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 December 28, 2008

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

LAM RESEARCH CORPORATION

Delaware		94-2634797
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4650 Cushing Parkway
Fremont, California 94538
(Address of principal executive offices including zip code)

(510) 572-0200
(Registrant’s telephone number, including area code)

   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 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” in Rule 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 in Exchange Act Rule 12b-2 of the Exchange Act).
Yes o No þ

   As of January 29, 2009, there were 125,531,613 shares of Registrant’s Common Stock outstanding.

 

 

LAM RESEARCH CORPORATION

TABLE OF CONTENTS

		Page No.
PART I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of December 28, 2008 and June 29, 2008			3
Consolidated Statements of Operations for the three and six months ended December 28, 2008 and December 23, 2007			4
Condensed Consolidated Statements of Cash Flows for the three and six months ended December 28, 2008 and December 23, 2007			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			34
PART II. Other Information			35
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			43
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 5. Other Information			44
Item 6. Exhibits			44
Signatures			45
Exhibit Index			46
EX-4.14
EX-10.148
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LAM RESEARCH CORPORATION

		December 28,				June 29,
		2008				2008
		(unaudited)				(1)
ASSETS
Cash and cash equivalents		$	652,913			$	732,537
Short-term investments			297,399				326,199
Accounts receivable, less allowance for doubtful accounts of $3,943 as of December 28, 2008 and $4,102 as of June 29, 2008			290,565				412,356
Inventories			269,959				282,218
Deferred income taxes			93,002				96,748
Prepaid expenses and other current assets			56,648				67,649
Total current assets			1,660,486				1,917,707
Property and equipment, net			233,250				235,735
Restricted cash and investments			168,405				146,072
Deferred income taxes			25,836				19,793
Goodwill			270,682				281,298
Intangible assets, net			101,305				121,889
Other assets			78,457				84,261
Total assets		$	2,538,421			$	2,806,755
LIABILITIES AND STOCKHOLDERS’ EQUITY
Trade accounts payable		$	39,808			$	89,158
Accrued expenses and other current liabilities			322,547				390,062
Deferred profit			54,158				128,250
Current portion of long-term debt and capital leases			29,899				30,209
Total current liabilities			446,412				637,679
Long-term debt and capital leases			257,135				276,121
Income taxes payable			92,382				85,611
Other long-term liabilities			21,300				23,400
Total liabilities			817,229				1,022,811
Minority interests			—				5,347
Commitments and contingencies
Stockholders’ equity:
Preferred stock, at par value of $0.001 per share; authorized - 5,000 shares, none outstanding			—				—
Common stock, at par value of $0.001 per share; authorized - 400,000 shares; issued and outstanding - 125,088 shares at December 28, 2008 and 125,187 shares at June 29, 2008			125				125
Additional paid-in capital			1,364,450				1,332,159
Treasury stock, at cost, 35,188 shares at December 28, 2008 and 34,220 shares at June 29, 2008			(1,510,716	)			(1,490,701	)
Accumulated other comprehensive income (loss)			(43,762	)			10,620
Retained earnings			1,911,095				1,926,394
Total stockholders’ equity			1,721,192				1,778,597
Total liabilities and stockholders’ equity		$	2,538,421			$	2,806,755

See Notes to Condensed Consolidated Financial Statements

LAM RESEARCH CORPORATION

		Three Months Ended								Six Months Ended
		December 28,				December 23,				December 28,				December 23,
		2008				2007				2008				2007
Total revenue		$	283,409			$	610,320			$	723,770			$	1,294,941
Cost of goods sold			174,329				302,659				428,532				643,393
Cost of goods sold — restructuring and asset impairments			7,728				—				10,776				—
Total cost of goods sold			182,057				302,659				439,308				643,393
Gross margin			101,352				307,661				284,462				651,548
Research and development			68,781				80,243				150,344				156,531
Selling, general and administrative			59,842				66,084				128,902				135,797
Restructuring and asset impairments			10,121				—				26,089				—
Total operating expenses			138,744				146,327				305,335				292,328
Operating income (loss)			(37,392	)			161,334				(20,873	)			359,220
Other income (expense), net			(7,233	)			(37	)			1,784				7,596
Income (loss) before income taxes			(44,625	)			161,297				(19,089	)			366,816
Income tax expense (benefit)			(20,453	)			46,238				(3,790	)			103,169
Net income (loss)		$	(24,172	)		$	115,059			$	(15,299	)		$	263,647
Net income (loss) per share:
Basic net income (loss) per share		$	(0.19	)		$	0.92			$	(0.12	)		$	2.12
Diluted net income (loss) per share		$	(0.19	)		$	0.91			$	(0.12	)		$	2.08
Number of shares used in per share calculations:
Basic			125,084				124,685				125,266				124,370
Diluted			125,084				126,653				125,266				126,523

See Notes to Condensed Consolidated Financial Statements

LAM RESEARCH CORPORATION

		Six Months Ended
		December 28,				December 23,
		2008				2007
		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(15,299	)		$	263,647
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			35,073				22,563
Deferred income taxes			(2,297	)			(10,014	)
Equity-based compensation expense			29,457				20,615
Income tax benefit on equity-based compensation plans			(2,006	)			57,177
Excess tax benefit on equity-based compensation plans			(517	)			(37,639	)
Restructuring and asset impairments			36,865				—
Other, net			5,865				11,316
Changes in operating asset accounts			(82,998	)			(83,778	)
Net cash provided by operating activities			4,143				243,887
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures and intangible assets			(27,568	)			(38,561	)
Acquisitions of businesses, net of cash acquired			(11,190	)			—
Purchases of available-for-sale securities			(143,667	)			(101,665	)
Sales and maturities of available-for-sale securities			190,414				69,780
Purchase of call option			—				(10,279	)
Purchase of other investments			—				(4,560	)
Other			(2,000	)			(2,248	)
Transfer of restricted cash and investments			(48,306	)			(1,074	)
Net cash used for investing activities			(42,317	)			(88,607	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations			(15,433	)			(100	)
Net proceeds from issuance of long-term debt			625				—
Excess tax benefit on equity-based compensation plans			517				37,639
Treasury stock purchases			(27,203	)			(10,225	)
Reissuances of treasury stock			7,584				7,301
Proceeds from issuance of common stock			4,444				10,106
Net cash provided by (used for) financing activities			(29,466	)			44,721
Effect of exchange rate changes on cash			(11,984	)			2,087
Net increase (decrease) in cash and cash equivalents			(79,624	)			202,088
Cash and cash equivalents at beginning of period			732,537				573,967
Cash and cash equivalents at end of period		$	652,913			$	776,055

See Notes to Condensed Consolidated Financial Statements

LAM RESEARCH CORPORATION

NOTE 1 — BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Lam Research Corporation (“Lam Research” or the “Company”) for the fiscal year ended June 29, 2008, which are included in the Annual Report on Form 10-K as of and for the year ended June 29, 2008 (the “2008 Form 10-K”). The Company’s Forms 10-K, Forms 10-Q and Forms 8-K are available online at the Securities and Exchange Commission website on the Internet. The address of that site is www.sec.gov. The Company also posts the Forms 10-K, Forms 10-Q and Forms 8-K on the corporate website at www.lamresearch.com.

     The Company’s reporting period is a 52/53-week fiscal year. The Company’s current fiscal year will end June 28, 2009 and includes 52 weeks. The quarters ended December 28, 2008 and December 23, 2007 each included 13 weeks.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

     On June 30, 2008, the Company adopted the required portions of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (“SFAS No. 157”). There was no material impact to the Company’s consolidated financial statements from the adoption of SFAS No. 157. This Statement defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. SFAS No. 157 currently applies to all financial assets and liabilities, and nonfinancial assets and liabilities that are recognized or disclosed at fair value on a recurring basis. In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. 157-2, delaying the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value on a recurring basis. The delayed portions of SFAS No. 157 will be adopted by the Company beginning in its fiscal year ending June 27, 2010. In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active,” which clarifies the application of Statement 157 when the market for a financial asset is inactive. Specifically, FSP FAS 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The guidance of FSB FAS 157-3 is effective immediately and the Company has adopted its provisions with respect to its financial assets and liabilities as of September 28, 2008. The impact of adopting the non-delayed portions of SFAS No. 157 is more fully described in Note 4.

     In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement was effective for the Company beginning June 30, 2008. The Company has not applied the fair value option to any items; therefore, the Statement did not have an impact on the consolidated financial statements.

     In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. The Company expects to adopt SFAS No. 141R in the beginning of fiscal year 2010 and is currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on its consolidated results of operations and financial condition.

     In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the treatment of noncontrolling interests in a subsidiary. Noncontrolling interests in a subsidiary will be reported as a component of equity in the consolidated financial statements and any retained noncontrolling equity investment upon deconsolidation of a subsidiary is initially measured at fair value. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 160 will result in the reclassification of minority interests to stockholders’ equity. The Company is currently assessing any further impacts of SFAS 160 on its results of operations and financial condition.

     In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement 133” (“SFAS 161”). SFAS 161 requires expanded and enhanced disclosure for

derivative instruments, including those used in hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently assessing the impact of the adoption of SFAS 161 on its consolidated financial statement disclosures.

     In April 2008, the FASB issued FASB Staff Position Statement of Financial Accounting Standards 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 provides guidance with respect to estimating the useful lives of recognized intangible assets acquired on or after the effective date and requires additional disclosure related to the renewal or extension of the terms of recognized intangible assets. FSP SFAS 142-3 is effective for fiscal years and interim periods beginning after December 15, 2008. The Company is currently assessing the impact of the adoption of FSP SFAS 142-3 on its results of operations and financial condition.

NOTE 3 — EQUITY-BASED COMPENSATION PLANS

     The Company has adopted stock plans that provide for the grant to eligible participants of equity-based awards, including stock options and restricted stock units, of Lam Research common stock (“Common Stock”). The Company also has an employee stock purchase plan (“ESPP”) that allows employees to purchase its Common Stock.

     The Company accounts for equity-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) using the modified prospective method. The Company recognized equity-based compensation expense of $14.0 million and $9.8 million during the three months ended December 28, 2008 and December 23, 2007, respectively. The Company recognized equity-based compensation expense of $29.5 million and $20.6 million during the six months ended December 28, 2008 and December 23, 2007, respectively. The income tax benefit recognized in the consolidated statements of operations related to equity-based compensation expense was $2.5 million and $1.3 million during the three months ended December 28, 2008 and December 23, 2007, respectively. The income tax benefit recognized in the consolidated statements of operations related to equity-based compensation expense was $5.3 million and $2.9 million during the six months ended December 28, 2008 and December 23, 2007, respectively. The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis for awards granted after the adoption of SFAS No. 123R and on a graded vesting basis for awards granted prior to the adoption of SFAS No. 123R.

Stock Options and Restricted Stock Units

     The 2007 Stock Incentive Plan provides for the grant of non-qualified equity-based awards to eligible participants. Additional shares are reserved for issuance pursuant to awards previously granted under the Company’s 1997 Stock Incentive Plan and its 1999 Stock Option Plan. As of December 28, 2008, there were a total of 3,751,249 equity-based awards issued and outstanding. There were an additional 12,754,875 shares reserved and available for future issuance under the 2007 Stock Incentive Plan (“Plan”) as of December 28, 2008.

     The Company did not grant any stock options during the three and six months ended December 28, 2008 and December 23, 2007.

     A summary of stock option activity under the Plans as of December 28, 2008 and changes during the six months then ended is presented below:

										Weighted-
										Average
						Weighted-				Remaining				Aggregate Intrinsic
						Average				Contractual				Value as of
		Shares				Exercise				Term				December 28, 2008
Options		(in thousands)				Price				(years)				(in thousands)
Outstanding at June 29, 2008			2,607				21.60				1.59
Granted			—				—
Exercised			(314	)			14.13
Forfeited or expired			(17	)		$	29.56
Outstanding at December 28, 2008			2,276			$	22.60				1.20			$	5,257
Exercisable at December 28, 2008			2,267			$	22.59				1.20			$	5,246

     The total intrinsic value of options exercised during the three and six months ended December 28, 2008 was $7.4 million and $9.5 million, respectively. The total intrinsic value of options exercised during the three and six months ended December 23, 2007 was $6.7 million and $18.6 million, respectively. As of December 28, 2008, there was less than $0.1 million of total unrecognized compensation cost related to nonvested stock options granted and outstanding; that cost is expected to be recognized through fiscal year 2009, with a weighted average remaining period of less than one year. Cash received from stock option exercises was $1.3 million and $4.4 million during the three and six

months ended December 28, 2008, respectively. Cash received from stock option exercises was $3.4 million and $10.1 million during the three and six months ended December 23, 2007, respectively.

     A summary of the status of the Company’s restricted stock units as of December 28, 2008, and changes during the six months then ended is presented below:

						Average
						Grant-
		Shares				Date Fair
Nonvested Restricted Stock Units		(in thousands)				Value
Nonvested at June 29, 2008			1,696			$	46.51
Granted			453				34.01
Vested			(552	)			41.97
Forfeited			(122	)			45.70
Nonvested at December 28, 2008			1,475			$	40.97

     The fair value of the Company’s restricted stock units was calculated based upon the fair market value of the Company’s stock at the date of grant. As of December 28, 2008, there was $36.4 million of total unrecognized compensation cost related to nonvested restricted stock units granted; that cost is expected to be recognized over a weighted average remaining period of 1.1 years.

     ESPP

     The 1999 Employee Stock Purchase Plan (the “1999 ESPP”) allows employees to designate a portion of their base compensation to be used to purchase the Company’s Common Stock at a purchase price per share of the lower of 85% of the fair market value of the Company’s Common Stock on the first or last day of the applicable offering period. Typically, each offering period lasts 12 months and comprises three interim purchase dates. As of December 28, 2008, there were a total of 6,141,631 shares available for issuance under the 1999 ESPP.

     ESPP awards were valued using the Black-Scholes model with expected volatility calculated using implied volatility. ESPP awards were valued assuming no expected dividends and the following weighted-average assumptions for the three and six months ended December 28, 2008:

Expected life (years)			0.68
Expected stock price volatility			45.0	%
Risk-free interest rate			1.9	%

     As of December 28, 2008, there was $4.9 million of total unrecognized compensation cost related to the 1999 ESPP that is expected to be recognized over a remaining period of 0.8 years.

NOTE 4 — FINANCIAL INSTRUMENTS

     The Company adopted the required portions of the fair value measurement and disclosure provisions of SFAS No. 157 on June 30, 2008. SFAS No. 157 establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities that are already subject to fair value measurements under current accounting rules. SFAS No. 157 also requires expanded disclosures related to fair value measurements.

     SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement. This Statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

     Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities.

     The Company’s Level 1 assets consist of money market fund deposits, U.S. Treasury securities, and equity instruments, all of which are traded in an active market with sufficient volume and frequency of transactions.

     Level 2: Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

     The Company’s Level 2 assets and liabilities include U.S. agency securities, bank time deposits, government sponsored enterprises, bank and corporate notes, municipal notes and bonds, mortgage and asset-backed securities, equity securities, derivative assets and liability contracts, which are priced using inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

     Level 3: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities

     The Company had no Level 3 assets or liabilities as of December 28, 2008.

     The following table sets forth the Company’s financial assets and liabilities that were recorded at fair value on a recurring basis during the quarter, by level, within the fair value hierarchy at December 28, 2008:

						Fair Value Measurement at December 28, 2008
						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable				Unobservable
		Total				Assets (Level 1)				Inputs (Level 2)				Inputs (Level 3)
		(in thousands)
Assets
Fixed Income
Cash equivalents		$	567,746			$	567,746			$	—			$	—
U.S. Treasuries and Agencies			47,157				41,769				5,388
Government Sponsored Enterprises			26,616				—				26,616				—
Bank and Corporate Notes			216,599				—				216,599				—
Municipal Notes and Bonds			161,720				—				161,720				—
Total fixed income			1,019,838				609,515				410,323				—
Equities			3,404				3,306				98				—
Derivatives assets			178				—				178				—
Total		$	1,023,420			$	612,821			$	410,599			$	—
Liabilities
Derivatives liabilities		$	7,686			$	—			$	7,686			$	—

The amounts in the table above are reported in the consolidated balance sheet as of December 28, 2008 as follows:

		Total				Level 1				Level 2				Level 3
		(in thousands)
Cash equivalents		$	554,198			$	554,198			$	—			$	—
Short-term investments			297,399				41,769				255,630				—
Restricted cash and investments			168,339				13,548				154,791				—
Prepaid expenses and other current assets			178				—				178
Other assets			3,306				3,306				—				—
		$	1,023,420			$	612,821			$	410,599
Accrued expenses and other current liabilities		$	7,686			$	—			$	7,686			$	—

NOTE 5 — INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out method) or market. Shipments to Japanese customers are classified as inventory and carried at cost until title transfers. Inventories consist of the following:

		December 28,				June 29,
		2008				2008
		(in thousands)
Raw materials		$	160,106			$	157,135
Work-in-process			49,282				54,684
Finished goods			60,571				70,399
		$	269,959			$	282,218

NOTE 6 — PROPERTY AND EQUIPMENT, NET

     Property and equipment, net, consists of the following:

		December 28,				June 29,
		2008				2008
		(in thousands)
Manufacturing, engineering and office equipment		$	252,799			$	244,378
Computer equipment and software			71,785				73,237
Land			16,728				16,785
Buildings			63,987				59,102
Leasehold improvements			47,144				46,300
Furniture and fixtures			13,636				12,104
			466,079				451,906
Less: accumulated depreciation and amortization			(232,829	)			(216,171	)
		$	233,250			$	235,735

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

Goodwill

     Changes in the balance of goodwill during the six months ended December 28, 2008 were as follows:

		(in thousands)
Balance as of June 29, 2008		$	281,298
Additional share purchases			5,526
Adjustment to unrecognized tax benefits			2,935
Effect of changes in foreign currency exchange rates			(19,077	)
Balance as of December 28, 2008		$	270,682

     Goodwill attributable to the SEZ acquisition of approximately $211 million is not tax deductible. The remaining goodwill balance of approximately $60 million is tax deductible.

Intangible Assets

     The following table provides details of the Company’s intangible assets subject to amortization as of December 28, 2008 (in thousands, except years):

										Changes in								Weighted-
										Foreign								Average
										Currency								Useful
						Accumulated				Exchange								Life
		Gross				Amortization				Rates				Net				(years)
Customer relationships		$	35,226			$	(11,079	)		$	—			$	24,147				6.90
Existing technology			61,598				(7,771	)			(7,204	)			46,623				6.70
Other intangible assets			35,216				(14,614	)			(1,298	)			19,304				4.10
Patents			17,710				(6,479	)			—				11,231				7.40
		$	149,750			$	(39,943	)		$	(8,502	)		$	101,305				6.20

     The following table provides details of the Company’s intangible assets subject to amortization as of June 29, 2008 (in thousands, except years):

														Weighted-
						Accumulated								Average Useful
		Gross				Amortization				Net				Life (years)
Customer relationships		$	35,226			$	(8,501	)		$	26,725				6.90
Existing technology			61,598				(4,008	)			57,590				6.70
Other intangible assets			35,216				(10,157	)			25,059				4.10
Patents			17,710				(5,195	)			12,515				7.40
		$	149,750			$	(27,861	)		$	121,889				6.20

     The Company recognized $5.4 million and $12.0 million in intangible asset amortization expense during the three and six months ended December 28, 2008, respectively. The Company recognized $3.6 million and $7.2 million in intangible asset amortization expense during the three and six months ended December 23, 2007, respectively.

     The estimated future amortization expense of purchased intangible assets as of December 28, 2008 is as follows (in thousands):

Fiscal Year			Amount
2009 (six months)			$	12,174
2010				23,460
2011				21,009
2012				17,469
2013				15,503
Thereafter				11,690
			$	101,305

NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

     Accrued expenses and other current liabilities consist of the following:

		December 28,				June 29,
		2008				2008
		(in thousands)
Accrued compensation		$	199,167			$	225,227
Warranty reserves			34,570				61,308
Income and other taxes payable			807				32,589
Restructuring			25,605				5,485
Other			62,398				65,453
		$	322,547			$	390,062

     As a result of determinations made in connection with the Company’s voluntary independent stock option review, the Company considered the application of Section 409A of the Internal Revenue Code of 1986 (“Section 409A”), as amended (“IRC”) and similar provisions of state law to certain stock option grants where, under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, intrinsic value existed at the time of grant. In the event such stock option grants are not considered as issued at fair market value at the original grant date under the IRC and applicable regulations thereunder, these options are subject to Section 409A. On March 30, 2008, the Board of Directors of the Company authorized the Company to assume the tax liability of certain employees, including the Company’s Chief Executive Officer and certain other executive officers, with options subject to Section 409A. The assumed 409A liability was $52.5 million and $50.9 million as of December 28, 2008 and June 29, 2008, respectively, and is included in accrued compensation in the table above. The determinations from the voluntary independent stock option review are more fully described in Note 3, “Restatement of Consolidated Financial Statements” to Consolidated Financial Statements in Item 8 of the Company’s 2007 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of the Company’s 2007 Form 10-K.

NOTE 9 — OTHER INCOME (EXPENSE), NET

     The significant components of other income (expense), net, are as follows:

		Three Months Ended								Six Months Ended
		December 28,				December 23,				December 28,				December 23,
		2008				2007				2008				2007
		(in thousands)
Interest income		$	8,131			$	14,685			$	15,927			$	27,972
Interest expense			(2,483	)			(3,357	)			(5,036	)			(6,793	)
Foreign exchange losses			(13,565	)			(10,823	)			(10,299	)			(12,190	)
Charitable contributions			—				(408	)			—				(908	)
Other, net			684				(134	)			1,192				(485	)
		$	(7,233	)		$	(37	)		$	1,784			$	7,596

     The Company calculates its interim income tax provision in accordance with Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” and FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (“FIN 18”). In applying APB 28 and FIN 18 to the income tax provision computation for the period ended December 2008, the Company excluded from its calculation of the effective tax rate losses of a certain foreign jurisdiction since the Company cannot benefit those losses due to application of certain foreign tax rulings.

     The Company’s effective tax rate for the three and six months ended December 28, 2008 was approximately 45.8% and 19.9%, respectively. These rates differ from the statutory rate due to the geographical mix of income in higher and lower tax jurisdictions, the application of certain foreign tax rulings, and the implementation of a tax strategy to align the future revenue and profit of SEZ with the Company’s current tax operating structure. The Company recorded the following material discrete events during the December 2008 quarter: (1) a tax benefit of $6.5 million of restructuring costs, (2) a tax benefit of $5.8 million related to the extension of the federal research credit as it pertains to the Company’s fiscal year 2008, (3) a tax expense of $5.4 million related to the application of certain foreign tax rulings, (4) a tax expense of $1.3 million related to deferred taxes for leases and (5) a tax expense of $ 1.1 million of FIN 48 interest.

     As of September 28, 2008 and December 28, 2008, the total gross unrecognized tax benefits were $151.4 million and $149.6 million, respectively, compared to $143.8 million as of June 29, 2008, representing an increase of approximately $7.6 million and $5.8 million for the three and six month periods, respectively. If the remaining balance of $149.6 million of gross unrecognized tax benefits as of December 28, 2008 were realized in a future period, it would result in a net tax benefit of $104.9 million and a reduction in the effective tax rate. Approximately $13.6 million of gross unrecognized tax benefits are related to the SEZ pre-acquisition period and would result in an adjustment to goodwill of $0.7 million. The Company does not anticipate that the total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statute of limitations in the next 12 months.

     As of September 28, 2008 and December 28, 2008, the Company had accrued approximately $16.2 million and $18.6 million, respectively, for the payment of interest and penalties relating to unrecognized tax benefits compared to $12.6 million as of June 29, 2008. For the three and six month periods ended December 28, 2008, interest and penalties related to unrecognized tax benefits increased by $2.4 million and $6.0 million, respectively, of which $4.5 million was recognized in the provision for income tax and the remaining balance of approximately $1.5 million related to the SEZ acquisition and was recorded to goodwill.

     The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Realization of the Company’s net deferred tax assets is dependent on future taxable income. The Company believes it is more likely than not those assets will be realized. However, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. In the event that the Company determines that it would not be able to realize all or part of its net deferred tax assets, an adjustment would be charged to earnings in the period such determination is made. Likewise, if the Company later determines that it is more likely than not that the deferred tax assets would be realized, the previously provided valuation allowance would be reversed. The Company’s current valuation allowance of $3.4 million recorded relates to certain deferred tax assets acquired in the SEZ acquisition. Any subsequently recognized tax benefits associated with valuation allowances recorded in the SEZ acquisition will be recorded as an adjustment to goodwill. The Company evaluates the realizability of the deferred tax assets quarterly and will continue to assess the need for additional valuation allowances, if any.

     The Company files U.S. federal, U.S. state, and foreign income tax returns. As of December 28 2008, tax years 2000-2007 remained subject to examination in the U.S., and tax years 2002-2007 remained subject to examination in various foreign jurisdictions.

     The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008”, was enacted on October 3, 2008 by the U.S. government. Under the Act, the research credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. As a result, during the quarter ended December 28, 2008, the Company recorded a $5.8 million tax benefit related to the extension of the federal research credit as it pertains to the Company’s fiscal year 2008.

     Assembly Bill 1452, enacted on September 30, 2008 by the State of California, limits the amount of tax credits that can be utilized on the tax return. This change did not have any impact on the Company’s effective tax rate since the tax credits not utilized in the current year can be used to offset future tax liability.

NOTE 11 — NET INCOME (LOSS) PER SHARE

     Basic net income (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed, using the treasury stock method, as though all potential common shares that are dilutive were outstanding during the period. The following table provides a reconciliation of the numerators and denominators of the basic and diluted computations for net income (loss) per share.

		Three Months Ended								Six Months Ended
		December 28,				December 23,				December 28,				December 23,
		2008				2007				2008				2007
		(in thousands, except per share data)
Numerator:
Net income (loss)		$	(24,172	)		$	115,059			$	(15,299	)		$	263,647
Denominator:
Basic average shares outstanding			125,084				124,685				125,266				124,370
Effect of potential dilutive securities:
Employee stock plans			—				1,968				—				2,153
Diluted average shares outstanding			125,084				126,653				125,266				126,523
Net income (loss) per share — Basic		$	(0.19	)		$	0.92			$	(0.12	)		$	2.12
Net income (loss) per share — Diluted		$	(0.19	)		$	0.91			$	(0.12	)		$	2.08

     For purposes of computing diluted net income per share, weighted-average common shares do not include potential dilutive securities that are anti-dilutive under the treasury stock method. The following potential dilutive securities were excluded:

		Three Months Ended								Six Months Ended
		December 28,				December 23,				December 28,				December 23,
		2008				2007				2008				2007
		(in thousands)
Number of potential dilutive securities excluded			3,414				48				2,376				37

NOTE 12 — COMPREHENSIVE INCOME (LOSS)

     The components of comprehensive income (loss) are as follows:

		Three Months Ended								Six Months Ended
		December 28,				December 23,				December 28,				December 23,
		2008				2007				2008				2007
		(in thousands)
Net income (loss)		$	(24,172	)		$	115,059			$	(15,299	)		$	263,647
Foreign currency translation adjustment			5,660				2,745				(42,569	)			5,187
Unrealized gain (loss) on fair value of derivative financial instruments, net			(11,803	)			4,106				(16,533	)			(2,004	)
Unrealized gain (loss) on financial instruments, net			2,831				1,206				(5	)			2,624
Reclassification adjustment for loss (gain) included in earnings			4,050				1,226				4,657				694
SFAS No. 158 adjustment			33				17				68				34
Comprehensive income (loss)		$	(23,401	)		$	124,359			$	(69,681	)		$	270,182

The balance of accumulated other comprehensive income (loss) is as follows:

		December 28,				June 29,
		2008				2008
		(in thousands)
Accumulated foreign currency translation adjustment		$	(35,957	)		$	6,612
Accumulated unrealized gain (loss) on derivative financial instruments			(6,007	)			5,895
Accumulated unrealized loss on financial instruments			(714	)			(734	)
SFAS No. 158 adjustment			(1,084	)			(1,153	)
Accumulated other comprehensive gain (loss)		$	(43,762	)		$	10,620

NOTE 13 — ACQUISITIONS

     During fiscal year 2008, the Company acquired approximately 99% of the outstanding shares of SEZ, a major supplier of single-wafer wet clean technology and products to the global semiconductor manufacturing industry. The acquisition was an all-cash transaction. The Company acquired the remaining outstanding shares during the six months ended December 28, 2008. The acquisition of the shares was conducted pursuant to the terms of a Transaction Agreement entered into on December 10, 2007 by and between the Company and SEZ. SEZ’s Spin-Process single-wafer technology is part of a broad equipment portfolio for wafer cleaning and decontamination that is a key process adjacent to the etch process.

     The acquisition was accounted for as a business combination in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations”, and the preliminary purchase price at the time of acquisition was allocated based on the estimated fair value of net tangible and intangible assets acquired, and liabilities assumed. The purchase price allocation is preliminary, pending further information on tax contingencies.

     The purchase price was preliminarily allocated to the fair value of assets acquired and liabilities assumed as follows, in thousands:

Cash consideration		$	628,092
Transaction costs			11,115
		$	639,207
ASSETS
Cash and cash equivalents		$	147,870
Short-term investments			5,492
Accounts receivable			103,794
Inventories			80,336
Prepaid expenses and other current assets			24,201
Property and equipment			86,096
Restricted cash and investments			40,038
Deferred income taxes			739
Goodwill			225,970
Intangible assets			67,743
Other assets			2,527
LIABILITIES
Accounts payable			11,700
Accrued expenses and other accrued liabilities			58,942
Long-term debt and capital leases			55,088
Other long-term liabilities			19,869
		$	639,207

NOTE 14 — LONG-TERM DEBT AND GUARANTEES

     The Company’s contractual cash obligations relating to its existing capital leases and debt as of December 28, 2008 are as follows:

		Capital				Long-term
		Leases				Debt				Total
		(in thousands)
Payments due by period:
One year		$	1,414			$	29,299			$	30,713
Two years			2,537				222,080				224,617
Three years			1,950				9,838				11,788
Four years			1,968				4,946				6,914
Five years			1,964				1,723				3,687
Over five years			14,094				—				14,094
Total			23,927				267,886				291,813
Interest on capital leases			4,779								4,779
Current portion of long-term debt and capital leases			600				29,299				29,899
Long-term debt and capital leases		$	18,548			$	238,587			$	257,135

Capital Leases

     Capital leases reflect building lease obligations assumed from the Company’s acquisition of SEZ. The amounts in the table above include the interest portion of payment obligations. The Company’s total capital lease obligations were $19.1 million as of December 28, 2008.

Long-Term Debt

     On March 3, 2008, and as amended on September 29, 2008, the Company, as borrower, entered into a Credit Agreement with ABN AMRO BANK N.V (the “Agent”), as administrative agent for the lenders party to the Credit Agreement, and such lenders. Bullen Semiconductor Corporation entered into the Bullen Guarantee to guarantee the obligations of the Company under the Credit Agreement. In connection with the Credit Agreement, the Company and Bullen entered into certain collateral documents (the “Collateral Documents”) including a security agreement, a Bullen security agreement, a pledge agreement and other collateral documents to secure the Company’s obligations under the Credit Agreement. The Collateral Documents encumber current and future accounts receivables, inventory, equipment and related assets of the Company and Bullen, as well as 100% of the Company’s ownership interest in Bullen and 65% of the Company’s ownership interest in Lam Research International BV, a wholly-owned subsidiary of the Company. In addition, any future domestic subsidiaries of the Company will also enter into a similar guarantee and collateral documents to encumber the foregoing type of assets.

     Under the Credit Agreement, the Company borrowed $250 million in principal amount for general corporate purposes. The loan under the Credit Agreement is a non-revolving term loan with the following remaining repayment terms as of December 28, 2008: (a) $12.5 million of the principal amount due in the June 2009 and December 2009 quarters, and (b) the payment of the remaining principal amount on March 6, 2010. During the quarter ended December 28, 2008, the Company made a scheduled principal repayment of $12.5 million. The outstanding principal amount bears interest at LIBOR plus 0.75% per annum or, alternatively, at the Agent’s “prime rate.” The Company may prepay the loan under the Credit Agreement in whole or in part at any time without penalty. The Credit Agreement contains customary representations, warranties, affirmative covenants and events of default, as well as various negative covenants (including maximum leverage ratio, minimum liquidity and minimum EBITDA).

     The Company’s total long-term debt of $267.9 million as of December 28, 2008 includes the remaining balance of $237.5 million under the Credit Agreement noted above and $30.4 million assumed in connection with the acquisition of SEZ, consisting of various bank loans and government subsidized technology loans supporting operating needs.

Guarantees

     The Company accounts for its guarantees in accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a company that is a guarantor to make specific disclosures about its obligations under certain guarantees that it has issued. FIN 45 also requires a company (the guarantor) to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee.

     On December 18, 2007, and as amended on April 3, 2008 and July 9, 2008, the Company entered into a series of two operating leases (the “Livermore Leases”) regarding certain improved properties in Livermore, California. On December 21, 2007, the Company entered into a series of four amended and restated operating leases (the “New Fremont Leases,” and collectively with the Livermore Leases, the “Operating

Leases”) with regard to certain improved properties at its headquarters in Fremont, California. Each of the Operating Leases is an off-balance sheet arrangement. The Operating Leases (and associated documents for each Operating Lease) were entered into by the Company and BNP Paribas Leasing Corporation (“BNPPLC”).

     Each Livermore Lease facility has an approximately seven-year term (inclusive of an initial construction period during which BNPPLC’s and the Company’s obligations will be governed by the Construction Agreement entered into with regard to such Livermore Lease facility) ending on the first business day in January 2015. Each New Fremont Lease has an approximately seven-year term ending on the first business day in January 2015.

     Under each Operating Lease, the Company may, at its discretion and with 30 days’ notice, elect to purchase the property that is the subject of the Operating Lease for an amount approximating the sum required to prepay the amount of BNPPLC’s investment in the property and any accrued but unpaid rent. Any such amount may also include an additional make-whole amount for early redemption of the outstanding investment, which will vary depending on prevailing interest rates at the time of prepayment.

     The Company will be required, pursuant to the terms of the Operating Leases and associated documents, to maintain collateral in an aggregate of approximately $167.4 million (upon completion of the Livermore construction) in separate interest-bearing accounts and/or eligible short-term investments as security for its obligations under the Operating Leases. The Company completed construction of one of two Livermore properties on December 1, 2008. Upon completion of construction of this property, the property was no longer governed by the Construction Agreement, and is now part of the Operating Leases. As of December 28, 2008, the Company had $154.8 million recorded as restricted cash and short-term investments in its consolidated balance sheet as collateral required under the lease agreements related to the amounts currently outstanding on the facility.

     Upon expiration of the term of an Operating Lease, the property subject to that Operating Lease may be remarketed. The Company has guaranteed to BNPPLC that each property will have a certain minimum residual value, as set forth in the applicable Operating Lease. The aggregate guarantee made by the Company under the Operating Leases is no more than approximately $143.9 million (although, under certain default circumstances, the guarantee with regard to an Operating Lease may be 100% of BNPPLC’s investment in the applicable property; in the aggregate, the amounts payable under such guarantees will be no more than $167.4 million plus related indemnification or other obligations).

     The lessor under the lease agreements is a substantive independent leasing company that does not have the characteristics of a variable interest entity (VIE) as defined by FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” and is therefore not consolidated by the Company.

     The Company has issued certain indemnifications to its lessors under some of its agreements. The Company has entered into certain insurance contracts which may limit its exposure to such indemnifications. As of December 28, 2008, the Company has not recorded any liability on its financial statements in connection with these indemnifications, as it does not believe, based on information available, that it is probable that any amounts will be paid under these guarantees.

     Generally, the Company indemnifies, under pre-determined conditions and limitations, its customers for infringement of third-party intellectual property rights by the Company’s products or services. The Company seeks to limit its liability for such indemnity to an amount not to exceed the sales price of the products or services subject to its indemnification obligations. The Company does not believe, based on information available, that it is probable that any material amounts will be paid under these guarantees.

Warranties

     The Company offers standard warranties on its systems that run generally for a period of 12 months from system acceptance. The liability amount is based on actual historical warranty spending activity by type of system, customer and geographic region, modified for any known differences such as the impact of system reliability improvements.

     Changes in the Company’s product warranty reserves were as follows:

		Three Months Ended								Six Months Ended
		December 28,				December 23,				December 28,				December 23,
		2008				2007				2008				2007
		(in thousands)
Balance at beginning of period		$	46,067			$	51,635			$	61,308			$	52,186
Warranties issued during the period			2,796				13,774				8,012				28,406
Settlements made during the period			(9,255	)			(13,462	)			(19,526	)			(29,206	)
Expirations and change in liability for pre-existing warranties during the period			(4,774	)			(167	)			(13,689	)			394
Changes in foreign currency exchange rates			(264	)			—				(1,535	)			—
Balance at end of period		$	34,570			$	51,780			$	34,570			$	51,780

NOTE 15 — DERIVATIVE INSTRUMENTS AND HEDGING

     The Company carries derivative financial instruments (derivatives) on its balance sheet at their fair values in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). The Company enters into foreign exchange forward contracts with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate fluctuations. The counterparties to these foreign exchange forward contracts are creditworthy multinational financial institutions; therefore, the risk of counterparty nonperformance is not considered to be material.

     Cash Flow Hedges

     The Company’s policy is to attempt to minimize short-term business exposure to foreign currency exchange rate fluctuations using an effective and efficient method to eliminate or reduce such exposures. In the normal course of business, the Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations. To protect against the reduction in value of forecasted Japanese yen-denominated revenues, the Company has instituted a foreign currency cash flow hedging program. The Company enters into foreign exchange forward contracts that generally expire within 12 months and no later than 24 months. These foreign exchange forward contracts are designated as cash flow hedges and are carried on the Company’s balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income (loss) and subsequently recognized in revenue in the same period the hedged revenue is recognized.

     At inception and at each quarter end, hedges are tested for effectiveness using regression testing. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness and are recognized in revenue in the current period. The change in forward time value was not material for all reported periods. At December 28, 2008, $4.0 million of deferred net losses, net of tax, included in “Accumulated other comprehensive income (loss)” in the Consolidated Balance Sheet was associated with ineffectiveness related to forecasted transactions that were no longer considered probable of occurring and was recognized in “Other income (expense), net” in the Company’s Consolidated Statements of Operations during the three and six months ended December 28, 2008. There were no gains or losses during the three and six months ended December 23, 2007 associated with ineffectiveness or forecasted transactions that failed to occur. To qualify for hedge accounting, the hedge relationship must meet criteria relating both to the derivative instrument and the hedged item. These criteria include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows will be measured.

     To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. When derivative instruments are designated and qualify as effective cash flow hedges, the Company is able to defer effective changes in the fair value of the hedging instrument within accumulated other comprehensive income (loss) until the hedged exposure is realized. Consequently, with the exception of excluded time value and hedge ineffectiveness recognized, the Company’s results of operations are not subject to fluctuation as a result of changes in the fair value of the derivative instruments. If hedges are not highly effective or if the Company does not believe that the underlying hedged forecasted transactions would occur, the Company may not be able to account for its derivative instruments as cash flow hedges. If this were to occur, future changes in the fair values of the Company’s derivative instruments would be recognized in earnings without the benefits of offsets or deferrals of changes in fair value arising from hedge accounting treatment. Approximately $6.0 million of deferred net losses, net of tax, included in “Accumulated other comprehensive income (loss)” in the Consolidated Balance Sheet are expected to be reclassified to current earnings in the Consolidated Statement of Results of Operations over the next 12 months. The actual amount recorded in earnings will vary based on the exchange rates at the time the hedged transactions impact earnings.

     Balance Sheet Hedges

     The Company also enters into foreign exchange forward contracts to hedge the effects of foreign currency fluctuations associated with foreign currency denominated assets and liabilities, primarily intercompany receivables and payables. Under SFAS No. 133 and SFAS No. 149, these foreign exchange forward contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these derivatives is recorded into earnings as a component of other income and expense and offsets the change in fair value of the foreign currency denominated intercompany and trade receivables, recorded in other income and expense, assuming the hedge contract fully covers the intercompany and trade receivable balances.

NOTE 16 — RESTRUCTURING AND ASSET IMPAIRMENTS

     During the June 2008 quarter the Company incurred expenses for restructuring and asset impairment charges related to the integration of SEZ and overall streamlining of the Company’s combined Clean Product Group (“June 2008 Plan”). The Company incurred additional expenses under the June 2008 Plan during the quarter ended September 28, 2008. The charges during the June 2008 quarter included severance and related benefits costs, excess facilities-related costs and certain asset impairments associated with the Company’s initial product line integration road maps. The charges during the September 2008 quarter primarily included severance and related benefits costs and certain asset impairments associated with the Company’s product line integration road maps. During the December 2008 quarter the Company incurred expenses for restructuring and asset impairment charges designed to better align the Company’s cost structure with its business opportunities in consideration of market and economic uncertainties (“December 2008 Plan”). The charges during the December 2008 quarter consisted primarily of severance and related benefits costs as well as certain facilities related costs and asset impairments.

     Prior to the end of the June, September, and December 2008 quarters, the Company initiated the announced restructuring activities and management, with the proper level of authority, approved specific actions under the June 2008 Plan and the December 2008 Plan. Severance packages to affected employees were communicated in enough detail such that the employees could determine their type and amount of benefit. The termination of the affected employees occurred as soon as practical after the restructuring plans were announced. The amount of remaining future lease payments for facilities the Company ceased to use and included in the restructuring charges is based on management’s estimates using known prevailing real estate market conditions at that time based, in part, on the opinions of independent real estate experts. Leasehold improvements relating to the vacated buildings were written off, as these items will have no future economic benefit to the Company and have been abandoned.

     The Company distinguishes regular operating cost management activities from restructuring activities. Accounting for restructuring activities requires an evaluation of formally committed and approved plans. Restructuring activities have comparatively greater strategic significance and materiality and may involve exit activities, whereas regular cost containment activities are more tactical in nature and are rarely characterized by formal and integrated action plans or exiting a particular product, facility, or service.

     The Company recorded net restructuring charges and asset impairments during fiscal year 2008 of approximately $19.0 million, consisting of severance and benefits for involuntarily terminated employees of $5.5 million, charges for the present value of remaining lease payments on vacated facilities of $0.9 million, and the write-off of related fixed assets of $1.9 million. The Company also recorded asset impairments related to initial product line integration road maps of $10.7 million. Of the total $19.0 million in charges, $12.6 million was recorded in cost of goods sold and $6.4 million was recorded in operating expenses in the Company’s fiscal year 2008 consolidated statement of operations.

     The Company recorded net restructuring charges and asset impairments during the September 2008 quarter of approximately $19.0 million, consisting of severance and benefits for involuntarily terminated employees of $12.5 million. The Company also recorded additional asset impairments related to product line integration road maps of $6.5 million. Of the total $19.0 million in charges, $3.0 million was recorded in cost of goods sold and $16.0 million was recorded in operating expenses in the Company’s consolidated statement of operations for the three months ended September 28, 2008.

     The Company recorded net restructuring charges and asset impairments during the December 2008 quarter of approximately $17.8 million, consisting of severance and benefits for involuntarily terminated employees of $16.4 million. The Company also recorded approximately $0.8 million related to asset impairments and $0.6 million related to excess facilities. Of the total $17.8 million in charges, $7.7 million was recorded in cost of goods sold and $10.1 million was recorded in operating expenses in the Company’s consolidated statement of operations for the three months ended December 28, 2008.

     Below is a table summarizing activity relating to the June 2008 Plan:

		Severance
		and								Abandoned
		Benefits				Facilities				Assets				Inventory				Total
		(in thousands)
June 2008 quarter expense		$	5,513			$	899			$	1,893			$	10,671			$	18,976
Cash payments			(927	)			—				—				—				(927	)
Non-cash charges			—				—				(1,893	)			(10,671	)			(12,564	)
Balance at June 29, 2008			4,586				899				—				—				5,485
September 2008 quarter expense			12,554				—				3,395				3,067				19,016
Cash payments			(1,098	)			(215	)			—				—				(1,313	)
Non-cash Charges			—				—				(3,395	)			(3,067	)			(6,462	)
Balance at September 28, 2008			16,042				684				—				—				16,726
Cash payments			(2,483	)			(52	)			—				—				(2,535	)
Balance at December 28, 2008		$	13,559			$	632			$	—			$	—			$	14,191

     Below is a table summarizing activity relating to the December 2008 Plan:

		Severance
		and
		Benefits				Facilities				Inventory				Total
		(in thousands)
December 2008 quarter expense		$	16,412			$	618			$	819			$	17,849
Cash payments			(4,998	)			—				—				(4,998	)
Non-cash charges			—				(618	)			(819	)			(1,437	)
Balance at December 28, 2008		$	11,414			$	—			$	—			$	11,414

     The severance and benefits-related costs are anticipated to be utilized by the end of fiscal year 2009. The facilities balance consists primarily of lease payments on vacated buildings and is expected to be utilized by the end of fiscal year 2009.

NOTE 17 — STOCK REPURCHASE PROGRAM

     On September 8, 2008, the Company announced that its Board of Directors had authorized the repurchase of up to $250 million of Company common stock from the public market or in private purchases. While the repurchase program does not have a defined termination date, it may be suspended or discontinued at any time, and is funded using the Company’s available cash. The Company suspended repurchases under the Board authorized program prior to the end of the December 2008 quarter. Share repurchases under the authorizations were as follows:

														Amount
		Total												Available
		Number of												Under
		Shares				Total Cost of				Average Price				Repurchase
Period		Repurchased				Repurchase				Paid Per Share				Program
		(in thousands, except per share data)
Authorization of up to $250 million — September 2008														$	250,000
Quarter ended September 28, 2008			1			$	15			$	30.00			$	249,985
Quarter ended December 28, 2008			1,053				23,043			$	21.87			$	226,942

     In addition to shares repurchased under Board authorized repurchase programs shown above, during the three months ended December 28, 2008 and September 28, 2008, the Company withheld 73,437 and 85,047 shares, respectively, through net share settlements upon the vesting of restricted stock unit awards under the Company’s equity compensation plans to cover tax withholding obligations.

NOTE 18: LEGAL PROCEEDINGS

     From time to time, the Company has received notices from third parties alleging infringement of such parties’ patent or other intellectual property rights by the Company’s products. In such cases it is the Company’s policy to defend the claims, or if considered appropriate, negotiate licenses on commercially reasonable terms. However, no assurance can be given that the Company will be able in the future to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on the Company’s consolidated financial position or operating results.

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

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

          With the exception of historical facts, the statements contained in this discussion are forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. Forward-looking statements include, but are not limited to, statements that relate to our future revenue, shipments, cost and margins, product development, demand, acceptance and market share, competitiveness, market opportunities, levels of research and development (“R&D”), outsourced activities and operating expenses, anticipated manufacturing, customer and technical requirements, the ongoing viability of the solutions that we offer and our customer’s success, tax expenses, our management’s plans and objectives for our current and future operations and business focus, the levels of customer spending, the sufficiency of financial resources to support future operations, capital expenditures and general economic conditions. Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value and effect, including without limitation those discussed below under the heading “Risk Factors” within Part II Item 1A and elsewhere in this report and other documents we file from time to time with the Securities and Exchange Commission (SEC), such as our annual reports on Form 10-K and our current reports on Form 8-K . Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on information currently and reasonably known to us. We undertake no obligation to release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances that occur after the date hereof or to reflect the occurrence or effect of anticipated or unanticipated events.

          Documents To Review In Connection With Management’s Analysis Of Financial Condition and Results Of Operations

     For a full understanding of our financial position and results of operations for the three and six months ended December 28, 2008, this discussion should be read in conjunction with the condensed consolidated financial statements and notes presented in this Form 10-Q and the financial statements and notes in our Annual Report on Form 10-K for the fiscal year ended June 29, 2008.

     The semiconductor industry is cyclical in nature and has historically experienced periodic downturns and upturns. Today’s leading indicators of changes in customer investment patterns may not be any more reliable than in prior years. Demand for our equipment can vary significantly from period to period as a result of various factors, including, but not limited to, economic conditions, supply, demand, and prices for semiconductors, customer capacity requirements, and our ability to develop and market competitive products. For these and other reasons, our results of operations for the three and six months ended December 28, 2008 may not necessarily be indicative of future operating results.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations consists of the following sections:

          Executive Summary provides a summary of key highlights of our results of operations

          Results of Operations provides an analysis of operating results

          Critical Accounting Policies and Estimates discusses accounting policies that reflect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements

          Liquidity and Capital Resources provides an analysis of cash flows, contractual obligations and financial position

EXECUTIVE SUMMARY

     We design, manufacture, market, and service semiconductor processing equipment used in the fabrication of integrated circuits and are recognized as a major provider of such equipment to the worldwide semiconductor industry. Semiconductor wafers are subjected to a complex series of process and preparation steps that result in the simultaneous creation of many individual integrated circuits. We leverage our expertise in these areas to develop integrated and standalone processing solutions which typically benefit our customers through reduced cost, lower defect rates, enhanced yields, or faster processing time as well as by facilitating their ability to meet more stringent performance and design standards.

     The following summarizes certain key quarterly financial information for the periods indicated below (in thousands, except percentages and per share amounts):

		Three Months Ended
		December 28,				September 28,				December 23,
		2008				2008				2007
Revenue		$	283,409			$	440,361			$	610,320
Gross margin			101,352				183,110				307,661
Gross margin as a percent of total revenue			35.8	%			41.6	%			50.4	%
Net income (loss)			(24,172	)			8,873				115,059
Diluted net income (loss) per share		$	(0.19	)		$	0.07			$	0.91

     Our results during the quarter ended December 28, 2008 were adversely affected by the continued decline in customer demand consistent with the deterioration in the general economic outlook and specifically the downturn in the semiconductor industry. December 2008 quarter revenue was at the high end of our revised expectations and decreased 36% compared with the September 2008 quarter.

     In the quarter ended December 28, 2008, gross margin as a percent of revenues decreased to 35.8% as a result of restructuring charges, product mix, and reduced manufacturing and field support utilization levels. Restructuring and asset impairment charges of $7.7 million in the December 2008 quarter and $3.0 million in the September 2008 quarter are included in gross margin.

     Operating expenses in the December 2008 quarter decreased approximately $27.8 million sequentially and included $10.1 million of restructuring and asset impairments compared to $16.0 million in the September 2008 quarter. The reduction in operating expenses in the December 2008 quarter compared with the September 2008 quarter includes the decrease in restructuring charges, a reduction in employee variable compensation expense, a decrease in deferred compensation liabilities due to recent stock market declines, the partial quarter impact of the Company’s December quarter restructuring activities and the Company’s continued commitment to cost containment.

     Equity-based compensation expense recognized during the December 2008 quarter in cost of goods sold and operating expenses was $2.8 million and $11.2 million, respectively. Equity-based compensation expense recognized during the September 2008 quarter in cost of goods sold and operating expenses was $3.3 million and $12.1 million, respectively.

     Our cash and cash equivalents, short-term investments, and restricted cash and investments totaled approximately $1.1 billion as of December 28, 2008 compared to $1.2 billion as of September 28, 2008. Cash used by operations was approximately $(39.0) million during the December 2008 quarter compared with cash provided by operations of $43.1 million during the September 2008 quarter.

RESULTS OF OPERATIONS

Shipments

		Three Months Ended
		December 28,				September 28,				December 23,
		2008				2008				2007
Shipments (in millions)		$	226			$	345			$	593
North America			17	%			15	%			17	%
Europe			12	%			11	%			13	%
Asia Pacific			12	%			11	%			13	%
Taiwan			20	%			16	%			19	%
Korea			17	%			29	%			19	%
Japan			22	%			18	%			19	%

     Shipments for the December 2008 quarter decreased sequentially by 34% and year-over-year by 62%, reflecting the industry and economic environments noted above. During the December 2008 quarter, 300 millimeter applications represented approximately 85% of total system shipments and 85% of total system shipments were for applications at less than or equal to the

90 nanometer technology node. Total system shipments market segmentation for the December quarter was as follows: Memory at approximately 48%, Integrated Device Manufacturers and Logic at 24% and Foundry at 28%.

Revenue

		Three Months Ended												Six Months Ended
		December 28,				September 28,				December 23,				December 28,				December 23,
		2008				2008				2007				2008				2007
Revenue (in thousands)		$	283,409			$	440,361			$	610,320			$	723,770			$	1,294,941
North America			15	%			15	%			18	%			15	%			18	%
Europe			10	%			10	%			12	%			10	%			10	%
Asia Pacific			8	%			17	%			10	%			14	%			12	%
Taiwan			17	%			14	%			20	%			15	%			21	%
Korea			22	%			27	%			17	%			25	%			21	%
Japan			28	%			17	%			23	%			21	%			18	%

     The sequential quarterly revenue declines and the year over year revenue declines for the three and six months ended December 28, 2008 reflect a continued decline in demand for our products reflecting the industry and economic environments noted above. Our revenue levels are correlated to the amount of shipments and our installation and acceptance timelines. The overall Asia region continued to account for a significant portion of our revenues and represents a substantial amount of worldwide capacity additions for semiconductor manufacturing. Our deferred revenue balance decreased to $68.4 million as of December 28, 2008 compared to $193.6 million as of June 29, 2008, consistent with the decline in customer spending levels. Our deferred revenue balance does not include shipments to Japanese customers, to whom title does not transfer until customer acceptance. Shipments to Japanese customers are classified as inventory at cost until the time of acceptance. The anticipated future revenue from shipments to Japanese customers was approximately $8.6 million as of December 28, 2008.

Gross Margin

		Three Months Ended												Six Months Ended
		December 28,				September 28,				December 23,				December 28,				December 23,
		2008				2008				2007				2008				2007
		(in thousands, except percentages)
Gross Margin		$	101,352			$	183,110			$	307,661			$	284,462			$	651,548
Percent of total revenue			35.8	%			41.6	%			50.4	%			39.3	%			50.3	%

     In the quarter ended December 2008, gross margin as a percent of revenues decreased as a result of restructuring charges, product mix and reduced manufacturing and field support utilization levels. Restructuring and asset impairment charges of $7.7 million in the December 2008 quarter and $3.0 million in the September 2008 quarter are included in gross margin. The reduction in gross margin during the three and six months ended December 28, 2008 compared with the same periods in the prior year was also primarily due to restructuring charges and asset impairments, unfavorable product mix and reduced manufacturing and field utilization levels consistent with reduced business activity.

Research and Development

		Three Months Ended												Six Months Ended
		December 28,				September 28,				December 23,				December 28,				December 23,
		2008				2008				2007				2008				2007
		(in thousands, except percentages)
Research & Development (“R&D”)		$	68,781			$	81,563			$	80,243			$	150,344			$	156,531
Percent of total revenue			24.3	%			18.5	%			13.1	%			20.8	%			12.1	%

     We continue to make significant investments in R&D focused on plasma etch, single wafer clean and new products. The decrease in R&D expenses during the December 2008 quarter compared to the September 2008 quarter is mainly due to the reduction of variable compensation and cost controls including a reduction of approximately $3 million in salaries and benefits, $2 million in incentive-based compensation, and $8 million in outside services and supplies.

     The decrease in R&D expenses during the three and six months ended December 28, 2008 compared to the same periods in the prior year is mainly due to the reduction of variable compensation and cost controls, offset by the inclusion of the results of SEZ. Decreases during the three months ended December 28, 2008, compared to the same period in the prior year, include approximately $6 million in lower incentive-based compensation on lower profits, and approximately $12 million in outside services and supplies, partially offset by an increase of $2 million in equity-based compensation and an increase of $2 million in depreciation and amortization related to the inclusion of SEZ.

     The decrease in R&D expenses during the six months ended December 28, 2008, compared to the same period in the prior year, include approximately $11 million in lower incentive-based compensation on lower profits, $11 million in reduced spending for outside services and supplies, partially offset by an increase of $3 million in equity-based compensation and increases in salaries and benefits costs of approximately $5 million and $4 million in depreciation and amortization due to the inclusion of SEZ.

Selling, General and Administrative

		Three Months Ended												Six Months Ended
		December 28,				September 28,				December 23,				December 28,				December 23,
		2008				2008				2007				2008				2007
		(in thousands, except percentages)
Selling, General & Administrative (“SG&A”)		$	59,842			$	69,060			$	66,084			$	128,902			$	135,797
Percent of total revenue			21.1	%			15.7	%			10.8	%			17.8	%			10.5	%