UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


(Mark One)
	þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended ~~August 1, 2010~~January 30, 2011
or
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number000-06920

Applied Materials, Inc.

(Exact name of registrant as specified in its charter)


Delaware		94-1655526
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3050 Bowers Avenue,		95052-8039
P.O. Box 58039 ~~Santa Clara, California~~		~~95052-8039~~ (Zip Code)
Santa Clara, California
(Address of principal executive offices)

(Registrant’s telephone number, including area code)

(408) 727-5555

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ

Number of shares outstanding of the issuer’s common stock as of ~~August 1, 2010: 1,336,068,013~~January 30, 2011: 1,319,407,222

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
CONSOLIDATED CONDENSED BALANCE SHEETS*
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
APPLIED MATERIALS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Item ~~2. Unregistered Sales of Equity Securities and Use of Proceeds~~
~~Item~~ 3. Defaults Upon Senior Securities
	Item 4. ~~[Reserved]~~[Removed and Reserved]
	Item 5. Other Information
	Item 6. Exhibits
~~EX-10.73~~SIGNATURES
EX-10.60
EX-10.61
EX-10.62
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


											Three Months Ended
	Three Months Ended					Nine Months Ended					January 30,			January 31,
	August 1,		July 26,			August 1,		July 26,			2011			2010
	2010		2009			2010		2009			(Unaudited)
	(Unaudited)										(In millions, except
	(In thousands, except per share amounts)										per share amounts)

Net sales	$	2,517,790	$	1,133,740		$	6,662,232	$	3,487,213		$	2,686		$	1,849
Cost of products sold		1,657,662		808,866			4,164,028		2,615,244			1,550			1,138

Gross margin		860,128		324,874			2,498,204		871,969			1,136			711
Operating expenses:
Research, development and engineering		290,398		234,052			865,329		699,927			270			269
General and administrative		145,994		88,487			396,572		330,808			112			125
Marketing and selling		105,754		79,518			303,369		248,311			109			97
Restructuring and asset impairments		135,331		—			248,143		159,481
Restructuring charges and asset impairments (Note 10)												(29	)		104

Total operating expenses		677,477		402,057			1,813,413		1,438,527			462			595
Income (loss) from operations		182,651		(77,183	)		684,791		(566,558	)
Pre-tax loss of equity method investment		—		—			—		34,983
Impairment of equity method investment and strategic investments		7,804		2,341			12,665		79,422
Income from operations												674			116
Interest expense		5,496		4,893			15,762		15,945			5			5
Interest income		8,480		10,233			27,253		37,257
Interest income and other income, net												11			8

Income (loss) before income taxes		177,831		(74,184	)		683,617		(659,651	)
Provision (benefit) for income taxes		54,735		(19,319	)		213,766		(216,462	)
Income before income taxes												680			119
Provision for income taxes												174			36

Net income (loss)	$	123,096	$	(54,865	)	$	469,851	$	(443,189	)
Net income											$	506		$	83

Earnings (loss) per share:
Basic	$	0.09	$	(0.04	)	$	0.35	$	(0.33	)
Diluted	$	0.09	$	(0.04	)	$	0.35	$	(0.33	)
Earnings per share:
Basic and Diluted											$	0.38		$	0.06
Weighted average number of shares:
Basic		1,339,660		1,333,278			1,342,068		1,331,410			1,324			1,342
Diluted		1,348,808		1,333,278			1,350,587		1,331,410			1,335			1,350

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS*


		August 1,			October 25,				January 30,			October 31,
		2010			2009				2011			2010
		(In thousands)							(In millions, except per share amounts)

ASSETS	ASSETS							ASSETS
Current assets:
Cash and cash equivalents		$	1,564,337		$	1,576,381
Short-term investments			783,799			638,349
Accounts receivable, net			1,721,496			1,041,495
Inventories			1,590,052			1,627,457
Cash and cash equivalents (Notes 3 and 4)									$	1,974		$	1,858
Short-term investments (Notes 3 and 4)										772			727
Accounts receivable, net (Note 6)										1,946			1,831
Inventories (Note 7)										1,647			1,547
Deferred income taxes, net			577,442			356,336				512			513
Income taxes receivable			—			184,760
Other current assets			314,622			264,169				291			289

Total current assets			6,551,748			5,688,947				7,142			6,765
Long-term investments			1,279,515			1,052,165
Property, plant and equipment, net			983,790			1,090,433
Goodwill			1,336,426			1,170,932
Purchased technology and other intangible assets, net			300,401			306,416
Long-term investments (Notes 3 and 4)										1,351			1,307
Property, plant and equipment, net (Note 7)										893			963
Goodwill, net (Note 8)										1,336			1,336
Purchased technology and other intangible assets, net (Note 8)										273			287
Deferred income taxes and other assets			274,268			265,350				279			285

Total assets		$	10,726,148		$	9,574,243			$	11,274		$	10,943

															LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	1,848		$	1,240			$	1		$	1
Accounts payable and accrued expenses			1,643,606			1,061,502
Customer deposits and deferred revenue			1,036,938			864,280
Accounts payable and accrued expenses (Note 7)										1,582			1,766
Customer deposits and deferred revenue (Note 7)										1,055			847
Income taxes payable			207,080			12,435				276			274

Total current liabilities			2,889,472			1,939,457				2,914			2,888
Long-term debt			204,438			200,654				204			204
Employee benefits and other liabilities			354,099			339,524
Employee benefits and other liabilities (Note 12)										317			315

Total liabilities			3,448,009			2,479,635				3,435			3,407

Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock: $.01 par value per share; 2,500,000 shares authorized; 1,336,068 and 1,340,917 shares outstanding at August 1, 2010 and October 25, 2009, respectively			13,361			13,409
Stockholders’ equity (Note 11):
Common stock										13			13
Additional paid-in capital			5,368,862			5,195,437				5,447			5,406
Retained earnings			11,135,753			10,934,004				11,925			11,511
Treasury stock: 523,791 and 508,254 shares at August 1, 2010 and October 25, 2009, respectively, net			(9,246,407	)		(9,046,562	)
Accumulated other comprehensive income (loss)			6,570			(1,680	)
Treasury stock										(9,546	)		(9,396	)
Accumulated other comprehensive income										—			2

Total stockholders’ equity			7,278,139			7,094,608				7,839			7,536

Total liabilities and stockholders’ equity		$	10,726,148		$	9,574,243			$	11,274		$	10,943


*		Amounts as of ~~August 1, 2010~~January 30, 2011 are unaudited. Amounts as of October ~~25, 2009~~31, 2010 are derived from the October ~~25, 2009~~31, 2010 audited consolidated financial statements.

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)


															Accumulated																					Accumulated
							Additional								Other											Additional										Other
	Common Stock						Paid-In		Retained			Treasury			Comprehensive						Common Stock					Paid-In		Retained			Treasury Stock					Comprehensive
	Shares			Amount			Capital		Earnings			Stock			Income (Loss)			Total			Shares			Amount		Capital		Earnings			Shares		Amount			Income (Loss)			Total
	(Unaudited)																				(Unaudited)
	(In thousands)																				(In millions)

Nine Months Ended August 1, 2010
Balance at October 25, 2009		1,340,917		$	13,409		$	5,195,437	$	10,934,004		$	(9,046,562	)	$	(1,680	)	$	7,094,608
Balance at October 31, 2010																						1,328		$	13	$	5,406	$	11,511			537	$	(9,396	)	$	2		$	7,536
Components of comprehensive income, net of tax:
Net income		—			—			—		469,851			—			—			469,851			—			—		—		506			—		—			—			506
Change in unrealized net gain on investments		—			—			—		—			—			6,876			6,876			—			—		—		—			—		—			(1	)		(1	)
Change in unrealized net gain on derivative instruments		—			—			—		—			—			1,359			1,359			—			—		—		—			—		—			(1	)		(1	)
Change in defined and postretirement benefit plans liability		—			—			—		—			—			74			74
Translation adjustments		—			—			—		—			—			(59	)		(59	)

Comprehensive income																			478,101																					504
Dividends		—			—			—		(268,102	)		—			—			(268,102	)		—			—		—		(92	)		—		—			—			(92	)
Share-based compensation		—			—			94,772		—			—			—			94,772			—			—		33		—			—		—			—			33
Issuance under stock plans, net of a tax detriment of $11,842 and other		10,689			107			78,653		—			—			—			78,760
Issuance under stock plans																						2			—		8		—			—		—			—			8
Common stock repurchases		(15,538	)		(155	)		—		—			(199,845	)		—			(200,000	)		(11	)		—		—		—			11		(150	)		—			(150	)

Balance at August 1, 2010		1,336,068		$	13,361		$	5,368,862	$	11,135,753		$	(9,246,407	)	$	6,570		$	7,278,139
Balance at January 30, 2011																						1,319		$	13	$	5,447	$	11,925			548	$	(9,546	)	$	—		$	7,839

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


	Nine Months Ended						Three Months Ended
	August 1,			July 26,			January 30,			January 31,
	2010			2009			2011			2010
	(Unaudited)						(Unaudited)
	(In thousands)						(In millions)

Cash flows from operating activities:
Net income (loss)	$	469,851		$	(443,189	)
Adjustments required to reconcile net income (loss) to cash provided by operating activities:
Net income							$	506		$	83
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization		235,742			219,609			63			76
Loss on fixed asset retirements		14,505			16,165			1			4
Provision for bad debts		6,718			62,539			—			6
Restructuring and asset impairments		248,143			159,481
Restructuring charges and asset impairments								(29	)		104
Deferred income taxes		(214,984	)		96,117			10			(44	)
Net recognized loss on investments		15,532			13,083			4			6
Pre-tax loss of equity method investment		—			34,983
Impairment of investments		12,665			79,422
Share-based compensation		94,772			116,114			33			34
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable		(648,477	)		786,319			(115	)		(194	)
Inventories		100,305			238,510			(100	)		25
Income taxes receivable		184,760			(296,330	)		1			18
Other current assets		(37,936	)		49,990			(4	)		23
Other assets		(6,643	)		(7,134	)		—			(9	)
Accounts payable and accrued expenses		374,037			(632,193	)		(159	)		42
Customer deposits and deferred revenue		166,799			(314,250	)		208			123
Income taxes payable		192,054			(122,967	)		1			82
Employee benefits and other liabilities		(10,109	)		36,527			5			(7	)

Cash provided by operating activities		1,197,734			92,796			425			372

Cash flows from investing activities:
Capital expenditures		(134,044	)		(187,804	)		(24	)		(53	)
Cash paid for acquisition, net of cash acquired		(322,599	)		—			—			(323	)
Proceeds from sale of facility								39			—
Proceeds from sales and maturities of investments		967,067			1,121,026			443			184
Purchases of investments		(1,357,261	)		(649,417	)		(537	)		(297	)

Cash provided by (used in) investing activities		(846,837	)		283,805
Cash used in investing activities								(79	)		(489	)

Cash flows from financing activities:
Debt repayments, net		(5,684	)		(241	)		—			1
Proceeds from common stock issuances		98,920			29,406			13			20
Common stock repurchases		(200,000	)		(22,906	)		(150	)		—
Payment of dividends to stockholders		(255,032	)		(239,756	)		(93	)		(81	)

Cash used in financing activities		(361,796	)		(233,497	)		(230	)		(60	)

Effect of exchange rate changes on cash and cash equivalents		(1,145	)		742			—			—

Increase (decrease) in cash and cash equivalents		(12,044	)		143,846			116			(177	)

Cash and cash equivalents — beginning of period		1,576,381			1,411,624			1,858			1,576

Cash and cash equivalents — end of period	$	1,564,337		$	1,555,470		$	1,974		$	1,399

Supplemental cash flow information:
Cash payments for income taxes	$	255,109		$	192,027		$	165		$	11
Cash refunds of income taxes	$	199,149			52,402
Cash payments for interest	$	7,196		$	7,212
Cash refunds for income taxes							$	1		$	44

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)


Note 1	Basis of Presentation

Basis of Presentation

In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October ~~25, 2009~~31, 2010 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report onForm 10-K for the fiscal year ended October ~~25, 2009 (2009~~31, 2010 (2010Form 10-K). Applied’s results of operations for the three ~~and nine~~ months ended ~~August 1, 2010~~January 30, 2011 are not necessarily indicative of future operating results.

Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal ~~2010~~2011 contains 5352 weeks, while fiscal ~~2009~~2010 contained 5253 weeks, and the first ~~nine months~~quarter of fiscal 2011 contained 13 weeks, while the first quarter of fiscal 2010 contained ~~40 weeks, while the first nine months of fiscal 2009 contained 39~~14 weeks.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of ~~stock-based~~share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

In the third quarter of fiscal 2010, Applied initiated a plan to restructure its Energy and Environmental Solutions segment. The action was in response to adverse market conditions for thin film solar, including delays in utility-scale solar adoption, solar panel manufacturers’ challenges in obtaining affordable capital, changes and uncertainty in government renewable energy policies, and competitive pressure from crystalline silicon (c-Si) solar technologies. Under this plan, Applied incurred charges totaling $405 million, which included inventory-related charges of $247 million related to SunFab thin film solar equipment, asset impairment charges of $110 million, employee severance charges of $45 million, and other costs of $3 million. In addition, during the third quarter of fiscal 2010, Applied revised the cost estimate of a global workforce reduction program, originally announced in November 2009, as a result of changes in business requirements and recorded a favorable adjustment of $20 million.

Revenue Recognition

Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment, Applied recognizes revenue upon shipment for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment, revenue is recognized when legal title passes to the customer, which is generally at customer technical acceptance; (4)for arrangements containing multiple elements and initiated at or prior to October 25, 2009, the last day of fiscal ~~2010 containing multiple~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

~~elements,~~2009, the revenue relating to the undelivered elements is deferred at their estimated relative fair values until delivery of the deferred elements; and (5) for arrangements initiated or materially modified ~~during fiscal 2010~~subsequent to October 25, 2009 containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. The completed contract method is used for SunFab^tm thin film

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

lines. Certain SunFab thin film contracts have provisions for additional amounts to become due to Applied if the line achieves certain output criteria subsequent to factory acceptance. Any additional amounts earned under these contracts are recognized upon achievement. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

~~In the first quarter of fiscal 2010,~~ Applied elected to early adopt amended accounting standards issued by the Financial Accounting Standards Board (FASB) for multiple deliverable revenue arrangements on a prospective basis for applicable transactions originating or materially modified after October 25, 2009. The new standard ~~changes~~changed the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. The FASB also amended the accounting standards for revenue recognition to exclude software that is contained in a tangible product from the scope of software revenue guidance ifwhen the software is essential to the tangible product’s functionality. Implementation of this new authoritative guidance had an insignificant impact on reported net sales as compared to net sales under previous guidance, as the new guidance did not change the units of accounting within sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an inconsequential impact on the amount and timing of reported net sales. ~~Accordingly, Applied does not believe that the effect of adopting these standards will have a material impact on future financial periods.~~

For fiscal 2010 and ~~future~~subsequent periods, when a sales arrangement contains multiple elements, such as hardware and servicesand/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element arrangements wheremore-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue, as amended.

~~Business Combinations~~Recent Accounting Pronouncements

~~Effective~~In December 2010, the FASB amended its existing guidance for goodwill and other intangible assets. This authoritative guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This authoritative guidance becomes effective for Applied in fiscal 2012. The implementation of this authoritative guidance is not expected to have a material impact on Applied’s financial position or results of operations.

In December 2010, the ~~first quarter of fiscal 2010, Applied adopted revised~~FASB issued authoritative guidance on business combinations that covers the measurement of acquirer shares issued as consideration for a business combination, the recognition of contingent consideration, the accounting for preacquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition-related transaction costs, and the recognition of changes in the acquirer’s income tax valuation allowance.combinations. This authoritative guidance ~~also revised~~requires a public entity that presents comparative financial statements to disclose the ~~accounting~~revenue and earnings of the combined entity as though the business combinations that occurred during the current year had occurred as of the beginning of the prior annual reporting period. In addition, this authoritative guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This authoritative guidance is effective prospectively for ~~both increases~~business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Applied will comply with this authoritative guidance in fiscal 2012.

In January 2010, the FASB issued authoritative guidance for fair value measurements, which requires additional disclosures and ~~decreases~~clarifications to existing disclosures. This authoritative guidance requires a reporting entity to disclose separately the amounts of significant transfers in ~~a parent’s controlling ownership interest.~~and out of Level 1 and Level 2 fair value

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

measurements and also to describe the reasons for these transfers. This authoritative guidance also requires enhanced disclosure of activity in Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures for Level 1 and Level 2 fair value measurements became effective for Applied in the second quarter of fiscal 2010. Disclosures regarding activity within Level 3 fair value measurements become effective the first interim reporting period beginning after December 15, 2010. Applied will comply with this authoritative guidance in the second quarter of fiscal 2011. See Note 4 for information and related disclosures regarding Applied’s fair value measurements.


Note 2	Earnings ~~(Loss)~~ Per Share

Basic earnings ~~(loss)~~ per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plans shares) outstanding during the period. Applied’s net income ~~(loss)~~ has not been adjusted for any period presented for purposes of computing basic or diluted earnings ~~(loss)~~ per share due to the Company’s non-complex capital structure. For purposes of computing diluted earnings per share, weighted average potential common shares do not include stock options with an exercise price greater than the average fair market value of Applied common stock for the period as the effect would be anti-dilutive. Potential common shares have not been included in the calculation of diluted net loss per share for the three and nine months ended July 26, 2009 as the effect would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for the three and nine months ended July 26, 2009 are the same.


	Three Months Ended					Nine Months Ended					Three Months Ended
	August 1,		July 26,			August 1,		July 26,			January 30,		January 31,
	2010		2009			2010		2009			2011		2010
	(In thousands, except per share amounts)										(In millions, except per share amounts)

Numerator:
Net income (loss)	$	123,096	$	(54,865	)	$	469,851	$	(443,189	)
Net income											$	506	$	83
Denominator:
Weighted average common shares outstanding		1,339,660		1,333,278			1,342,068		1,331,410			1,324		1,342
Effect of dilutive stock options, restricted stock units and employee stock purchase plans shares		9,148		—			8,519		—			11		8

Denominator for diluted earnings (loss) per share		1,348,808		1,333,278			1,350,587		1,331,410
Denominator for diluted earnings per share												1,335		1,350

Basic earnings (loss) per share	$	0.09	$	(0.04	)	$	0.35	$	(0.33	)
Diluted earnings (loss) per share	$	0.09	$	(0.04	)	$	0.35	$	(0.33	)
Basic earnings per share											$	0.38	$	0.06
Diluted earnings per share											$	0.38	$	0.06
Potentially dilutive securities		33,700		91,655			33,844		91,655			19		46

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


Note 3	Cash, Cash Equivalents and Investments

Summary of Cash, Cash Equivalents and Investments

The following tables summarizes Applied’s cash, cash equivalents and investments by security type:


			Gross		Gross						Gross		Gross
			Unrealized		Unrealized		Estimated				Unrealized		Unrealized		Estimated
August 1, 2010	Cost		Gains		Losses		Fair Value
January 30, 2011									Cost		Gains		Losses		Fair Value
	(In thousands)								(In millions)

Cash	$	624,590	$	—	$	—	$	624,590	$	699	$	—	$	—	$	699

Cash equivalents:
Money market funds		873,705		—		—		873,705		1,256		—		—		1,256
U.S. Treasury and agency securities		66,060		—		18		66,042		4		—		—		4
U.S. commercial paper, corporate bonds and medium-term notes										15		—		—		15

Total Cash equivalents		939,765		—		18		939,747		1,275		—		—		1,275

Total Cash and Cash equivalents	$	1,564,355	$	—	$	18	$	1,564,337	$	1,974	$	—	$	—	$	1,974

Short-term and Long-term investments:
Short-term and long-term investments:
U.S. Treasury and agency securities	$	839,798	$	9,598	$	25	$	849,371	$	699	$	6	$	—	$	705
Obligations of states and political subdivisions		510,072		6,644		5		516,711		532		3		1		534
U.S. commercial paper, corporate bonds and medium-term notes		365,365		6,082		54		371,393		463		4		1		466
Other debt securities*		229,891		5,531		346		235,076		325		2		1		326

Total fixed income securities		1,945,126		27,855		430		1,972,551		2,019		15		3		2,031
Publicly traded equity securities		13,854		14,708		—		28,562		8		25		—		33
Equity investments in privately-held companies		62,201		—		—		62,201		59		—		—		59

Total Short-term and Long-term investments	$	2,021,181	$	42,563	$	430	$	2,063,314
Total short-term and long-term investments									$	2,086	$	40	$	3	$	2,123

Total Cash, Cash equivalents and Investments	$	3,585,536	$	42,563	$	448	$	3,627,651	$	4,060	$	40	$	3	$	4,097

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


			Gross		Gross						Gross		Gross
			Unrealized		Unrealized		Estimated				Unrealized		Unrealized		Estimated
October 25, 2009	Cost		Gains		Losses		Fair Value
October 31, 2010									Cost		Gains		Losses		Fair Value
	(In thousands)								(In millions)

Cash	$	341,127	$	—	$	—	$	341,127	$	701	$	—	$	—	$	701

Cash equivalents:
Money market funds		1,235,254		—		—		1,235,254		1,139		—		—		1,139
Obligations of states and political subdivisions										18		—		—		18

Total Cash equivalents		1,235,254		—		—		1,235,254		1,157		—		—		1,157

Total Cash and Cash equivalents	$	1,576,381	$	—	$	—	$	1,576,381	$	1,858	$	—	$	—	$	1,858

Short-term and Long-term investments:
Short-term and long-term investments:
U.S. Treasury and agency securities	$	653,627	$	8,013	$	170	$	661,470	$	665	$	8	$	—	$	673
Obligations of states and political subdivisions		419,640		7,597		—		427,237		500		5		—		505
U.S. commercial paper, corporate bonds and medium-term notes		382,550		5,676		281		387,945		502		7		—		509
Other debt securities*		103,193		1,430		391		104,232		261		3		1		263

Total fixed income securities		1,559,010		22,716		842		1,580,884		1,928		23		1		1,950
Publicly traded equity securities		9,572		9,439		—		19,011		9		16		—		25
Equity investments in privately-held companies		90,619		—		—		90,619		59		—		—		59

Total Short-term and Long-term investments	$	1,659,201	$	32,155	$	842	$	1,690,514
Total short-term and long-term investments									$	1,996	$	39	$	1	$	2,034

Total Cash, Cash equivalents and Investments	$	3,235,582	$	32,155	$	842	$	3,266,895	$	3,854	$	39	$	1	$	3,892


*		Other debt securities consist primarily of investment grade asset-backed and mortgage-backed securities.

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments at ~~August 1, 2010:~~January 30, 2011:


			Estimated				Estimated
	Cost		Fair Value		Cost		Fair Value
	(In thousands)				(In millions)

Due in one year or less	$	752,111	$	755,220	$	734	$	735
Due after one through five years		959,665		978,408		957		966
Due after five years		3,459		3,847		3		4
No single maturity date**		305,946		325,839		392		418

	$	2,021,181	$	2,063,314	$	2,086	$	2,123


**		Securities with no single maturity date include publicly-traded and privately-held equity securities, and asset-backed and mortgage-backed securities.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Gains and Losses on Investments

Gross realized gains and losses on sales of investments during the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010 ~~and July 26, 2009~~ were as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	August 1,		July 26,		August 1,		July 26,		January 30,		January 31,
	2010		2009		2010		2009		2011		2010
	(In thousands)								(In millions)

Gross realized gains	$	1,297	$	992	$	3,185	$	5,796	$	5	$	—
Gross realized losses	$	654	$	1,491	$	1,323	$	10,468	$	1	$	1

At ~~August 1, 2010,~~January 30, 2011, Applied had a gross unrealized loss of ~~$0.4~~$3 million due to a decrease in the fair value of certain fixed income securities. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss iswas considered to be temporary, orother-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied has determined that the gross unrealized losses on its marketable securities at ~~August 1, 2010~~January 30, 2011 are temporary in nature and therefore it did not recognize any impairment of its marketable securities for the three ~~and nine~~ months ended ~~August 1, 2010. At August 1,~~January 30, 2011. For the three months ended January 31, 2010, Applied did not recognize any impairment of its marketable securities. During the three months ended January 31, 2010, Applied determined that certain of its equity investments in privately-held companies wereother-than-temporarily impaired and, accordingly, recognized impairment charges in the ~~amounts~~amount of $8 million and $13 million for the three and nine months ended August 1, 2010, respectively. Impairment charges associated with equity investments in privately-held companies for the three months ended July 26, 2009 totaled $2 million. Impairment charges associated with financial assets for the nine months ended July 26, 2009 totaled $79 million, consisting of the following: equity method investment, $45 million; publicly-traded equity securities, $20 million; and equity investments in privately-held companies, $14$1 million.

The following table provides the fair market value of Applied’s investments with unrealized losses that are not deemed to beother-than-temporarily impaired as of ~~August 1, 2010.~~January 30, 2011.


	In Loss Position for				In Loss Position for								In Loss Position for
	Less Than 12 Months				12 Months or Greater				Total				Less Than 12 Months				Total
			Gross				Gross				Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)												(In millions)

U.S. Treasury and agency securities	$	84,630	$	38	$	7,558	$	5	$	92,188	$	43
Obligations of states and political subdivisions		5,667		5		—		—		5,667		5	$	170	$	1	$	170	$	1
U.S. commercial paper, corporate bonds and medium-term notes		44,137		54		—		—		44,137		54		118		1		118		1
Other debt securities		30,817		196		1,641		150		32,458		346		105		1		105		1

Total	$	165,251	$	293	$	9,199	$	155	$	174,450	$	448	$	393	$	3	$	393	$	3

Unrealized gains and temporary losses on investments classified asavailable-for-sale are included within accumulated other comprehensive income (loss), net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive income (loss) to results of operations.

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~


Note 4	Fair Value Measurements

Applied’s financial assets are measured and recorded at fair value, except for equity investments held in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed forother-than-temporary impairment when events or circumstances indicate that another-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when events or circumstances indicate that another-than-temporary decline in value may have occurred.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Fair Value Hierarchy

Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:


	•	Level 1 — Quoted prices in active markets for identical assets or liabilities;

	•	Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or ~~liabilities;~~liabilities, quoted prices in markets that are not ~~active;~~active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

	•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Applied’s investments are comprised primarily of debt securities that are classified asavailable-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.

Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of ~~August 1, 2010,~~January 30, 2011, substantially all of Applied’savailable-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below as of ~~August 1, 2010~~January 30, 2011 and October ~~25, 2009:~~31, 2010:


	August 1, 2010										October 25, 2009										January 30, 2011										October 31, 2010
	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
	(In thousands)										(In thousands)										(In millions)										(In millions)

Assets:
Assets:
Money market funds	$	873,705	$	—		$	—	$	873,705		$	1,235,254	$	—		$	—	$	1,235,254		$	1,256		—		$	—	$	1,256		$	1,139		—		$	—	$	1,139
U.S. Treasury and agency securities		172,781		742,632			—		915,413			145,166		516,304			—		661,470			127		582			—		709			153		520			—		673
Obligations of states and political subdivisions		—		516,711			—		516,711			—		427,237			—		427,237			—		534			—		534			—		523			—		523
U.S. commercial paper, corporate bonds and medium-term notes		—		371,393			—		371,393			—		387,945			—		387,945			—		481			—		481			—		509			—		509
Other debt securities		—		235,076			—		235,076			—		104,232			—		104,232			—		326			—		326			—		263			—		263
Publicly traded equity securities		28,562		—			—		28,562			19,011		—			—		19,011			33		—			—		33			25		—			—		25
Foreign exchange derivative assets		—		6,167			—		6,167			—		2,173			—		2,173			—		4			—		4			—		6			—		6

Total	$	1,075,048	$	1,871,979		$	—	$	2,947,027		$	1,399,431	$	1,437,891		$	—	$	2,837,322		$	1,416	$	1,927		$	—	$	3,343		$	1,317	$	1,821		$	—	$	3,138

Liabilities:
Foreign exchange derivative liabilities	$	—	$	(2,191	)	$	—	$	(2,191	)	$	—	$	(1,678	)	$	—	$	(1,678	)	$	—	$	(2	)	$	—	$	(2	)	$	—	$	(1	)	$	—	$	(1	)

Total	$	—	$	(2,191	)	$	—	$	(2,191	)	$	—	$	(1,678	)	$	—	$	(1,678	)	$	—	$	(2	)	$	—	$	(2	)	$	—	$	(1	)	$	—	$	(1	)

There were no significant transfers in and out of Level 1 and Level 2 fair value measurements during both the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010. ~~During~~Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements during the three ~~and nine~~ months ended ~~July 26, 2009, Level 3 assets consisted of asset-backed~~January 30, 2011 and mortgage-backed securities, the values of which were based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data. The following table presents the activity in Level 3 instruments during the periods indicated below:

Three Months Ended Nine Months Ended
August 1, 2010
July 26, 2009
August 1, 2010
July 26, 2009

Level 3 Level 3 Level 3 Level 3
(In thousands) (In thousands) (In thousands) (In thousands)

Balance, beginning of period $ — $ 2,285 $ — $ 13,100
Total realized and unrealized losses:
Included in earnings — 908 — (1,859 )
Included in other comprehensive loss — (27 ) — (1,152 )
Purchases, sales, and maturities — (1,996 ) — (8,991 )
Transfers out of Level 3, net — 438 — 510

Balance, end of period $ — $ 1,608 $ — $ 1,608

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

January 31, 2010, respectively.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed forother-than-temporary impairment when an event or circumstance indicates that another-than-temporary decline in value may have occurred. If Applied determines that another-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. Equity investments in privately-held companies totaled ~~$62~~$59 million at ~~August 1, 2010,~~January 30, 2011, of which ~~$39~~$40 million of investments were accounted for under the cost method of accounting and ~~$23~~$19 million of investments had been measured at fair value on a non-recurring basis due to another-than-temporary decline in value. At ~~July 26, 2009,~~January 31, 2010, equity investments in privately-held companies totaled ~~$90~~$68 million, of which ~~$48~~$52 million of investments were accounted for under the cost method of accounting and ~~$42~~$16 million of investments had been measured at fair value on a non-recurring basis due to another-than-temporary decline in value.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The following tables present the balances of equity securities at ~~August 1,~~January 30, 2011 and January 31, 2010 ~~and July 26, 2009~~ that had been measured at fair value on a non-recurring basis, using the process described above, and the impairment charges recorded during the three ~~and nine~~ months then ended:

Impairment of Equity Investments
in Privately-Held Companies
Three Months
Nine Months
Ended
Ended
Level 1 Level 2 Level 3 August 1, 2010 August 1, 2010
(In thousands)

Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2010 $ — $ — $ 22,970 $ 7,804 $ 12,665


							Impairment of
							Equity Investments
							in Privately-Held
	Level 1		Level 2		Level 3		Companies
	(In millions)

Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2011	$	—	$	—	$	19	$	—

Impairment of Equity Investments
in Privately-Held Companies
Three Months
Nine Months
Ended
Ended
Level 1 Level 2 Level 3 July 26, 2009 July 26, 2009
(In thousands)

Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2009 $ — $ — $ 42,110 $ 2,341 $ 14,402


							Impairment of
							Equity Investments
							in Privately-Held
	Level 1		Level 2		Level 3		Companies
	(In millions)

Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2010	$	—	$	—	$	16	$	1

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments. At ~~August 1, 2010,~~January 30, 2011, the carrying amount of long-term debt was ~~$206~~$205 million and the estimated fair value was $240 million. At October ~~25, 2009,~~31, 2010, the carrying amount of long-term debt was ~~$202~~$205 million and the estimated fair value was ~~$216~~$238 million. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues.

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~


Note 5	Derivative Instruments and Hedging Activities

Derivative Financial Instruments

Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.

Derivative instruments and hedging activities, including foreign currency exchange contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.

Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income or loss (AOCI) in stockholders’ equity and is reclassified into earnings when the hedged

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

transaction affects earnings. The majority of the after-tax net income or loss related to derivative instruments included in AOCI at ~~August 1, 2010~~January 30, 2011 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized promptly in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in general and administrative expenses. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three months ended July 26, 2009 and was $25 million for the nine months ended July 26, 2009.

~~Forward~~Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

Fair values of derivative instruments were as follows:


		Asset Derivatives					Liability Derivatives
	Balance Sheet	January 30,		October 31,		Balance Sheet	January 30,		October 31,
	Location	2011		2010		Location	2011		2010
		(In millions)					(In millions)

Derivatives Designated as Hedging Instruments

Foreign exchange contracts	Other current assets	$	3	$	5	Accrued expenses	$	1	$	1

Derivatives Not Designated as Hedging Instruments

Foreign exchange contracts	Other current assets	$	1	$	1	Accrued expenses	$	1	$	—

Total derivatives		$	4	$	6		$	2	$	1

The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the three months ended January 30, 2011 and January 31, 2010 were as follows:


		Three Months Ended January 30, 2011							Three Months Ended January 31, 2010
						Ineffective Portion									Ineffective Portion
						Excluded from									Excluded from
						Effectiveness									Effectiveness
	Location of Gain	Effective Portion				Testing			Effective Portion						Testing
	or (Loss)	Gain or (Loss)		Gain or (Loss)		Gain or (Loss)			Gain or (Loss)			Gain or (Loss)			Gain or (Loss)
	Reclassified from	Recognized in		Reclassified from		Recognized in			Recognized in			Reclassified from			Recognized in
	AOCI into Income	AOCI		AOCI into Income		Income			AOCI			AOCI into Income			Income
		(In millions)							(In millions)

Derivatives in Cash Flow Hedging Relationships

Foreign exchange contracts	Cost of products sold	$	4	$	4	$	(2	)	$	(3	)	$	(2	)	$	—
Foreign exchange contracts	General and administrative		—		2		—			—			1			(1	)

Total		$	4	$	6	$	(2	)	$	(3	)	$	(1	)	$	(1	)

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

~~Fair values of derivative instruments were as follows:~~

Asset Derivatives Liability Derivatives
Balance Sheet
August 1,
October 25,
Balance Sheet
August 1,
October 25,

Location 2010 2009 Location 2010 2009

Derivatives Designated as Hedging Instruments

Foreign exchange contracts Other current
assets $ 4,512 $ 1,811 Accounts payable
and accrued
expenses $ 1,821 $ 1,225

Derivatives Not Designated as Hedging Instruments

Foreign exchange contracts Other current
assets $ 1,655 $ 362 Accounts payable
and accrued
expenses $ 370 $ 453

Total derivatives $ 6,167 $ 2,173 $ 2,191 $ 1,678

~~The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the three months and nine months ended August 1, 2010 and July 26, 2009 was as follows:~~

Three Months Ended August 1, 2010 Three Months Ended July 26, 2009
Ineffective Portion
Ineffective Portion

and Amount
and Amount

Location of Gain
Excluded from
Excluded from

or (Loss)
Effectiveness
Effectiveness

Reclassified from
Effective Portion Testing Effective Portion Testing
AOCI into
Gain or
Gain or (Loss)
Gain or
Gain or (Loss)

Income or
(Loss)
Reclassified
Gain or (Loss)
(Loss)
Reclassified
Gain or (Loss)

Recognized in
Recognized
from AOCI into
Recognized in
Recognized
from AOCI into
Recognized in

Income in AOCI Income Income in AOCI Income Income
(In thousands) (In thousands)

Derivatives in Cash Flow Hedging Relationships

Foreign exchange contracts Cost of products
sold $ (3,259 ) $ (1,321 ) $ (1,386 ) $ 3,522 $ (52 ) $ (303 )
Foreign exchange contracts General and
administrative — (3,179 ) (372 ) — 2,859 (203 )
Foreign exchange contracts Research,
development and
engineering — (82 ) — — (82 ) —

Total $ (3,259 ) $ (4,582 ) $ (1,758 ) $ 3,522 $ 2,725 $ (506 )

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

Nine Months Ended August 1, 2010 Nine Months Ended July 26, 2009
Ineffective Portion
Ineffective Portion

and Amount
and Amount

Location of Gain
Excluded from
Excluded from

or (Loss)
Effectiveness
Effectiveness

Reclassified from
Effective Portion Testing Effective Portion Testing
AOCI into Income
Gain or (Loss)
Gain or (Loss)
Gain or (Loss)
Gain or (Loss)
Gain or (Loss)
Gain or (Loss)

or Recognized
Recognized in
Reclassified from
Recognized in
Recognized in
Reclassified from
Recognized in

in Income AOCI AOCI into Income Income AOCI AOCI into Income Income
(In thousands) (In thousands)

Derivatives in Cash Flow Hedging Relationships

Foreign exchange contracts Cost of products
sold $ (4,866 ) $ (2,488 ) $ (1,685 ) $ (4,598 ) $ (8,953 ) $ (3,161 )
Foreign exchange contracts General and
administrative — (4,266 ) (1,316 ) — (9,345 ) 24,039
Foreign exchange contracts Research,
development and
engineering — (245 ) — — (245 ) —

Total $ (4,866 ) $ (6,999 ) $ (3,001 ) $ (4,598 ) $ (18,543 ) $ 20,878


		Three Months Ended						Nine Months Ended
		August 1, 2010			July 26, 2009			August 1, 2010			July 26, 2009
	Location of Gain													Location of Gain	Amount of Gain or (Loss) Recognized in
	or (Loss)													or (Loss)	Income
	Recognized	Amount of Gain or (Loss)						Amount of Gain or (Loss)						Recognized	Three Months Ended		Three Months Ended
	in Income	Recognized in Income						Recognized in Income						in Income	January 30, 2011		January 31, 2010
		(In thousands)						(In thousands)							(In millions)

Derivatives Not Designated as Hedging Instruments

Foreign exchange contracts	General and administrative	$	(8,395	)	$	(1,518	)	$	(12,075	)	$	(11,410	)	General and administrative	$	2	$	(10	)

Total		$	(8,395	)	$	(1,518	)	$	(12,075	)	$	(11,410	)		$	2	$	(10	)

Credit Risk Contingent Features

If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with ~~credit-risk related~~credit risk-related contingent features that were in a net liability position was immaterial as of ~~August 1, 2010.~~January 30, 2011.

Entering into foreign exchange contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~


Note 6	Accounts Receivable, Net

Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied also discounts letters of credit through various financial institutions. Applied sells its accounts receivable without recourse. Details of discounted letters of credit, factored accounts receivable and discounted promissory notes for the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010 ~~and July 26, 2009~~ were as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	August 1,		July 26,		August 1,		July 26,		January 30,		January 31,
	2010		2009		2010		2009		2011		2010
	(In thousands)								(In millions)

Discounted letters of credit	$	80,886	$	99,407	$	134,148	$	152,107	$	123	$	27
Factored accounts receivable		54,939		1,620		103,630		23,504
Discounted promissory notes		862		597		1,959		2,913
Factored accounts receivable and discounted promissory notes										36		26

Total	$	136,687	$	101,624	$	239,737	$	178,524	$	159	$	53

Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for ~~all~~both periods presented.

Accounts receivable are presented net of allowance for doubtful accounts of $74 million at ~~August 1, 2010~~both January 30, 2011 and ~~$67 million at~~ October ~~25, 2009.~~31, 2010. Applied sells principally to manufacturers within the semiconductor, display and solar industries. As a result of challenging economic and industry conditions, certain of these manufacturers may experience difficulties in meeting their obligations in a timely manner. While Applied believes that its allowance for doubtful accounts is adequate and represents Applied’s best estimate ~~at August 1, 2010,~~as of January 30, 2011, Applied will continue to closely monitor customer liquidity and other economic conditions, which may result in changes to Applied’s estimates regarding collectability.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


Note 7	Balance Sheet Detail


	August 1,		October 25,		January 30,		October 31,
	2010		2009		2011		2010
	(In thousands)				(In millions)

Inventories
Customer service spares	$	326,308	$	263,688	$	311	$	324
Raw materials		222,474		351,824		368		260
Work-in-process		603,588		667,484		444		500
Finished goods		437,682		344,461
Finished goods*						524		463

	$	1,590,052	$	1,627,457	$	1,647	$	1,547

~~Inventories are stated at the lower of cost or market, with cost determined on a FIFO basis. Included in finished goods inventory is $171 million at August 1,~~


*		Included in finished goods inventory is $208 million at January 30, 2011, and $148 million at October 31, 2010, ~~and $133 million at October 25, 2009,~~ of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1.


			January 30,			October 31,
	Useful Life		2011			2010
	(In years)		(In millions)

Property, Plant and Equipment, Net
Land and improvements			$	203		$	227
Buildings and improvements		3-30		1,199			1,234
Demonstration and manufacturing equipment		3-5		672			670
Furniture, fixtures and other equipment		3-15		712			719
Construction in progress				22			19

Gross property, plant and equipment				2,808			2,869
Accumulated depreciation				(1,915	)		(1,906	)

			$	893		$	963


Accounts Payable and Accrued Expenses
Accounts payable	$	686	$	658
Compensation and employee benefits		270		435
Warranty		173		155
Other accrued taxes		101		99
Dividends payable		92		93
Restructuring reserve		58		104
Other		202		222

	$	1,582	$	1,766


Customer Deposits and Deferred Revenue
Customer deposits	$	417	$	407
Deferred revenue		638		440

	$	1,055	$	847

In the first quarter of fiscal 2011, Applied ~~adjusts inventory carrying value for estimated obsolescence equal to~~received $39 million in proceeds from the ~~difference between~~sale of a property located in North America and incurred a loss of $1 million on the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Applied fully reserves for inventories and noncancelable purchase orders for inventory deemed obsolete. Applied performs periodic reviews of inventory items to identify excess inventories on hand by comparing on-hand balances to anticipated usage using recent historical activity as well as anticipated or forecasted demand. If estimates oftransaction.

1817

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

customer demand diminish further or market conditions become less favorable than those projected by Applied, additional inventory adjustments may be required. During the first nine months of fiscal 2010, Applied incurred inventory-related charges, including $330 million associated with SunFab thin film solar equipment.

August 1,
October 25,

2010 2009
(In thousands)

Property, Plant and Equipment, Net

Land and improvements $ 227,144 $ 228,057
Buildings and improvements 1,233,091 1,164,384
Demonstration and manufacturing equipment 665,181 654,779
Furniture, fixtures and other equipment 722,065 713,505
Construction in progress 18,058 146,232

Gross property, plant and equipment 2,865,539 2,906,957
Accumulated depreciation (1,881,749 ) (1,816,524 )

$ 983,790 $ 1,090,433

Accounts Payable and Accrued Expenses

Accounts payable $ 628,326 $ 477,148
Compensation and employee benefits 321,994 134,949
Warranty 147,200 117,537
Dividends payable 93,525 80,455
Other accrued taxes 94,792 36,954
Restructuring reserve 112,425 31,581
Other 245,344 182,878

$ 1,643,606 $ 1,061,502

Customer Deposits and Deferred Revenue

Customer deposits $ 602,283 $ 564,412
Deferred revenue 434,655 299,868

$ 1,036,938 $ 864,280

~~During the first nine months of fiscal 2010, Applied incurred asset impairment charges of $119 million primarily related to the restructuring of its Energy and Environmental Solutions segment.~~ As of ~~August 1,~~January 30, 2011 and October 31, 2010 other accrued expenses included ~~$42~~$22 million and $40 million, respectively, in contractual termination obligation charges.


Note 8	Goodwill, Purchased Technology and Other Intangible Assets

Goodwill and Purchased Intangible Assets

Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results. For goodwill, Applied performs a two-step impairment test. In the first step, Applied compares the estimated fair value of each reporting unit to its carrying value. Applied’s reporting units are consistent with the reportable segments identified in Note 15, based on the manner in which Applied operates its business and the nature of those operations. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. Under the income approach, Applied calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Estimated future cash flows will be impacted by a number of factors including anticipated future operating results, estimated cost of capitaland/or discount rates. Under the market approach, Applied estimates the fair value based on market multiples of revenue or earnings for comparable companies, as appropriate. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then Applied would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. Applied would then allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, as if Applied had acquired the reporting unit in a business combination, with the fair value of the reporting unit being the “purchase price.” The excess of the “purchase price” over the carrying amounts assigned to assets and liabilities represents the implied fair value of goodwill. If Applied determined that the carrying value of a reporting unit’s goodwill exceeded its implied fair value, Applied would record an impairment charge equal to the difference.

Applied conducted impairment tests in the fourth quarter of fiscal ~~2009,~~2010, and the results of the first step of the impairment test indicated that Applied’s goodwill and purchased intangible assets with indefinite useful lives for each of its reporting units were not impaired. ~~During both~~

Effective in the ~~second and third quarters~~first quarter of fiscal ~~2010,~~2011, Applied ~~tested goodwill of~~transferred its SunFab thin film solar product from the Energy and Environmental Solutions ~~reporting unit for potential impairment and~~segment to the ~~results~~Applied Global Services segment as it was determined to have reached a particular stage in the product lifecycle. As a result of ~~the first step~~this transfer, Applied reallocated $17 million of ~~the impairment test for each quarter indicated that there was no impairment. Applied tested~~ goodwill ~~of the~~from its Energy and Environmental Solutions ~~reporting unit for impairment in the second fiscal quarter in light of developments that included the insolvency of a thin film solar customer, inability of other thin film solar customers~~segment to secure financing, weaker outlooks for certain customers that in turn reduced their spending plans resulting in the delay or cancellation of thin film production lines, and other adverse operating conditions affecting the solar industry.its Applied ~~tested goodwill of the Energy and Environmental Solutions reporting unit for impairment in the third fiscal quarter in light of the restructuring announced during the quarter.~~

2018

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

were estimated using a terminal value rate, which considered the long-term earnings growth rate specific to the Energy and Environmental Solutions reporting unit. The change in the estimated fair value in excess of the carrying value from the second fiscal quarter was due primarily to changes in the business mix of forecasted future operating results and a reduction in the carrying value of the reporting unit. The reduction in the carrying value of the reporting unit was due to inventory-related charges and asset impairments recognized during the third fiscal quarter. The estimated future cash flows were discounted to present value using a discount rate that was the value-weighted average of Applied’s estimated cost of equity and debt derived using both known and estimated market metrics, and was adjusted to reflect risk factors that considered both the timing and risks associated with the estimated cash flows. In the event of future adverse business conditions in the market in which the Energy and Environmental Solutions reporting unit operates, Applied will reassess and update its forecasts and estimates used in a future impairment analysis. If the results of this analysis are lower than current estimates, a material impairment charge may result at that time.

Details of indefinite-lived intangible assets were as follows:


	August 1, 2010						October 25, 2009						January 30, 2011						October 31, 2010
			Other						Other						Other						Other
			Intangible						Intangible						Intangible						Intangible
	Goodwill		Assets		Total		Goodwill		Assets		Total		Goodwill		Assets		Total		Goodwill		Assets		Total
	(In thousands)												(In millions)

Silicon Systems Group	$	381,305	$	—	$	381,305	$	223,584	$	—	$	223,584	$	381	$	—	$	381	$	381	$	—	$	381
Applied Global Services		177,184		17,400		194,584		177,184		17,860		195,044		194		18		212		177		18		195
Display		115,908		—		115,908		115,908		—		115,908		116		—		116		116		—		116
Energy and Environmental Solutions		662,029		—		662,029		654,256		—		654,256		645		—		645		662		—		662

Carrying amount	$	1,336,426	$	17,400	$	1,353,826	$	1,170,932	$	17,860	$	1,188,792	$	1,336	$	18	$	1,354	$	1,336	$	18	$	1,354

From October 25, 2009 to August 1, 2010, goodwill increased by $158 million due to the acquisition of Semitool, Inc. (Semitool), and by $7 million due to an asset purchase from Advent Solar, Inc. (Advent Solar), both during the first quarter of fiscal 2010 (see Note 16). Other intangible assets that are not subject to amortization consist primarily of a trade name.

Finite-Lived Purchased Intangible Assets

Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.

Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.

Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure.

2119

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

~~indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure.~~

Details of amortized intangible assets were as follows:


	August 1, 2010									October 25, 2009									January 30, 2011									October 31, 2010
				Other									Other									Other									Other
	Purchased			Intangible						Purchased			Intangible						Purchased			Intangible						Purchased			Intangible
	Technology			Assets			Total			Technology			Assets			Total			Technology			Assets			Total			Technology			Assets			Total
	(In thousands)																		(In millions)

Silicon Systems Group	$	310,259		$	19,800		$	330,059		$	244,558		$	—		$	244,558		$	310		$	20		$	330		$	310		$	20		$	330
Applied Global Services		32,089			60,564			92,653			39,729			60,564			100,293			32			61			93			32			61			93
Display		109,828			33,500			143,328			109,828			33,500			143,328			110			33			143			110			33			143
Energy and Environmental Solutions		105,305			231,667			336,972			160,805			235,565			396,370			105			232			337			105			232			337

Gross carrying amount	$	557,481		$	345,531		$	903,012		$	554,920		$	329,629		$	884,549		$	557		$	346		$	903		$	557		$	346		$	903

Silicon Systems Group	$	(244,651	)	$	(4,984	)	$	(249,635	)	$	(238,628	)	$	—		$	(238,628	)	$	(250	)	$	(6	)	$	(256	)	$	(247	)	$	(6	)	$	(253	)
Applied Global Services		(17,944	)		(42,142	)		(60,086	)		(19,974	)		(38,635	)		(58,609	)		(20	)		(45	)		(65	)		(19	)		(43	)		(62	)
Display		(95,160	)		(21,667	)		(116,827	)		(91,364	)		(19,602	)		(110,966	)		(98	)		(23	)		(121	)		(96	)		(23	)		(119	)
Energy and Environmental Solutions		(33,833	)		(159,630	)		(193,463	)		(50,127	)		(137,663	)		(187,790	)		(39	)		(167	)		(206	)		(37	)		(163	)		(200	)

Accumulated amortization	$	(391,588	)	$	(228,423	)	$	(620,011	)	$	(400,093	)	$	(195,900	)	$	(595,993	)	$	(407	)	$	(241	)	$	(648	)	$	(399	)	$	(235	)	$	(634	)

Carrying amount	$	165,893		$	117,108		$	283,001		$	154,827		$	133,729		$	288,556		$	150		$	105		$	255		$	158		$	111		$	269

From October 25, 2009 to August 1, 2010, the change in gross carrying amount of the amortized intangible assets was approximately $18 million, primarily due the acquisition of Semitool during the first quarter of fiscal 2010, offset by impairment of intangible assets in connection with restructuring of the Energy and Environmental Solutions segment in the third quarter of fiscal 2010. Aggregate amortization expense was ~~$17~~$14 million and ~~$22~~$25 million for the three months ended ~~August 1,~~January 30, 2011 and January 31, 2010, ~~and July 26, 2009, respectively, and $71 million and $67 million for the nine months ended August 1, 2010 and July 26, 2009,~~ respectively.

As of ~~August 1, 2010,~~January 30, 2011, future estimated amortization expense is expected to be as follows:


	Amortization Expense		Amortization Expense
	(In thousands)		(In millions)

2010	$	13,712
2011		52,673	$	40
2012		51,342		51
2013		48,633		49
2014		40,986		41
2015				25
Thereafter		75,655		49

	$	283,001	$	255


Note 9	Borrowing Facilities

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.1 billion, of which $1.0 billion is comprised of a5-year revolving credit agreement with a group of banks that is scheduled to expire in January 2012. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at January 30, 2011. Remaining credit facilities in the amount of approximately $98 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of these facilities at both January 30, 2011 and October 31, 2010.

2220

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


Note 9	~~Warranty, Guarantees and Contingencies~~

~~Warranty~~

~~Changes in the warranty reserves during the three and nine months ended August 1, 2010 and July 26, 2009 were as follows:~~

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 2010 2009
(In thousands)

Beginning balance $ 140,369 $ 131,871 $ 117,537 $ 142,846
Provisions for warranty 36,665 19,052 102,611 64,771
Consumption of reserves (29,834 ) (32,421 ) (72,948 ) (89,115 )

Ending balance $ 147,200 $ 118,502 $ 147,200 $ 118,502

~~Applied products are generally sold with a12-month~~ warranty period following installation. The provision for the estimated cost of warranty is recorded when revenue is recognized. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region. Quarterly warranty consumption is generally associated with sales that occurred during the preceding four quarters, and quarterly warranty provisions are generally related to the current quarter’s sales.

~~Guarantees~~

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 August 1, 2010, the maximum potential amount of future payments that Applied could be required to make under these guarantee arrangements was $50 million. Applied has not recorded any liability in connection with these guarantee arrangements beyond that required to 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 agreements with various global banks to facilitate subsidiary banking operations world-wide, including overdraft arrangements, bank guarantees and letters of credit. As of August 1, 2010, Applied Materials, Inc. has provided parent guarantees to banks for approximately $175 million to cover these arrangements.

~~Legal matters~~

~~Semitool Shareholder Litigation~~

On November 17, 2009, Applied announced that it was making a tender offer to acquire all of the outstanding shares of Semitool in accordance with an Agreement and Plan of Merger entered into with Semitool. Following this announcement, three lawsuits were filed by Semitool shareholders in the District Court of the Eleventh Judicial District Court for the State of Montana, County of Flathead, against Semitool, Semitool’s directors, Applied Materials, Inc. and Applied’s acquisition subsidiary. The actions sought certification of a class of all holders of Semitool common stock, except the defendants and their affiliates. The complaints alleged that Semitool’s directors breached their fiduciary duties by, among other things, failing to maximize shareholder value and failing to disclose material information, and that Applied aided and abetted such alleged breaches. The actions sought injunctive relief, damages and attorneys’ fees.

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

Exchange Commission on December 14, 2009. Following the tender of shares representing over 95 percent of the outstanding shares of Semitool common stock, the merger of Semitool into Applied’s acquisition subsidiary was completed on December 21, 2009. Pursuant to a memorandum of understanding between the parties, plaintiffs conducted discovery to confirm the fairness and reasonableness of the settlement and defendants agreed not to object to an application by plaintiffs’ counsel for an award of attorneys’ fees and expenses in an amount up to $200,000. A class of Semitool’s public shareholders is expected to be certified solely for purposes of settlement, which, if approved by the Court, will result in a complete and final discharge of all claims on behalf of the class.

~~Jusung~~

Applied has been engaged in several lawsuits and patent and administrative proceedings in Taiwan and South Korea since 2003, and more recently in China, with Jusung Engineering Co., Ltd. (Jusung Engineering)~~and/or~~ Jusung Pacific Co., Ltd. (Jusung Pacific, referred to together with Jusung Engineering as Jusung) involving technology used in manufacturing LCDs. Applied believes that it has meritorious claims and defenses against Jusung that it intends to pursue vigorously.

In 2004, Applied filed a complaint for patent infringement against Jusung in the Hsinchu District Court in Taiwan seeking damages and a permanent injunction for infringement of a patent related to chemical vapor deposition (CVD) equipment, and this case remains pending. Jusung Pacific unsuccessfully sought invalidation of Applied’s CVD patent in the Taiwanese Intellectual Property Office (TIPO). Jusung Pacific’s initial appeal of the TIPO’s decision was denied, and it has filed a further appeal to the Taipei High Supreme Administrative Court. In 2009, Jusung filed a second action with the TIPO seeking invalidation of Applied’s CVD patent which remains pending.

In 2006, Applied filed an action in the TIPO challenging the validity of a patent owned by Jusung Engineering related to severability of the transfer chamber on a CVD tool. Jusung Engineering sued Applied and AKT America in Hsinchu District Court in Taiwan alleging infringement of the same patent and this action is pending. The TIPO granted Applied’s request for invalidation and revoked Jusung Engineering’s patent. In March 2009, the Hsinchu District Court dismissed Jusung Engineering’s lawsuit, and in April 2009, the Ministry of Economic Affairs overruled Jusung Engineering’s administrative appeal of the decision revoking its patent. On January 7, 2010, the Taiwan Intellectual Property Court granted Jusung’s appeal of the decision revoking its patent and remanded the matter to the TIPO for reconsideration of validity. In November 2009, Applied filed an action in China with the Patent Reexamination Board of the State Intellectual Property Office seeking to invalidate this patent. On June 18, 2010, the Patent Reexamination Board issued a decision invalidating Jusung’s patent in China.

In 2006, Jusung Engineering filed a complaint of private prosecution in the Taipei District Court of Taiwan alleging that Applied’s outside counsel received from the Court and used a copy of an expert report that Jusung had filed in the ongoing patent infringement lawsuits that Jusung had intended to remain confidential. The complaint names as defendants Applied’s outside counsel in Taiwan, as well as Michael R. Splinter, Applied’s Chairman, President and Chief Executive Officer, as the statutory representative of Applied. The Taipei District Court dismissed the private prosecution complaint, and the matter was transferred to the Taipei District Attorney’s Office. The Taipei District Attorney’s Office has issued four successive rulings not to prosecute, each of which Jusung Engineering has appealed. In each instance, the Taiwan High Court District Attorney has returned the matter to the Taipei District Attorney’s Office for further consideration, where it remains pending.

~~Korea Criminal Proceedings~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

AMK employees. Hearings on these matters are ongoing in the Seoul Eastern District Court. Applied is investigating the allegations and underlying circumstances. Applied is also discussing these matters and potential consequences with the major customer. There is a risk that these matters may lead to other claims. Applied currently is unable to determine what impact these matters may have on Applied’s business. The magnitude of the impact on Applied’s business will depend on many factors, including the outcome of the proceedings and Applied’s customer relationships.

From time to time, Applied receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions by Applied in connection with claims made against them. In addition, from time to time, Applied receives notification from third parties claiming that Applied may be or is infringing or misusing their intellectual property or other rights. Applied also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business.

Although the outcome of the above-described matters or these claims and proceedings cannot be predicted with certainty, Applied does not believe that any of these proceedings or other claims will have a material adverse effect on its consolidated financial condition or results of operations.


~~Note~~ 10	Restructuring Charges and Asset Impairments

On July 21, 2010, Applied announced a plan to restructure its Energy and Environmental Solutions ~~segment. The action,~~segment, which iswas expected to impact between 400 to 500 positions globally, was in response to adverse market conditions for thin film solar, including delays in utility-scale solar adoption, solar panel manufacturers’ challenges in obtaining affordable capital, changes and uncertainty in government renewable energy polices, and competitive pressure from c-Si solar technologies.globally. During the third quarter of fiscal 2010, Applied recorded charges related to this plan totaling $405 million, which included inventory-related charges of $247 million related to SunFab thin film solar equipment, asset impairment charges of $110 million,incurred employee severance charges of $45 million associated with this program. During the first quarter of fiscal 2011, as a result of changes in Applied’s operating environment and ~~other costs~~business requirements, Applied revised its workforce reduction under this program to approximately 200 positions and recorded a favorable adjustment of $3$28 million.

Severance
(In thousands)

Provision for restructuring reserves $ 45,075

As of January 30, 2011, the severance accrual associated with restructuring reserves under this program was $11 million.

On November 11, 2009, Applied announced a restructuring program to reduce its global workforce as of October 25, 2009 by approximately 1,300 to 1,500 positions, or 10 to 12 percent, over a period of 18 months. During the first quarter of fiscal 2010, Applied recorded restructuring charges of $104 million associated with this program. During the third quarter of fiscal 2010, as a result of changes in business requirements, Applied revised its global workforce reduction under this program to approximately 1,000 positions and recorded a favorable adjustment of $20 million. As of January 30, 2011, the severance accrual associated with restructuring reserves under this program was $41 million.

During the first quarter of fiscal 2011, Applied favorably adjusted the remaining severance accrual associated with a global restructuring program announced in the first quarter of fiscal 2009 by $4 million. As of January 30, 2011, the severance accrual associated with restructuring reserves under this program was $1 million.

Changes in severance accruals associated with restructuring reserves ~~related to the program described above~~ for the ~~nine months ended August 1, 2010~~first quarter of fiscal 2011 were as follows:


	Severance			Severance
	(In thousands)			(In millions)

Provision for restructuring reserves	$	103,780
Consumption of reserves		(16,688	)

Balance, January 31, 2010		87,092
Consumption of reserves		(6,710	)

Balance, May 2, 2010		80,382
Balance, October 31, 2010				$	99
Consumption of reserves		(4,728	)		(14	)
Adjustment of restructuring reserves		(20,000	)		(32	)

Balance, August 1, 2010	$	55,654
Balance, January 30, 2011				$	53

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

~~Changes~~In addition, as of January 30, 2011, Applied had $5 million in restructuring reserves ~~for the nine months ended August 1, 2010 related to other restructuring plans and facilities realignment programs initiated in prior periods were as follows:~~

Severance Facilities Total
(In thousands)

Balance, October 25, 2009 $ 26,353 $ 5,228 $ 31,581
Provision for restructuring reserves — 64 64
Consumption of reserves (11,915 ) (227 ) (12,142 )
Foreign currency changes — 3 3

Balance, January 31, 2010 14,438 5,068 19,506

Provision for restructuring reserves — 57 57
Consumption of reserves (6,167 ) (29 ) (6,196 )
Adjustment of restructuring reserves 2 (160 ) (158 )
Foreign currency changes — (1 ) (1 )

Balance, May 2, 2010 8,273 4,935 13,208

Provision for restructuring reserves — 57 57
Consumption of reserves (1,532 ) (37 ) (1,569 )

Balance, August 1, 2010 $ 6,741 $ 4,955 $ 11,696

associated with facilities. During the ~~third~~first quarter of fiscal ~~2010,~~2011, Applied recorded asset impairment charges of ~~$110~~$3 million related to ~~the restructuring of its Energy and Environmental Solutions segment. During the second quarter of fiscal 2010, Applied recorded an asset impairment charge of $9 million to write down~~ a facility ~~to its estimated fair value based on prices for comparable local properties. The facility was reclassified as an asset held for sale within other current assets.~~held-for-sale.


Note 11	Stockholders’ Equity, Comprehensive Income and Share-Based Compensation

Comprehensive Income

Components of comprehensive income, ~~(loss),~~ on an after-tax basis where applicable, were as follows:

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 2010 2009
(In thousands)

Net income (loss) $ 123,096 $ (54,865 ) $ 469,851 $ (443,189 )
Pension liability adjustment — — 74 112
Change in unrealized net gain on investments 4,863 7,958 6,876 39,294
Change in unrealized net gain (loss) on derivative instruments
qualifying as cash flow hedges 844 508 1,359 (7,795 )
Foreign currency translation adjustments 1,566 810 (59 ) 707

Comprehensive income (loss) $ 130,369 $ (45,589 ) $ 478,101 $ (410,871 )


	Three Months Ended
	January 30,			January 31,
	2011			2010
	(In millions)

Net income	$	506		$	83
Change in unrealized net gain on investments		(1	)		2
Change in unrealized net gain on derivative instruments qualifying as cash flow hedges		(1	)		(1	)

Comprehensive income	$	504		$	84

2621

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Components of accumulated other comprehensive income, ~~(loss),~~ on an after-tax basis where applicable, were as follows:


	August 1,			October 25,			January 30,			October 31,
	2010			2009			2011			2010
	(In thousands)						(In millions)

Pension liability and post retirement benefits	$	(32,075	)	$	(32,149	)
Pension liability							$	(39	)	$	(39	)
Unrealized gain on investments net		26,848			19,972			24			25
Unrealized gain on derivative instruments qualifying as cash flow hedges		1,669			310			3			4
Cumulative translation adjustments		10,128			10,187			12			12

	$	6,570		$	(1,680	)	$	—		$	2

For further details on derivative instruments, see Note 5 of the Notes to Consolidated Condensed Financial Statements.

Stock Repurchase Program

On March 8, 2010, Applied’s Board of Directors approved a new stock repurchase program authorizing up to $2$2.0 billion in repurchases over the next three years ending in March 2013. Under this authorization, Applied renewed its systematic stock repurchase program and may also make supplemental stock repurchases from time to time, depending on market conditions, stock price and other factors. During the three months ended ~~August 1, 2010,~~January 30, 2011, Applied repurchased ~~7,907,000~~11 million shares of its common stock at an average price of ~~$12.65~~$13.74 per share for a total cash outlay of ~~$100 million. During the nine months ended August 1, 2010, Applied repurchased 15,537,000 shares of its common stock at an average price of $12.87 per share for a total cash outlay of $200~~$150 million. Applied did not repurchase any shares of its common stock during the three months ended ~~July 26, 2009. During the nine months ended July 26, 2009, Applied repurchased 1,942,000 shares of its common stock at an average price of $11.80 per share for a total cash outlay of $23 million.~~January 31, 2010.

Dividends

On June 9, 2010, Applied’s Board of Directors approved a quarterly cash dividend in the amount of $0.07 per share, payable on September 15, 2010 to stockholders of record as of August 25, 2010. On June 16, 2010, Applied paid a quarterly cash dividend of $0.07 per share to stockholders of record as of May 26, 2010. In December ~~2009,~~2010, Applied’s Board of Directors declared a quarterly cash dividend in the amount of ~~$0.06~~$0.07 per share that ~~was~~will be paid on March ~~17, 2010~~23, 2011 to stockholders of record as of ~~February 24, 2010. The~~March 2, 2011. Applied currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, although the declaration and amount of any future cash dividend isare at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination ~~by the Board of Directors~~ that cash dividends are in the best interest of Applied’s stockholders.

Share-Based Compensation

Applied has adopted stock plans that permit grants to employees of share-based awards, including stock options, restricted stock and restricted stock units (also referred to as “performance shares” under Applied’s principal equity compensation plan, the Employee Stock Incentive Plan). In addition, the Employee Stock Incentive Plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of ~~equity-based~~share-based awards to consultants. Applied also has two Employee Stock Purchase Plans, one for United States employees and a second for international employees (collectively, ESPP), which enable eligible employees to purchase Applied common stock.

2722

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

During the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010, ~~and July 26, 2009,~~ Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock units and restricted stock. Total share-based compensation and related tax benefits were as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	August 1,		July 26,		August 1,		July 26,		January 30,		January 31,
	2010		2009		2010		2009		2011		2010
	(In thousands)				(In thousands)				(In millions)

Share-based compensation	$	32,442	$	43,334	$	94,772	$	116,114	$	33	$	34
Tax benefit recognized	$	9,732	$	12,133	$	27,758	$	32,512	$	10	$	9

The cost associated with ~~equity~~share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the ~~achievement of~~likelihood that the applicable performance ~~goals.~~goals will be achieved.

At ~~August 1, 2010,~~January 30, 2011, Applied had ~~$197~~$282 million in total unrecognized compensation expense, net of estimated forfeitures, related to stock option, restricted stock unit and restricted stock grants, which will be recognized over a weighted average period of ~~1.4~~2.9 years. Under the stock plans, there were 154 million shares available for grant at January 30, 2011.

Stock Options

Applied grants options to purchase shares of its common stock to employees and consultants. The exercise price of each stock option equals the fair market value of Applied common stock on the date of grant. Most options are scheduled to vest over four years ~~subject to the grantee’s continued service with Applied,~~ and expire no later than seven years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Applied’s employee stock options have characteristics significantly different from those of publicly traded options. ~~The weighted average assumptions used in the model are outlined in the following table:~~

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,
2010 2009 2010 2009

Stock Options:

Dividend yield — 2.25 % — 2.80 %
Expected volatility — 46 % — 50 %
Risk-free interest rate — 1.3 % — 1.3 %
Expected life (in years) — 3.0 — 3.0

The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on a combination of historical and implied volatilities. When establishing the expected life assumption, Applied periodically reviews historical employee exercise behavior with respect to option grants.

There were no stock options granted in the three ~~and nine~~ months ended ~~August 1, 2010. The weighted average grant date fair value of options granted during the three and nine months ended July 26, 2009 was $2.99 and $2.52, respectively.~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~January 30, 2011.

Stock option activity for the ~~nine~~three months ended ~~August 1, 2010~~January 30, 2011 was as follows:

Weighted

Average

Exercise

Shares Price
(In thousands, except per share amounts)

Outstanding at October 25, 2009 73,101 $ 14.72
Granted — $ —
Exercised (6,730 ) $ 11.02
Canceled/forfeited (13,213 ) $ 15.22

Outstanding at August 1, 2010 53,158 $ 15.12

Exercisable at August 1, 2010 39,264 $ 17.42


				Weighted
				Average
				Exercise
	Shares			Price
	(In millions, except per share amounts)

Outstanding, at October 31, 2010		51		$	15.04
Granted		—		$	—
Exercised		(2	)	$	8.99
Canceled and forfeited		(12	)	$	21.49

Outstanding at January 30, 2011		37		$	13.14

Exercisable at January 30, 2011		24		$	15.68

Restricted Stock Units and Restricted Stock

Restricted stock units are converted into shares of Applied common stock upon vesting on aone-for-one basis. Restricted stock has the same rights as other issued and outstanding shares of Applied common stock except these shares have no right to dividends and are held in escrow until the award vests. Restricted stock units and awards of restricted stock typically vest over three to four years. Vesting of restricted stock units and restricted stock usually is subject to the grantee’s continued service with Applied and, in some cases, achievement of specified performance

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

goals. The compensation expense related to these awards is determined using the fair market value of Applied common stock on the date of the grant, and the compensation expense is recognized over the vesting period. Beginning in fiscal 2007, Applied initiated a performance-based equity award program for named executive officers and other key employees. Awards of restricted stock units or restricted stock granted under this program vest only if specific performance goals set by the Human Resources and Compensation Committee of Applied’s Board of Directors (the Committee) are achieved and if the grantee remains employed by Applied through the applicable vesting date. The performance goals require the achievement of targeted ~~relative~~adjusted annual operating profit margin levels as compared to Applied’s peer companies in at least one of the four fiscal years beginning with the fiscal year of the grant. The fair value of these performance-based awards is estimated using the fair market value of Applied common stock on the date of the grant and assumes that the specified performance goals will be achieved. If achieved, these awards vest over a specified remaining service period. If the performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is reduced for estimated forfeitures. The Committee approved the grant of ~~1,825,000~~2 million performance-based restricted stock units and ~~50,000~~0.1 million performance-based shares of restricted stock under this program in the ~~nine~~three months ended ~~August 1, 2010. There were no performance-based awards granted in the nine months ended July 26, 2009.~~January 30, 2011. With respect to the performance-based awards granted in fiscal 2010, as of January 30, 2011, 40 percent of the awards had been earned, subject to additional time-based vesting requirements. The remaining 60 percent of the awards may still be earned, depending on future performance in one or more of fiscal years 2011 through 2013. With respect to most of the performance-based awards granted in fiscal 2008, as of ~~August 1, 2010, 70~~January 30, 2011, 78 percent of the ~~performance goals associated with these~~ awards had been ~~achieved.~~earned, subject to additional time-based vesting requirements. The ~~performance goals associated with~~remaining 22 percent of the ~~remaining 30 percent~~awards may still be ~~achieved~~earned depending on performance during fiscal ~~2010 and fiscal~~ 2011.

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

Restricted stock unit and restricted stock activity for the ~~nine~~three months ended ~~August 1, 2010 was~~January 30, 2011was as follows:


				Weighted		Weighted					Weighted		Weighted
				Average		Average					Average		Average
				Grant Date		Remaining					Grant Date		Remaining
	Shares			Fair Value		Contractual Term		Shares			Fair Value		Contractual Term
	(In thousands)							(In millions, except per share amounts)

Non-vested restricted stock units and restricted stock at October 25, 2009		12,105		$	16.16		2.4 Years
Non-vested restricted stock units and restricted stock at October 31, 2010									18		$	13.33		2.8 Years
Granted		12,216		$	12.42				14		$	12.62
Vested		(2,275	)	$	15.45				(1	)	$	15.51
Canceled		(1,503	)	$	15.68				(1	)	$	13.47

Non-vested restricted stock units and restricted stock at August 1, 2010		20,543		$	14.05		2.7 Years
Non-vested restricted stock units and restricted stock at January 30, 2011									30		$	12.91		3.2 Years

Employee Stock Purchase Plans

Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning or end of each6-month purchase period, subject to certain limits. Based on the Black-Scholes option pricing model, the weighted average estimated fair value of purchase rights under the ESPP was $3.00 and $2.99 for the nine months ended August 1, 2010 and July 26, 2009, respectively. No shares were issued under the ESPP during the three months ended ~~August 1, 2010 and July 26, 2009, respectively. The number of shares issued under~~January 30, 2011 or January 31, 2010. Compensation expense associated with the ESPP ~~during the nine months ended August 1, 2010 and July 26, 2009 was 2,440,000 and 3,536,000, respectively. Compensation expense~~ is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. ~~Underlying assumptions used in the model are outlined in the following table:~~

Nine Months Ended
August 1,
July 26,
2010 2009

ESPP:

Dividend yield 2.24 % 2.71 %
Expected volatility 33 % 69 %
Risk-free interest rate 0.18 % 0.41 %
Expected life (in years) 0.5 0.5


Note 12	Employee Benefit Plans

Applied sponsors a number of employee benefit plans, including defined benefit plans of certain foreign subsidiaries, and a plan that provides certain ~~health~~medical and vision benefits to eligible retirees. A summary of the ~~components of net periodic benefit costs of these defined and postretirement benefit plans for the three and nine months ended August 1, 2010 and July 26, 2009 is presented below:~~

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 2010 2009
(In thousands) (In thousands)

Service cost $ 3,350 $ 3,290 $ 10,050 $ 9,870
Interest cost 3,444 3,007 10,332 9,021
Expected return on plan assets (1,913 ) (1,863 ) (5,739 ) (5,589 )
Amortization of actuarial loss 286 174 858 522
Amortization of prior service credit (63 ) (70 ) (189 ) (210 )
Amortization of transition obligation 14 19 42 57

Net periodic pension cost $ 5,118 $ 4,557 $ 15,354 $ 13,671

3024

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


~~Note 13~~	~~Borrowing Facilities~~

~~Applied has credit facilities for unsecured borrowings in various currencies~~components of ~~up to $1.1 billion, of which $1.0 billion is comprised of a5-year~~ revolving credit agreement with a group of banks that is scheduled to expire in January 2012. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at August 1, 2010. Remaining credit facilities in the amount of approximately $91 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under anynet periodic benefit costs of these ~~facilities at August 1, 2010.~~defined and postretirement benefit plans for the three months ended January 30, 2011 and January 31, 2010 is presented below:


	Three Months Ended
	January 30,			January 31,
	2011			2010
	(In millions)

Service cost	$	4		$	3
Interest cost		4			4
Expected return on plan assets		(3	)		(2	)

Net periodic benefit cost	$	5		$	5


Note 1413	Income Taxes

Applied’s effective income tax rate for the ~~third~~first quarter of fiscal 2011 and fiscal 2010 was a provision of ~~30.8~~25.5 percent and 30.3 percent, respectively. The rate for the first quarter of fiscal 2011 was lower than the rate for the comparable period in the prior year primarily due to an increase in income in jurisdictions outside the U.S. with lower tax rates. The tax rate further benefited from tax incentives offered in several jurisdictions. The rate for the first quarter of fiscal 2011 also included the impact of legislation restoring the U.S. federal research and development tax credit, which favorably affected the effective tax rate by approximately 2 percentage points. The tax rate for the ~~third~~first quarter of fiscal ~~2009 was a benefit of 26.0 percent. Both periods~~2010 included the impact of restructuring charges. Applied’s future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of Applied’s pre-tax income, and the tax rate on equity compensation. Management carefully monitors these factors and timely adjusts the interim income tax rate accordingly.

During the second quarter of fiscal 2010, Applied received a U.S. federal cash refund of approximately $130 million due to the carryback of the fiscal year 2009 net operating loss to fiscal year 2005.

During fiscal 2009, the Internal Revenue Service began an examination of Applied’s federal income tax returns for fiscal years 2007 and 2006. Applied believes it has adequately reserved for any income tax uncertainties that may arise as a result of this examination.

A number of Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. federal returns for fiscal 2005 and later years, California returns for fiscal 2006 and later years, tax returns for certain other states for fiscal ~~2002~~2005 and later years, and tax returns in certain jurisdictions outside of the United States for fiscal 2003 and later years.

The timing of the resolution of income tax examinations, as well as the amounts and timing of various tax payments that may be made as part of the ~~settlement~~resolution process, is highly uncertain. This could cause large fluctuations in the balance sheet classification of current assets and non-current assets and liabilities. Applied does not expect a material change in unrecognized tax benefits in the next 12 months.


Note 14	Warranty, Guarantees and Contingencies

Warranty

Changes in the warranty reserves during the three months ended January 30, 2011 and January 31, 2010 were as follows:


	Three Months Ended
	January 30,			January 31,
	2011			2010
	(In millions)

Beginning balance	$	155		$	118
Provisions for warranty		51			34
Consumption of reserves		(33	)		(15	)

Ending balance	$	173		$	137

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Applied products are generally sold with a12-month warranty period following installation. The provision for the estimated cost of warranty is recorded when revenue is recognized. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region. Quarterly warranty consumption is generally associated with sales that occurred during the preceding four quarters, and quarterly warranty provisions are generally related to the current quarter’s sales.

Guarantees

In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of January 30, 2011, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $57 million. Applied has not recorded any liability in connection with these guarantee agreements 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 agreements.

Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of January 30, 2011, Applied Materials Inc. has provided parent guarantees to banks for approximately $185 million to cover these services.

Legal Matters

Semitool Shareholder Litigation

On November 17, 2009, Applied announced that it was making a tender offer to acquire all of the outstanding shares of Semitool, Inc. (Semitool) in accordance with an Agreement and Plan of Merger entered into with Semitool. Following this announcement, three lawsuits were filed by Semitool shareholders in the District Court of the Eleventh Judicial District Court for the State of Montana, County of Flathead, against Semitool, Semitool’s directors, Applied Materials, Inc. and Applied’s acquisition subsidiary. The actions sought certification of a class of all holders of Semitool common stock, except the defendants and their affiliates. The complaints alleged that Semitool’s directors breached their fiduciary duties by, among other things, failing to maximize shareholder value and failing to disclose material information, and that Applied aided and abetted such alleged breaches. The actions sought injunctive relief, damages and attorneys’ fees.

On December 14, 2009, all parties in these cases reached an agreement in principle to settle the matters and the plaintiffs withdrew their motion to enjoin consummation of the transaction. Without admitting any wrongdoing or fault, Semitool disclosed certain additional information in itsSchedule 14D-9 filed with the Securities and Exchange Commission on December 14, 2009. Following the tender of shares representing over 95 percent of the outstanding shares of Semitool common stock, the merger of Semitool into Applied’s acquisition subsidiary was completed on December 21, 2009. Pursuant to a memorandum of understanding between the parties, plaintiffs conducted discovery to confirm the fairness and reasonableness of the settlement and defendants agreed not to object to an application by plaintiffs’ counsel for an award of attorneys’ fees and expenses in an amount up to $200,000. In November 2010, the parties filed their Stipulation and Agreement of Settlement, which, if approved by the Court, will result in a complete and final discharge of all claims. Under its order issued January 12, 2011, the Court preliminarily approved the stipulation and settlement and certified a class of Semitool’s public shareholders solely for purposes of settlement, comprised of all record and beneficial holders of Semitool common stock from November 17, 2009 through December 21, 2009 (subject to specified exclusions). The Court further approved, as to form and content, the notice to the class and set a settlement hearing for April 4, 2011.

Jusung

Applied has been engaged in several lawsuits and patent and administrative proceedings with Jusung Engineering Co., Ltd.and/or Jusung Pacific Co., Ltd. (Jusung) in Taiwan and South Korea since 2003, and more

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

recently in China, involving technology used in manufacturing LCDs. Applied believes that it has meritorious claims and defenses against Jusung that it intends to pursue vigorously.

In 2004, Applied filed a complaint for patent infringement against Jusung in the Hsinchu District Court in Taiwan seeking damages and a permanent injunction for infringement of a patent related to chemical vapor deposition (CVD) equipment. Jusung filed a counterclaim against Applied. On December 31, 2010, the Hsinchu District Court announced that it had ruled against Applied and dismissed the lawsuit and Jusung’s counterclaim. Applied appealed the dismissal of its lawsuit and Jusung appealed the dismissal of its counterclaim.. Jusung unsuccessfully sought invalidation of Applied’s CVD patent in the Taiwanese Intellectual Property Office (TIPO). In September 2010, the Supreme Administrative Court dismissed Jusung’s appeal of the TIPO’s decision. In 2009, Jusung filed a second action with the TIPO seeking invalidation of Applied’s CVD patent, which remains pending.

In 2006, Applied filed an action in the TIPO challenging the validity of a Jusung patent related to severability of the transfer chamber on a CVD tool. Jusung sued Applied and AKT America in Hsinchu District Court in Taiwan alleging infringement of the same patent. In March 2009, the Hsinchu District Court dismissed Jusung’s lawsuit, and in October, 2010, the Taiwan Intellectual Property Court dismissed Jusung’s appeal. Separately, the TIPO granted Applied’s request for invalidation and also revoked Jusung’s patent. In January 2010, the Taiwan Intellectual Property Court granted Jusung’s appeal of the TIPO decision revoking its patent and remanded the matter to the TIPO for reconsideration of validity. In November 2009, Applied filed an action in China with the Patent Reexamination Board of the State Intellectual Property Office seeking to invalidate this patent. On June 18, 2010, the Patent Reexamination Board issued a decision invalidating Jusung’s patent in China. Jusung has appealed this decision.

In 2006, Jusung filed a complaint of private prosecution in the Taipei District Court of Taiwan alleging that Applied’s outside counsel received from the Court and used a copy of an expert report that Jusung had filed in the ongoing patent infringement lawsuits that Jusung had intended to remain confidential. The complaint names as defendants Applied’s outside counsel in Taiwan, as well as Michael R. Splinter, Applied’s Chairman, President and Chief Executive Officer, as the statutory representative of Applied. The Taipei District Court dismissed the private prosecution complaint, and the matter was transferred to the Taipei District Attorney’s Office. The Taipei District Attorney’s Office issued five successive rulings not to prosecute, each of which Jusung appealed. In each instance, the Taiwan High Court District Attorney returned the matter to the Taipei District Attorney’s Office for further consideration, where it is now pending.

Korea Criminal Proceedings

In February 2010, the Seoul Prosecutor’s Office for the Eastern District of Korea (the Prosecutor’s Office) indicted employees of several companies for the alleged improper receipt and use of confidential information belonging to Samsung Electronics Co., Ltd. (Samsung), a major Applied customer based in Korea. The Prosecutor’s Office did not name Applied or any of its subsidiaries as a party to the criminal action. The individuals charged included the former head of Applied Materials Korea (AMK), who at the time of the indictment was a vice president of Applied Materials, Inc., and certain other AMK employees. Hearings on these matters are ongoing in the Seoul Eastern District Court. Applied and Samsung entered into a settlement agreement effective as of November 1, 2010, which resolves potential civil claims related to this matter, which is separate from and does not affect the criminal proceedings.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


Note 15	Industry Segment Operations

Applied’s four reportable segments are: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire ~~Company.~~company. Segment information is presented based upon Applied’s management organization structure as of ~~August 1, 2010~~January 30, 2011 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to ~~the Company’s~~Applied’s reportable segments.

Each reportable segment is separately managed and has separate financial results that are reviewed by Applied’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by Applied’s chief operating decision-maker.

Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Effective in the first quarter of fiscal 2010, Applied changed its methodology for allocating certain expenses to its reportable segments, such as components of variable compensation and operating expenses

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

~~associated with the global sales organization. Applied has reclassified segment operating results for the three and nine months ended July 26, 2009 to conform to the fiscal 2010 presentation.~~ Management measures the performance of each reportable segment based upon several metrics including orders, net sales and operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level, which include costs related to share-based ~~compensation,~~compensation; certain ~~corporate functions (certain~~ management, finance, legal, human resources, and research, development and ~~engineering),~~engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these charges or adjustments pertain to a specific reportable segment. Segment operating income excludes interest income/expense and other financial charges and income ~~taxes according to how a particular reportable segment’s management is measured.~~taxes. Management does not consider the unallocated costs in measuring the performance of the reportable segments.

In fiscal 2010, as part of the restructuring of the Energy and Environmental Solutions segment, Applied discontinued sales to new customers of its fully-intergrated SunFab lines but continued to offer individual tools for thin film solar manufacturing. Applied is supporting existing SunFab customers with services, upgrades and capacity increases through its Applied Global Services segment as these products are considered to have reached a particular stage in the product lifecycle. Effective in the first quarter of fiscal 2011, Applied accounts for thin film products under its Applied Global Services segment.

The Silicon Systems Group segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, and wafer packaging.

The Applied Global Services segment includes technically differentiated products and services to improve operating efficiency, reduce operating costs and lessen the environmental impact of semiconductor, display and solar customers’ factories. Applied Global Services’ products consist of spares, services, certain earlier generation products, remanufactured equipment, and ~~remanufactured equipment.~~products that have reached a particular stage in the product lifecycle. Customer demand for these products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.

The Display segment includes products for manufacturing LCDs for TVs, personal computers and other video-enabled devices.

The Energy and Environmental Solutions segment includes products for fabricating solar photovoltaic cells and modules, high throughputroll-to-roll coating systems for flexible electronics and web products, and systems used in the manufacture of energy-efficient glass.

~~Net sales and operating income (loss) for each reportable segment for the three and nine months ended August 1, 2010 and July 26, 2009 were as follows:~~

Three Months Ended Nine Months Ended
Operating
Operating

Net Sales Income (Loss) Net Sales Income (Loss)
(In thousands) (In thousands)

2010:
Silicon Systems Group $ 1,446,740 $ 524,752 $ 3,821,179 $ 1,328,426
Applied Global Services 467,539 84,426 1,348,857 237,164
Display 216,139 63,632 617,749 178,426
Energy and Environmental Solutions 387,372 (371,213 ) 874,447 (552,430 )

Total Segment $ 2,517,790 $ 301,597 $ 6,662,232 $ 1,191,586

2009:
Silicon Systems Group $ 497,679 $ 67,198 $ 1,303,921 $ 31,076
Applied Global Services 342,427 24,156 1,006,836 48,936
Display 69,161 (7,875 ) 301,696 10,508
Energy and Environmental Solutions 224,473 (51,854 ) 874,760 (206,088 )

Total Segment $ 1,133,740 $ 31,625 $ 3,487,213 $ (115,568 )

3228

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Net sales and operating income (loss) for each reportable segment for the three months ended January 30, 2011 and January 31, 2010 were as follows:


			Operating
	Net Sales		Income (loss)
	(In millions)

2011:
Silicon Systems Group	$	1,496	$	543
Applied Global Services		567		85
Display		147		28
Energy and Environmental Solutions		476		144

Total Segment	$	2,686	$	800

2010:
Silicon Systems Group	$	970	$	306
Applied Global Services		426		63
Display		132		25
Energy and Environmental Solutions		321		(36	)

Total Segment	$	1,849	$	358

In the first quarter of fiscal 2011, Applied recorded a favorable adjustment of $28 million related to a restructuring program, announced in fiscal 2010, that was reported in the Energy and Environmental Solutions segment.

Reconciliations of total segment operating income to Applied’s consolidated operating income ~~(loss)~~ for the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010 ~~and July 26, 2009~~ were as follows:

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 2010 2009
(In thousands) (In thousands)

Total segment operating income (loss) $ 301,597 $ 31,625 $ 1,191,586 $ (115,568 )
Corporate and unallocated costs (138,889 ) (108,808 ) (413,926 ) (291,509 )
Unallocated restructuring and asset impairment benefit (charge) 19,943 — (92,869 ) (159,481 )

Income (loss) from operations $ 182,651 $ (77,183 ) $ 684,791 $ (566,558 )


	Three Months Ended
	January 30,			January 31,
	2011			2010
	(In millions)

Total segment operating income	$	800		$	358
Corporate and unallocated costs		(127	)		(138	)
Restructuring and asset impairment benefit (charges), net		1			(104	)

Income from operations	$	674		$	116

~~During the nine months ended August 1, 2010, Samsung Electronics Co., Ltd.~~The following companies accounted for 16at least 10 percent of Applied’s net sales ~~and Taiwan Semiconductor Manufacturing Company Limited accounted~~ for ~~12 percent. These two customers accounted~~the three months ended January 30, 2011, which were for ~~22 percent of the accounts receivable balance as of August 1, 2010.~~products in multiple reportable segments.


	~~Note 16~~ January 30,		~~Business Combinations~~
	2011

Taiwan Semiconductor Manufacturing Company Limited		14	%
Samsung Electronics Co., Ltd.		13	%
Intel Corporation		10	%

On December 21, 2009, Applied acquired Semitool, a public company based in the state of Montana, for a purchase price of $323 million in cash, net of cash acquired, pursuant to a tender offer and subsequent short-form merger. The acquired business is a leading supplier of electrochemical plating and wafer surface preparation equipment used by semiconductor packaging and manufacturing companies globally. Applied’s primary reasons for this acquisition were to complement its existing product offerings and to provide opportunities for future growth. The acquired business is included in results for the Silicon Systems Group segment.

~~In November 2009, Applied acquired substantially all the assets, including the intellectual property,~~As of ~~Advent Solar, a developer~~January 30, 2011, accounts receivable for those customers that accounted for at least 10% of ~~advanced technology for c-Si solar photovoltaic cells and modules (PVs). This acquisition complemented~~ Applied’s ~~portfolio of solar PV technologies and enhanced Applied’s opportunities in the c-Si equipment market. The acquisition is included in results~~net sales for the ~~Energy and Environmental Solutions segment.~~

Applied allocated the purchase price of each of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired, based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management. These estimatesthree months ended January 30, 2011 were ~~determined through established and generally accepted calculation techniques. Applied calculated the fair value of the tangible and intangible assets~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

~~acquired to allocate the purchase prices at the respective acquisition dates. Based upon these calculations, the purchase prices for the above acquisitions were allocated~~ as follows:

Acquisitions

Fair Market Values 2010
(In thousands)

Cash and cash equivalents $ 38,744
Accounts receivable, net 37,961
Inventories 61,838
Other current assets 3,837
Property and equipment, net 45,578
Goodwill 165,495
Purchased intangible assets 93,376

Total assets acquired 446,829
Accounts payable and accrued expenses (46,246 )
Other liabilities (25,240 )

Total liabilities assumed (71,486 )

Purchase price allocated $ 375,343

Purchased

Useful
Intangible Assets

Life 2010
(In years) (In thousands)

Developed technology 6-10 $ 65,700
Customer relationships 8 10,900
Trade names 3-10 5,700
Patents and trademarks 7-10 5,462
Backlog 1 4,100
Other 5 1,514

Total purchased intangible assets $ 93,376


	~~Note 17~~ January 30,		~~Recent Accounting Pronouncements~~
	2011

Taiwan Semiconductor Manufacturing Company Limited		16	%
Samsung Electronics Co., Ltd.		14	%
Intel Corporation		15	%

In March 2010, the FASB issued updated authoritative guidance that amends the requirements for evaluating whether a decision maker or service provider has a variable interest entity and clarified that a quantitative approach should not be the sole consideration in assessing the criteria for variable interest entity determination. The guidance also clarifies that related parties should be considered in applying all of the decision maker and service provider criteria. This is in addition to the authoritative guidance the FASB issued in June 2009 that applies to determining whether an entity is a variable interest entity and requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. Under this guidance, an enterprise has a controlling financial interest when it has (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The guidance also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

interest entity, requires enhanced disclosures, and eliminates the scope exclusion for qualifying special-purpose entities. This guidance is effective for Applied beginning in the first quarter of fiscal 2011. Applied is evaluating the potential impact of the implementation of this authoritative guidance on its consolidated financial statements.

In January 2010, the FASB issued authoritative guidance for fair value measurements, which requires additional disclosures and clarifications to existing disclosures. This authoritative guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and also to describe the reasons for these transfers. This authoritative guidance also requires enhanced disclosure of activity in Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures for Level 1 and Level 2 fair value measurements became effective for Applied in the second quarter of fiscal 2010. Disclosures regarding activity within Level 3 fair value measurements becomes effective the first interim reporting period after December 15, 2010 and will be effective for Applied in the second quarter of fiscal 2011. Applied is evaluating the potential impact of the implementation of this authoritative guidance on its consolidated financial statements. See Note 4 for information and related disclosures regarding Applied’s fair value measurements.

In June 2009, the FASB issued authoritative guidance on variable interest entities, which requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. In December 2009, the FASB issued authoritative guidance on the financial reporting by entities involved with variable interest entities which amends previously issued guidance on variable interest entities. The amendments in this authoritative guidance replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This authoritative guidance becomes effective for Applied in fiscal 2011. Applied is evaluating the potential impact of the implementation of this authoritative guidance on its consolidated financial statements.

3529


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

All statements in this Quarterly Report onForm 10-Q and those made by the management of Applied, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Applied’s future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, research and development, acquisitions and joint ventures, growth opportunities, customers, working capital, liquidity, investment portfolio and policies, and legal proceedings and claims, as well as industry trends and outlooks. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” ~~“predict,”~~ “potential” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, “Risk Factors,” below and elsewhere in this report. Other risks and uncertainties may be disclosed in Applied’s prior Securities and Exchange Commission (SEC) filings. These and many other factors could affect Applied’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Applied undertakes no obligation to revise or update any forward-looking statements.

Overview

Applied provides ~~Nanomanufacturing Technology~~^tm ~~solutions for~~manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic (PV) and related ~~industries, with a broad portfolio of innovative equipment, service and software products.~~industries. Applied’s customers ~~are primarily~~include manufacturers of ~~semiconductors,~~semiconductor wafers and chips, flat panel liquid crystal displays (LCDs), solar ~~photovoltaic~~PV cells and modules, ~~(solar PVs), flexible electronics~~ and ~~energy-efficient glass.~~other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in four reportable segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 15 of Notes to Consolidated Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in North America, Europe, Israel and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.

Applied’s results historically have been driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand for electronic products. Each of Applied’s businesses is subject to highly cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, LCDs, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and technological advances in fabrication processes. After a challenging year in fiscal 2009 that was characterized by credit constraints in the financial markets, a weak global economy and a semiconductor industry downturn, global economic and industry conditions affecting Applied’s businesses generally improved in the first nine months of fiscal 2010, except for conditions in the thin film solar PV market.

Financial results for the ~~third~~first quarter of fiscal ~~2010~~2011 reflected ~~significantly~~ increased demand ~~for manufacturing equipment and services~~across all segments due to more favorable global economic and industry conditions compared to the ~~third~~first quarter of fiscal ~~2009.~~2010. Total orders in the quarter increasedyear-over-year, primarily due to ~~increased~~greater demand for ~~most of Applied’s products, with the principal exception of SunFab thin film~~semiconductor equipment and crystalline silicon (c-Si) solar ~~manufacturing lines.~~PV products. Net sales and net income increased during the ~~third~~first quarter of fiscal ~~2010~~2011 compared to the ~~third~~first quarter of fiscal ~~2009,~~2010, led primarily by stronger sales of semiconductor ~~equipment.~~

In the third quarter of fiscal 2010, Applied incurred charges totaling $405 million associated with a plan to restructure its Energy and Environmental Solutions segment. The action was in response to adverse market conditions for thin film solar, including delays in utility-scale solar adoption, solar panel manufacturers’ challenges in obtaining affordable capital, changes and uncertainty in government renewable energy policies, and competitive pressure from crystalline silicon (c-Si) solar technologies. As part of the restructuring, Applied will discontinue sales to new customers of its fully-integrated SunFab lines but will offer individual tools for thin film solar manufacturing. Applied will support existing SunFab customers with services, upgrades and capacity increases through its Applied Global Services segment and will continue RD&E efforts to improve thin film panel efficiency and high-productivity deposition.

~~Financial results for the first nine months of fiscal 2010 over fiscal 2009 similarly reflected significantly increased demand for manufacturing~~ equipment and services ~~due to more favorable global economic~~ and industry conditions. The increase in total orders from the first nine months of fiscal 2009 was primarily due to increased demand for semiconductor and display products, partially offset by decreased demand for SunFab thin film solar lines. Net sales increased during the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009, due primarily to higher sales of semiconductor and displayc-Si products. Net income in ~~both periods~~the first quarter of fiscal 2011 included a favorable adjustment to restructuring reserves of $32 million, offset by asset impairment charges of $3 million, while net income in the first quarter of 2010 included restructuring ~~charges.~~charges of $104 million.

Results of Operations

New Orders

New orders by geographic region, determined by the location of customers’ facilities, for the three months ended January 30, 2011 and January 31, 2010 were as follows:


	January 30,				Change			January 31,
	2011				2011 over 2010			2010
	($)		(%)		(%)			($)		(%)
	(In millions, except percentages)

Taiwan		745		25		13			658		34
China		653		22		204			215		11
Korea		226		8		(42	)		387		20
Japan		187		6		5			178		9
Southeast Asia		135		4		8			125		6

Asia Pacific		1,946		65		25			1,563		80
North America(*)		679		23		165			256		13
Europe		346		12		137			146		7

Total		2,971		100		51			1,965		100


(*)		Primarily the United States.

New orders of ~~$2.7~~$3.0 billion for the ~~third~~first quarter of fiscal ~~2010 increased significantly~~2011 were up 51 percent from ~~new orders of $1.1 billion in~~ the ~~third~~first quarter of fiscal ~~2009.~~2010. The increase was ~~principally due~~primarily attributable to ~~greater~~an increase in demand for semiconductor ~~equipment and services, primarily~~products from ~~memory~~logic and foundry customers, as well as increased demand for c-Si ~~solar manufacturing products and display equipment. New orders of $7.2 billion for~~products. For the first ~~nine months~~quarter of fiscal ~~2010 more than doubled from the first nine months of fiscal 2009. The increase~~2011, customers in ~~new orders was primarily attributable to higher demand for equipment and services from semiconductor customers, as well as increased demand for display equipment and c-Si products.~~

~~New orders by geographic region (determined by the location of customers’ facilities) for the three and nine months ended August 1, 2010 and July 26, 2009 were as follows:~~

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 2010 2009
($) (%) ($) (%) ($) (%) ($) (%)
(In millions, except percentages)

Taiwan 733 27 261 24 2,047 28 407 15
Korea 519 19 114 11 1,467 20 263 10
China 415 15 181 17 1,181 16 276 11
Southeast Asia 245 9 88 8 522 7 159 6
Japan 233 8 151 14 568 8 407 15

Asia Pacific 2,145 78 795 74 5,785 79 1,512 57
North America(*) 342 13 147 14 898 13 511 20
Europe 238 9 130 12 540 8 601 23

Total 2,725 100 1,072 100 7,223 100 2,624 100


*		~~Primarily the United States.~~

3731

Taiwan accounted for $745 million of new orders, followed by North America with new orders of $679 million and China with new orders of $653 million.

Applied’s backlog for the most recent three fiscal quarters was as follows: $3.5 billion at January 30, 2011, $3.2 billion at October 31, 2010, and $3.1 billion at August 1, ~~2010, $3.0 billion at May 2, 2010, and $2.9 billion at January 31,~~ 2010. Backlog increased ~~5 percent for~~in the ~~third quarter of 2010 from the second~~first quarter of fiscal ~~2010,~~2011 primarily due to ~~an increase~~increases in new orders for the Silicon Systems Group segment and ~~Applied Global Services.~~the Energy and Environmental Solutions segment reflecting increased demand for semiconductor equipment and c-Si products, respectively. Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; (2) contractual service revenue and maintenance fees to be earned within the next 12 months; and (3) orders for SunFab lines that are anticipated to be recognized as revenue within the next 12 months. Applied’s backlog at any particular time is not necessarily indicative of actual sales for any future periods, due to the potential for customer changes in delivery schedules or cancellation of orders. ~~In addition, the~~The majority of sales in the Silicon Systems Group, our largest business segment, were from orders received and shipped in the same quarter.

Net sales of $2.5 billion for the third quarter of fiscal 2010 more than doubled from the third quarter of fiscal 2009, reflecting higher sales of equipment and services to semiconductor equipment customers as well as display and c-Si customers. Net sales of $6.7 billion for the first nine months of fiscal 2010 increased 91 percent from the first nine months of fiscal 2009, primarily due to higher sales of semiconductor equipment.Sales

Net sales by geographic region ~~(determined~~,determined by the location of customers’ ~~facilities)~~facilities, for the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010 ~~and July 26, 2009~~ were as follows:


	Three Months Ended								Nine Months Ended								January 30,				Change			January 31,
	August 1,				July 26,				August 1,				July 26,				2011				2011 over 2010			2010
	2010				2009				2010				2009				($)		(%)		(%)			($)		(%)
	($)		(%)		($)		(%)		($)		(%)		($)		(%)		(In millions, except percentages)
	(In millions, except percentages)

China																		674		25		372			143		8
Taiwan		707		28		393		35		1,921		29		699		20		635		24		23			514		28
China		469		19		116		10		843		13		356		10
Korea		398		16		129		11		1,361		20		412		12		169		6		(49	)		331		18
Japan		203		8		130		12		610		9		501		14		166		6		(5	)		174		9
Southeast Asia		162		6		53		5		403		6		183		6		154		6		13			136		7

Asia Pacific		1,939		77		821		73		5,138		77		2,151		62		1,798		67		39			1,298		70
North America(*)		294		12		139		12		765		12		733		21		610		23		153			241		13
Europe		285		11		174		15		759		11		603		17		278		10		(10	)		310		17

Total		2,518		100		1,134		100		6,662		100		3,487		100		2,686		100		45			1,849		100


()		Primarily the United States.

~~Gross margin as a percentage~~Net sales of $2.7 billion for the first quarter of fiscal 2011 were up 45 percent from the first quarter of fiscal 2010. In the first quarter of fiscal 2011, customers in China accounted for $674 million of total net sales followed by Taiwan with net sales of $635 million and North America with net sales of $610 million. In the first quarter of fiscal 2011, the majority of net sales ~~was 34 percent~~in China reflected purchases of c-Si products by solar PV manufacturers, and the majority of net sales in Taiwan were due to purchases of semiconductor products by logic and foundry customers.

Gross Margin

Gross margins for the ~~third~~three months ended January 30, 2011 and January 31, 2010 were as follows:


	Three Months Ended
	January 30,			January 31,			Change
	2011			2010			2011 over 2010
	(In millions, except percentages)

Gross margin	$	1,136		$	711		$	425
Gross margin (% of net sales)		42	%		38	%		4 points

The increase in the gross margin for the first quarter of fiscal 2011 from the first quarter of fiscal 2010 ~~up from 29 percent for the third quarter of fiscal 2009. For the first nine months of fiscal 2010, gross margin as a percentage of net sales~~ was ~~37 percent, up from 25 percent for the first nine months of fiscal 2009. The increases for both the three and nine months ended August 1, 2010 were~~ principally attributable to higher net sales, more favorable product mix, improved factory utilization, lower costs

from continued manufacturing transition of certain Silicon Systems Group products to Applied’s Singapore Operations Center, and continued cost control ~~measures, offset in part by inventory-related charges of $247 million related to SunFab thin film solar equipment taken~~measures. Gross margin during the ~~third~~first quarters of fiscal 2011 and 2010 included $11 million and $5 million of share-based compensation expense, respectively.

Research, Development and Engineering

Research, Development and Engineering expenses for the three months ended January 30, 2011 and January 31, 2010 were as follows:


	Three Months Ended
	January 30,		January 31,		Change
	2011		2010		2011 over 2010
	(In millions)

Research, development and engineering	$	270	$	269	$	1

Applied’s future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. Applied believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced designs. Applied historically has maintained its commitment to investing in RD&E in order to continue to offer new products and technologies. RD&E expenses were $270 million for the first quarter of fiscal 2011 compared to $269 million for the first quarter of fiscal 2010. RD&E expense during the first quarters of fiscal 2011 and 2010 included $10 million and $12 million of share-based compensation expense, respectively. Development cycles range from 12 to 36 months depending on whether the product is an enhancement of an existing product, which typically has a shorter development cycle, or a new product, which typically has a longer development cycle. Most of Applied’s existing products resulted from internal development activities and innovations involving new technologies, materials and processes. In certain instances, Applied acquires technologies, either in ~~connection with~~existing or new product areas, to complement its existing technology capabilities and to reduce time to market.

Marketing, Selling, General and Administrative

Marketing, selling, general and administrative expenses for the three months ended January 30, 2011 and January 31, 2010 were as follows:


	Three Months Ended
	January 30,		January 31,		Change
	2011		2010		2011 over 2010
	(In millions)

Marketing, selling, general and administrative	$	221	$	222	$	(1	)

Marketing, selling, general and administrative expenses were $221 million for the first quarter of fiscal 2011 compared to $222 million for the first quarter of fiscal 2010. The decline reflected lower general and administrative expenses as a result of the restructuring of the Energy and Environmental Solutions ~~segment. These inventory-related charges lowered gross margin for~~segment that occurred in the third quarter of fiscal 2010, offset in part by ~~approximately 10 percentage points. Inventory-related charges of $330 million associated with SunFab thin film solar equipment lowered gross margin for~~increased marketing and selling expenses. Marketing, selling and general and administrative expenses during the first ~~nine months of fiscal 2010 by approximately 5 percentage points. Gross margin during the third~~ quarters of fiscal 2011 and 2010 ~~and 2009~~ included ~~$10~~$12 million and $9$17 million of share-based compensation expense, respectively. ~~Gross margin during the first nine months of fiscal 2010 and 2009 included $23 million of share-based compensation expense in each period.~~

~~Operating~~Restructuring and Asset Impairments

Restructuring and asset impairment expenses ~~included expenses related~~for the three months ended January 30, 2011 and January 31, 2010 were as follows:


	Three Months Ended
	January 30,			January 31,		Change
	2011			2010		2011 over 2010
	(In millions)

Restructuring and asset impairments	$	(29	)	$	104	$	(133	)

On July 21, 2010, Applied announced a plan to ~~research, development~~restructure its Energy and ~~engineering (RD&E), marketing and selling (M&S), and general and administrative (G&A). Expenses related~~Environmental Solutions segment, which was expected to ~~RD&E, M&S and G&A totaled $542 million for~~impact between 400 to 500 positions globally. During the third quarter of fiscal 2010, ~~compared to $402~~Applied incurred employee severance charges of $45 million ~~for~~associated with this program. During the ~~third~~first quarter of fiscal ~~2009. This increase~~2011, as a result of changes in Applied’s operating ~~expenses~~environment and business requirements, Applied revised its workforce reduction associated with this program to approximately 200 positions and recorded a favorable adjustment of $28 million. In addition, Applied favorably adjusted the remaining severance accrual associated with a global restructuring program announced in the first quarter of fiscal 2009 by $4 million. During the first quarter of fiscal 2011, Applied recorded an asset impairment charge of $3 million related to a facility held for sale.

During the first quarter of fiscal 2010, Applied announced a restructuring program to reduce its global workforce as of October 25, 2009 by approximately 1,300 to 1,500 positions, or 10 to 12 percent, over a period of 18 months. During the first quarter of fiscal 2010, Applied recorded restructuring charges of $104 million associated with this program. During the third quarter of fiscal 2010, ~~reflected~~as a result of changes in business requirements, Applied revised its global workforce reduction associated with this program to approximately 1,000 positions and recorded a favorable adjustment of $20 million.

For further details, see Note 10 of Notes to Consolidated Financial Statements.

Net Interest Income and Other Income, Net

Net interest income and other income, net, for the ~~elimination~~three months ended January 30, 2011 and January 31, 2010 were as follows:


	Three Months Ended
	January 30,		January 31,		Change
	2011		2010		2011 over 2010
	(In millions)

Net interest income and other income, net	$	6	$	3	$	3

The increase in net interest income and other income, net in the first quarter of ~~temporary salary reductions~~fiscal 2011 from the first quarter of fiscal 2010 was primarily due to an increase in gains realized on sale of investment securities.

Income Taxes

Income tax expenses for the three months ended January 30, 2011 and ~~shutdowns, and~~January 31, 2010 were as follows:


	Three Months Ended
	January 30,			January 31,			Change
	2011			2010			2011 over 2010
	(In millions, except per share amounts and percentages)

Provision for income taxes	$	174		$	36		$	138
Effective income tax rate		26	%		30	%		4 points

The change in the ~~resumption of variable compensation programs. Expenses related to RD&E, M&S~~

~~and G&A totaled $1.6 billion~~tax rate for the first ~~nine months~~quarter of fiscal 2011 from the rate in the first quarter of fiscal 2010 ~~compared~~was primarily due to ~~$1.3 billion~~an increase in income in jurisdictions outside the U.S. with lower tax rates. The tax rate further benefited from tax incentives offered in several jurisdictions. The rate for the first ~~nine months~~quarter of fiscal ~~2009.~~2011 also included the impact of legislation restoring the U.S. federal research and development tax credit, which favorably affected the effective tax rate by 2 percentage points. The first nine months of fiscal 2010 included fewer shutdown days than the first nine months of fiscal 2010, an extra week, elimination of temporary salary reductions, and the resumption of variable compensation programs. Operating expensestax rate for the first quarter of fiscal 2010 included ~~transaction and legal costs related to the acquisition of Semitool, Inc. (Semitool) and the Advent Solar, Inc. (Advent Solar) asset purchase.~~

Operating expenses for the third quarter of fiscal 2010 included asset impairment charges of $110 million and restructuring charges of $45 million associated with the Energy and Environmental Solutions restructuring plan announced in July 2010, offset by a $20 million favorable adjustment to the restructuring plan announced in November 2009. There were no restructuring or asset impairment charges during the third quarter of fiscal 2009.

Operating expenses for the first nine months of fiscal 2010 included asset impairment charges of $110 million and restructuring charges of $45 million associated with the Energy and Environmental Solutions restructuring plan announced in July 2010, restructuring charges of $84 million associated with a restructuring plan announced in November 2009, and asset impairment charges of $9 million related to a facility held for sale. Operating expenses for the first nine months of fiscal 2009 included restructuring charges of $145 million associated with a restructuring program announced in November 2008, and asset impairment charges of $15 million related to wafer cleaning equipment.

During the three and nine months ended August 1, 2010, Applied recognized $8 million and $13 million, respectively, in impairment charges associated with certain equity investments in privately-held companies. For the three months ended July 26, 2009, Applied recognized $2 million in impairment charges associated with certain equity investments in privately-held companies. During the nine months ended July 26, 2009, Applied recognized $79 million in impairment charges, consisting of $45 million associated with its equity method investment in Sokudo, a Japanese joint venture company, and $34 million in impairment charges associated with certain strategic investments.

Net interest income was $3 million for the third quarter of fiscal 2010, down from $5 million for the third quarter of fiscal 2009. Net interest income was $11 million for the first nine months of fiscal 2010, down from $21 million for the first nine months of fiscal 2009. Lower net interest income for the three and nine months ended August 1, 2010 were primarily due to a decrease in interest rates.

Applied’s effective income tax rate for the third quarter of fiscal 2010 was a provision of 30.8 percent as compared to a benefit of 26.0 percent for the third quarter of fiscal 2009. Applied’s effective income tax rate for the first nine months of fiscal 2010 was a provision of 31.3 percent as compared to a benefit of 32.8 percent for the first nine months of fiscal 2009. The income tax rate for each of these periods included the effect of restructuring charges as discrete items. The effective income tax rate for the first nine months of fiscal 2010 did not include the impact of the U.S. R&D tax credit from the time it expired in December 2009. In the event the U.S. R&D tax credit is enacted on a retroactive basis, there would be a favorable impact to Applied’s effective income tax rate.restructuring charges.. Applied’s future effective income tax rate depends on various factors, such as tax legislation, ~~and~~ the geographic composition of Applied’s pre-tax ~~income.~~income, and the tax rate on equity compensation. Management carefully monitors these factors and timely adjusts the interim income tax rate accordingly.

Segment Information

Applied reports financial results in four segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 15 of Notes to Consolidated Condensed Financial Statements.

Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level. These unallocated costs include costs for share-based ~~compensation,~~compensation; certain ~~corporate functions (certain~~ management, finance, legal, human resources, and RD~~&E),~~&E functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these charges or adjustments pertain to a specific reportable segment.

Effective in the first quarter of fiscal 2010, Applied changed its methodology for allocating certain expenses to its reportable segments, such as components of variable compensation and operating expenses associated with the global sales organization. Applied has reclassified segment operating results for the three and nine months ended July 26, 2009 to conform to the fiscal 2010 presentation.

The results for each reportable segment are discussed below.

Silicon Systems Group Segment

The Silicon Systems Group segment includes semiconductor capital equipment for deposition, etch, rapid thermal processing, chemical mechanical planarization, metrology and inspection, and wafer packaging. Development efforts are focused on solving customers’ key technical challenges, including transistor performance and nanoscale patterning, and improving chip manufacturing productivity to reduce costs.

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 Change 2010 2009 Change
(In millions, except percentages) (In millions, except percentages)

New orders $ 1,535 $ 542 $ 993 $ 4,086 $ 1,047 $ 3,039
Net sales 1,447 498 949 3,821 1,304 2,517
Operating income 525 67 458 1,329 31 1,298
Operating margin 36 % 13 % 23 points 35 % 2 % 33 points

Factors that influenced the competitive environment for the Silicon Systems Group in the first quarter of fiscal 2011 included the continuing rebound in the semiconductor industry, driven by higher demand for consumer and computing devices. Higher factory utilization rates and tight device supply led manufacturers to increase their wafer fab equipment (WFE) capital spending, which is the major driver for Silicon Systems Group net sales.

Certain significant measures for the three months ended January 30, 2011 and January 31, 2010 were as follows:


	January 30,			January 31,			Change
	2011			2010			2011 over 2010
	(In millions, except percentages)

New orders	$	1,610		$	1,135		$	475	42	%
Net sales		1,496			970			526	54	%
Operating income		543			306			237	78	%
Operating margin		36	%		32	%			4 points

New orders increased by ~~$993~~$475 million to $1.6 billion for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The increase in new orders was primarily from logic and foundry customers. Net sales increased by $526 million to $1.5 billion for the ~~third~~first quarter of fiscal ~~2010 compared to the third quarter of fiscal 2009, and also increased by $3.0 billion to $4.1 billion for the first nine months of fiscal 2010~~2011 compared to the first nine months of fiscal 2009. The increases in new orders for the three and nine months ended August 1, 2010 were primarily from memory and foundry customers and reflected the general recovery in the semiconductor equipment industry from the steep downturn experienced in the first nine months of fiscal 2009. The majority of fiscal 2010 new orders were for customers’ capacity expansions, while fiscal 2009 orders were primarily for customers’ new technology investments.

~~Net sales increased by $949 million to $1.4 billion for the third~~ quarter of fiscal ~~2010 compared to the third quarter of fiscal 2009 and also increased by $2.5 billion to $3.8 billion for the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009.~~2010. The ~~increases~~increase in net sales ~~for the three and nine months ended August 1, 2010 were~~was primarily due to increased investment by ~~memory~~foundry and ~~foundry~~logic customers. Four customers accounted for 5766 percent of net sales in this segment infor the first ~~nine months~~quarter of fiscal ~~2010.~~2011. Approximately 6563 percent of net sales in the ~~third~~first quarter of fiscal ~~2010~~2011 were for orders received and shipped within the quarter.

In the first quarter of fiscal 2011, customers in North America and Taiwan accounted for 60 percent of total net sales for the Silicon Systems Group segment. In the first quarter of fiscal 2010, customers in Taiwan and Korea accounted for 66 percent of total net sales for this segment. The book to bill ratio (new orders divided by net sales) ~~was 1.1 for each of the third quarters of fiscal 2010 and fiscal 2009. The book to bill ratio increased~~decreased to 1.1 for the first ~~nine months~~quarter of fiscal 2011 compared to 1.2 for the first quarter of fiscal 2010, reflecting ~~increased demand, compared~~a higheryear-over-year increase in net sales relative to ~~0.8 for the first nine months of fiscal 2009.~~

demand. Operating income increased by ~~$458~~$237 million to ~~$525~~$543 million for the ~~third~~first quarter of fiscal ~~2010~~2011 compared to ~~the third~~first quarter of fiscal ~~2009. Operating income increased significantly to $1.3 billion for the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009.~~2010. The ~~increases~~increase in operating income for the ~~three and nine months ended August 1, 2010 were~~first quarter of fiscal 2011 was due to ~~considerably~~ higher revenue from semiconductor equipment sales and reflected the ~~general~~continued recovery in the semiconductor equipment industry during the first ~~nine months of fiscal 2010. Results for the three and nine months ended August 1, 2010 included Semitool, which was acquired by Applied during the first~~ quarter of fiscal ~~2010.~~2011.

Operating results of the Silicon Systems Group may be affected by an agreement between Applied and Samsung Electronics Co., Ltd (Samsung) that is generally effective for a three-year period from November 1, 2010, which provides in part for volume-based rebates and other incentives to Samsung. The financial impact of the rebates and incentives on the segment will depend on the volume of semiconductor equipment purchases by Samsung.

Applied Global Services Segment

The Applied Global Services segment encompasses technically differentiated products, including spares, services, certain earlier generation equipment products, and remanufactured equipment, to improve operating

efficiency, reduce operating costs, and lessen the environmental impact of semiconductor, display and solar customers’ factories. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 Change 2010 2009 Change
(In millions, except percentages) (In millions, except percentages)

New orders $ 595 $ 298 $ 297 $ 1,552 $ 844 $ 708
Net sales 468 342 126 1,349 1,007 342
Operating income 84 24 60 237 49 188
Operating margin 18 % 7 % 11 points 18 % 5 % 13 points

Industry conditions that affected Applied Global Services’ sales of spares and services in the first quarter of fiscal 2011 were principally semiconductor manufacturers’ wafer starts as well as additions to the tool installed base.

Certain significant measures for the three months ended January 30, 2011 and January 31, 2010 were as follows:


	January 30,			January 31,			Change
	2011			2010			2011 over 2010
	(In millions, except percentages)

New orders	$	552		$	474		$	78	16	%
Net sales		567			426			141	33	%
Operating income		85			63			22	34	%
Operating margin		15	%		15	%			—

New orders increased by ~~$297~~$78 million to ~~$595~~$552 million for the ~~third~~first quarter of fiscal ~~2010 compared to the third quarter of fiscal 2009, and increased 84 percent to $1.6 billion for the first nine months of fiscal 2010~~2011 compared to the first ~~nine months~~quarter of fiscal ~~2009.~~2010. The ~~increases~~increase in new orders ~~for the three and nine months ended August 1, 2010 were~~was due primarily to higher demand for spare parts and refurbished equipment, reflecting customers’ higher factory utilization ~~rates as semiconductor industry conditions improved.~~

rates. Net sales increased ~~36 percent~~by $141 million to ~~$468~~$567 million for the ~~third~~first quarter of fiscal ~~2010 compared to the third quarter of fiscal 2009. Net sales increased 34 percent to $1.3 billion for the first nine months of fiscal 2010~~2011 compared to the first ~~nine months~~quarter of fiscal ~~2009.~~2010. The ~~increases~~increase in net sales ~~for the three and nine months ended August 1, 2010 were~~was primarily due to higher sales of ~~spare parts.~~

refurbished equipment. The book to bill ratio ~~increased~~decreased to ~~1.3~~1.0 for the ~~third~~first quarter of fiscal ~~2010~~2011, reflecting a higheryear-over-year increase in net sales relative to demand, compared to ~~0.9~~1.1 for the ~~third~~first quarter of fiscal ~~2009. The book to bill ratio increased to 1.2 for the first nine months of fiscal 2010 compared to 0.8 for the first nine months of fiscal 2009.~~

2010. Operating income increased by ~~$60~~$22 million to ~~$84 million for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009. Operating income increased by $188 million to $237~~$85 million for the first ~~nine months~~quarter of fiscal ~~2010~~2011 compared to ~~the~~ first ~~nine months~~quarter of fiscal ~~2009.~~2010. The ~~increases~~increase in operating income for the ~~three and nine months ended August 1, 2010~~first quarter of fiscal 2011 primarily reflected increased sales of ~~spare parts.~~refurbished equipment. For the first quarter of fiscal 2011, the operating margin remained essentially unchanged as a result of lower margins on remanufactured equipment.

Display Segment

The Display segment encompasses products for manufacturing LCDs for TVs, personal computers and other video-enabled devices. The business is focused on expanding market share by differentiation with larger-scale substrates, entry into new markets, and development of products to enable cost reductions through productivity and uniformity.

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 Change 2010 2009 Change
(In millions, except percentages) (In millions, except percentages)

New orders $ 242 $ 96 $ 146 $ 624 $ 135 $ 489
Net sales 216 69 147 618 302 316
Operating income (loss) 64 (8 ) 72 179 11 168
Operating margin 30 % (11 )% 41 points 29 % 4 % 25 points

~~New orders increased by $146 million~~The competitive environment for Applied’s Display segment in the first quarter of fiscal 2011, as compared to ~~$242 million for~~ the ~~third~~fourth quarter of fiscal 2010, ~~compared to the third quarter of fiscal 2009,~~was characterized by decreased capacity requirements for larger flat panel televisions and ~~increased by $489 million to $624 million~~growing global demand for ~~the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009. The increases in orders~~touch screen devices.

Certain significant measures for the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010 ~~reflected the general recovery in the LCD market,~~were as ~~customers increased production levels in response to strong end-demand for flat panel TVs and notebook computers.~~follows:


	January 30,			January 31,			Change
	2011			2010			2011 over 2010
	(In millions, except percentages)

New orders	$	142		$	126		$	16	13	%
Net sales		147			132			15	11	%
Operating income		28			25			3	11	%
Operating margin		19	%		19	%			—

4136

New orders increased by $16 million to $142 million for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The increase in new orders reflected increased demand for touch panel and organic light emitting diode (OLED) systems. Net sales increased by ~~$147~~$15 million to ~~$216~~$147 million for the ~~third~~first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The increase in net sales reflected increased purchases by customers of color filter systems. Four customers accounted for 89 percent of net sales in the Display segment for the first quarter of fiscal 2011. Customers in Taiwan and China combined accounted for 97 percent of net sales in this segment for the first quarter of fiscal 2011. In the first quarter of fiscal 2010, ~~compared to the third quarter of fiscal 2009~~customers in Taiwan and increased by $316 million to $618 million for the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009. The increases in net sales for the three and nine months ended August 1, 2010 reflected strong market demand for LCD products. Four customersJapan accounted for 5664 percent of total net sales for the Display ~~segment in the first nine months of fiscal 2010.~~

segment. The book to bill ratio ~~decreased to 1.1 for the third quarter of fiscal 2010 compared to 1.4 for the third quarter of fiscal 2009. The book to bill ratio increased to~~was 1.0 for both of the first ~~nine months of~~ fiscal ~~2010 compared to 0.4 for the first nine months of fiscal 2009.~~

~~Operating income was $64 million for the third quarter of fiscal 2010 compared to an operating loss of $8 million for the third quarter of fiscal 2009.~~quarters 2011 and 2010. Operating income increased by ~~$168~~$3 million to ~~$179~~$28 million for the first ~~nine months~~quarter of fiscal ~~2010~~2011 compared to ~~the~~ first ~~nine months~~quarter of fiscal ~~2009.~~2010. The ~~increases~~increase in operating income ~~for the three and nine months ended August 1, 2010 were~~was due to ~~a significant~~an increase in net ~~sales and more favorable product mix.~~sales.

Energy and Environmental Solutions Segment

The Energy and Environmental Solutions segment includes products for fabricating ~~thin film and~~ c-Si solar PVs, high throughputroll-to-roll coating systems for flexible electronics and web products, and systems used in the manufacture of energy-efficient glass. This business is focused on delivering solutions to generate and conserve energy, with an emphasis on lowering the cost to produce solar power by providing equipment to enhance manufacturing scale and efficiency.

The Energy and Environmental Solutions segment previously included a fully-integrated production line for manufacturing thin film solar panels. Effective in the first quarter of fiscal 2011, Applied accounts for thin film products under its Applied Global Services segment rather than its Energy and Environmental Solutions segment. During the third quarter of fiscal 2010, Applied ~~incurred charges related~~announced a plan to ~~the restructuring plan~~restructure its Energy and Environmental Solutions segment in response to adverse market conditions for thin film solar and as a result, Applied discontinued sales to new customers of its fully-integrated SunFab lines, but is offering individual tools for thin film solar manufacturing. Applied is supporting existing SunFab line customers with services, upgrades and capacity increases through its Applied Global Services segment. RD&E efforts to improve thin film panel efficiency and high-productivity deposition is continuing under the Energy and Environmental Solutions segment described above of $405 million, which included inventory-related charges of $247 million related to SunFab thin film solar equipment, asset impairment charges of $110 million, employee severance charges of $45 million, and other costs of $3 million. In addition, during the second quarter of fiscal 2010, Applied incurred inventory-related charges of $83 million.segment.

Three Months Ended Nine Months Ended
August 1,
July 26,
August 1,
July 26,

2010 2009 Change 2010 2009 Change
(In millions, except percentages) (In millions, except percentages)

New orders $ 353 $ 136 $ 217 $ 961 $ 598 $ 363
Net sales 387 224 163 874 874 —
Operating income (loss) (371 ) (52 ) (319 ) (552 ) (206 ) (346 )
Operating margin (96 )% (23 )% (73) points (63 )% (24 )% (39) points

Certain significant measures for the three months ended January 30, 2011 and January 31, 2010 were as follows:


	January 30,			January 31,			Change
	2011			2010			2011 over 2010
	(In millions, except percentages)

New orders	$	668		$	230		$	438	190	%
Net sales		476			321			155	48	%
Operating income (loss)		144			(36	)		180	497	%
Operating margin		30	%		(11	)%			41 points

New orders increased by ~~$217~~$438 million to ~~$353 million for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009. New orders increased 61 percent to $961~~$668 million for the first ~~nine months~~quarter of fiscal ~~2010~~2011 compared to the first ~~nine months~~quarter of fiscal ~~2009.~~2010. The ~~increases~~increase in orders ~~for the three and nine months ended August 1, 2010~~ reflected significantly increased demand for c-Si products, particularly wafering and metallization products, offset by diminished demand for SunFab thin film manufacturing lines. The continued challenging operating environment for manufacturers of thin film solar panels, among other factors, contributed to the severe reduction in orders for SunFab lines in the first nine months of fiscal 2010.

products. Net sales increased ~~73 percent~~by $155 million to ~~$387~~$476 million for the ~~third~~first quarter of fiscal ~~2010~~2011 compared to the ~~third~~first quarter of fiscal ~~2009, and were $874 million for each of the first nine months of fiscal 2010 and fiscal 2009.~~2010. The ~~increases~~increase in net sales ~~for the three months ended August 1, 2010~~primarily reflected higher sales to c-Si customers. Net sales for the first ~~nine months~~quarter of fiscal 2010 ~~reflected higher sales to c-Si customers, offset~~included $208 million in ~~part by lower sales to~~revenue from SunFab ~~customers than in~~thin film customers. For the first ~~nine months~~quarter of fiscal ~~2009.~~

2011, customers in China accounted for 79 percent of new orders and 82 percent of net sales in this segment. Europe accounted for 69 percent of net sales in this segment for the first quarter of fiscal 2010. The book to bill ratio increased to ~~0.9~~1.4 for the ~~third~~first quarter of fiscal ~~2010 compared to 0.6 for the third quarter of fiscal 2009. The book to bill ratio~~2011, reflecting increased ~~to 1.1 for the first nine months of fiscal 2010~~demand, compared to 0.7 for the first ~~nine months~~quarter of fiscal ~~2009.~~

2010. The Energy and Environmental Solutions segment reported operating income of $144 million for the first quarter of fiscal 2011 compared to an operating loss of $36 million for the first quarter of fiscal 2010. Operating income of $144 million was attributable to higher net sales of c-Si products and to a favorable adjustment of $28 million related to a restructuring program, announced in fiscal 2010, that was reported in the Energy and Environmental Solutions ~~segment increased by $319 million to $371 million for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009, and increased by~~segment.

4237

$346 million to $552 million for the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009. The increases in operating loss for the three and nine months ended August 1, 2010 were primarily due to charges totaling $405 million associated with the Energy and Environmental Solutions restructuring plan announced in July 2010 and lower net sales to SunFab customers, partially offset by increased sales of c-Si products and cost control initiatives.

During both the second and third quarters of fiscal 2010, Applied tested goodwill for potential impairment for the Energy and Environmental Solutions reporting unit as a result of certain developments. The results of the first step of the impairment test indicated that goodwill of the Energy and Environmental Solutions reporting unit was not impaired. Applied tested goodwill of the Energy and Environmental Solutions reporting unit for impairment in the second quarter in light of developments that included the insolvency of a thin film solar customer, inability of other thin film solar customers to secure financing, weaker outlooks for certain customers that in turn reduced their spending plans resulting in the delay or cancellation of thin film production lines, and other adverse operating conditions affecting the solar industry. Applied tested goodwill of the Energy and Environmental Solutions reporting unit for impairment in the third quarter of fiscal 2010 in light of the restructuring announced during the quarter.

Applied utilized the discounted cash flow method of the income approach to estimate the fair value of the Energy and Environmental Solutions reporting unit. Although considered, the market approach was not used as comparable enterprises, market-based growth rates, and gross margins were determined not to be representative of the Energy and Environmental Solutions reporting unit. For the second quarter of fiscal 2010, while the results of the first step of the impairment test indicated that goodwill and intangible assets within the Energy and Environmental Solutions reporting unit were not impaired, the estimated fair value in excess of carrying value had declined from the fourth quarter of fiscal 2009 to the end of the second quarter of fiscal 2010 to approximately $200 million (or 19 percent over the carrying value of the reporting unit). For the third quarter of fiscal 2010, the results of the first step of the impairment test indicated that goodwill and intangible assets within the Energy and Environmental Solutions reporting unit were not impaired and that the estimated fair value in excess of carrying value had increased from the fourth quarter of fiscal 2009 to the end of the third quarter of fiscal 2010 to approximately $1.3 billion (or 165 percent over the carrying value of the reporting unit). The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. The estimates used in the impairment testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered the significant developments that occurred during the quarter. Cash flows beyond the discrete forecasts were estimated using a terminal value rate, which considered the long-term earnings growth rate specific to the Energy and Environmental Solutions reporting unit. The change in the estimated fair value in excess of the carrying value from the second fiscal quarter was due primarily to changes in the business mix of forecasted future operating results and a reduction in the carrying value of the reporting unit. The reduction in the carrying value of the reporting unit was due to inventory-related charges and asset impairments recognized during the third fiscal quarter. The estimated future cash flows were discounted to present value using a discount rate that was the value-weighted average of Applied’s estimated cost of equity and debt derived using both known and estimated market metrics, and was adjusted to reflect risk factors that considered both the timing and risks associated with the estimated cash flows. While there are inherent uncertainties related to the significant assumptions used and management’s application of these assumptions in conducting the goodwill impairment analysis, Applied believes that the income approach and the related assumptions used provides a reasonable estimate of the fair value of the Energy and Environmental Solutions reporting unit. In the event of future adverse business conditions in the market in which the Energy and Environmental Solutions reporting unit operates, Applied will be required to reassess and update its forecasts and estimates used in a future impairment analysis. If the results of this analysis are lower than current estimates, a material impairment charge may result at that time. (See Note 8 of Notes to Consolidated Condensed Financial Statements.)

Financial Condition, Liquidity and Capital Resources

~~During the nine months ended August 1, 2010,~~Applied’s cash, cash equivalents and investments increased ~~by $361 million~~to $4.1 billion at January 30, 2011 from ~~$3.3~~$3.9 billion ~~as of~~at October ~~25, 2009.~~31, 2010, due primarily to an increase in cash generated from operating activities.

Cash, cash equivalents and investments ~~consisted~~consist of the following:


	August 1,		October 25,		January 30,		October 31,
	2010		2009		2011		2010
	(In millions)				(In millions)

Cash and cash equivalents	$	1,564	$	1,577	$	1,974	$	1,858
Short-term investments		784		638		772		727
Long-term investments		1,280		1,052		1,351		1,307

Total cash, cash equivalents and investments	$	3,628	$	3,267
Total cash, cash-equivalents and investments					$	4,097	$	3,892

A summary of cash provided by (used in) operating, investing, and financing activities is as follows:


	January 30,			January 31,
	2011			2010
	(In millions)

Cash provided by operating activities	$	425		$	372
Cash used in investing activities	$	(79	)	$	(489	)
Cash used in financing activities	$	(230	)	$	(60	)

Applied generated ~~$1.2 billion~~$425 million of cash infrom operating activities for the ~~nine~~three months ended ~~August 1, 2010.~~January 30, 2011. The primary sources of cash from operating activities for the ~~nine~~three months ended ~~August 1, 2010~~January 30, 2011 were net income, as adjusted to exclude the effect of non-cash charges including depreciation, amortization, share-based compensation, restructuring and asset impairments, ~~depreciation, amortization, share-based compensation,~~ and changes in components of working capital. ~~Changes~~The change in working capital ~~included thin film solar inventory-related charges~~for the first quarter of ~~$330 million.~~fiscal 2011 was negatively impacted by increased payments for variable compensation and income taxes. Applied utilized programs to discount letters of credit issued by customers of ~~$134~~$123 million and $27 million for the ~~nine~~three months ended ~~August 1, 2010.~~January 30, 2011 and January 31, 2010, respectively. Discounting of letters of credit depends on many factors, including the willingness of financial institutions to discount the letters of credit and the cost of such arrangements. For the ~~nine~~three months ended ~~August 1,~~January 30, 2011 and January 31, 2010, Applied factored accounts receivable ~~of $104 million~~ and discounted promissory notes ~~of $2 million.~~totaling $36 million and $26 million, respectively. Days sales outstanding for the ~~third~~first quarter of fiscal ~~2010~~2011 increased to 6266 days, compared to 5758 days inat the ~~second quarter~~end of fiscal 2010, primarily due to ~~increased~~a decrease in net sales infrom the ~~third~~fourth quarter of fiscal 2010, offset ~~in part~~ by the ~~benefit~~benefits of ~~factoring and~~ discounted letters of ~~credit.~~credit and factoring of accounts receivable. Days sales outstanding varies due to the timing of shipments and the payment terms. Applied’s working capital was ~~$3.7~~$4.2 billion at ~~each~~January 30, 2011 and $3.9 billion at October 31, 2010.

Applied used $79 million of ~~August 1, 2010~~cash for investing activities during the three months ended January 30, 2011. Purchases of investments, net of proceeds from sales and ~~October 25, 2009. During~~maturities of investments, totaled $94 million for the ~~second~~first quarter of fiscal 2011. Capital expenditures of $24 million for the first quarter of fiscal 2011, which included construction in progress additions in North America, was offset by $39 million in proceeds received from the sale of a property located in North America. Investing activities also include investments in technology and acquisitions of companies to allow Applied to access new market opportunities or emerging technologies. In the first quarter of fiscal 2010, Applied ~~received a U.S. federal income tax refund of approximately $130 million for the carryback of Applied’s net operating loss from fiscal 2009 to fiscal 2005.~~

~~Applied used $847 million of cash from investing activities during the nine months ended August 1, 2010, primarily due to the acquisition of~~acquired Semitool, a public company based in the state of Montana, for $323 million, net of cash acquired. Purchases of investments, net of proceeds from sales and maturities of investments, totaled $390 million. Capital expenditures were $134 million for the nine months ended August 1, 2010 and included investment in the construction of a solar R&D/demonstration center in Xi’an, China and a manufacturing facility in Singapore.

Applied used ~~$362~~$230 million of cash for financing activities during the ~~nine~~three months ended ~~August 1, 2010,~~January 30, 2011, consisting primarily of ~~$255~~$150 million in common stock repurchases and $93 million in cash dividends paid to stockholders, ~~and $200 million in common stock repurchases,~~ offset by ~~$99~~$13 million in proceeds from common stock issuances related to equity compensation awards. In March 2010, Applied’s Board of Directors approved a new stock repurchase program authorizing up to $2 billion in repurchases over the next three years ending in March 2013.

~~On June 9,~~In December 2010, Applied’s Board of Directors ~~approved~~declared a quarterly cash dividend in the amount of $0.07 per share ~~payable~~that will be paid on ~~September 15, 2010~~March 23, 2011 to stockholders of record as of ~~August 25, 2010. On June 16, 2010,~~March 2, 2011. Applied ~~paid a quarterly cash dividend of $0.07 per share to stockholders of record as of May 26, 2010. Applied~~ currently

anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.1 billion, of which $1.0 billion is comprised of a5-year revolving credit agreement with a group of banks that is scheduled to expire in January 2012. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at ~~August 1, 2010.~~January 30, 2011. Remaining credit facilities in the amount of approximately ~~$91~~$98 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of ~~the above credit~~these facilities at ~~August 1,~~both January 30, 2011 and October 31, 2010.

In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of ~~August 1, 2010,~~January 30, 2011, the maximum potential amount of future payments that Applied could be required to make under these guarantee ~~arrangements~~agreements was ~~$50~~approximately $57 million. Applied has not recorded any liability in connection with these guarantee ~~arrangements~~agreements 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.~~agreements.

Applied’s investment portfolio consists principally of investment grade money market mutual funds, U.S. Treasury and agency securities, municipal bonds, corporate bonds and mortgage-backed and asset-backed securities, as well as equity securities. Applied regularly monitors the credit risk in its investment portfolio and takes appropriate measures, which may include the sale of certain securities, to manage such risks prudently in accordance with its investment policies.

During the nine months ended August 1, 2010, as part of its regular investment review process, Applied recorded impairment charges of $13 million associated with equity investments in privately-held companies. At ~~August 1, 2010,~~January 30, 2011, Applied had a gross unrealized loss in its investment portfolio of ~~$0.4~~$3 million due to a decrease in the fair value of certain fixed income ~~securities~~.securities. For the three months ended January 30, 2011, Applied ~~regularly reviews~~did not recognize any impairment on its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more~~likely-than-not~~ that Applied will be required to sell the security prior to any anticipated recovery in fair value. Generally, the contractual terms of the investments do not permit settlement at prices less than the amortized cost of the investments. ~~While Applied cannot predict future market conditions or market liquidity, Applied believes that its investment policies provide an appropriate means to manage the risks in its investment portfolio.~~

Applied did not record a bad debt provision during the three months ended January 30, 2011. During the ~~nine~~three months ended ~~August 1,~~January 31, 2010, Applied recorded a bad debt provision of $7$6 million as a result of certain customers’ ~~deteriorating financial condition. During the nine months ended July 26, 2009, Applied recorded a bad debt provision of $63 million as a result of certain customers’ deteriorating~~ financial condition. While Applied believes that its allowance for doubtful accounts at ~~August 1, 2010~~January 30, 2011 is adequate, it will continue to closely monitor customer liquidity and economic conditions.

Although cash requirements will fluctuate based on the timing and extent of factors such as those discussed above, Applied’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’s liquidity requirements for the next 12 months. For further details regarding Applied’s operating, investing and financing activities, see the Consolidated Statements of Cash Flows in this report.

Critical Accounting Policies and Estimates

The preparation of consolidated 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.~~policies.

A critical accounting policy is defined as one that is both material to the presentation of Applied’s consolidated financial statements and that requires management to make difficult, subjective or complex judgments that could have a material effect on Applied’s financial condition or results of operations. Specifically, these policies 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’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’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 include those discussed in Part II, Item 1A, “Risk Factors.” 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’s consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and provide a meaningful presentation of Applied’s financial condition and results of operations.

Management believes that the following are critical accounting policies:

Revenue Recognition

Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Each sale arrangement may contain commercial terms that differ from other arrangements. In addition, Applied frequently enters into contracts that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could have a material effect on Applied’s financial condition and results of operations.

In 2009, the Financial Accounting Standards Board issued amended revenue recognition guidance for arrangements with multiple deliverables and certain software sold with tangible products. This new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific evidence or third party evidence is unavailable. Applied implemented this guidance prospectively beginning in the first quarter of fiscal 2010 for transactions that were initiated or materially modified during fiscal 2010. The implementation of the new guidance had an insignificant impact on reported net sales as compared to net sales under previous guidance, as the new guidance did not change the units of accounting within sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an inconsequential impact on the amount and timing of reported net sales.

Warranty Costs

Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied’s warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. As Applied’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’s estimates, revisions to the estimated warranty liability would be required, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Allowance for Doubtful Accounts

Applied maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues Applied has identified. Changes in circumstances, such as an unexpected material adverse change in a major customer’s ability to meet its financial obligation to Applied or its payment trends, may require Applied to further adjust its estimates of the recoverability of amounts due to Applied, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Inventory Valuation

Inventories are generally stated at the lower of cost or market, with cost determined on afirst-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 and new products. If actual demand were to be substantially lower than estimated, additional adjustments for excess or obsolete inventory may be required, which could have a material adverse effect on Applied’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 annually reviews goodwill and intangibles with indefinite lives for impairment. Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments 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 reduce the carrying value of the reporting unit to its realizable value. The fair value of a reporting unit is estimated using both the income approach and the market approach taking into account such factors as future anticipated operating results and estimated cost of capital. Management uses significant judgment when assessing goodwill for potential impairment, especially in emerging markets. A severe decline in market value could result in an unexpected impairment charge for impaired goodwill, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Income Taxes

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. Management carefully monitors the changes in many factors and adjusts the effective income tax rate as required. 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’s business, financial condition and results of operations.

Applied accounts for income taxes by recognizing deferred tax assets and liabilities using statutory tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryforwards. Deferred tax assets are also 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 Applied’s future taxable income will be sufficient to realize its deferred tax assets.

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Applied’s expectations could have a material impact on Applied’s results of operations and financial condition.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

Applied’s investment portfolio includes fixed-income securities with a fair value of approximately $2.0 billion at ~~August 1, 2010.~~January 30, 2011. These securities are subject to interest rate risk and will decline in value if interest rates increase. Based on Applied’s investment portfolio at ~~August 1, 2010,~~January 30, 2011, an immediate 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately ~~$25~~$28 million. While an increase in interest rates reduces the fair value of the investment portfolio, Applied will not realize the losses in the consolidated condensed statement of operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to beother-than-temporary.

Certain operations of Applied are conducted in foreign ~~currencies.~~currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied enters into currency forward exchange and option contracts to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions expected to occur within 24 months. Gains and losses on these contracts are generally recognized in income at the time that the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on currency forward exchange and 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 were not material for the three ~~and nine~~ months ended ~~August 1,~~January 30, 2011 and January 31, 2010.


Item 4.	*Controls and Procedures*

As required byRule 13a-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act), Applied’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of Applied’s disclosure controls and procedures as defined in Exchange ActRule 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 the end of the period covered by this report in ensuring that information required to be disclosed in Applied’s SEC reports is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to Applied’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As required byRule 13a-15(d), Applied’s 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 fiscal quarter that have materially affected, or are reasonably likely to materially affect, Applied’s internal control over financial reporting. Based on that evaluation, there has been no such change during the fiscal quarter.

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 will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future ~~events~~events.

4842

PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings*

The information set forth above under the caption “Legal Matters” in Note 914 contained in Notes to Consolidated Condensed Financial Statements is incorporated herein by reference.


Item 1A.	*Risk Factors*

The risk factors set forth below include any material changes to, and supersede the description of, the risk factors disclosed in Item 1A of Applied’s ~~2009~~2010Form 10-K.

The industries that Applied serves are volatile and difficult to predict.

As a supplier to the global semiconductor, flat panel display, solar and related industries, Applied is subject to business cycles, the timing, length and volatility of which can be difficult to predict and which vary by reportable segment. These industries historically have been cyclical due to sudden changes in customers’ manufacturing capacity and advanced technology requirements and spending, which depend in part on customers’ capacity utilization, production volumes, access to affordable capital, end-use demand, and inventory levels relative to demand, as well as the rate of technology ~~transitions and customers’ access to affordable capital.~~transitions. These changes have affected the timing and amounts of customers’ purchases and investments in technology, and continue to affect Applied’s orders, net sales, operating expenses and net income.

To meet rapidly changing demand in the industries it serves, Applied must accurately forecast demand and effectively manage its resources and production capacity for each of its segments as well as across multiple segments. During periods of increasing demand for its products, Applied must have sufficient manufacturing capacity and inventory to meet customer demand; effectively manage its supply chain; attract, retain and motivate a sufficient number of qualified employees; and continue to control costs. During periods of decreasing demand, Applied must ~~appropriately~~reduce costs and align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees. If Applied does not accurately forecast and timely and appropriately adapt to changes in its business environment, Applied’s business, financial condition orand results of operations may be materially and adversely affected.

Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.

The global semiconductor, flat panel display, solar and related industries in which Applied operates are characterized by ongoing changes affecting some or all of these industries, including:


	•	increasing capital requirements for building and operating new fabrication plants and customers’ ability to raise the necessary capital, particularly when financial market conditions are difficult;

	•	differences in growth rates among the semiconductor, display and solar industries;

	•	the increasing importance of establishing, improving and maintaining strong relationships with customers;

	•	abrupt and unforeseen shifts in the nature and amount of customer and end-user demand;

	•	the increasing cost and complexity for customers to move from product design to volume manufacturing, which may slow the adoption rate for new manufacturing technology;

	•	the need to reduce the total cost of manufacturing system ownership, due in part to greater demand for lower-cost consumer electronics as compared to business information technology spending;

	•	the heightened importance to customers of system reliability and productivity and the effect on demand for fabrication systems as a result of their increasing productivity, device yield and reliability;

	•	the increasing importance of, and difficulties in, developing products with sufficient differentiation to influence customers’ purchasing decisions;


	•	requirements for shorter cycle times for the development, manufacture and installation of manufacturing equipment;

	•	price and performance trends for semiconductor devices, LCDs and solar PVs, and the corresponding effect on demand for such products;

	•	the increasing importance of the availability of spare parts to maximize the time that customers’ systems are available for production;

	•	the increasing role for and complexity of software in Applied products; and

	•	the increasing focus on reducing energy usage and improving the environmental impact and sustainability associated with manufacturing operations.

If Applied does not successfully manage the risks resulting from the ongoing changes in the semiconductor, flat panel display, solar and related industries, its business, financial condition and results of operations could be materially and adversely affected.

Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry.

The greatest portion of Applied’s consolidated net sales and profitability historically has been derived from sales of manufacturing equipment by the Silicon Systems Group to the global semiconductor industry. In addition, a majority of the revenues of Applied Global Services is from sales of service products to semiconductor manufacturers. The semiconductor industry is characterized by ongoing changes particular to that industry in addition to the general industry changes described in the preceding risk factor, including:


	•	the increasing cost of research and development due to many factors, including: decreasing linewidths on a chip; the use of new materials such as cobalt and yttrium; new and more complex device structures; more applications and process steps; increasing chip design costs; and the increasing cost and complexity of integrated manufacturing processes;

	•	the growing number of types and varieties of semiconductors and number of applications across multiple substrate sizes;

	•	differing market growth rates and capital requirements for different applications, such as NAND Flash, DRAM, logic and foundry, and the resulting effect on customers’ spending patterns and on Applied’s ability to compete in these market segments;

	•	the increasing cost and complexity for semiconductor manufacturers to move more technically advanced capability and smaller linewidths to volume manufacturing, and the resulting impact on the rates of technology transition and investment in capital equipment;

	•	semiconductor manufacturers’ increasing adoption of more productive 300mm systems in relation to 200mm system capacity, and the resulting effect on demand for manufacturing equipment and services;

	•	the decreasing rate of capital expenditures as a percentage of semiconductor manufacturers’ revenue;

	•	shorter cycle times between customers’ order placement and product shipment, which may lead to inventory write-offs and manufacturing inefficiencies that decrease gross margin;

	•	technology developments in related markets, such as lithography, to which Applied may need to adapt;

	•	competitive factors that make it difficult to enhance market position;

	•	the importance of growing market positions in larger market segments, such as etch and inspection;

	•	the increasing concentration of wafer starts in one country, Korea, where Applied’s service penetration and service-revenue-per-wafer-start have been lower than in other regions;


	•	the increasing fragmentation of semiconductor markets, leading certain markets to become too small to support the cost of a new fabrication plant, while others require less technologically advanced products; and

	•	the cost, technical complexity and timing of a proposed industry transition from 300mm to 450mm wafers.

If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the semiconductor industry, its business, financial condition and results of operations could be materially and adversely affected.

Applied is exposed to risks as a result of ongoing changes specific to the flat panel display industry.

The global flat panel display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of LCD manufacturers and the concentrated nature of LCD end-use applications. Recently, industry growth has depended to a considerable extent on consumer demand for increasingly larger and more advanced TVs. In addition to the general industry changes described above in the second risk factor, the display industry is characterized by ongoing changes particular to that industry, including:


	•	the planned expansion of manufacturing facilities in China by Chinese display manufacturers as well as manufacturers from other countries, and the ability of non-Chinese manufacturers to obtain government approvals;

	•	technical and financial difficulties associated with transitioning to larger substrate sizes for LCDs, which may slow or prevent substrate generation scaling;

	•	the effect of a slowing rate of transition to larger substrate sizes on capital intensity and product differentiation;

	•	the increasing importance of new types of displays, such as touch panels and OLEDs (organic light-emitting devices);

	•	technical difficulties and costs associated with developing new technologies for use in LCD manufacturing, such as LEDs for backlighting; and

	•	uncertainty with respect to future LCD technology end-use applications and growth drivers.

If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the display industry, its business, financial condition and results of operations could be materially and adversely affected.

Applied is exposed to risks as a result of ongoing changes specific to the solar industry.

An increasing portion of Applied’s business is in the emerging solar market, which, in addition to the general industry changes described above in the second risk factor, is characterized by ongoing changes specific to the solar industry, including:


	•	the need to continually decrease thecost-per-watt of electricity produced by solar PV products to at or below grid parity by, among other things, reducing operating costs and increasing throughputs for solar PV manufacturing, and improving the conversion efficiency of solar PVs;

	•	the impact on demand for solar PV products arising from the cost of electricity generated by solar PVs compared to the cost of electricity from the existing grid or other energy sources;

	•	the varying energy policies of governments around the world and their effect in influencing the rate of growth of the solar PV market, including the availability and amount of government incentives for solar power such as tax credits, feed-in tariffs, rebates, renewable portfolio standards that require electricity providers to sell a targeted amount of energy from renewable sources, and goals for solar installations on government facilities;

	•	the growing number of solar PV manufacturers and increasing global production capacity for solar PVs, primarily in China as a result of increased solar subsidies and lower manufacturing costs;


	•	the varying levels of operating and industry experience among solar PV manufacturers and the resulting differences in the nature and extent of customer support services requested from Applied;

	•	challenges associated with marketing and selling manufacturing equipment and services to a diverse and diffuse customer base;

	•	the cost of polysilicon and other materials; and

	•	access to affordable financing and capital by customers and end-users.

In addition, current projections for global solar PV production exceed anticipated near-term end-use demand, which is heavily dependent on installed cost-per-watt, government policies and incentives, and the availability of affordable capital. An oversupply of solar PVs may lead customers to delay or reduce investments in manufacturing capacity and new technology, and adversely impact the sales growth rates and/or profitability of Applied’s products. If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the solar industry, its business, financial condition and results of operations could be materially and adversely affected.

Applied is exposed to risks associated with the difficult financial markets and uncertain global economy.

The ~~tightening of the credit markets,~~ disruption in the financial markets and global economic recession that began in 2008 contributed to significant slowdowns in the industries in which Applied operates. Although economic and market conditions have improved, continuing difficulties in the financial markets and uncertainty regarding the global economic recovery are posing ~~challenges.~~challenges, while some governments may implement policies to control economic growth. The markets for semiconductors and flat panel displays in particular depend largely on consumer spending. Economic uncertainty exacerbates negative trends in consumer spending and may cause certain Applied customers to push out, cancel, or refrain from placing orders for equipment or services, which may reduce net sales, reduce backlog, and affect Applied’s ability to convert backlog to sales. Difficulties in obtaining capital, uncertain market conditions, or reduced profitability may also cause some customers to scale back operations, exit businesses, merge with other manufacturers, or file for bankruptcy protection and potentially cease operations, leading to customers’ reduced research and development fundingand/or capital expenditures and, in turn, lower salesand/or additional inventory or bad debt expense for Applied. These conditions may also similarly affect key suppliers, which could impair their ability to deliver parts and result in delays for Applied’s products or added costs. In addition, these conditions may lead to strategic alliances by, or consolidation of, other equipment manufacturers, which could adversely affect Applied’s ability to compete effectively.

Uncertainty about future economic and industry conditions also makes it more challenging for Applied to forecast its operating results, make business decisions, and identify the risks that may affect its business, sources and uses of cash, financial condition and results of operations. Applied may be required to implement additional cost reduction efforts, including restructuring activities,and/or modify its business model, which may adversely affect Applied’s ability to capitalize on opportunities in a market recovery. In addition, Applied maintains an investment

portfolio that is subject to general credit, liquidity, foreign exchange, market and interest rate risks. The risks to Applied’s investment portfolio may be exacerbated if financial market conditions deteriorate and, as a result, the value and liquidity of the investment portfolio and return on pension assets could be negatively impacted and lead to impairment charges. If Applied does not timely and appropriately adapt to changes resulting from the uncertain macroeconomic environment and industry conditions, Applied’s business, financial condition or results of operations may ~~be materially and adversely affected.~~

~~Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.~~

~~The global semiconductor, flat panel display, solar and related industries in which Applied operates are characterized by ongoing changes affecting some or all of these industries, including:~~


	•	~~increasing capital requirements for building and operating new fabrication plants and customers’ ability to raise the necessary capital, particularly in a difficult financial market;~~

	•	~~differences in growth rates among the semiconductor, display and solar industries;~~

	•	~~abrupt and unforeseen shifts in the nature and amount of customer and end-user demand;~~

	•	~~the increasing cost and complexity for customers to move from product design to volume manufacturing, which may slow the adoption rate for new manufacturing technology;~~

	•	~~the need to reduce the total cost of manufacturing system ownership, due in part to greater demand for lower-cost consumer electronics as compared to business information technology spending;~~

	•	the heightened importance to customers of system reliability and productivity and the effect on demand for fabrication systems as a result of their increasing productivity, device yield and reliability;

	•	~~the increasing importance of, and difficulties in, developing products with sufficient differentiation to influence customers’ purchasing decisions;~~

	•	~~requirements for shorter cycle times for the development, manufacture and installation of manufacturing equipment;~~

	•	~~price and performance trends for semiconductor devices, LCDs and solar PVs, and the corresponding effect on demand for such products;~~

	•	~~the increasing importance of the availability of spare parts to maximize the time that customers’ systems are available for production;~~

	•	~~the increasing role for and complexity of software in Applied products; and~~

	•	~~the increasing focus on reducing energy usage and improving the environmental impact and sustainability associated with manufacturing operations.~~

~~Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry.~~

The greatest portion of Applied’s revenues and profitability historically has been derived from sales of manufacturing equipment to the global semiconductor industry. In addition, a majority of the revenues of Applied Global Services is from sales of service products to semiconductor manufacturers. The semiconductor industry is characterized by ongoing changes particular to that industry in addition to the general industry changes described in the preceding risk factor, including:


	•	the increasing cost of research and development due to many factors, including: decreasing linewidths on a chip; the use of new materials such as cobalt and yttrium; more complex device structures; more applications and process steps; increasing chip design costs; and the increasing cost and complexity of an integrated manufacturing process;


	•	~~the growing number of types and varieties of semiconductors and number of applications across multiple substrate sizes;~~

	•	differing market growth rates and capital requirements for different applications, such as memory (including NAND flash and DRAM), logic and foundry, and Applied’s ability to compete in these market segments;

	•	the increasing cost and complexity for semiconductor manufacturers to move more technically advanced capability and smaller linewidths to volume manufacturing, and the resulting impact on the rates of technology transition and investment in capital equipment;

	•	~~semiconductor manufacturers’ increasing adoption of more productive 300mm systems in relation to 200mm system capacity, and the resulting effect on demand for manufacturing equipment and services;~~

	•	~~the decreasing rate of capital expenditures as a percentage of semiconductor manufacturers’ revenue;~~

	•	~~customers’ increasing need for shorter cycle times between order placement and product shipment;~~

	•	~~technology developments in related markets, such as lithography, to which Applied may need to adapt;~~

	•	~~competitive factors that make it difficult to enhance market position, especially in larger market segments such as etch;~~

	•	~~the increasing concentration of wafer starts in one country, Korea, where Applied’s service penetration and service-revenue-per-wafer-start have been lower than in other regions;~~

	•	the increasing fragmentation of semiconductor markets, leading certain markets to become too small to support the cost of a new fabrication plant, while others require less technologically advanced products; and

	•	~~the cost, technical complexity and timing of a proposed transition from 300mm to 450mm wafers.~~

~~Applied is exposed to risks as a result of ongoing changes specific to the flat panel display industry.~~

The global flat panel display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of LCD manufacturers and the concentrated nature of LCD end-use applications. Recently, industry growth has depended to a considerable extent on consumer demand for increasingly larger and more advanced TVs. In addition to the general industry changes described above in the third risk factor, the display industry is characterized by ongoing changes particular to that industry, including:


	•	~~the planned expansion of manufacturing facilities in China by display manufacturers based in other countries, and uncertainty regarding their ability to obtain government approvals;~~

	•	~~technical and financial difficulties associated with transitioning to larger substrate sizes for LCDs;~~

	•	~~the effect of a slowing rate of transition to larger substrate sizes on capital intensity and product differentiation;~~

	•	~~new energy efficiency standards for large-screen LCD TVs; and~~

	•	~~uncertainty with respect to future LCD technology end-use applications and growth drivers.~~

~~Applied is exposed to risks as a result of ongoing changes specific to the solar industry.~~

Applied anticipates that an increasing portion of its business will be in the emerging solar market, which, in addition to the general industry changes described above in the third risk factor, is characterized by ongoing changes specific to the solar industry, including:


	•	~~the impact on demand for solar PV products arising from the cost of electricity generated by solar PV technology compared to the cost of electricity from the existing grid or other energy sources;~~

	•	the varying energy policies of governments around the world and their effect in influencing the rate of growth of the solar PV market and between certain market segments such as rooftop (which is more suited for c-Si modules) and ground-mounted, utility-scale (which is more suited for thin film modules), including the availability and amount of government incentives for solar power such as tax credits, incentives, rebates, renewable portfolio standards that require electricity providers to sell a targeted amount of energy from renewable sources, and goals for solar installations on government facilities;

	•	~~changes in the nature and amount of end demand for solar PVs that adversely impact the sales growth rates and profitability of Applied’s products;~~

	•	varying levels of infrastructure investment for “smart grid” technologies to modernize and enhance the transmission, distribution and use of electricity, which link distributed solar PV sources to population centers, increase transmission capability, and optimize power usage;

	•	~~access to affordable financing and capital by customers and end-users; and~~

	•	~~increasingly greater global production capacity for solar PVs, primarily in China.~~

~~If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the solar industry, its business, financial condition and results of operations could~~ be materially and adversely affected.

Applied must adapt its business and product offerings to respond to competition and rapid technological changes.

As Applied operates in a highly competitive environment, its future success depends on many factors, including the effective commercialization and customer acceptance of its ~~nanomanufacturing technology~~ equipment, ~~service~~services and related products. In addition, Applied must successfully execute its growth strategy, including enhancing market share in existing markets, expanding into related markets, cultivating new markets and exceeding industry growth rates, while constantly improving its operational performance. The development, introduction and support of a broadening set of products in more varied competitive environments have grown increasingly complex and expensive over time.

Furthermore, new or improved products may entail higher costs and reduced profits. Applied’s performance may be adversely affected if it does not timely, cost-effectively and successfully:


	•	develop new products, improveand/or develop new applications for existing products, and adapt similar products for use by customers in different applicationsand/or markets with varying technical requirements;

	•	appropriately price and achieve market acceptance of products;

	•	differentiate its products from those of competitors and any disruptive technologies, meet performance specifications, and drive efficiencies and cost reductions;

	•	maintain operating flexibility to enable different responses to different markets, customers and applications;

	•	allocate resources, including people and R&D funding, among Applied’s products and between the development of new products and the enhancement of existing products, as most appropriate and effective for future growth;

	•	reduce the cost of, and improve the productivity of capital invested in, R&D activities;

	•	accurately forecast demand, work with suppliers and meet production schedules for its products;

	•	improve its manufacturing processes and achieve cost efficiencies across product offerings;


	•	adapt to changes in value offered by companies in different parts of the supply chain;

	•	qualify products for evaluation and, in turn, volume manufacturing with its customers; and

	•	implement changes in its design engineering methodology, including those that enable reduction of material costs and cycle time, greater commonality of platforms and types of parts used in different systems, greater effectiveness of product life cycle management, and reduced energy usage and environmental ~~impact; and~~impact.

If Applied does not successfully manage these challenges, its business, financial condition and results of operations could be materially and adversely affected.

Operating in multiple industries, and the entry into new markets and industries, entail additional challenges.

As part of its growth strategy, Applied must successfully expand into related or new markets and industries, either with its existing ~~nanomanufacturing technology~~ products or with new products developed internally or obtained through acquisitions. The entry into different markets involves additional challenges, including those arising from:


	•	the need to devote additional resources to develop new products for, and operate in, new markets;

	•	differing rates of profitability and growth among ~~its~~ multiple businesses;

	•	Applied’s ability to anticipate demand, capitalize on opportunities, and avoid or minimize risks;

	•	the complexity of managing multiple businesses with variations in production planning, execution, supply chain management and logistics;

	•	the adoption of new business models;

	•	the need to undertake activities to grow demand for end-products;

	•	the need to develop adequate new business processes and systems;

	•	Applied’s ability to rapidly expand its operations to meet increased demand and the associated effect on working capital;

	•	new materials, processes and technologies;

	•	the need to attract, motivate and retain employees with skills and expertise in these new areas;


	•	new and more diverse customers and suppliers, including some with limited operating histories, uncertainand/or limited funding, evolving business modelsand/or locations in regions where Applied does not have existing operations;

	•	different customer service requirements;

	•	new~~and/~~or different competitors with potentially more financial or other resources, ~~and~~ industry ~~experience;~~experienceand/or established customer relationships;

	•	entry into new industries and countries, with differing levels of government involvement, laws and regulations, and business, employment and safety practices;

	•	third parties’ intellectual property rights; and

	•	the need to comply with, or work to establish, industry standards and practices.

In addition, Applied has begun applying for and receiving funding from United States and other government agencies for certain strategic development programs to increase its R&D resources and address new market opportunities. As a condition to this government funding, Applied may be subject to certain record-keeping, audit, intellectual property rights-sharingand/or other obligations.

If Applied does not successfully manage the risks resulting from its diversification and entry into new markets and industries, its business, financial condition and results of operations could be materially and adversely affected.

Applied is exposed to the risks of operating a global business.

In the ~~third~~first quarter of fiscal ~~2010,~~2011, approximately 8877 percent of Applied’s net sales were to customers in regions outside the United States. Certain of Applied’s R&D~~and/or~~ and manufacturing facilities, as well as suppliers to Applied, are also located outside the United States, including in Singapore, Taiwan, China, Korea, Israel, Italy and ~~Korea.~~Switzerland. Applied is

also expanding its business and operations in new countries. The global nature of Applied’s business and operations presents challenges, including but not limited to those arising from:


	•	varying regional and geopolitical business conditions and demands;

	•	political and social attitudes, laws, rules, regulations and policies within countries that favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the development and growth of local competitors;

	•	variations among, and changes in, local, regional, national or international laws and regulations (including ~~protection of~~ intellectual property, ~~and other legal rights,~~ labor, ~~laws, and~~ tax, and import /export ~~restrictions)~~laws), as well as the interpretation and application of such laws and regulations;

	•	global trade issues, including those related to the interpretation and application of import and export licenses;

	•	positions taken by governmental agencies regarding possible national commercialand/or security issues posed by international business operations;

	•	fluctuating raw material, commodity and energy costs;

	•	challenges associated with managing more geographically ~~and culturally~~ diverse operations and projects ;

	•	varying customs, practices and ~~people;~~expectations of workers in different regions;

	•	variations in the ability to develop relationships with local customers, suppliers and ~~other local businesses;~~governments;

	•	fluctuations in interest rates and currency exchange rates, including the relative strength or weakness of the U.S. dollar and the euro;

	•	the need to provide sufficient levels of technical support in different locations;


	•	political instability, natural disasters (such as earthquakes, floods or storms), pandemics, terrorism or acts of war in locations where Applied has operations, suppliers or ~~sales;~~sales, or that may influence the value chain of the industries that Applied serves;

	•	cultural and language differences;

	•	shipping costsand/or delays;

	•	the need to continually improve the Company’s operating cost structure;

	•	difficulties and uncertainties associated with the entry into new countries;

	•	uncertainties with respect to economic growth rates in various countries; and

	•	uncertainties with respect to growth rates for the manufacture and sales of semiconductors, LCDs and solar PVs in the developing economies of certain countries.

Many of these challenges are present in China and Korea, which are experiencing significant growth of both suppliers and competitors to Applied. Applied further believes that China and Korea present large potential markets for its products and opportunity for growth over the long term, although at lower projected levels of profitability and margins for certain products than historically have been achieved in other regions. In addition, Applied must regularly reassess the size, capability and location of its global infrastructure and make appropriate changes, and must have effective change management processes and procedures to address changes in its business and operations. These challenges may materially and adversely affect Applied’s business, financial condition and results of operations.

Applied is exposed to risks associated with a highly concentrated customer base.

Applied’s semiconductor and flat panel display customer bases historically have been, and are becoming even more, highly concentrated as a result of economic and industry conditions. For example, in the first quarter of fiscal 2011, four semiconductor manufacturers accounted for 66 percent of Silicon Systems Group net sales, and four LCD manufacturers accounted for 89 percent of Display net sales. Certain customers have experienced significant ownership or management changes, consolidated with other manufacturers, outsourced manufacturing activities, or engaged in collaboration or cooperation arrangements with other manufacturers. In addition,

customers have entered into strategic alliances or industry consortia that have increased the influence of key industry participants in technology decisions made by their partners. Also, certain semiconductor and display customers are making an increasingly greater percentage of their respective industry’s capital equipment investments.

In this environment, contracts or orders from a relatively limited number of semiconductor and display manufacturers have accounted for, and are expected to continue to account for, a substantial portion of Applied’s business, which may result in added complexities in managing customer relationships and transactions. In addition, the mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the business. As Applied’s products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant, non-recoverable costs. Major customers may also seek, and on occasion receive, pricing, payment, intellectual property-related, or other commercial terms that are less favorable to Applied. These factors could have a material adverse effect on Applied’s business, financial condition and results of operations.

Manufacturing interruptions or delays could affect Applied’s ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.

Applied’s business depends on its timely supply of equipment, services and related products that meet the rapidly changing technical and volume requirements of its customers, which depends in part on the timely delivery of parts, components and subassemblies (collectively, parts) from ~~suppliers.~~suppliers and timely performance by contract manufacturers. Some key parts may be subject to long lead-timesand/or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other

than the United States, including China and Korea. Cyclical industry conditions and the volatility of demand for manufacturing equipment increase capital, technical, operational and other risks for companies throughout Applied’s supply chain. Further, the adverse conditions in the credit and financial markets and industry slowdowns in recent periods have caused, and may continue to cause, some suppliers to scale back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease operations, potentially affecting Applied’s ability to obtain quality parts on a timely basis. Applied may experience significant interruptions of its manufacturing operations, delays in its ability to deliver products or services, increased costs or customer order cancellations as a result of:


	•	the failure or inability of suppliers to timely deliver sufficient quantities of quality ~~parts;~~parts on a cost-effective basis;

	•	volatility in the availability and cost of materials;

	•	difficulties or delays in obtaining required import or export approvals;

	•	information technology or infrastructure failures;

	•	natural disasters (such as earthquakes, floods or storms); or

	•	other causes (such as regional economic downturns, pandemics, political instability, terrorism, or acts of war) that could result in delayed deliveries, manufacturing inefficiencies, increased costs or order cancellations.

If a supplier fails to meet Applied’s requirements concerning quality, cost or other performance factors, Applied may transfer its business to alternative sourcing, which could entail manufacturing delays, additional costs, or other difficulties. In addition, Applied’s need to rapidly increase its business and manufacturing capacity to meet increases in demand or expedited shipment schedules may exacerbate any interruptions in Applied’s manufacturing operations and supply chain and the associated effect on Applied’s working capital. Moreover, if actual demand for Applied’s products is different than expected, Applied may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. If Applied purchases inventory in anticipation of customer demand that does not materialize, or if customers reduce or delay orders, Applied may incur excess inventory charges. Any or all of these factors could materially and adversely affect Applied’s business, financial condition and results of operations.

Applied is exposed to risks associated with acquisitions and strategic investments.

Applied has made, and in the future intends to make, acquisitions of, and investments in, companies, technologies or products in existing, related or new markets for Applied. Acquisitions involve numerous risks, including but not limited to:


	•	diversion of management’s attention from other operational matters;

	•	inability to complete acquisitions as anticipated or at all;

	•	inability to realize anticipated benefits;

	•	failure to commercialize purchased technologies;

	•	initial dependence on unfamiliar supply chains or relatively small supply partners;

	•	inability to capitalize on characteristics of new markets that may be significantly different from Applied’s existing markets and where competitors may have stronger market ~~positions;~~positions and customer relationships;

	•	failure to attract, retain and motivate key employees from the acquired business;

	•	exposure to new operational risks, rules, regulations, worker expectations, customs and practices to the extent acquired businesses are located in countries where Applied has not historically conducted business;

	•	challenges associated with managing new, more diverse and more widespread operations, projects and people;


	•	inability to obtain and protect intellectual property rights in key technologies;

	•	inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures,and/or environmental, health &and safety, anti-corruption, human resource, or other policies or practices;

	•	impairment of acquired intangible assets and goodwill as a result of changing business conditions, technological advancements orworse-than-expected performance of the segment;

	•	the risk of litigation or ~~disputes~~claims associated with ~~customers, suppliers, partners or stockholders of an acquisition target arising from~~ a proposed or completed transaction;

	•	unknown, underestimatedand/or undisclosed commitments or liabilities;

	•	inappropriate scale of acquired entities’ critical resources or facilities for business needs; and

	•	ineffective integration of operations, systems, technologies, products or employees of an acquired business.

Applied also makes strategic investments in other companies, including companies formed as joint ventures, which may decline in valueand/or not meet desired objectives. The success of these investments depends on various factors over which Applied may have limited or no control and, particularly with respect to joint ventures, requires ongoing and effective cooperation with strategic partners. The risks to Applied’s strategic investment portfolio may be exacerbated by unfavorable financial market and macroeconomic conditions and, as a result, the value of the investment portfolio could be negatively impacted and lead to impairment charges. Mergers and acquisitions and strategic investments 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 operations. If Applied does not successfully manage the risks associated with acquisitions and strategic investments, its business, financial condition and results of operations could be materially and adversely affected.

~~Applied may incur impairment charges to goodwill or long-lived assets.~~

strategies or product portfolio, and restructuring activities. Applied’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. Applied may be required to record a charge to earnings during the period in which an impairment of goodwill or amortizable intangible assets is determined to exist, which could materially and adversely affect Applied’s results of operations.

The ability to attract, retain and motivate key employees is vital to Applied’s success.

Applied’s success and competitiveness depend in large part on its ability to attract, retain and motivate key employees. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, changes in Applied’s management or leadership, competitors’ hiring practices, cost reduction activities (including workforce reductions), and the effectiveness of Applied’s compensation and benefit programs, including its ~~equity-based~~share-based programs. ~~Applied periodically evaluates its overall compensation program and makes adjustments, as appropriate, to enhance its competitiveness.~~ If Applied does not successfully attract, retain and motivate key employees, Applied may be unable to capitalize on its opportunities and its operating results may be materially and adversely affected.

The failure to successfully implement and conduct ~~off-shoring and~~ outsourcing activities and other operational initiatives could adversely affect results of operations.

To better align its costs with market conditions, ~~increase its presence in growing markets,~~locate closer to customers, enhance productivity, and improve efficiencies, Applied conducts engineering, software development, manufacturing, sourcing and other operations in regions outside the United States, including India, China, and Korea. Applied is implementing a more distributed manufacturing model, which includes transitioning certain manufacturing and supply chain activities from the United States and Europe to Singapore, Taiwan and ~~Taiwan~~other countries in Asia, and completing assembly of some systems at the customer site. In addition, Applied outsources certain functions to third parties, including companies in the United States, India, China, Korea and other countries. Outsourced functions include contract manufacturing, engineering, ~~manufacturing,~~ customer support, software development, information technology support, finance and administrative activities. The expanding role of third party providers has required changes to Applied’s existing operations and the adoption of new procedures and processes for retaining and managing these providers, as well as redistributing responsibilities as warranted, in order to realize the potential productivity and operational efficiencies, assure quality and continuity of supply, and protect Applied’s intellectual property. If Applied does not accurately forecast the amount, timing and mix of demand for products, or if contract manufacturers or other outsource providers fail to perform in a timely manner or at satisfactory quality levels, Applied’s ability to meet customer requirements could suffer, particularly during a market upturn.

In addition, Applied is implementing a comprehensive program to better align its global organizations and processes, including initiatives to enhance the Asia supply chain, integrate its sales teams into the business units, and improve back office and information technology infrastructure for more efficient transaction processing. Applied also is implementing a multi-year, company-wide program to transform certain business processes, including the transition to a single enterprise resource planning (ERP) software system to perform various functions. The implementation of additional functionality to the ERP system entails certain risks, including difficulties with changes in business processes that could disrupt Applied’s operations, such as its ability to track orders and timely ship products, project inventory requirements, manage its supply chain and aggregate financial and operational data. The implementation of new initiatives may not achieve the anticipated benefits and may divert management’s attention from other operational activities, negatively affect employee morale, or have other unintended consequences.

If Applied does not effectively develop and implement its ~~off-shoring~~outsourcing and ~~outsourcing~~relocation strategies, if required export and other governmental approvals are not timely obtained, if Applied’s third party providers do not perform as anticipated, or if there are delays or difficulties in enhancing business processes, Applied may not realize anticipated productivity improvements or cost efficiencies, and may experience operational difficulties, increased costs (including energy and transportation), manufacturing interruptions or delays, inefficiencies in the structureand/or operation of its supply chain, loss of its intellectual property rights, quality issues, increased producttime-to-market,and/or inefficient allocation of human resources, any or all of which could materially and adversely affect Applied’s business, financial condition and results of operations.

Applied may incur impairment charges to goodwill or long-lived assets.

Applied has a significant amount of goodwill and other acquired intangible assets related to acquisitions. Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year, and more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The review compares the fair value for each of Applied’s reporting units to its associated carrying value, including goodwill. Factors that could lead to impairment of goodwill and intangible assets include adverse industry or economic trends, reduced estimates of future cash flows, declines in the market price of Applied common stock, changes in the Company’s strategies or product portfolio, and restructuring activities. Applied’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. Applied may be required to record a charge to earnings during the period in which an impairment of goodwill or amortizable intangible assets is determined to exist, which could materially and adversely affect Applied’s results of operations.

Applied is exposed to various risks related to legal proceedings or claims and protection of intellectual property rights.

Applied from time to time 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, unfair competition, misappropriation of trade secrets, employment, workplace safety, and other matters. Applied also on occasion receives notification from customers who believe that Applied owes them indemnification or other obligations related to claims made against such customers by third parties.

In February 2010, the Seoul Prosecutor’s Office for the Eastern District in Korea indicted certain employees of Applied Materials Korea (AMK), including the former head of AMK who at the time of indictment was a vice president of Applied Materials, Inc., along with employees of several other companies, alleging the improper receipt and use of the confidential information of Samsung Electronics Co., Ltd. (Samsung), a major customer. Hearings on these matters are ongoing in the Seoul Eastern District Court. Applied and Samsung entered into a settlement agreement effective as of November 1, 2010, which resolves potential civil claims related to this matter and which is ~~investigating~~separate from and does not affect the allegations and underlying circumstances. Applied is also discussing these matters and potential consequences with the major customer. There is a risk that these matters may lead to other claims. Applied currently is unable to determine what impact these matters may have on Applied’s business. The magnitude of the impact on Applied’s business will depend on many factors, including the outcome of the court proceedings and the discussions with the customer.criminal proceedings.

Legal proceedings and claims, whether with or without merit, and associated internal investigations, may (1) be time-consuming and expensive to prosecute, defend or conduct; (2) divert management’s attention and other

Applied resources; (3) inhibit Applied’s ability to sell its products; (4) result in adverse judgments for damages, injunctive relief, penalties and fines;and/or (5) negatively affect Applied’s business. There can be no assurance regarding the outcome of current or future legal proceedings, claims or investigations. If Applied is not able to favorably resolve or settle legal proceedings or claims, or in the event of any adverse findings against Applied or any of its employees, Applied’s business, financial condition and results of operations could be materially and adversely affected and Applied may suffer harm to its reputation.

Applied’s success depends in significant part on the protection of its intellectual property and other rights. Infringement of Applied’s rights by a third party, such as the unauthorized manufacture or sale of equipment or spare parts, could result in uncompensated lost market and revenue opportunities for Applied. Applied’s intellectual property rights may not provide significant competitive advantages if they are circumvented, invalidated, rendered obsolete by the rapid pace of technological change, or if Applied does not adequately protect or assert these rights. Furthermore, the laws and practices of other countries, including China, India, Taiwan and Korea, permit the protection and enforcement of Applied’s rights to varying extents, which may not be sufficient to adequately protect Applied’s rights. Applied previously entered into an arrangement with one of its competitors to decrease the risk of patent infringement lawsuits in the future. There can be no assurance that the intended results of this arrangement will be achieved or that Applied will be able to adequately protect its intellectual property rights with the restrictions associated with the arrangement. If Applied is not able to favorably resolve or settle claims, obtain or enforce intellectual property rights, obtain necessary licenses on commercially reasonable terms,and/or successfully prosecute or defend its intellectual property position, Applied’s business, financial condition and results of operations could be materially and adversely affected and Applied may suffer harm to its reputation.

Changes in tax rates or tax assets and liabilities could affect results of operations.

As a global company, Applied is subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Applied’s future annual and quarterly tax rates could be affected by numerous factors, including changes in the: (1) applicable tax laws; (2) amount and composition of pre-tax income in countries with differing tax rates; or (3) valuation of Applied’s deferred tax assets and liabilities.

To better align with the increasingly international nature of its business, Applied is transitioning certain manufacturing, supply chain, and other operations into Asia, bringing these activities closer to customers. These changes are expected to result in a reduction of future operating costs. In Singapore, Applied has received authorization to use tax incentives that provide that certain income earned in Singapore will be subject to tax holidays or reduced income tax rates. To obtain the benefit of these tax provisions, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these provisions could be materially affected if, among other things, applicable requirements are not met, or if Applied incurs net losses for which it cannot claim a deduction.

In addition, Applied is subject to regular examination by the Internal Revenue Service and other tax authorities, and from time to time initiates amendments to previously filed tax returns. Applied regularly assesses the likelihood of favorable or unfavorable outcomes resulting from these examinations and amendments to determine the adequacy of its provision for income taxes, which requires estimates and judgments. Although Applied believes its tax estimates are reasonable, there can be no assurance that the tax authorities will agree with

such estimates. Applied may have to engage in litigation to achieve the results reflected in the estimates, which may be time-consuming and expensive. There can be no assurance that Applied will be successful or that any final determination will not be materially different from the treatment reflected in Applied’s historical income tax provisions and accruals, which could materially and adversely affect Applied’s financial condition and results of operations.

Applied is subject to risks of non-compliance with environmental and safety regulations.

Applied is subject to environmental and safety regulations in connection with its global business operations, including but not limited to: regulations related to the development, manufacture and use of its products; recycling and disposal of materials used in its products or in producing its products; the operation of its facilities; and the use of its real property. The failure or inability to comply with existing or future environmental and safety regulations, such as those related to climate change, could result in: (1) significant remediation liabilities; (2) the imposition of

fines; (3) the suspension or termination of the development, manufacture, sale or use of certain of its products; (4) limitations on the operation of its facilities or ability to use its real property;and/or (5) a decrease in the value of its real property, each of which could have a material adverse effect on 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 bodiesand/or regulatory agencies in the countries in which Applied operates; (2) disagreements or disputes between national or regional regulatory agencies related to international trade; and (3) the interpretation and application of laws, rules and regulations. For example, as a public company with global operations, Applied is subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, including those related to financial and other disclosures, corporate governance, privacy, and anti-corruption. Changes in laws, regulations and standards may create uncertainty regarding compliance matters. Efforts to comply with new and changing regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If Applied is found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, Applied could be subject to legal or regulatory sanctions, the public’s perception of Applied could decline, and Applied’s business, financial condition and results of operations could be materially and adversely affected.

~~Applied is subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act.~~

~~Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, Applied must include in its Annual Report onForm 10-K~~ a report of management on the effectiveness of Applied’s internal control over financial reporting. Ongoing compliance with this requirement is complex, costly and time-consuming. If Applied fails to maintain effective internal control over financial reporting or Applied’s management does not timely assess the adequacy of such internal control, Applied could be subject to regulatory sanctions and the public’s perception of Applied may decline.


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

The following table provides information as of ~~August 1, 2010~~January 30, 2011 with respect to the shares of common stock repurchased by Applied during the ~~third~~first quarter of fiscal ~~2010.~~2011.


							Maximum Dollar								Maximum Dollar
					Total Number of		Value of Shares						Total Number of		Value of Shares
			Average		Shares Purchased as		That May Yet be				Average		Shares Purchased as		That May Yet be
	Total Number of		Price Paid		Part of Publicly		Purchased Under		Total Number of		Price Paid		Part of Publicly		Purchased Under
Period	Shares Purchased		per Share		Announced Program*		the Program*		Shares Purchased		per Share		Announced Program*		the Program*
	(Shares in thousands)				(Shares in thousands)		(Dollars in millions)		( In millions, except per share amounts)

Month #1
(May 3, 2010 to May 30, 2010)		1,433	$	12.89		1,433	$	1,882
(November 1, 2010 to November 28, 2010)										1	$	12.64		1	$	1,641
Month #2
(May 31, 2010 to June 27, 2010)		3,259	$	12.88		3,259	$	1,840
(November 29, 2010 to December 26, 2010)										5	$	13.32		5	$	1,572
Month #3
(June 28, 2010 to August 1, 2010)		3,215	$	12.30		3,215	$	1,800
(December 27, 2010 to January 30, 2011)										5	$	14.32		5	$	1,500

Total		7,907	$	12.65		7,907	$	1,800		11	$	13.74		11


*		On March 8, 2010, the Board of Directors approved a stock repurchase program for up to $2.0 billion in repurchases over the next three years, ending March 2013.


Item 3.	*Defaults Upon Senior Securities*

None.


Item 4.	*[Removed and Reserved]*


Item 5.	*Other Information*

None.

6054


Item 6.	*Exhibits*

Exhibits are numbered in accordance with the Exhibit Table of Item 601 ofRegulation S-K:


Exhibit	Exhibit			Exhibit
No	No		Description	No		Description

	10	.73	Retirement Agreement and Release between Applied Materials, Inc. and Franz Janker dated July 10, 2010	10	.60	Amendment No. 8 to the Applied Materials, Inc. Executive Deferred Compensation Plan.
	31	.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	10	.61	Amendment No. 4 to the Applied Materials, Inc. 2005 Executive Deferred Compensation Plan.
	31	.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	10	.62	Settlement Agreement between Applied Materials, Inc. and Samsung Electronics Co., Ltd. dated November 1, 2010. (Confidential treatment has been requested for redacted portions of the agreement, which redacted portions have been separately provided to the Securities and Exchange Commission.)
	32	.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	31	.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	31	.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	101	.INS	XBRL Instance Document	32	.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	101	.SCH	XBRL Taxonomy Extension Schema Document	32	.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	101	.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	101	.INS	XBRL Instance Document
	101	.LAB	XBRL Taxonomy Extension Definition Linkbase Document	101	.SCH	XBRL Taxonomy Extension Schema Document
	101	.PRE	XBRL Taxonomy Extension Label Linkbase Document	101	.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101	.DEF	XBRL Taxonomy Extension Presentation Linkbase Document	101	.LAB	XBRL Taxonomy Extension Definition Linkbase Document
				101	.PRE	XBRL Taxonomy Extension Label Linkbase Document
				101	.DEF	XBRL Taxonomy Extension Presentation Linkbase Document

6155

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

APPLIED MATERIALS, INC.


	By:	/s/ GEORGE S. DAVIS

George S. Davis

Executive Vice President,

Chief Financial Officer

(Principal Financial Officer)

~~September 3, 2010~~February 28, 2011


	By:	/s/ THOMAS S. TIMKO

Thomas S. Timko

Corporate Vice President,

Corporate Controller

and Chief Accounting Officer

(Principal Accounting Officer)

~~September 3, 2010~~February 28, 2011

6256


	Three Months Ended					Nine Months Ended
	August 1, 2010		July 26, 2009			August 1, 2010		July 26, 2009
	Level 3		Level 3			Level 3		Level 3
	(In thousands)		(In thousands)			(In thousands)		(In thousands)

Balance, beginning of period	$	—	$	2,285		$	—	$	13,100
Total realized and unrealized losses:
Included in earnings		—		908			—		(1,859	)
Included in other comprehensive loss		—		(27	)		—		(1,152	)
Purchases, sales, and maturities		—		(1,996	)		—		(8,991	)
Transfers out of Level 3, net		—		438			—		510

Balance, end of period	$	—	$	1,608		$	—	$	1,608


							Impairment of Equity Investments
							in Privately-Held Companies
							Three Months		Nine Months
							Ended		Ended
	Level 1		Level 2		Level 3		August 1, 2010		August 1, 2010
	(In thousands)

Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2010	$	—	$	—	$	22,970	$	7,804	$	12,665


		Three Months Ended August 1, 2010									Three Months Ended July 26, 2009
								Ineffective Portion								Ineffective Portion
								and Amount								and Amount
	Location of Gain							Excluded from								Excluded from
	or (Loss)							Effectiveness								Effectiveness
	Reclassified from	Effective Portion						Testing			Effective Portion					Testing
	AOCI into	Gain or			Gain or (Loss)						Gain or		Gain or (Loss)
	Income or	(Loss)			Reclassified			Gain or (Loss)			(Loss)		Reclassified			Gain or (Loss)
	Recognized in	Recognized			from AOCI into			Recognized in			Recognized		from AOCI into			Recognized in
	Income	in AOCI			Income			Income			in AOCI		Income			Income
		(In thousands)									(In thousands)

Derivatives in Cash Flow Hedging Relationships

Foreign exchange contracts	Cost of products sold	$	(3,259	)	$	(1,321	)	$	(1,386	)	$	3,522	$	(52	)	$	(303	)
Foreign exchange contracts	General and administrative		—			(3,179	)		(372	)		—		2,859			(203	)
Foreign exchange contracts	Research, development and engineering		—			(82	)		—			—		(82	)		—

Total		$	(3,259	)	$	(4,582	)	$	(1,758	)	$	3,522	$	2,725		$	(506	)


		Nine Months Ended August 1, 2010									Nine Months Ended July 26, 2009
								Ineffective Portion									Ineffective Portion
								and Amount									and Amount
	Location of Gain							Excluded from									Excluded from
	or (Loss)							Effectiveness									Effectiveness
	Reclassified from	Effective Portion						Testing			Effective Portion						Testing
	AOCI into Income	Gain or (Loss)			Gain or (Loss)			Gain or (Loss)			Gain or (Loss)			Gain or (Loss)			Gain or (Loss)
	or Recognized	Recognized in			Reclassified from			Recognized in			Recognized in			Reclassified from			Recognized in
	in Income	AOCI			AOCI into Income			Income			AOCI			AOCI into Income			Income
		(In thousands)									(In thousands)

Derivatives in Cash Flow Hedging Relationships

Foreign exchange contracts	Cost of products sold	$	(4,866	)	$	(2,488	)	$	(1,685	)	$	(4,598	)	$	(8,953	)	$	(3,161	)
Foreign exchange contracts	General and administrative		—			(4,266	)		(1,316	)		—			(9,345	)		24,039
Foreign exchange contracts	Research, development and engineering		—			(245	)		—			—			(245	)		—

Total		$	(4,866	)	$	(6,999	)	$	(3,001	)	$	(4,598	)	$	(18,543	)	$	20,878


Accounts Payable and Accrued Expenses
Accounts payable	$	628,326	$	477,148
Compensation and employee benefits		321,994		134,949
Warranty		147,200		117,537
Dividends payable		93,525		80,455
Other accrued taxes		94,792		36,954
Restructuring reserve		112,425		31,581
Other		245,344		182,878

	$	1,643,606	$	1,061,502


Customer Deposits and Deferred Revenue
Customer deposits	$	602,283	$	564,412
Deferred revenue		434,655		299,868

	$	1,036,938	$	864,280


	Severance			Facilities			Total
	(In thousands)

Balance, October 25, 2009	$	26,353		$	5,228		$	31,581
Provision for restructuring reserves		—			64			64
Consumption of reserves		(11,915	)		(227	)		(12,142	)
Foreign currency changes		—			3			3

Balance, January 31, 2010		14,438			5,068			19,506

Provision for restructuring reserves		—			57			57
Consumption of reserves		(6,167	)		(29	)		(6,196	)
Adjustment of restructuring reserves		2			(160	)		(158	)
Foreign currency changes		—			(1	)		(1	)

Balance, May 2, 2010		8,273			4,935			13,208

Provision for restructuring reserves		—			57			57
Consumption of reserves		(1,532	)		(37	)		(1,569	)

Balance, August 1, 2010	$	6,741		$	4,955		$	11,696


	Acquisitions
Fair Market Values	2010
	(In thousands)

Cash and cash equivalents	$	38,744
Accounts receivable, net		37,961
Inventories		61,838
Other current assets		3,837
Property and equipment, net		45,578
Goodwill		165,495
Purchased intangible assets		93,376

Total assets acquired		446,829
Accounts payable and accrued expenses		(46,246	)
Other liabilities		(25,240	)

Total liabilities assumed		(71,486	)

Purchase price allocated	$	375,343


		Purchased
	Useful	Intangible Assets
	Life	2010
	(In years)	(In thousands)

Developed technology	6-10	$	65,700
Customer relationships	8		10,900
Trade names	3-10		5,700
Patents and trademarks	7-10		5,462
Backlog	1		4,100
Other	5		1,514

Total purchased intangible assets		$	93,376