business volume.volume.

Non-recurring Items
Non-recurring items for18

     The restructuring actions taken in fiscal 2000 totaled $40 million, or $0.02 per diluted share after tax, related2001, 2002 and 2003 were intended to merger expenses forbetter align Applied’s cost structure with prevailing market conditions due to the acquisitionprolonged industry downturn. These actions, which were necessary as a result of Etec.reduced business volume, reduced Applied’s global workforce and consolidated global facilities.

Non-recurring items     Restructuring, asset impairments and other charges for fiscal 2001 totaled $221 million, or $0.09 per diluted share after tax, consisting of a pre-tax charge of $10 million for acquired in-process research and development and pre-tax restructuring and asset impairment charges of $211 million. During fiscal 2001, Applied recorded pre-taxThe restructuring and asset impairment charges of $211 million consistingconsisted of $105 million for headcount reductions, $45 million for consolidation of facilities and $61 million for other costs, primarily fixed asset write-offs. These restructuring actions occurred in Applied's second, third and fourth fiscal quarters, and were takenwriteoffs due to better align Applied's cost structure with prevailing market conditions. Duringfacility consolidation. As of October 26, 2003, the second fiscal quarter of 2001, Applied completed a voluntary separation plan that resulted in a headcount reduction of approximately 1,000 employees, or three percent of its global workforce, for a cost of $47 million. During the third fiscal quarter of 2001, Applied recorded a pre-tax restructuring charge of $4 million associated with severance and benefit costs. During the fourth fiscal quarter of 2001, Applied eliminated approximately 2,000 additional positions, or 10 percent of its global workforce, for a cost of $54 million. The majority of the affected employees were based in Santa Clara, Californiafiscal 2001 restructuring actions have been completed.

     Restructuring, asset impairments and Austin, Texas, and represented multiple company activities and functions.

Non-recurring itemsother charges for fiscal 2002 totaled $85 million, or $0.04 per diluted share after tax, consisting of a pre-tax charge of $8 million for acquired in-process research and development and a pre-tax restructuring chargeand asset impairment charges of $77 million. The pre-tax restructuring charge, which was recorded in the first fiscal quarter of 2002,and asset impairment charges consisted of $39 million for headcount reductions, $16 million for consolidation of facilities and $22 million for other costs, primarily fixed asset write-offs. This restructuring action was taken to better align Applied's cost structure with prevailing market conditionswriteoffs due to facility consolidation. As of October 26, 2003, the prolonged industry downturn, and it reduced Applied's global workforce by approximately 1,100 employees, or six percent. The majority of the affected employees were basedfiscal 2002 restructuring actions have been completed.

     Restructuring, asset impairments and other charges for fiscal 2003 totaled $372 million, consisting of $186 million for headcount reductions, $86 million for consolidation of facilities and $100 million for other costs, primarily fixed asset writeoffs due to facility consolidation. The fiscal 2003 restructuring activities are expected to be completed during early 2004, which will result in Santa Clara, California and Austin, Texas, and represented multiple company activities and functions.additional costs.

For further details, see Note 6 of Notes to Consolidated Financial Statements.

Non-recurring Income
Non-recurring income of $68 million for fiscal 2000 was related to a 1998 litigation settlement with ASM International, N.V. For further details, see Note 7 of Notes to Consolidated Financial Statements.

Net Interest Income
Net interest income was $133 million for fiscal 2000, $174 million for fiscal 2001, and $131 million for fiscal 2002. The increase2002 and $102 million for fiscal 2001 was due primarily to higher average cash and investment balances.2003. The decrease forin net interest income in fiscal 2002 and 2003 was due primarily to lower average interest rates.

Provision for Income Taxes
Applied'sApplied’s effective income tax provision/(benefit) rate was 30.0 percent for fiscal 2000, 29.8 percent for fiscal 2001, and 21.0 percent for fiscal 2002. Applied expected an effective rate of 29.52002 and (29.5) percent for fiscal 2001, which decreased from the fiscal 2000 effective rate due to a shift in the geographic composition of Applied's pre-tax income.2003. The actual effective rate for fiscal 2001 of 29.8 percent differed from the expectedanticipated effective rate of 29.5 percent due to the non-tax deductible nature of $10 million of acquired in-process research and development expense. Applied'sexpense and a shift in the geographic composition of Applied’s pre-tax income. Applied’s actual effective rate of 21.0 percent for fiscal 2002 differed from the anticipated effective rate of 29.5 percent primarily due to significant Foreign Sales Corporation and extraterritorial income tax benefits. Absentbenefits, which resulted from an increase in Foreign Sales Corporation and extraterritorial qualified income. Without these additional benefits, earnings per diluted share would have been reduced by $0.02 for fiscal 2002. Applied's2002. Applied expected and experienced an actual effective benefit rate of 29.5 percent for fiscal 2003. Applied’s future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of Applied'sApplied’s pre-tax income and non-tax deductible expenses incurred in connection with acquisitions and the effectiveness of its tax planning strategies.acquisitions.

Business Combinations
On November 20, 2001,April 18, 2003, Applied acquired the assets of Schlumberger's electron-beam wafer inspection business for $66 million in cash. On December 3, 2001, Applied acquired Global Knowledge Services,Boxer Cross, Inc., a providerproducer of advancedin-line monitoring systems that provide customers with critical electrical measurement data mining services to improvefor controlling semiconductor manufacturing yield and efficiency,processes, for $16$14 million in cash. On April 8, 2002, Applied acquired Electron Vision Corporation, a designer, manufacturer and seller of e-beam stabilization and curing tools for the semiconductor, thin film head and micro-fabrication industries, for $26 million in cash.

On December 3, 2001, Applied also made acquisitionsacquired Global Knowledge Services, Inc., a provider of advanced data mining services to improve semiconductor manufacturing yield and efficiency, for $16 million in fiscal 2000 and fiscal 2001.cash. On November 20, 2001, Applied acquired the assets of Schlumberger’s electron-beam wafer inspection business for $66 million in cash. On June 27, 2001, Applied acquired Oramir, a supplier of advanced laser cleaning technology for semiconductor wafer, for $21 million in cash.

     For further details, see Note 1312 of Notes to Consolidated Financial Statements.

SUBSEQUENT EVENT

On November 4, 2002, Applied announced a headcount reduction of approximately 1,750 positions, or 11 percent of its global workforce, in response to the continuing downturn in the semiconductor industry. The majority of the affected employees were based in Santa Clara, California and Austin, Texas, and represented multiple company activities and functions. As a result of these activities, Applied will record a restructuring charge for the first fiscal quarter of 2003.19

RECENT ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncement

In August 2001,January 2003, the Financial Accounting Standards Board (FASB) issued StatementFASB Interpretation No. 46 (FIN 46), “Consolidation of Financial Accounting Standards (SFAS)Variable Interest Entities, an interpretation of ARB No. 143, "Accounting51.” FIN 46 provides guidance on: 1) the identification of entities for Asset Retirement Obligations." SFAS No. 143 addresseswhich control is achieved through means other than through voting rights, known as “variable interest entities” (VIEs); and 2) which business enterprise is the primary beneficiary and when it should consolidate a VIE. This new requirement for consolidation applies to entities: 1) where the equity investors (if any) do not have a controlling financial accountinginterest; or 2) whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and reportingall other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for obligations associated withall new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the retirementprovisions of tangible long-lived assetsFIN 46 must be applied for the first interim or annual period ending after December 15, 2003. Certain disclosures are effective immediately. Applied holds an interest in a venture fund, Applied Materials Ventures I, L.P. (Ventures I). Applied will implement FIN 46 during the first fiscal quarter of 2004 and the associated retirement costs.will consolidate Ventures I as a VIE. Applied does not expect the adoption of SFAS No. 143, which will be effective for Applied's fiscal 2003,implementation to have a material effect on itsthe financial condition or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal For additional discussion of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Applied does not expect the adoption of SFAS No. 144, which will be effective for Applied's fiscal 2003, to have a material effect on its financial condition or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Applied does not expect the adoption of SFAS No. 145, which will become effective at varying dates from May 2002 to Applied's fiscal 2003, to have a material effect on its financial condition or results of operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Applied does not expect the adoption of SFAS No. 146 to have a material effect on its financial condition or results of operations.

For further details regarding the abovethis recent accounting pronouncements,pronouncement and Ventures I, see Note 1 and Note 3 of the Notes to the Consolidated Financial Statements.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Financial Condition, Liquidity and Capital Resources

Applied increased its cash, cash equivalents and short-term investments from $4.8 billion at October 28, 2001 to $4.9 billion at October 27, 2002. Applied has generated $3.72002 to $5.5 billion of cash from operating activities during the past three years, primarily from net income and working capital management.at October 26, 2003. Applied has not undertaken any significant external financing activities for several years.

Applied generated cash from operating activities of $1.7 billion for fiscal 2000, $1.6 billion for fiscal 2001, and $492 million for fiscal 2002.2002 and $802 million for fiscal 2003. The primary sources of cash from operating activities have been net income, as adjusted to exclude the effect of non-cash charges, and changes in working capital requirements,levels, including accounts receivable and inventories. Applied utilized programs to sell accounts receivable of $1.5 billion for fiscal 2000, $1.2 billion for fiscal 2001, and $689 million for fiscal 2002.2002 and $556 million for fiscal 2003. These accounts receivable sales had the effect of increasing cash and reducing accounts receivable and days sales outstanding. Days sales outstanding was 68 days at the end of fiscal 2003, compared to 66 days at the end of fiscal 2002 compared toand 56 days at the end of fiscal 2001 and 73 days at the end2001. A portion of fiscal 2000.these sold accounts receivable is subject to certain limited recourse provisions. However, Applied has not experienced any losses under these programs, and receivables sold under these programs have terms and credit risk characteristics similar to Applied's overall receivables portfolio.programs. For further details regarding accounts receivable sales, see Note 1211 of Notes to Consolidated Financial Statements.Statements. Inventories were reduced by $139$323 million in fiscal 20022003 due to lower systems inventories, partially offset by an increase in customer service spares inventories to support new 300mm products shipped to customers.ongoing inventory reduction and management programs.

Applied used $1.0$1.6 billion of cash for investing activities for fiscal 2000, $1.6 billion for fiscal 2001, and $693 million for fiscal 2002.2002 and $731 million for fiscal 2003. Capital expenditures, net of retirements, were $383 million for fiscal 2000, $711 million for fiscal 2001, and $417 million for fiscal year 2002 and $212 million for fiscal 2003, totaling $1.5$1.3 billion for the past three years. Application laboratories, equipment and related facilities comprised most of the capital spending. The largest capital expenditure for the last three years was the$153 million for additional construction and fit-up of the Maydan Process Module Technology Center in Sunnyvale, California where Applied'sApplied’s demonstration laboratories for new technology applications are located. Fiscal 2002 capital expenditures also included $65 million for the purchase of properties in Santa Clara, California that were previously held under a synthetic lease. Fiscal 2003 capital expenditures also included $52 million for the purchase of facilities in Hillsboro, Oregon that were previously held under a synthetic lease. Investing activities also included purchases and sales of short-term investments and acquisitions of technology or of other companies to allow Applied to access new market segmentsopportunities or emerging technology.technologies.

Applied generated $149used $261 million of cash from financing activities for fiscal 2000, used $261 million for fiscal 2001, and generated $131 million for fiscal 2002. Net common stock activities (issuances of common stock under employee stock plans, offset by share repurchases) generated $992002 and $8 million for fiscal 2000 as a result of a significant increase in option exercises by employees, reflecting Applied's higher average stock price, partially offset by stock repurchases.2003. During fiscal 2001, net common stock activity used $169 million of cash as stock repurchases increased and stock sales to employees decreased, reflecting Applied's lower average stock price in fiscal 2001.decreased. During fiscal 2002 and 2003, net common stock activity generated $75 million and $73 million of cash due toas proceeds received from stock sales to employees and lowerexceeded the amount used for stock repurchases. Since March 1996, Applied has systematically repurchased shares of its common stock in the open market to partially fund its stock-based employee benefit and incentive plans. Financing activities also included borrowings and repayments of debt. ChangesNet changes in debt generated $50 million of cash for fiscal 2000, used $92 million of cash for fiscal 2001, and generated $56 million of cash for fiscal 2002.2002 and used $64 million of cash for fiscal 2003.

To date, Applied has not declared or paid cash dividends to its stockholders due to a number of factors, including the volatile nature of the semiconductor industry and the potential requirements to finance working capital in the event of a significant upturn in business. Applied reevaluates this practice from time to time but is not contemplating the payment of a cash dividend.20

     On March 21, 2002, Applied'sApplied’s Board of Directors approved a two-for-one stock split of Applied'sApplied’s common stock, which was distributed in the form of a 100 percent stock dividend on or about April 16, 2002 to stockholders of record as of April 1, 2002.

Although cash requirements will fluctuate based on the timing and extent of these factors, Applied'sApplied’s management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy Applied'sApplied’s liquidity requirements for the next 12 months. For further details regarding Applied'sApplied’s operating, investing and financing activities for each of the three years in the period ended October 27, 2002,26, 2003, see the Consolidated Statements of Cash Flows in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

     During the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either Applied or its subsidiaries. As of October 26, 2003, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $56 million. Applied has not recorded any liability in connection with these guarantee arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements.

     Applied also has additional guarantee arrangements on behalf of certain subsidiaries. As of October 26, 2003, Applied has not recorded any liability related to guarantees of subsidiary obligations. Applied does not expect, based on historical experience and information currently available, that it is probable any amounts will be required to be paid under these arrangements. Subsidiary guarantees as of October 26, 2003 were associated with the following types of arrangements: short-term borrowings, term loans, overdrafts and leases. While certain subsidiaries have short-term borrowing, term loans and overdraft facilities available totaling approximately $169 million as of October 26, 2003, no amounts were outstanding as October 26, 2003. In the event of use and subsequent default of these facilities by Applied’s subsidiaries, such arrangements would be guaranteed by Applied. In addition, certain subsidiaries have lease arrangements guaranteed by Applied. These leases will expire between 2009 and 2014. In the event that the subsidiaries do not make the required payments, Applied could be required to pay the leases on behalf of the subsidiaries. As of October 26, 2003, annual lease obligations under these arrangements approximated $12 million.

     Ventures I invests in privately-held, early-stage companies engaged in developing systems, components and devices based on nanotechnology for specific applications and products. Ventures I is a limited partnership with Applied as the sole limited partner and an independent party as the general partner. Applied has committed to fund $50 million in capital contributions, but has reserved the option to discontinue capital contributions at $25 million. Applied’s capital contributions to Ventures I totaled approximately $9 million through October 27, 2002 and $16 million through October 26, 2003. See Note 3 of Notes to Consolidated Financial Statements for further details on Ventures I.

     Applied also has operating leases for various facilities. Total rental expense for operating leases was $153 million for fiscal 2001, $140 million for fiscal 2002 and $134 million for fiscal 2003.

The following table summarizes the effect on Applied'sApplied’s liquidity and cash flows from contractual obligations of debt arrangements and noncancellablenon-cancelable operating leases as of October 27, 2002:

Fiscal year ended     2003   2004   2005   2006   2007  Thereafter   Total
- -------------------- ------ ------ ------ ------ ------ ---------- --------
(In millions)

Debt maturities......   $9   $109    $50     $7   $202       $206     $583
Noncancellable
  operating leases...  133    110     81     38     32        115      509
- -------------------- ------ ------ ------ ------ ------ ---------- --------
                      $142   $219   $131    $45   $234       $321   $1,092
- -------------------- ------ ------ ------ ------ ------ ---------- --------

CRITICAL ACCOUNTING POLICIESCritical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

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A critical accounting policy is defined as one that is both material to the presentation of Applied'sApplied’s financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on Applied'sApplied’s financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) Applied is required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates Applied could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Applied'sApplied’s financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. Applied bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as Applied'sApplied’s operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in the section below entitled "Trends,“Trends, Risks and Uncertainties."” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Applied'sApplied’s consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and presentprovide a meaningful presentation of Applied'sApplied’s financial condition and results of operations.

Management believes that the following are critical accounting policies:

Warranty Costs
Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration experience statistics and regional warranty support costs. Applied'sApplied’s warranty obligation is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. As Applied'sApplied’s customer engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from Applied'sApplied’s estimates, revisions to the estimated warranty liability would be required, which could have a material adverse effect on Applied'sApplied’s business, financial condition and results of operations.

Inventories
Inventories are generally stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated market value based upon assumptions about future demand. Applied evaluates the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders are evaluated for potential obsolescence.and new products. If actual demand were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory maymight be required, which could have a material adverse effect on Applied'sApplied’s business, financial condition and results of operations.

Goodwill and Intangible Assets
Applied reviews goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also reviews goodwill annually in accordance with SFASStatement of Financial Accounting Standards (SFAS) No. 142 "Goodwill(SFAS 142), “Goodwill and Other Intangible Assets."” Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is determined by an independent valuation firmusually based on estimates and judgment regarding expectations for the success and life cycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, Applied may be required to record an impairment charge to write down the asset to its realizable value. In addition, SFAS No. 142 requires that goodwill be tested annually using a two-step process. The first step is to identify any potential impairment by comparing the carrying value of the reporting unit to its fair value. If a potential impairment is identified, the second step is to compare the implied fair value of goodwill with its carrying amount to measure the impairment loss. The fair value of a reporting unit is estimated using the market multiples approach, and is dependent on market values for companies in a similar industry. A severe decline in market value could result in an unexpected impairment charge tofor impaired goodwill, which could have a material adverse effect on Applied'sApplied’s business, financial condition and results of operations.

Income Taxes
22

Applied accounts for income taxes in accordance with SFAS No. 109, "Accounting(SFAS 109) “Accounting for Income Taxes,"” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Management has determined that it is more likely than not that its future taxable income will be sufficient to realize its deferred tax assets.

Applied provides for income taxes based upon an annual estimated effective income tax rate. The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, non-tax deductible expenses incurred in connection with acquisitions and availability of tax credits and the effectiveness of Applied's tax planning strategies.credits. Management carefully monitors the changes in many factors and adjusts the effective income tax rate on a timely basis. If actual results differ from these estimates, Applied could be required to record a valuation allowance on deferred tax assets or adjust its effective income tax rate, which could have a material adverse effect on Applied'sApplied’s business, financial condition and results of operations.

TRENDS, RISKS AND UNCERTAINTIES

The industry that Applied serves is highly volatileTrends, Risks and unpredictable.Uncertainties

As a supplier to the global semiconductor industry, Applied is subject to the industry’s business cycles, that characterize the industry-the timing, length and volatility of these cycleswhich are difficult to predict. The semiconductor industry has historically been cyclical because of sudden changes in demand for semiconductors and manufacturing capacity, requirements, including capacity utilizing the latest technology. The rate of changes in demand, including end demand, is accelerating, and the effect of these changes uponon Applied is occurring sooner, exacerbating the volatility of these cycles. These changes have affected the timing and amounts of customers'customers’ capital equipment purchases and investments in new technology. These industry cycles create pressure on Applied'stechnology, and continue to affect Applied’s net sales, gross margin and net income.results of operations. In addition to affecting Applied'sApplied’s customers and suppliers, these business cycles also challenge key management, engineering and other employees of Applied who are vital to Applied's success.Applied.

During periods of decliningincreasing demand for semiconductor manufacturing equipment, customers typically reduce purchases, delay delivery of products and/or cancel orders. During downturns, Applied must be able to timely and effectively align its cost structure with prevailing market conditions, to manage its inventory levels to reduce the possibility of future inventory write-downs resulting from obsolescence and liability to suppliers for order cancellations, and to motivate and retain key employees. During periods of rapid growth, Applied must be able to acquire and/or develophave sufficient manufacturing capacity and inventory to meet customer demand, and must be able to attract, hire, assimilate and retain a sufficient number of qualified people.individuals. The semiconductor industry appears to be in the early stages of an upturn. However, management cannot predict the sustainability of a recovery, if any, and/or the industry’s rate of growth in such a recovery, both of which will be affected by many factors, including the global uncertainties discussed below. If Applied is unable to achieveeffectively manage its objectives in a timely mannerresources and production capacity during changes in business conditions,an industry upturn, there could be a material adverse effect on its business, financial condition and results of operations.

The semiconductor equipment industry is currently experiencing a continued Conversely, in downturns, Applied must be able to appropriately align its cost structure with prevailing market conditions and prolonged downturn. Management believes that this current downturn may be the most severe decline in historyeffectively motivate and cannot predict when a recovery will begin or what the industry's rate of growth will be in such a recovery.

Applied is exposedretain key employees. In response to the risksdownturn that began in fiscal 2001, Applied continues the implementation of operating a global business.
Currently, 74 percent of Applied's revenues result from sales outside the U.S.,realignment activities in order to align its cost structure with an increasing percentage of sales to customers headquartered in Asia. Certain manufacturing facilities and suppliers are also located outside the U.S. Managing Applied's global operations presents challenges, including periodic regional economic downturns, trade balance issues, varying business conditions and demands, political instability, variations in enforcement of intellectual propertyto enable Applied to focus resources on core research and contract rights in different jurisdictions, differences indevelopment programs. If Applied is unable to implement these realignment activities according to the abilitytimetable and to develop relationships with suppliers and other local businesses, changes in U.S. and international laws and regulations including U.S. export restrictions, fluctuations in interest and currency exchange rates, the ability to provide sufficient levels of technical support in different locations, cultural differences, shipping delays and terrorist actsextent anticipated, if implementation negatively affects Applied’s operations, net sales or acts of war, among other risks. Many of these challenges are present in China, which represents a large potential market for semiconductor equipment and whereprofitability, or if Applied anticipates significant opportunity for growth. Global uncertainties with respect to: 1) economic growth rates in various countries; 2) sustainability of demand for electronics products; 3) capital spending by semiconductor manufacturers; 4) price weakness for certain semiconductor devices; and 5) political instability in regions where Applied has operations, such as Israel and Asia, may also affect Applied'sdoes not maintain effective cost controls, Applied’s business, financial condition, andor results of operations.operations may be negatively affected.

23

Because it operates in a highly competitive industry characterized by increasingly rapid technological changes.
Applied'senvironment, Applied’s future success depends on performing better thanis heavily dependent upon effective development, commercialization and customer acceptance of its competitors in a numbernew products and services over those of ways, including its competitors. Specifically, these risks may include, but are not limited to, Applied’s ability to timely and cost-effectively: 1) develop new products, services and technologies, including those utilizing new materials, such as copper;copper and low-k materials; 2) develop improvements toimprove existing products, services and technologies; 3) develop new markets in the semiconductor industry for itsApplied’s products and services; 4) introduce new products and services to the marketplace; 5) achieve market acceptance;acceptance and accurately forecast demand for its products and services; 6) transition from 200mm systems to 300mm systems; 7) qualify new or improved products for volume manufacturing with its customers; 7)8) commence and adjust production to meet customer demands; and 8)9) price products and services appropriately.appropriately; and 10) lower customers’ cost of ownership. The development, introduction of and the ability to support of an increasingly broaderbroad set of new or improved products, services and technologies, including those enabling the transition to smaller device feature sizes, new materials and 300mm wafers, growsgrow increasingly complex and expensive over time. Such new or improved products and services may involve higher costs and reduced efficiencies compared to Applied'sApplied’s more established products and services and could adversely affect Applied'sApplied’s gross margins. If Applied does not develop and introduce new or improved products, services and technologies in a timely and cost-effective manner in response to changing market conditions or customer requirements, its competitive position, financial condition and results of operations could be materially and adversely affected.

The semiconductor industry is characterized by rapid ongoing changes, in the semiconductor industry.
Ongoing changes in the semiconductor industry, includingincluding: 1) more complex technology requirements, 2) the growth in Asia, increasing pressure on semiconductor manufacturers to allocate resources to activities that enhance their competitive advantage,changing information technology cost structure and the importance of driving down cost of ownership, 3) the increasing significance of consumer electronics as a driver for chip demand for semiconductors and the related focus on lower costs, have in turn resultedprices, 4) the growing type and variety of integrated circuits and applications, 5) an increasing number of applications across multiple substrate sizes in the increasing importance of spares and service assemiconductor industry, resulting in divergent interests among semiconductor manufacturers, 6) a growingrising percentage of semiconductor equipment suppliers' business. These changes are also requiringbusiness from customers in Asia and emergence of customers and competitors in new geographical regions, 7) customer demands for increasingly shorter lead times for the manufacture and installation of semiconductor manufacturing equipment suppliers to provideand 8) higher capital requirements for new semiconductor fabrication plants. These factors are increasing levelsthe need for customer partnering, use of foundries, collective research and development efforts and process integration support. These trends also heighten the importance of spare parts and services as a competitive advantage for semiconductor equipment manufacturers. In addition, key integrated circuit manufacturers have become influential in technology decisions made by their global partners. If Applied does not successfully manage the risks resulting from thesethe ongoing changes occurring in the semiconductor industry, its business, financial condition and results of operationsoperation could be materially and adversely affected.

Applied is exposed to risks associated with a highly concentrated customer base.
Applied'sApplied’s customer base is and has been highly concentrated. Orders from a relatively limited number of semiconductor manufacturers of integrated circuits have accounted for, and likely will continue to account for, a substantial portion of Applied'sApplied’s net sales, which may lead customers to demand pricing and other terms less favorable to Applied. In addition, sales to any single customer may vary significantly from quarter to quarter. If current customers delay, cancel or do not place orders, Applied may not be able to replace these orders with new orders. As Applied'sApplied’s products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant and often non-recoverable costs. The resulting fluctuations in the amount of orand terms forof orders could have a material adverse effect on Applied'sApplied’s business, financial condition and results of operations.

Manufacturing interruptions or delays could affect Applied's     During fiscal 2003, more than 70 percent of Applied’s net sales were to regions outside the United States. Certain manufacturing facilities and suppliers of Applied are also located outside the United States. Managing Applied’s global operations presents challenges, including those arising from periodic regional economic downturns, trade balance issues, varying business conditions and demands, variations in enforcement of intellectual property and contract rights in different jurisdictions, differences in the ability to meet customer demand.
Applied'sdevelop relationships with suppliers and other local businesses, changes in U.S. and international laws and regulations including U.S. export restrictions, fluctuations in interest and currency exchange rates, the need to provide

24

Applied’s success depends in large part on its ability to attract, retain and motivate key employees, including those in managerial, technical, marketing and support roles. Achieving this objective may be difficult due to changes in the global economy, the industry, Applied’s workforce actions and realignment activities, and its changes in management. If Applied does not successfully attract, retain and motivate key employees, the Company’s operating results and ability to capitalize on its opportunities may be materially and adversely affected.

Applied’s business depends on its ability to manufacturesupply products that meet the rapidly changing demands of its customers. Applied's ability to manufacturecustomers, which depends in part on the timely delivery of parts, components, and subassemblies (collectively "parts")(parts) from suppliers. Some key parts may be obtained only from a single supplier or a limited group of suppliers. In addition, Applied outsources certain manufacturing activities. Significant interruptions of manufacturing operations as a result of the failure or inability of suppliers to timely deliver quality parts, outsourcing difficulties, natural disasters (such as earthquakes or tornadoes), or other causes (such as information technology or infrastructure failures, regional economic downturns, political instability, or terrorist acts orterrorism, acts of war)war, or epidemics) could result in delayed product deliveries or manufacturing inefficiencies. Any or all of these factors could materially and adversely affect Applied'sApplied’s business, financial condition and results of operations.

Applied has made, and may in the future make, acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. Acquisitions involve numerous risks, including but not limited to: 1) diversion of management’s attention from other operational matters; 2) the inability to realize expected synergies resulting from the acquisition; 3) failure to commercialize purchased technology; 4) impairment of acquired intangible assets as a result of technological advancements or worse-than-expected performance of the acquired company; 5) integration and retention of key employees; and 6) integration of operations. Mergers and acquisitions are inherently subject to significant risks, and the inability to effectively manage these risks could materially and adversely affect Applied’s business, financial condition and results of non-compliance with environmental and safety regulations.
operations.

Applied is subject to environmental and safety regulations in connection with its business operations, including but not limited to regulations related to the development, manufacturingmanufacture and use of its products. Failure or inability to comply with existing or future environmental and safety regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of development, manufacturingmanufacture or use of certain of its products, each of which could have a material adverse effect on Applied'sApplied’s business, financial condition and results of operations.

Applied is exposed to risks associated with acquisitions.
Applied has made, and may in the future make, acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. Acquisitions involve numerous risks, including but not limited to: 1) diversion of management's attention from other operational matters; 2) the inability to realize expected synergies resulting from the acquisition; 3) failure to commercialize purchased technology; and 4) impairment of acquired intangible assets as a result of technological advancements or worse-than-expected performance of the acquired company. Mergers and acquisitions are inherently subject to multiple significant risks, and the inability to effectively manage these risks could materially and adversely affect Applied's business, financial condition and results of operations.

Applied is exposed to various risks related to the regulatory environment.
Applied is subject to various risks related to: 1) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countriesregions in which Applied operates and with which Applied must comply; and 2) disagreements or disputes between national or regional regulatory agencies related to international trade.

For example, the World Trade Organization (WTO) has determined that the U.S. Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) exclusion constitute a prohibited export subsidysubsidies warranting the possible imposition of trade sanctions on certain goods, including semiconductor manufacturing equipment.goods. Applied has benefited from FSC and ETI tax provisions. Theprovisions, and the elimination of these tax benefits or imposition of sanctions could materially and adversely affect Applied's business,Applied’s financial condition and results of operations.

25

During fiscal 2002, Applied filed an application with the SEC for an exemptive order confirming that it is not subject to the Investment Company Act of 1940 (the Act), which requires companies primarily engaged in the business of investing in securities to comply with additional rules and regulations. Largely due to the industry downturn, Applied'sApplied’s ratios of investments to total assets and of interest income to net income have increased, resulting in the risk that Applied could be deemed to be covered by the Act. If the SEC does not grant the exemption, Applied may have to take other actions that could adversely affect its results of operations in order not to be subject to the Act.

Applied is exposedfrom time to various risks related to legal proceedings or claims.
Applied currentlytime is, and in the future may be, involved in legal proceedings or claims regarding patent infringement, intellectual property rights, antitrust, environmental regulations, securities, contracts, product performance, product liability, employment and other matters (see Item 3: Legal Proceedings).matters. In addition, from time to time, Applied on occasion receives notification from customers who believe that Applied owes them indemnification or other obligations related to infringement claims made against the customers by third parties. These legal proceedings and claims, whether with or without merit, are time-consuming and expensive to prosecute or defend and divert management'smanagement’s attention and resources. There can be no assurance regarding the outcome of current or future legal proceedings or claims. In addition, Applied'sApplied’s intellectual property rights may not provide significant competitive advantages if they are circumvented, invalidated or obsoletedrendered obsolete by the rapid pace of technological change. Furthermore, the laws of other countries permit the protection of Applied'sApplied’s proprietary rights to varying extents, compared to U.S. laws. Applied'sApplied’s success is dependent in part upon the protection of its intellectual property rights. Infringement of Applied'sApplied’s rights by a third party could result in uncompensated lost market and revenue opportunities for Applied. If Applied is not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend its position, Applied'sApplied’s business, financial condition and results of operations could be materially and adversely affected.

Interest Rate Risk

At October 27, 2002, Applied's26, 2003, Applied’s investment portfolio included fixed-income securities with a fair value of approximately $4.2$5.0 billion. These securities are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of Applied'sApplied’s investment portfolio, an immediate 10 percent change in interest rates is not expected to have a material effect on Applied'sApplied’s near-term financial condition or results of operations.

Applied's     Applied’s long-term debt bears interest primarily at fixed rates; therefore, Applied'sApplied’s results of operations would be affected by interest rate changes only to the extent that variable rate short-term notes payable are outstanding. Due to the short-term nature and relatively insignificant amount of Applied'sApplied’s short-term notes payable, an immediate 10 percent change in interest rates is not expected to have a material effect on Applied'sApplied’s near-term financial condition or results of operations.

Foreign Currency Exchange Rate Risk

Certain operations of Applied are conducted in foreign currencies, such as Japanese yen, the euro, Israeli shekel and British pounds.pound. Applied enters into forward exchange and currency option contracts to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions expected to occur within 12 months. Gains and losses on these contracts are generally recognized in the Consolidated Statements of Operations at the time that the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on forward exchange and currency option contracts generally offsets the related effect on the underlying items being hedged, these financial instruments are not expected to subject Applied to risks that would otherwise result from changes in currency exchange rates. Applied does not use derivative financial instruments for trading or speculative purposes. Net foreign currency gains and losses did not have a material effect on Applied'sApplied’s results of operations for fiscal 2000, 2001, 2002 or 2002.2003.

Forward exchange contracts are denominated in the same currency as the underlying transactions (primarily Japanese yen, the euro, Israeli shekel and British pounds)pound), and the terms of the forward exchange contracts generally match the terms of the underlying transactions. Applied'sApplied’s outstanding forward exchange contracts are marked to marketmarked-to-market (see Note 2 of Notes to Consolidated Financial Statements), as are the majority of the related underlying transactions being hedged; therefore, the effect of exchange rate changes on forward exchange contracts is expected to be substantially offset by the effect of these changes on the

26

Item 8: Financial Statements and Supplementary Data

The consolidated financial statements required by this Item are set forth on the pages indicated at Item 15(a).

PART IIINone.

Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of the informationAs required by Part III of Form 10-K are incorporated by reference from Applied's Proxy Statement to be filed withRule 13a-15(b), Applied management, including the SEC in connection with the 2003 Annual Meeting of Stockholders ("the Proxy Statement").

Item 10: DirectorsChief Executive Officer and Executive Officers of the Registrant

(a) Information concerning directors of Applied appears in Applied's Proxy Statement, under "Election of Directors." This portion of the Proxy Statement is incorporated herein by reference.

(b) For information with respect to Executive Officers, see Part I of this Annual Report on Form 10-K, under "Executive Officers of the Registrant."

(c) Information concerning Section 16(a) beneficial ownership reporting compliance appears in Applied's Proxy Statement, under "Section 16(a) Beneficial Ownership Reporting Compliance." This portion of the Proxy Statement is incorporated herein by reference.

Item 11: Executive Compensation

Information concerning executive compensation appears in Applied's Proxy Statement, under "Executive Compensation and Related Information." This portion of the Proxy Statement is incorporated herein by reference.

Item 12: Security Ownership of Certain Beneficial Owners and Management

Information concerning the security ownership of certain beneficial owners and management appears in Applied's Proxy Statement, under "Principal Stockholders." This portion of the Proxy Statement is incorporated herein by reference.

The following table summarizes information with respect to options under Applied's equity compensation plans at October 27, 2002:

                                  Number of                           Number of securities
                               securities to be                       available for future
                                 issued upon       Weighted average   issuance under equity
                                 exercise of       exercise price of   compensation plans
                                 outstanding         outstanding      (excluding securities
                               options, warrants   options, warrants     reflected in
                                and rights(1)         and rights          column (a))
                                     (a)                  (b)                 (c)
- ------------------------------ ------------------- -----------------  -----------------------
(In thousands, except per share amounts)

Equity compensation
  plans approved by
  security holders........             166,710               $13.75                63,477 (2)
Equity compensation
  plans not approved by
  security holders........             101,852 (3)           $19.67                64,532 (4)
- ------------------------------ ------------------- -----------------  -----------------------
                                       268,562               $16.00               128,009
- ------------------------------ ------------------- -----------------  -----------------------

(1) Includes only options outstanding under Applied's stock option plans, as no stock warrants or rights were outstanding as of October 27, 2002.

(2) Includes 22,509 shares of common stock reserved for future issuance under the Applied Materials, Inc. Employees' Stock Purchase Plan.

(3) Includes options to purchase 2,858 shares of Applied's common stock assumed through various mergers and acquisitions, after giving effect to the applicable exchange ratios. These assumed options had a weighted average exercise price of $13.57 per share. No further shares are available for issuance under these assumed plans.

(4) Includes 8,626 shares of common stock reserved for future issuance under the Applied Materials, Inc. Employees' Stock Purchase Plan for Offshore Employees.

The equity compensation plans not approved by security holders have generally the same features as those approved by security holders. For further details regarding Applied's equity compensation plans, see Note 9 of Notes to ConsolidatedChief Financial Statements.

Item 13: Certain Relationships and Related Transactions

None.

Item 14: Controls and Procedures

Based on theirOfficer, conducted an evaluation as of a date within 90 daysthe end of the filing dateperiod covered by this report, of this Annual Report on Form 10-K, Applied's principal executive officer and principal financial officer have concluded that Applied'sthe effectiveness of Applied’s disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Applied’s disclosure controls and procedures were effective as of 1934 (the Exchange Act)the end of the period covered by this report. As required by Rule 13a-15(d), Applied management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of Applied’s internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have materially affected, or are effectivereasonably likely to ensurematerially affect, Applied’s internal control over financial reporting. Based on that information required to be disclosed by Applied in reports that it files or submits underevaluation, there has been no such change during the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.fourth fiscal quarter.

There were no significant changes in Applied's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and up to the filing date of this Annual Report on Form 10-K. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system arewill be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because

27

PART III

Pursuant to Paragraph G(3) of these and other inherent limitationsthe General Instructions to Form 10-K, portions of control systems, there canthe information required by Part III of Form 10-K are incorporated by reference from Applied’s Proxy Statement to be no assurance that any design will succeedfiled with the SEC in achieving its stated goalsconnection with the 2004 Annual Meeting of Stockholders (“the Proxy Statement”).

     (1) Information concerning directors, including Applied’s audit committee financial expert, appears in Applied’s Proxy Statement, under all potential future conditions, regardless“Election of how remote.

PART IVDirectors.” This portion of the Proxy Statement is incorporated herein by reference.

Item 15: Exhibits, Financial Statement Schedules, and Reports(2) For information with respect to Executive Officers, see Part I of this Annual Report on Form 8-K10-K, under “Executive Officers of the Registrant.”

     (3) Information concerning Section 16(a) beneficial ownership reporting compliance appears in Applied’s Proxy Statement, under “Section 16(a) Beneficial Ownership Reporting Compliance.” This portion of the Proxy Statement is incorporated herein by reference.

Applied has adopted the Standards of Business Conduct, a code of ethics with which every person who works for Applied is expected to comply. The Standards of Business Conduct are publicly available on Applied’s website under the Investors Section (athttp://www.appliedmaterials.com/ investors/cgstandards.html#1). This website address is intended to be an inactive, textual reference only; none of the material on this website is part of this report. If any substantive amendments are made to the Standards of Business Conduct or grant any waiver, including any implicit waiver, from a provision of the code to Applied’s Chief Executive Officer, Chief Financial Officer or Corporate Controller, Applied will disclose the nature of such amendment or waiver on that website or in a report on Form 8-K.

Information concerning executive compensation appears in Applied’s Proxy Statement, under “Executive Compensation and Related Information.” This portion of the Proxy Statement is incorporated herein by reference.

     Information concerning the security ownership of certain beneficial owners and management appears in Applied’s Proxy Statement, under “Principal Stockholders.” This portion of the Proxy Statement is incorporated herein by reference.

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The following table summarizes information with respect to options under Applied’s equity compensation plans at October 26, 2003:

(1)	Includes only options outstanding under Applied’s stock option plans, as no stock warrants or rights were outstanding as of October 26, 2003.
(2)	Includes 17,633 shares of common stock reserved for future issuance under the Applied Materials, Inc. Employees’ Stock Purchase Plan.
(3)	Includes options to purchase 1,994 shares of Applied’s common stock assumed through various mergers and acquisitions, after giving effect to the applicable exchange ratios. These assumed options had a weighted average exercise price of $14.26 per share. No further shares are available for issuance under these assumed plans.
(4)	Includes 7,295 shares of common stock reserved for future issuance under the Applied Materials, Inc. Employees’ Stock Purchase Plan for Offshore Employees.

The information appearing in Applied’s fiscal 2003 Proxy Statement under the heading “Certain Relationships and Related Transactions” is incorporated herein by reference.

     Information concerning principal accountant fees and services and the audit committee’s preapproval policies and procedures appear in Applied’s Proxy Statement under the heading “Fees Paid to PricewaterhouseCoopers LLP” and is incorporated herein by reference.

29

PART IV

(a) The following documents are filed as part of this Annual Report on Form 10-K:

(1) Financial Statements:

					Page Number
(1)		Financial Statements:
			Consolidated Statements of Operations for each of the three years in the period ended October 26, 2003			31
			Consolidated Balance Sheets at October 27, 2002 and October 26, 2003			32
			Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended October 26, 2003			33
			Consolidated Statements of Cash Flows for each of the three years in the period ended October 26, 2003			34
			Notes to Consolidated Financial Statements			35
			Report of Management			56
			Report of Independent Auditors			57
(2)		Financial Statement Schedule:
			Schedule II — Valuation and Qualifying Accounts for each of the three years in the period ended October 26, 2003			62
(3)		Exhibits:
			The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.

     (b) On August 12, 2003, Applied furnished under Item 12 of Form 8-K the press release announcing Applied’s financial results for the fiscal quarter ended July 27, 2003, Applied’s consolidated condensed balance sheets as of October 27, 2002 and July 27, 2003, and Applied’s consolidated condensed statements of operations for the three years inmonths and the periodnine months ended OctoberJuly 28, 2002 and July 27, 20022003.

Consolidated Balance Sheets at October 28, 2001 and October 27, 2002

Consolidated Statements of Stockholders' Equity for each of the three years in the period ended October 27, 2002

Consolidated Statements of Cash Flows for each of the three years in the period ended October 27, 2002

Notes to Consolidated Financial Statements

Report of Management

Report of Independent Accountants

(2) Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended October 27, 2002

(3) Exhibits:

The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.

(b) A Report on Form 8-K was filed on September 6, 2002. The report contained information announcing that the Principal Executive Officer, James C. Morgan, and Principal Financial Officer, Joseph R. Bronson, submitted to the SEC sworn statements pursuant to Securities and Exchange Commission Order No. 4-460.

All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

30

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

                                                        October 29,  October 28,   October 27,
Fiscal year ended                                          2000         2001         2002
- ------------------------------------------------------ ------------ ------------ -------------
(In thousands, except per share amounts)

Net sales...................................            $9,564,412   $7,343,248    $5,062,312
Cost of products sold.......................             4,708,684    4,091,215     3,005,651
- ------------------------------------------------------ ------------ ------------ -------------
Gross margin................................             4,855,728    3,252,033     2,056,661

Operating expenses:
    Research, development and engineering...             1,107,922    1,198,799     1,052,269
    Marketing and selling...................               483,316      508,214       385,693
    General and administrative..............               477,437      393,710       323,262
    Non-recurring items.....................                40,000      221,164        85,479
- ------------------------------------------------------ ------------ ------------ -------------
Income from operations......................             2,747,053      930,146       209,958

Non-recurring income........................                68,158          --            --

Interest expense............................                51,375       47,640        49,357
Interest income.............................               184,008      221,296       179,910
- ------------------------------------------------------ ------------ ------------ -------------
Income from operations before
    income taxes and cumulative effect
    of change in accounting principle.......             2,947,844    1,103,802       340,511

Provision for income taxes..................               884,292      328,574        71,507
- ------------------------------------------------------ ------------ ------------ -------------
Income from operations before
    cumulative effect of change
    in accounting principle.................             2,063,552      775,228       269,004

Cumulative effect of change in
    accounting principle, net of tax........                   --      (267,399)          --
- ------------------------------------------------------ ------------ ------------ -------------
Net income..................................            $2,063,552     $507,829      $269,004
- ------------------------------------------------------ ------------ ------------ -------------

Earnings per share:
    Basic--income from operations before
        cumulative effect of change
        in accounting principle.............                 $1.28        $0.48         $0.16
    Basic--cumulative effect of change
        in accounting principle.............                   --         (0.17)          --
- ------------------------------------------------------ ------------ ------------ -------------
        Total basic                                          $1.28        $0.31         $0.16
- ------------------------------------------------------ ------------ ------------ -------------
    Diluted--income from operations before
        cumulative effect of change
        in accounting principle.............                 $1.20        $0.46         $0.16
    Diluted--cumulative effect of change
        in accounting principle.............                   --         (0.16)          --
- ------------------------------------------------------ ------------ ------------ -------------
        Total diluted.......................                 $1.20        $0.30         $0.16
- ------------------------------------------------------ ------------ ------------ -------------
Weighted average number of shares:
    Basic...................................             1,613,160    1,626,404     1,643,612
    Diluted.................................             1,718,338    1,694,658     1,701,557
- ------------------------------------------------------ ------------ ------------ -------------