Edgar Filing: MICRON TECHNOLOGY INC

q309_10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 4, 2009

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 number 1-10658

Micron Technology, Inc.

(Exact name of registrant as specified in its charter)

Delaware	75-1618004
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

8000 S. Federal Way, Boise, Idaho	83716-9632
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code	(208) 368-4000

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 x 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x	Accelerated Filer o
Non-Accelerated Filer o (Do not check if a smaller reporting company)	Smaller Reporting Company o

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

The number of outstanding shares of the registrant’s common stock as of July 9, 2009 was 846,844,650.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions except per share amounts)

(Unaudited)

	Quarter Ended						Nine Months Ended
	June 4, 2009			May 29, 2008			June 4, 2009			May 29, 2008


Net sales	$	1,106		$	1,498		$	3,501		$	4,392
Cost of goods sold		999			1,450			4,110			4,382
Gross margin		107			48			(609	)		10

Selling, general and administrative		80			116			272			348
Research and development		162			170			508			513
Restructure		19			8			58			29
Goodwill impairment		--			--			58			463
Other operating (income) expense, net		92			(21	)		121			(86	)
Operating loss		(246	)		(225	)		(1,626	)		(1,257	)

Interest income		6			15			20			68
Interest expense		(37	)		(21	)		(102	)		(62	)
Other non-operating income (expense), net		(3	)		--			(15	)		(7	)
		(280	)		(231	)		(1,723	)		(1,258	)

Income tax (provision) benefit		2			(13	)		(15	)		(16	)
Equity in net losses of equity method investees, net of tax		(45	)		--			(106	)		--
Noncontrolling interests in net (income) loss		33			8			97			(1	)
Net loss	$	(290	)	$	(236	)	$	(1,747	)	$	(1,275	)

Loss per share:
Basic	$	(0.36	)	$	(0.30	)	$	(2.22	)	$	(1.65	)
Diluted		(0.36	)		(0.30	)		(2.22	)		(1.65	)

Number of shares used in per share calculations:
Basic		813.3			772.8			786.5			772.4
Diluted		813.3			772.8			786.5			772.4

See accompanying notes to consolidated financial statements.

MICRON TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(in millions except par value)

(Unaudited)

As of	June 4, 2009			August 28, 2008

Assets
Cash and equivalents	$	1,306		$	1,243
Short-term investments		--			119
Receivables		750			1,032
Inventories		999			1,291
Other current assets		73			94
Total current assets		3,128			3,779
Intangible assets, net		355			364
Property, plant and equipment, net		7,536			8,811
Equity method investments		306			84
Other assets		339			392
Total assets	$	11,664		$	13,430

Liabilities and shareholders’ equity
Accounts payable and accrued expenses	$	1,037		$	1,111
Deferred income		183			114
Equipment purchase contracts		233			98
Current portion of long-term debt		372			275
Total current liabilities		1,825			1,598
Long-term debt		2,752			2,451
Other liabilities		260			338
Total liabilities		4,837			4,387

Commitments and contingencies

Noncontrolling interests in subsidiaries		2,130			2,865

Common stock, $0.10 par value, authorized 3,000 shares, issued and outstanding 846.8 and 761.1 shares, respectively		85			76
Additional capital		6,841			6,566
Accumulated deficit		(2,203	)		(456	)
Accumulated other comprehensive (loss)		(26	)		(8	)
Total shareholders’ equity		4,697			6,178
Total liabilities and shareholders’ equity	$	11,664		$	13,430

See accompanying notes to consolidated financial statements.

MICRON TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

Nine months ended	June 4, 2009			May 29, 2008

Cash flows from operating activities
Net loss	$	(1,747	)	$	(1,275	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,648			1,528
Provision to write down inventories to estimated market values		603			77
Noncash restructure charges		157			7
Equity in net losses of equity method investees, net of tax		106			--
Goodwill impairment		58			463
(Gain) loss from disposition of equipment, net		55			(70	)
Loss on write-down of Aptina imaging assets		53			--
Noncontrolling interests in net income (loss)		(97	)		1
Change in operating assets and liabilities:
Decrease in receivables		224			11
(Increase) decrease in inventories		(311	)		2
Decrease in accounts payable and accrued expenses		(6	)		(48	)
Increase (decrease) in deferred income		71			(4	)
Other		35			83
Net cash provided by operating activities		849			775

Cash flows from investing activities
Expenditures for property, plant and equipment		(439	)		(1,809	)
Acquisition of equity method investment		(408	)		--
Increase in restricted cash		(57	)		--
Purchases of available-for-sale securities		(6	)		(259	)
Proceeds from maturities of available-for-sale securities		130			529
Proceeds from sales of property, plant and equipment		13			175
Proceeds from sales of available-for-sale securities		--			24
Other		86			51
Net cash used for investing activities		(681	)		(1,289	)

Cash flows from financing activities
Distributions to noncontrolling interests		(592	)		(92	)
Repayments of debt		(373	)		(653	)
Payments on equipment purchase contracts		(127	)		(348	)
Cash paid for capped call transactions		(25	)		--
Proceeds from debt		716			507
Proceeds from issuance of common stock, net of costs		276			4
Cash received from noncontrolling interests		24			295
Proceeds from equipment sale-leaseback transactions		4			92
Other		(8	)		(9	)
Net cash used for financing activities		(105	)		(204	)

Net increase (decrease) in cash and equivalents		63			(718	)
Cash and equivalents at beginning of period		1,243			2,192
Cash and equivalents at end of period	$	1,306		$	1,474

Supplemental disclosures
Income taxes paid, net	$	(14	)	$	(24	)
Interest paid, net of amounts capitalized		(87	)		(59	)
Noncash investing and financing activities:
Equipment acquisitions on contracts payable and capital leases		305			404

See accompanying notes to consolidated financial statements.

MICRON TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in millions except per share amounts)

(Unaudited)

Business and Significant Accounting Policies

Basis of presentation: Micron Technology, Inc. and its subsidiaries (hereinafter referred to collectively as the “Company”) manufacture and market DRAM, NAND Flash memory, CMOS image sensors and other semiconductor components. The Company has two reportable segments, Memory and Imaging. The Memory segment’s primary products are DRAM and NAND Flash memory products and the Imaging segment’s primary product is CMOS image sensors. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its consolidated subsidiaries. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company and its consolidated results of operations and cash flows.

The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. The Company’s fiscal 2009 contains 53 weeks and the Company’s fiscal 2008, which ended on August 28, 2008, contained 52 weeks. All period references are to the Company’s fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended August 28, 2008.

Risks and uncertainties: The Company’s liquidity is highly dependent on average selling prices for its products and the timing of capital expenditures, both of which can vary significantly from period to period. Depending on conditions in the semiconductor memory market, the Company’s cash flows from operations and current holdings of cash and investments may not be adequate to meet the Company’s needs for capital expenditures and operations. Historically, the Company has used external financing to fund these needs. Due to conditions in the credit markets, it may be difficult to obtain financing on terms acceptable to the Company. The Company has significantly reduced its capital expenditures for 2009. In addition, the Company is considering further financing alternatives, continuing to limit capital expenditures and implementing further cost reduction initiatives.

Recently issued accounting standards: In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), which (1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative (2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and (3) requires additional disclosures about an enterprise’s involvement in variable interest entities. The Company is required to adopt SFAS No. 167 effective at the beginning of 2011. The Company is evaluating the impact the adoption of SFAS No. 167 will have on its financial statements.

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP No. APB 14-1 requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components in a manner such that interest cost will be recognized at the entity’s nonconvertible debt borrowing rate in subsequent periods. The Company is required to adopt FSP No. APB 14-1 effective at the beginning of 2010. Upon adoption, the Company will retrospectively account for its $1.3 billion of 1.875% convertible senior notes issued in May, 2007 under the provisions of FSP No. APB 14-1. The Company estimates that the initial carrying value of its $1.3 billion convertible senior notes would have been approximately $400 million lower under FSP No. APB 14-1. This difference of approximately $400 million would be accreted to interest expense over the approximate seven-year term of the notes and the Company estimates that this will result in additional interest expense in the first year of the notes of approximately $45 million increasing to approximately $70 million per year in the last year of the notes, excluding the effects of capitalized interest. The Company is continuing to evaluate the full impact the adoption of FSP No. APB 14-1 will have on its financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), which establishes the principles and requirements for how an acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree, (2) recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose. The Company is required to adopt SFAS No. 141(R) effective at the beginning of 2010. The impact of the adoption of SFAS No. 141(R) will depend on the nature and extent of business combinations occurring after the beginning of 2010.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160 requires that (1) noncontrolling interests be reported as a separate component of equity, (2) net income attributable to the parent and to the noncontrolling interest be separately identified in the statement of operations, (3) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and (4) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. The Company is required to adopt SFAS No. 160 effective at the beginning of 2010. SFAS No. 160 must be applied prospectively except for the presentation and disclosure requirements, which must be applied retrospectively. The Company is evaluating the impact the adoption of SFAS No. 160 will have on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.” Under SFAS No. 159, the Company may elect to measure many financial instruments and certain other items at fair value on an instrument by instrument basis, subject to certain restrictions. The Company adopted SFAS No. 159 effective at the beginning of 2009. The Company did not elect to measure any existing items at fair value upon the adoption of SFAS No. 159.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 (as amended by subsequent FSP’s) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The Company adopted SFAS No. 157 effective at the beginning of 2009 for financial assets and financial liabilities. The adoption did not have a significant impact on the Company’s financial statements. The Company is required to adopt SFAS No. 157 for all other assets and liabilities effective at the beginning of 2010 and is evaluating the impact the adoption will have on its financial statements.

Supplemental Balance Sheet Information

Receivables	June 4, 2009		August 28, 2008

Trade receivables (net of allowance of $5 and $2, respectively)	$	601	$	741
Income and other taxes		24		43
Other		125		248
	$	750	$	1,032

As of June 4, 2009 and August 28, 2008, other receivables included amounts due from Intel Corporation (“Intel”) of $61 million and $71 million, respectively, related to NAND Flash product design and process development activities. As of June 4, 2009 and August 28, 2008, other receivables also included $39 million and $75 million, respectively, due from settlement of litigation (an additional $39 million of the settlement receivable was included as other noncurrent assets as of August 28, 2008). Other receivables as of August 28, 2008 also included $58 million due from settlements of pricing adjustments with certain suppliers.

Inventories	June 4, 2009		August 28, 2008

Finished goods	$	286	$	444
Work in process		596		671
Raw materials and supplies		117		176
	$	999	$	1,291

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

Intangible Assets

	June 4, 2009					August 28, 2008
	Gross Amount		Accumulated Amortization			Gross Amount		Accumulated Amortization

Product and process technology	$	437	$	(174	)	$	577	$	(320	)
Customer relationships		127		(46	)		127		(35	)
Other		28		(17	)		29		(14	)
	$	592	$	(237	)	$	733	$	(369	)

During the first nine months of 2009 and 2008, the Company capitalized $82 million and $33 million, respectively, for product and process technology with weighted-average useful lives of 9 years and 10 years, respectively.

Amortization expense for intangible assets was $18 million and $58 million for the third quarter and first nine months of 2009, respectively, and $20 million and $60 million for the third quarter and first nine months of 2008, respectively. Annual amortization expense for intangible assets is estimated to be $69 million for 2009, $66 million for 2010, $62 million for 2011, $54 million for 2012 and $49 million for 2013.

Property, Plant and Equipment	June 4, 2009			August 28, 2008

Land	$	99		$	99
Buildings		4,496			3,829
Equipment		12,483			13,591
Construction in progress		54			611
Software		270			283
		17,402			18,413
Accumulated depreciation		(9,866	)		(9,602	)
	$	7,536		$	8,811

Depreciation expense was $487 million and $1,571 million for the third quarter and first nine months of 2009, respectively, and $493 million and $1,467 million for the third quarter and first nine months of 2008, respectively.

The Company, through its IM Flash joint venture, has an unequipped wafer manufacturing facility in Singapore that has been idle since it was completed in the first quarter of 2009. The Company has depreciated the facility since it was completed and its net book value was $633 million as of June 4, 2009. Utilization of the facility is dependent upon market conditions, including, but not limited to, worldwide market supply of, and demand for, semiconductor products, availability of financing, agreement between the Company and its joint venture partner and the Company’s operations, cash flows and alternative capacity utilization opportunities. (See “Consolidated Variable Interest Entities – IM Flash” note.)

As part of a restructure plan initiated in 2009 to shut down 200mm manufacturing operations at its Boise, Idaho facilities, the Company recorded impairment charges of $7 million and $150 million for the third quarter and first nine months of 2009, respectively. In connection therewith, assets with a carrying value of $27 million (original acquisition cost of $704 million) were classified as held for sale and included in other noncurrent assets as of June 4, 2009. (See “Restructure” note.)

Goodwill

As of August 28, 2008, other noncurrent assets included goodwill of $58 million, all of which related to the Company’s Imaging segment. In the second quarter of 2009, the Company wrote off the $58 million of Imaging goodwill based on the results of its test for impairment. In the second quarter of 2008, the Company wrote off the $463 million of goodwill relating to its Memory segment based on the results of its test for impairment.

SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment at a reporting unit level. The Company has determined that its reporting units are its Memory and Imaging segments based on its organizational structure and the financial information that is provided to and reviewed by management. The Company tests goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Goodwill is tested for impairment using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.

In the second quarter of 2009, the Company’s Imaging segment experienced a severe decline in sales, margins and profitability due to a significant decline in demand as a result of the downturn in global economic conditions. The drop in market demand resulted in significant declines in average selling prices and unit sales. Due to these market and economic conditions, the Company’s Imaging segment and its competitors experienced significant declines in market value. As a result, the Company concluded that there were sufficient factual circumstances for interim impairment analyses under SFAS No. 142. Accordingly, in the second quarter of 2009, the Company performed an assessment of goodwill for impairment.

In the first step of the impairment analysis, the Company performed valuation analyses utilizing both income and market approaches to determine the fair value of its reporting units. Under the income approach, the Company determined the fair value based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the Imaging segment and the rate of return an outside investor would expect to earn. Estimated future cash flows were based on the Company’s internal projection models, industry projections and other assumptions deemed reasonable by management. Under the market-based approach, the Company derived the fair value of its Imaging segment based on revenue multiples of comparable publicly-traded peer companies. In the second step of the impairment analysis, the Company determined the implied fair value of goodwill for the Imaging segment by allocating the fair value of the segment to all of its assets and liabilities in accordance with SFAS No. 141, “Business Combinations,” as if the reporting unit had been acquired in a business combination and the price paid to acquire it was the fair value.

Based on the results of the Company’s assessment of goodwill for impairment, it was determined that the carrying value of the Imaging segment exceeded its estimated fair value as of the end of the second quarter of 2009. Therefore, the Company performed a preliminary second step of the impairment test to estimate the implied fair value of goodwill. The preliminary analysis indicated that there would be no remaining implied value attributable to goodwill in the Imaging segment and accordingly, the Company wrote off the $58 million of goodwill associated with its Imaging segment in the second quarter of 2009. In the third quarter of 2009, the Company finalized the second step of the impairment analysis and the results confirmed that there was no implied value attributable to goodwill in the Imaging segment.

Equity Method Investments

The Company has a partnering arrangement with Nanya Technology Corporation (“Nanya”) pursuant to which the Company and Nanya jointly develop process technology and designs to manufacture stack DRAM products. Each party generally bears its own development costs and the Company’s development costs in the near term are expected to exceed Nanya’s development costs by a significant amount. In addition, the Company has transferred and licensed certain intellectual property related to the manufacture of stack DRAM products to Nanya and licensed certain intellectual property from Nanya. As a result, the Company is to receive an aggregate of $207 million from Nanya through 2010. The Company recognized $25 million and $79 million of license revenue in net sales from this agreement in the third quarter and first nine months of 2009, respectively, and since May 2008 through June 4, 2009, has recognized $115 million of cumulative license revenue. In addition, the Company expects to receive royalties in future periods from Nanya for sales of stack DRAM products manufactured by or for Nanya.

The Company has also partnered with Nanya in investments in two Taiwan DRAM memory companies: Inotera Memories, Inc. (“Inotera”) and MeiYa Technology Corporation (“MeiYa”). As of June 4, 2009, the ownership of Inotera was held 35.6% by Nanya, 35.5% by the Company and the balance was publicly held. As of June 4, 2009, the ownership of MeiYa was held 50% by Nanya and 50% by the Company.

The Company has concluded that both Inotera and MeiYa are variable interest entities as defined in FIN 46(R), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” because of the Inotera and MeiYa supply agreements with Micron and Nanya. Nanya and the Company are considered related parties under the provisions of FIN 46(R). The Company reviewed several factors to determine whether it is the primary beneficiary of Inotera and MeiYa, including the size and nature of the entities’ operations relative to Nanya and the Company, nature of the day-to-day operations and certain other factors. Based on those factors, the Company determined that Nanya is most closely associated with, and therefore the primary beneficiary of, Inotera and MeiYa. The Company accounts for its interests using the equity method of accounting and does not consolidate these entities.

Inotera and MeiYa each have fiscal years that end on December 31. The Company recognizes its share of Inotera’s and MeiYa’s quarterly earnings or losses for the calendar quarter that ends within the Company’s fiscal quarter. This results in the recognition of the Company’s share of earnings or losses from these entities for a period that lags the Company’s fiscal periods by approximately two months.

Inotera: In the first quarter of 2009, the Company acquired a 35.5% ownership interest in Inotera, a publicly-traded entity in Taiwan, from Qimonda AG (“Qimonda”) for $398 million. The interest in Inotera was acquired for cash, a portion of which was funded from loan proceeds of $200 million received by the Company from Nan Ya Plastics Corporation, an affiliate of Nanya, and $85 million received from Inotera. The loans were recorded at their fair values, which reflect an aggregate discount of $31 million from their face amounts. This aggregate discount was recorded as a reduction of the Company’s basis in its investment in Inotera. The Company also capitalized $10 million of costs and other fees incurred in connection with the acquisition. As a result of the above transactions, total consideration for the Company’s equity investment in Inotera was $377 million. The Company estimated that, as of the date of acquisition, its proportionate share of Inotera’s equity was approximately $250 million higher than the Company’s total consideration of $377 million. Substantially all of this difference will be amortized over the estimated five-year weighted-average remaining useful life of Inotera’s production equipment and facilities as of the acquisition date (the “Inotera Amortization”). (See “Debt” note.)

In connection with the acquisition of the shares in Inotera, the Company and Nanya entered into a supply agreement with Inotera (the “Supply Agreement”) pursuant to which Inotera will sell trench and stack DRAM products to the Company and Nanya. In addition, Inotera charges the Company and Nanya for a portion of the costs associated with its underutilized capacity. The Company has rights and obligations to purchase up to 50% of Inotera’s wafer production capacity. Inotera’s actual wafer production will vary from time to time based on market and other conditions and its trench production capacity is expected to transition to the Company’s stack process technology. The pricing formula in the Supply Agreement is based on manufacturing costs and margins associated with the resale of purchased DRAM products. Under the Supply Agreement, the Company will purchase 50% of Inotera’s aggregate trench DRAM production (less the trench DRAM products sold to Qimonda pursuant to a separate supply agreement between Inotera and Qimonda (the “Qimonda Supply Agreement”)) and 50% of the aggregate stack DRAM production. Under the Qimonda Supply Agreement, Qimonda was obligated to purchase trench DRAM products resulting from wafers started for it by Inotera through July 2009 in accordance with a ramp down schedule specified in the Qimonda Supply Agreement. In the second quarter of 2009, Qimonda filed for bankruptcy and defaulted on its obligations to purchase products from Inotera.

The Company’s results of operations for the third quarter of 2009 include a loss of $43 million for the Company’s share of Inotera’s loss for the first calendar quarter of 2009. The Company’s results of operations for the first nine months of 2009 includes losses of $99 million for the Company’s share of Inotera’s losses from the acquisition date through the first calendar quarter of 2009. The losses recorded by the Company in the third quarter and first nine months of 2009 are net of $15 million and $23 million, respectively, of amortization of the basis difference referred to above as the Inotera Amortization. During the third quarter of 2009, the Company received $50 million from Inotera pursuant to the terms of a technology transfer agreement. As of June 4, 2009, the carrying value of the Company’s equity investment in Inotera was $236 million and is included in equity method investments in the accompanying consolidated balance sheet. As of June 4, 2009, the Company had recorded $18 million to accumulated other comprehensive income in the accompanying consolidated balance sheet for cumulative translation adjustments on its investment in Inotera. Based on the closing trading price of Inotera’s shares on June 4, 2009, the estimated market value of the Company’s shares in Inotera was approximately $618 million.

Pursuant to the Company’s obligations under the Supply Agreement, the Company recorded $15 million and $66 million of charges in cost of goods sold in the third quarter and first nine months of 2009 related to underutilized capacity. As of June 4, 2009, accounts payable and other accrued expenses included $33 million of amounts payable to Inotera. As of June 4, 2009, the Company’s maximum exposure to loss on its investment in Inotera equaled the $254 million recorded in the Company’s consolidated balance sheet for its investment in Inotera. In addition, the Company may incur further losses in connection with its obligations under the Supply Agreement to purchase up to 50% of Inotera’s wafer production and for charges for Inotera’s underutilized capacity.

MeiYa: In the fourth quarter of 2008, the Company and Nanya formed MeiYa to manufacture stack DRAM products and sell such products exclusively to the Company and Nanya. As of June 4, 2009 and August 28, 2008, the carrying value of the Company’s equity investment in MeiYa was $70 million and $84 million, respectively, and is included in the consolidated balance sheets under the caption of equity method investments. As of June 4, 2009, the Company had recorded $8 million to accumulated other comprehensive income in the accompanying consolidated balance sheet for cumulative translation adjustments on its investment in MeiYa. In the third quarter and first nine months of 2009, the Company recognized losses of $2 million and $7 million, respectively, for its share of MeiYa’s results of operations for the three and nine-month periods ended March 31, 2009, respectively. In addition, during the first quarter of 2009, the Company received $50 million from MeiYa, half of which was accounted for as a technology transfer fee and half as a reduction of the Company’s investment in MeiYa. The Company recognized $3 million and $10 million of licensing fee revenue in the third quarter and first nine months of 2009, respectively. As of June 4, 2009, the Company had deferred income of $11 million related to the technology transfer fee. As of June 4, 2009, accounts payable and accrued expenses includes $51 million to reimburse MeiYa for technology transfer fees, pursuant to the terms of the Company’s technology transfer agreement with Inotera, under which the Company received $50 million during the third quarter of 2009. In connection with the purchase of its ownership interest in Inotera, the Company entered into a series of agreements with Nanya pursuant to which both parties ceased future funding of, and resource commitments to, MeiYa. As of June 4, 2009, the Company’s maximum exposure to loss on its MeiYa investment equaled the $78 million recorded in the Company’s consolidated balance sheet for its investment in MeiYa.

Accounts Payable and Accrued Expenses	June 4, 2009		August 28, 2008

Accounts payable	$	483	$	597
Customer advances		169		130
Salaries, wages and benefits		151		244
Payable to equity method investees		86		--
Income and other taxes		38		27
Other		110		113
	$	1,037	$	1,111

As of June 4, 2009 and August 28, 2008, customer advances included $167 million and $129 million, respectively, for the Company’s obligation through December 2010 to provide certain NAND Flash memory products to Apple Inc. (“Apple”) pursuant to a prepaid NAND Flash supply agreement. An additional $83 million related to this obligation was included in other noncurrent liabilities as of August 28, 2008. As of June 4, 2009 and August 28, 2008, other accounts payable and accrued expenses included $23 million and $16 million, respectively, for amounts due to Intel for NAND Flash product design and process development and licensing fees pursuant to a research and development cost-sharing arrangement. (See “Equity Method Investments” note.)

Debt	June 4, 2009			August 28, 2008

Convertible senior notes payable, interest rate of 1.875%, due June 2014	$	1,300		$	1,300
TECH credit facility, effective interest rates of 4.1% and 5.0% , respectively, net of discount of $2 million and $3 million, respectively, due in periodic installments through May 2012		573			597
Capital lease obligations, weighted-average imputed interest rate of 6.6%, due in monthly installments through February 2023		564			657
Convertible senior notes payable, interest rate of 4.25%, due October 2013		230			--
EDB notes payable, interest rate of 5.4%, due February 2012		207			--
Nan Ya Plastics notes payable, effective imputed interest rate of 12.1%, net of discount of $21 million, due November 2010		179			--
Convertible subordinated notes payable, interest rate of 5.6%, due April 2010		70			70
Notes payable, weighted-average effective interest rates of 9.5% and 1.6%, respectively, due in periodic installments through July 2015		1			102
		3,124			2,726
Less current portion		(372	)		(275	)
	$	2,752		$	2,451

As of June 4, 2009, notes payable and capital lease obligations above included an aggregate of $289 million, denominated in Singapore dollars, at a weighted-average interest rate of 5.5%.

On April 15, 2009, the Company issued $230 million of 4.25% Convertible Senior Notes due October 15, 2013 (the “4.25% Senior Notes”). Issuance costs for the 4.25% Senior Notes totaled $7 million. The initial conversion rate for the 4.25% Senior Notes is 196.7052 shares of common stock per $1,000 principal amount, equivalent to approximately $5.08 per share of common stock, and is subject to adjustment upon the occurrence of certain events specified in the indenture for the 4.25% Senior Notes. Holders of the 4.25% Senior Notes may convert them at any time prior to October 15, 2013. If there is a change in control, as defined in the indenture, in certain circumstances the Company may pay a make-whole premium by increasing the conversion rate to holders that convert their 4.25% Senior Notes in connection with such make-whole changes in control. The Company may not redeem the 4.25% Senior Notes prior to April 20, 2012. On or after April 20, 2012, the Company may redeem for cash all or part of the 4.25% Senior Notes if the closing price of its common stock has been at least 135% of the conversion price for at least 20 trading days during a 30 consecutive trading day period. The redemption price will equal 100% of the principal amount plus a make-whole premium equal to the present value of the remaining interest payments from the redemption date to the date of maturity of the 4.25% Senior Notes. Upon a change in control or a termination of trading, the Company may be required to repurchase for cash all or a portion of the 4.25% Senior Notes at a repurchase price equal to 100% of the principal plus any accrued and unpaid interest to, but excluding, the repurchase date.

On February 23, 2009, the Company entered into a term loan agreement with the Singapore Economic Development Board (“EDB”) enabling the Company to borrow up to $300 million Singapore dollars at 5.38%. The terms of the loan agreement require the Company to use the proceeds from any borrowings under the agreement to make equity contributions to its joint venture subsidiary, TECH Semiconductor Singapore Pte. Ltd. (“TECH”). The loan agreement further requires that TECH use the proceeds from the Company’s equity contributions to purchase production assets and meet certain production milestones related to the implementation of advanced process manufacturing. The loan contains a covenant that limits the amount of indebtedness TECH can incur without approval from the EDB. The loan is collateralized by the Company’s shares in TECH up to a maximum of 66% of TECH’s outstanding shares. The Company drew $150 million Singapore dollars under the facility on February 27, 2009 and another $150 million Singapore dollars on June 2, 2009 (aggregate of $207 million U.S. dollars as of June 4, 2009), which is due in February 2012 with interest payable quarterly.

In the first quarter of 2009, in connection with its purchase of a 35.5% interest in Inotera, the Company entered into a two-year, variable-rate term loan with Nan Ya Plastics and received loan proceeds of $200 million. Under the terms of the loan agreement, interest is payable quarterly at LIBOR plus 2%. The interest rate resets quarterly and was 2.7% per annum as of June 4, 2009. The Company recorded the debt in the first quarter of 2009 net of a discount of $28 million, which is recognized as interest expense over the life of the loan, based on an imputed interest rate of 12.1%. The loan is collateralized by a first priority security interest in the Inotera shares owned by the Company (approximate carrying value of $261 million as of June 4, 2009). (See “Equity Method Investments” note.)

Also in the first quarter of 2009, in connection with its purchase of a 35.5% interest in Inotera, the Company entered into a six-month, variable-rate term loan with Inotera and received loan proceeds of $85 million, which was repaid with accrued interest in the third quarter of 2009. The Company imputed an interest rate of 11.6% and recorded the debt net of a discount of $3 million, which was recognized as interest expense over the term of the loan. (See “Equity Method Investments” note.)

Several of the Company’s credit facilities, one of which was modified during the second quarter of 2009, have covenants which require the Company to maintain minimum levels of tangible net worth and cash and investments. As of June 4, 2009, the Company was in compliance with its debt covenants.

Contingencies

The Company has accrued a liability and charged operations for the estimated costs of adjudication or settlement of various asserted and unasserted claims existing as of the balance sheet date, including those described below. The Company is currently a party to other legal actions arising out of the normal course of business, none of which is expected to have a material adverse effect on the Company’s business, results of operations or financial condition.

In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s business, results of operations or financial condition.

The Company is involved in the following patent, antitrust and securities matters.

Patent Matters: As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that the Company’s products or manufacturing processes infringe their intellectual property rights. In this regard, the Company is engaged in litigation with Rambus, Inc. (“Rambus”) relating to certain of Rambus’ patents and certain of the Company’s claims and defenses. Lawsuits between Rambus and the Company are pending in the U.S. District Court for the District of Delaware, U.S. District Court for the Northern District of California, Germany, France, and Italy. On January 9, 2009, the Delaware Court entered an opinion in favor of the Company holding that Rambus had engaged in spoliation and that the twelve Rambus patents in the suit were unenforceable against the Company. Rambus subsequently appealed the decision to the U.S. Court of Appeals for the Federal Circuit. That appeal is pending. In the U.S. District Court for the Northern District of California, trial on a patent phase of the case has been stayed pending resolution of Rambus' appeal of the Delaware spoliation decision or further order of the California Court.

On March 6, 2009, Panavision Imaging, LLC filed suit against the Company and Aptina Imaging Corporation, a subsidiary of the Company (“Aptina”), in the U.S. District Court for the Central District of California. The complaint alleges that certain of the Company and Aptina’s image sensor products infringe four Panavision Imaging U.S. patents and seeks injunctive relief, damages, attorneys’ fees, and costs.

On March 24, 2009, Accolade Systems LLC filed suit against the Company and Aptina in the U.S. District Court for the Eastern District of Texas alleging that certain of the Company and Aptina’s image sensor products infringe one Accolade Systems U.S. patent. The complaint seeks injunctive relief, damages, attorneys’ fees, and costs.

On July 24, 2006, the Company filed a declaratory judgment action against Mosaid Technologies, Inc. (“Mosaid”) in the U.S. District Court for the Northern District of California seeking, among other things, a court determination that fourteen Mosaid patents are invalid, not enforceable, and/or not infringed. On July 25, 2006, Mosaid filed a lawsuit against the Company and others in the U.S. District Court for the Eastern District of Texas alleging infringement of nine Mosaid patents. On August 31, 2006, Mosaid filed an amended complaint adding three additional Mosaid patents. On January 31, 2009, the Company and Mosaid agreed to dismiss the litigation, granting the Company a license under certain Mosaid patents, and transferring certain Company patents to Mosaid.

Among other things, the above lawsuits pertain to certain of the Company’s SDRAM, DDR SDRAM, DDR2 SDRAM, DDR3 SDRAM, RLDRAM and image sensor products, which account for a significant portion of net sales.

The Company is unable to predict the outcome of assertions of infringement made against the Company and therefore cannot estimate the range of possible loss. A court determination that the Company’s products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes. Any of the foregoing could have a material adverse effect on the Company’s business, results of operations or financial condition.

Antitrust Matters: At least sixty-eight purported class action price-fixing lawsuits have been filed against the Company and other DRAM suppliers in various federal and state courts in the United States and in Puerto Rico on behalf of indirect purchasers alleging price-fixing in violation of federal and state antitrust laws, violations of state unfair competition law, and/or unjust enrichment relating to the sale and pricing of DRAM products during the period from April 1999 through at least June 2002. The complaints seek joint and several damages, trebled, in addition to restitution, costs and attorneys’ fees. A number of these cases have been removed to federal court and transferred to the U.S. District Court for the Northern District of California for consolidated pre-trial proceedings. On January 29, 2008, the Northern District of California court granted in part and denied in part the Company’s motion to dismiss plaintiffs’ second amended consolidated complaint. Plaintiffs subsequently filed a motion seeking certification for interlocutory appeal of the decision. On February 27, 2008, plaintiffs filed a third amended complaint. On June 26, 2008, the United States Court of Appeals for the Ninth Circuit agreed to consider plaintiffs’ interlocutory appeal.

In addition, various states, through their Attorneys General, have filed suit against the Company and other DRAM manufacturers. On July 14, 2006, and on September 8, 2006 in an amended complaint, the following Attorneys General filed suit in the U.S. District Court for the Northern District of California: Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and the Commonwealth of the Northern Mariana Islands. Thereafter, three states, Ohio, New Hampshire, and Texas, voluntarily dismissed their claims. The remaining states filed a third amended complaint on October 1, 2007. Alaska, Delaware, Kentucky, and Vermont subsequently voluntarily dismissed their claims. The amended complaint alleges, among other things, violations of the Sherman Act, Cartwright Act, and certain other states’ consumer protection and antitrust laws and seeks joint and several damages, trebled, as well as injunctive and other relief. Additionally, on July 13, 2006, the State of New York filed a similar suit in the U.S. District Court for the Southern District of New York. That case was subsequently transferred to the U.S. District Court for the Northern District of California for pre-trial purposes. The State of New York filed an amended complaint on October 1, 2007. On October 3, 2008, the California Attorney General filed a similar lawsuit in California Superior Court, purportedly on behalf of local California government entities, alleging, among other things, violations of the Cartwright Act and state unfair competition law.

Three purported class action DRAM lawsuits also have been filed against the Company in Quebec, Ontario, and British Columbia, Canada, on behalf of direct and indirect purchasers, alleging violations of the Canadian Competition Act. The substantive allegations in these cases are similar to those asserted in the DRAM antitrust cases filed in the United States. Plaintiffs’ motion for class certification was denied in the British Columbia and Quebec cases in May and June 2008, respectively. Plaintiffs subsequently filed an appeal of each of those decisions. Those appeals are pending.

In February and March 2007, All American Semiconductor, Inc., Jaco Electronics, Inc., and the DRAM Claims Liquidation Trust each filed suit against the Company and other DRAM suppliers in the U.S. District Court for the Northern District of California after opting-out of a direct purchaser class action suit that was settled. The complaints allege, among other things, violations of federal and state antitrust and competition laws in the DRAM industry, and seek joint and several damages, trebled, as well as restitution, attorneys’ fees, costs and injunctive relief.

On October 11, 2006, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the U.S. Department of Justice (“DOJ”) into possible antitrust violations in the “Static Random Access Memory” or “SRAM” industry. In December 2008, the Company was informed that the DOJ closed its investigation of the SRAM industry.

Subsequent to the issuance of subpoenas to the SRAM industry, a number of purported class action lawsuits have been filed against the Company and other SRAM suppliers. Six cases have been filed in the U.S. District Court for the Northern District of California asserting claims on behalf of a purported class of individuals and entities that purchased SRAM directly from various SRAM suppliers during the period from November 1, 1996 through December 31, 2005. Additionally, at least 74 cases have been filed in various U.S. district courts asserting claims on behalf of a purported class of individuals and entities that indirectly purchased SRAM and/or products containing SRAM from various SRAM suppliers during the time period from November 1, 1996 through December 31, 2006. In September 2008, a class of direct purchasers was certified, and plaintiffs were granted leave to amend their complaint to cover Pseudo-Static RAM or “PSRAM” products as well. The complaints allege price fixing in violation of federal antitrust laws and state antitrust and unfair competition laws and seek treble monetary damages, restitution, costs, interest and attorneys’ fees. On March 19, 2009, the Company executed settlement agreements with both the direct purchaser class and the purported indirect purchaser class. If approved by the Court, the agreements would resolve the pending U.S. class action SRAM litigation against the Company and release the Company from those claims.

Three purported class action SRAM lawsuits also have been filed against the Company in Canada, on behalf of direct and indirect purchasers, alleging violations of the Canadian Competition Act. The substantive allegations in these cases are similar to those asserted in the SRAM cases filed in the United States.

In addition, three purported class action lawsuits alleging price-fixing of Flash products have been filed in Canada, asserting violations of the Canadian Competition Act. These cases assert claims on behalf of a purported class of individuals and entities that purchased Flash memory directly and indirectly from various Flash memory suppliers.

On May 5, 2004, Rambus filed a complaint in the Superior Court of the State of California (San Francisco County) against the Company and other DRAM suppliers. The complaint alleges various causes of action under California state law including conspiracy to restrict output and fix prices of Rambus DRAM (“RDRAM”) and unfair competition. Trial is currently scheduled to begin in September 2009. The complaint seeks joint and several damages, trebled, punitive damages, attorneys’ fees, costs, and a permanent injunction enjoining the defendants from the conduct alleged in the complaint.

The Company is unable to predict the outcome of these lawsuits and investigations and therefore cannot estimate the range of possible loss. The final resolution of these alleged violations of antitrust laws could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.

Securities Matters: On February 24, 2006, a putative class action complaint was filed against the Company and certain of its officers in the U.S. District Court for the District of Idaho alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. Four substantially similar complaints subsequently were filed in the same Court. The cases purport to be brought on behalf of a class of purchasers of the Company’s stock during the period February 24, 2001 to February 13, 2003. The five lawsuits have been consolidated and a consolidated amended class action complaint was filed on July 24, 2006. The complaint generally alleges violations of federal securities laws based on, among other things, claimed misstatements or omissions regarding alleged illegal price-fixing conduct. The complaint seeks unspecified damages, interest, attorneys’ fees, costs, and expenses. On December 19, 2007, the Court issued an order certifying the class but reducing the class period to purchasers of the Company’s stock during the period from February 24, 2001 to September 18, 2002.

In addition, on March 23, 2006, a shareholder derivative action was filed in the Fourth District Court for the State of Idaho (Ada County), allegedly on behalf of and for the benefit of the Company, against certain of the Company’s current and former officers and directors. The Company also was named as a nominal defendant. An amended complaint was filed on August 23, 2006 and subsequently dismissed by the Court. Another amended complaint was filed on September 6, 2007. The amended complaint is based on the same allegations of fact as in the securities class actions filed in the U.S. District Court for the District of Idaho and alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and insider trading. The amended complaint seeks unspecified damages, restitution, disgorgement of profits, equitable and injunctive relief, attorneys’ fees, costs, and expenses. The amended complaint is derivative in nature and does not seek monetary damages from the Company. However, the Company may be required, throughout the pendency of the action, to advance payment of legal fees and costs incurred by the defendants. On January 25, 2008, the Court granted the Company’s motion to dismiss the second amended complaint without leave to amend. On March 10, 2008, plaintiffs filed a notice of appeal to the Idaho Supreme Court. That appeal is pending.

The Company is unable to predict the outcome of these cases and therefore cannot estimate the range of possible loss. A court determination in any of these actions against the Company could result in significant liability and could have a material adverse effect on the Company’s business, results of operations or financial condition.

Shareholders’ Equity

Issuance of common stock: On April 15, 2009, the Company issued 69.3 million shares of common stock for $4.15 per share in a public offering. The Company received net proceeds of $276 million after deducting underwriting fees and other offering costs of $12 million.

Capped call transactions: Concurrent with the offering of the 4.25% Senior Notes on April 15, 2009, the Company entered into capped call transactions (the “2009 Capped Calls”) that have an initial strike price of approximately $5.08 per share, subject to certain adjustments, which was set to equal initial conversion price of the 4.25% Senior Notes. The 2009 Capped Calls have a cap price of $6.64 per share and cover an approximate combined total of 45.2 million shares of common stock, and are subject to standard adjustments for instruments of this type. The 2009 Capped Calls are intended to reduce the potential dilution upon conversion of the 4.25% Senior Notes. If, however, the market value per share of the common stock, as measured under the terms of the 2009 Capped Calls, exceeds the applicable cap price of the 2009 Capped Calls, there would be dilution to the extent that the then market value per share of the common stock exceeds the cap price. The 2009 Capped Calls expire in October and November of 2012. The Company paid approximately $25 million to purchase the 2009 Capped Calls which was recorded as a charge to additional capital.

Fair Value Measurements

SFAS No. 157 establishes three levels of inputs that may be used to measure fair value: quoted prices in active markets for identical assets or liabilities (referred to as Level 1), observable inputs other than Level 1 that are observable for the asset or liability either directly or indirectly (referred to as Level 2) and unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities (referred to as Level 3).

Fair value measurements on a recurring basis: Assets measured at fair value on a recurring basis as of June 4, 2009 were as follows:

	Level 1		Level 2		Total

Money market(1)	$	1,061	$	--	$	1,061
Certificates of deposit(2)		--		216		216
Marketable equity investments(3)		11		--		11
	$	1,072	$	216	$	1,288

(1)Included in cash and equivalents
(2)$185 million included in cash and equivalents and $31 million included in other noncurrent assets
(3)Included in other noncurrent assets

Level 2 assets are valued using observable inputs in active markets for similar assets or alternative pricing sources and models utilizing market observable inputs. During the first quarter of 2009, the Company recognized an other-than-temporary impairment of $7 million for marketable equity instruments.

Fair value measurements on a nonrecurring basis: As of June 4, 2009, non-marketable equity investments of $7 million were valued using Level 3 inputs. In the third quarter and first nine months of 2009, the Company identified events and circumstances that indicated the fair value of certain non-marketable equity investments sustained an other-than-temporary declines in value and recognized charges of $5 million and $8 million, respectively, to write down the carrying values of these investments to their estimated fair values. The fair value measurements were determined using market multiples derived from industry-comparable companies which were classified as Level 3 inputs as they were unobservable and required management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments.

During the first quarter of 2009, the Company recorded loans with Nan Ya Plastics and Inotera at fair value because the stated interest rates were substantially lower than the prevailing rates for loans with comparable terms and collateral and for borrowers with similar credit ratings. In the third quarter of 2009, the Company repaid the loan to Inotera. During the second quarter of 2009, the Company recorded other noncurrent contractual liabilities at fair values of $36 million (net of $39 million of discounts) based on prevailing rates for comparable obligations. The fair values of these obligations were determined based on discounted cash flows using inputs that are observable in the market or that could be derived from or corroborated with observable market data, as well as significant unobservable inputs (Level 3), including interest rates based on published rates for transactions involving parties with similar credit ratings as the Company. (See “Debt” note.)

Equity Plans

As of June 4, 2009, the Company had an aggregate of 196.2 million shares of its common stock reserved for issuance under various equity plans, of which 128.4 million shares were subject to outstanding stock awards and 67.8 million shares were available for future grants. Awards are subject to terms and conditions as determined by the Company’s Board of Directors.

Stock options: The Company granted 0.3 million and 21.1 million stock options during the third quarter and first nine months of 2009, respectively, with weighted-average grant-date fair values per share of $2.70 and $1.67, respectively. The Company granted 0.4 million and 6.9 million stock options during the third quarter and first nine months of 2008, respectively, with weighted-average grant-date fair values per share of $2.67 and $2.54, respectively.

The fair values of option awards were estimated as of the date of grant using the Black-Scholes option valuation model. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable and requires the input of subjective assumptions, including the expected stock price volatility and estimated option life. The expected volatilities utilized by the Company were based on implied volatilities from traded options on the Company’s stock and on historical volatility. The expected lives of options granted in 2009 were based, in part, on historical experience and on the terms and conditions of the options. The expected lives of options granted prior to 2009 were based on the simplified method provided by the Securities and Exchange Commission. The risk-free interest rates utilized by the Company were based on the U.S. Treasury yield in effect at the time of the grant. No dividends were assumed in the Company’s estimated option values. Assumptions used in the Black-Scholes model are presented below:

	Quarter ended						Nine months ended
	June 4, 2009			May 29, 2008			June 4, 2009			May 29, 2008

Average expected life in years		5.02			4.25			4.91			4.25
Weighted-average expected volatility		71	%		48	%		73	%		46	%
Weighted-average risk-free interest rate		1.9	%		2.5	%		1.9	%		2.9	%

Restricted stock: The Company awards restricted stock and restricted stock units (collectively, “Restricted Awards”) under its equity plans. During the third quarter of 2008, the Company granted 0.6 million and 0.1 million shares of service-based and performance-based Restricted Awards, respectively. During the first nine months of 2009 and 2008, the Company granted 1.9 million and 4.2 million shares, respectively, of service-based Restricted Awards, and 1.7 million and 1.4 million shares, respectively, of performance-based Restricted Awards. The weighted-average grant-date fair values per share were $4.40 for Restricted Awards granted during the first nine months of 2009, and $7.56 and $8.42 for Restricted Awards granted during the third quarter and first nine months of 2008, respectively.

Stock-based compensation expense: Total compensation costs for the Company’s equity plans were as follows:

	Quarter ended				Nine months ended
	June 4, 2009		May 29, 2008		June 4, 2009		May 29, 2008

Stock-based compensation expense by caption:
Cost of goods sold	$	4	$	4	$	12	$	11
Selling, general and administrative		4		6		12		18
Research and development		4		4		10		11
	$	12	$	14	$	34	$	40

Stock-based compensation expense by type of award:
Stock options	$	7	$	7	$	22	$	19
Restricted stock		5		7		12		21
	$	12	$	14	$	34	$	40

As of June 4, 2009, $85 million of total unrecognized compensation costs related to non-vested awards was expected to be recognized through the third quarter of 2013, resulting in a weighted-average period of 1.2 years. Stock-based compensation expense in the above presentation does not reflect any significant income taxes, which is consistent with the Company’s treatment of income or loss from its U.S. operations. (See “Income Taxes” note.)

Restructure

In response to a severe downturn in the semiconductor memory industry and global economic conditions, the Company initiated restructure plans in 2009 primarily attributable to the Company’s Memory segment. In the first quarter of 2009, IM Flash, a joint venture between the Company and Intel, terminated its agreement with the Company to obtain NAND Flash memory supply from the Company’s Boise facility, reducing the Company’s NAND Flash production by approximately 35,000 200mm wafers per month. In addition, the Company and Intel agreed to suspend tooling and the ramp of NAND Flash production at IM Flash’s Singapore wafer fabrication facility. In the second quarter of 2009, the Company announced that it would phase out all remaining 200mm wafer manufacturing operations at its Boise, Idaho by the end of 2009. Excluding any gains or additional losses from disposition of equipment, the Company expects to incur additional restructure costs through the end of 2009 of approximately $7 million, comprised primarily of severance and other employee related costs. The following table summarizes restructure charges (credits) resulting from the Company’s 2009 restructure activities:

	Quarter ended		Nine months ended
	June 4, 2009		June 4, 2009

Write-down of equipment	$	7	$	150
Severance and other termination benefits		11		50
Gain from termination of NAND Flash supply agreement		--		(144	)
Other		1		2
	$	19	$	58

During the third quarter and first nine months of 2009, the Company made cash payments of $18 million and $51 million, respectively, for severance and other termination benefits. As of June 4, 2009, $7 million of restructure costs, primarily related to severance and other termination benefits, remained unpaid and were included in accounts payable and accrued expenses. In connection with the termination of the NAND Flash memory supply agreement with IM Flash, in the first quarter of 2009, the Company recorded a receivable from Intel of $208 million that was settled in the second quarter of 2009.

Under a previous restructure plan initiated in the fourth quarter of 2007, the Company recorded charges of $8 million and $29 million for the third quarter and first nine months of 2008, respectively, for severance and other employee-related costs and to write down certain facilities to their fair values.

Other Operating (Income) Expense, Net

Other operating (income) expense for the third quarter of 2009 included a loss of $53 million to write down the carrying value of certain long-lived assets classified as held for sale in connection with the Company’s sale of a majority interest in its Aptina imaging solutions business. Other operating (income) expense for the third quarter and first nine months of 2009 included losses of $12 million and $55 million, respectively, on disposals of semiconductor equipment and losses of $28 million and $25 million, respectively, from changes in currency exchange rates. Other operating (income) expense for the third quarter and first nine months of 2008 included gains of $13 million and $70 million, respectively, on disposals of semiconductor equipment. Other operating (income) expense for the first nine months of 2008 included a gain of $38 million for receipts from the U.S. government in connection with anti-dumping tariffs received in the first quarter of 2008 and losses of $33 million from changes in currency exchange rates. (See “Aptina Imaging Corporation” note.)

Income Taxes

Income taxes for 2009 and 2008 primarily reflect taxes on the Company’s non-U.S. operations and U.S. alternative minimum tax. The Company has a valuation allowance for its net deferred tax asset associated with its U.S. operations. The benefit for taxes on U.S. operations in 2009 and 2008 was substantially offset by changes in the valuation allowance.

Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of common shares and stock rights outstanding. Diluted earnings per share is computed based on the weighted-average number of common shares outstanding plus the dilutive effects of stock options and convertible notes. Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from earnings per share calculations. Antidilutive potential common shares that could dilute basic earnings per share in the future were 271.2 million for the third quarter and first nine months of 2009 and 223.8 million for the third quarter and first nine months of 2008.

	Quarter ended						Nine months ended
	June 4, 2009			May 29, 2008			June 4, 2009			May 29, 2008

Net loss available to common shareholders	$	(290	)	$	(236	)	$	(1,747	)	$	(1,275	)

Weighted-average common shares outstanding		813.3			772.8			786.5			772.4

Loss per share:
Basic	$	(0.36	)	$	(0.30	)	$	(2.22	)	$	(1.65	)
Diluted		(0.36	)		(0.30	)		(2.22	)		(1.65	)

Comprehensive Income (Loss)

Comprehensive loss for the third quarter of 2009 was ($309) million and included ($22) million, net of tax, from the change in cumulative translation adjustments for the Company’s equity method investments and $3 million, net of tax, of unrealized gains on investments. Comprehensive loss for the first nine months of 2009 was ($1,765) million and included ($26) million, net of tax, from the change in cumulative translation adjustments for the Company’s equity method investments and $7 million, net of tax, of unrealized gains on investments. Comprehensive loss for the third quarter and first nine months of 2008 was ($244) million and ($1,282) million, respectively, and included ($8) million and ($7) million net of tax, respectively, of unrealized losses on investments.

Consolidated Variable Interest Entities

NAND Flash joint ventures with Intel (“IM Flash”): The Company has formed two joint ventures with Intel (IM Flash Technologies, LLC formed January 2006 and IM Flash Singapore LLP formed February 2007) to manufacture NAND Flash memory products for the exclusive benefit of the partners. IMFT and IMFS are each governed by a Board of Managers, with Micron and Intel initially appointing an equal number of managers to each of the boards. The number of managers appointed by each party adjusts depending on the parties’ ownership interests. These ventures will operate until 2016 but are subject to prior termination under certain terms and conditions. IMFT and IMFS are aggregated as IM Flash in the following disclosure due to the similarity of their ownership structure, function, operations and the way the Company’s management reviews the results of their operations. At inception and through June 4, 2009, the Company owned 51% and Intel owned 49% of IM Flash.

IM Flash is a variable interest entity as defined by FIN 46(R) because all costs of IM Flash are passed to the Company and Intel through purchase agreements. IM Flash is dependent upon the Company and Intel for any additional cash requirements. The Company and Intel are also considered related parties under the provisions of FIN 46(R). As a result, the primary beneficiary of IM Flash is the entity that is most closely associated with IM Flash. The Company considered several factors to determine whether it or Intel is most closely associated with IM Flash, including the size and nature of IM Flash’s operations relative to the Company and Intel, and which entity had the majority of economic exposure under the purchase agreements. Based on those factors, the Company determined that it is most closely associated with IM Flash and is therefore the primary beneficiary. Accordingly, the financial results of IM Flash are included in the Company’s consolidated financial statements and all amounts pertaining to Intel’s interests in IM Flash are reported as noncontrolling interests in subsidiaries. (See “Business and Significant Accounting Policies” note.)

IM Flash manufactures NAND Flash memory products based on NAND Flash designs developed by the Company and Intel and licensed to the Company. Product design and other research and development (“R&D”) costs for NAND Flash are generally shared equally between the Company and Intel. As a result of reimbursements received from Intel under a NAND Flash R&D cost-sharing arrangement, the Company’s R&D expenses were reduced by $26 million and $83 million for the third quarter and first nine months of 2009, respectively, and $34 million and $116 million for the third quarter and first nine months of 2008, respectively.

IM Flash sells products to the joint venture partners generally in proportion to their ownership at long-term negotiated prices approximating cost. IM Flash sales to Intel were $195 million and $728 million for the third quarter and first nine months of 2009, respectively, and $280 million and $744 million for the third quarter and first nine months of 2008, respectively. As of June 4, 2009 and August 28, 2008, IM Flash had receivables from Intel primarily for sales of NAND Flash products of $124 million and $144 million, respectively. In addition, as of June 4, 2009 and August 28, 2008, the Company had receivables from Intel of $61 million and $71 million, respectively, related to NAND Flash product design and process development activities. As of June 4, 2009 and August 28, 2008, IM Flash had payables to Intel of $1 million and $4 million, respectively, for various services.

Under the terms of a wafer supply agreement, the Company manufactured wafers for IM Flash in its Boise, Idaho facility. In the first quarter of 2009, the Company and Intel agreed to discontinue production of NAND flash memory for IM Flash at the Boise facility. Pursuant to the terms of the termination agreement, the Company received $208 million from Intel in the second quarter of 2009. Also in the first quarter of 2009, IM Flash substantially completed construction of a new 300mm wafer fabrication facility structure in Singapore and the Company and Intel agreed to suspend tooling and the ramp of production at this facility.

IM Flash distributed $119 million and $582 million to Intel in the third quarter and first nine months of 2009, respectively, and $124 million and $606 million to the Company in the third quarter and first nine months of 2009, respectively. IM Flash distributed $92 million to Intel in the third quarter and first nine months of 2008, and $95 million to the Company in the third quarter and first nine months of 2008. In the first nine months of 2009, Intel contributed $24 million and the Company contributed $25 million to IM Flash. In the third quarter and first nine months of 2008, Intel contributed $103 million and $295 million, respectively, to IM Flash and the Company contributed $108 million and $308 million, respectively, to IM Flash. The Company’s ability to access IM Flash’s cash and marketable investment securities ($145 million as of June 4, 2009) to finance the Company’s other operations is subject to agreement by the joint venture partners.

Total IM Flash assets and liabilities included in the Company’s consolidated balance sheets are as follows:

As of	June 4, 2009		August 28, 2008

Assets
Cash and equivalents	$	145	$	393
Receivables		143		169
Inventories		152		225
Other current assets		4		14
Total current assets		444		801
Property, plant and equipment, net		3,559		3,998
Other assets		64		58
Total assets	$	4,067	$	4,857

Liabilities
Accounts payable and accrued expenses	$	99	$	166
Deferred income		139		67
Equipment purchase contracts		--		18
Current portion of long-term debt		6		5
Total current liabilities		244		256
Long-term debt		67		38
Other liabilities		4		5
Total liabilities	$	315	$	299

Amounts exclude intercompany balances that are eliminated in consolidation of the Company’s consolidated balance sheets. IMFT and IMFS are aggregated as IM Flash in this disclosure due to the similarity of their ownership structure, function, operations and the way the Company’s management reviews the results of their operations.

The creditors of IM Flash have recourse only to the assets of IM Flash and do not have recourse to any other assets of the Company.

MP Mask Technology Center, LLC (“MP Mask”): In 2006, the Company formed a joint venture, MP Mask, with Photronics, Inc. (“Photronics”) to produce photomasks for leading-edge and advanced next generation semiconductors. At inception and through June 4, 2009, the Company owned 50.01% and Photronics owned 49.99% of MP Mask. The Company purchases a substantial majority of the reticles produced by MP Mask pursuant to a supply arrangement. In connection with the formation of the joint venture, the Company received $72 million in 2006 in exchange for entering into a license agreement with Photronics, which is being recognized over the term of the 10-year agreement. As of June 4, 2009, deferred income and other noncurrent liabilities included an aggregate of $50 million related to this agreement. MP Mask made distributions to both the Company and Photronics of $5 million and $10 million each in the third quarter and first nine months of 2009, respectively.

MP Mask is a variable interest entity as defined by FIN 46(R) because all costs of MP Mask are passed on to the Company and Photronics through purchase agreements and MP Mask is dependent upon the Company and Photronics for any additional cash requirements. The Company and Photronics are also considered related parties under the provisions of FIN 46(R). As a result, the primary beneficiary of MP Mask is the entity that is most closely associated with MP Mask. The Company considered several factors to determine whether it or Photronics is more closely associated with the joint venture. The most important factor was the nature of the joint venture’s operations relative to the Company and Photronics. Based on those factors, the Company determined that it most closely associated with the joint venture and therefore it is the primary beneficiary. Accordingly, the financial results of MP Mask are included in the Company’s consolidated financial statements and all amounts pertaining to Photonics’ interest in MP Mask are reported as noncontrolling interests in subsidiaries. (See “Business and Significant Accounting Policies” note.)

Total MP Mask assets and liabilities included in the Company’s consolidated balance sheets are as follows:

As of	June 4, 2009		August 28, 2008

Current assets	$	20	$	27
Noncurrent assets (primarily property, plant and equipment)		103		121
Current liabilities		10		11

Amounts exclude intercompany balances that are eliminated in consolidation of the Company’s consolidated balance sheets.

The creditors of MP Mask have recourse only to the assets of MP Mask and do not have recourse to any other assets of the Company.

In 2008, the Company completed the construction of a facility to produce photomasks and sold the facility to Photronics under a build to suit lease agreement, with quarterly payments through January 2013. On May 19, 2009, the Company and Photronics entered into an agreement whereby the Company repurchased the facility from Photronics for $50 million and leased the facility to Photronics under an operating lease providing for quarterly lease payments aggregating $41 million through October 2014.

TECH Semiconductor Singapore Pte. Ltd.

Since 1998, the Company has participated in TECH Semiconductor Singapore Pte. Ltd. (“TECH”), a semiconductor memory manufacturing joint venture in Singapore among the Company, Canon Inc. and Hewlett-Packard Company (“HP”). The financial results of TECH are included in the Company’s consolidated financial statements and all amounts pertaining to Canon Inc. and HP are reported as noncontrolling interests in subsidiaries.

In the second quarter of 2009, the Company entered into a term loan agreement with the EDB that enabled the Company to borrow up to $300 million Singapore dollars at 5.38%. The Company is required to use the proceeds from any borrowings under the facility to make equity contributions to TECH. On February 27, 2009, the Company drew $150 million Singapore dollars under the facility and used the proceeds to purchase 85.1 million shares of TECH for $99 million. On June 2, 2009, the Company drew the remaining $150 million Singapore dollars under the facility and purchased an additional 282.0 million shares of TECH for $99 million. As a result, the Company’s interest in TECH increased from approximately 73% to approximately 76% by the February 2009 share purchase and to approximately 83% by the June 2009 share purchase. As a result of the share purchases, the Company reduced noncontrolling interests by $69 million. Because the cost of the noncontrolling interest acquired was below carrying value, the Company’s carrying value for TECH’s property, plant and equipment was also reduced $69 million. (See “Debt” note.)

TECH’s cash and marketable investment securities ($175 million as of June 4, 2009) are not anticipated to be available to finance the Company’s other operations. As of June 4, 2009, TECH had $573 million outstanding under a credit facility which is collateralized by substantially all of the assets of TECH (carrying value of approximately $1,532 million as of June 4, 2009) and contains covenants that, among other requirements, establish certain liquidity, debt service coverage and leverage ratios, and restrict TECH’s ability to incur indebtedness, create liens and acquire or dispose of assets. As of June 4, 2009, the Company was in compliance with these covenants. The Company has guaranteed approximately 73% of the outstanding amount of the facility, with the Company’s obligation increasing to 100% of the outstanding amount of the facility upon the occurrence of certain conditions.

Aptina Imaging Corporation

On July 10, 2009, the Company sold a 65% interest in Aptina Imaging Corporation (“Aptina”), a wholly-owned subsidiary of the Company and a significant component of its Imaging segment, to Riverwood Capital (“Riverwood”) and TPG Capital (“TPG”). Under the agreement, the Company received approximately $35 million in cash and retained a 35% minority stake in Aptina after Riverwood and TPG contributed significant debt-free capital to the independent, privately-held, company. The Company also retained all cash held by Aptina and its subsidiaries. The Company will account for its remaining interest in Aptina under the equity method. The Company’s Imaging segment will continue to manufacture products for Aptina under a wafer supply agreement and will provide services to Aptina. In the third quarter of 2009, the Company recorded a charge of $53 million, the estimated loss on the transaction, to write down certain Aptina intangible assets and property, plant and equipment to estimated fair values.

Segment Information

The Company’s reportable segments are Memory and Imaging. The Memory segment’s primary products are DRAM and NAND Flash memory and the Imaging segment’s primary product is CMOS image sensors. Subsequent to the sale of a 65% interest in Aptina, the Company’s Imaging segment will continue to manufacture products for Aptina under a wafer supply agreement and will provide services to Aptina. Segment information reported below is consistent with how it is reviewed and evaluated by the Company’s chief operating decision makers and is based on the nature of the Company’s operations and products offered to customers. The Company does not identify or report depreciation and amortization, capital expenditures or assets by segment.

	Quarter ended						Nine months ended
	June 4, 2009			May 29, 2008			June 4, 2009			May 29, 2008

Net sales:
Memory	$	979		$	1,327		$	3,111		$	3,917
Imaging		127			171			390			475
Total consolidated net sales	$	1,106		$	1,498		$	3,501		$	4,392

Operating income (loss):
Memory	$	(149	)	$	(228	)	$	(1,430	)	$	(1,230	)
Imaging		(97	)		3			(196	)		(27	)
Total consolidated operating loss	$	(246	)	$	(225	)	$	(1,626	)	$	(1,257	)

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

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements include, but are not limited to, statements such as those made in “Overview” regarding the Company’s DRAM development costs relative to Nanya, royalty payments to be received from Nanya in future periods, Inotera's transition to the Company's stack process technology and anticipated margins and operating expenses for the Imaging segment in future periods; in “Net Sales” regarding production levels for the fourth quarter of 2009; in “Gross Margin” regarding the effects of production slowdowns on product costs for the fourth quarter of 2009 and future charges for inventory write-downs; in “Research and Development” regarding research and development expenses for the fourth quarter of 2009;in Stock-Based Compensation regarding future costs to be recognized; in “Restructure” regarding the remaining costs of restructure plans; in “Liquidity and Capital Resources” regarding capital spending in 2009 and 2010, future distributions from IM Flash to Intel and capital contributions to TECH; and in “Recently Issued Accounting Standards” regarding the impact from the adoption of new accounting standards. The Company’s actual results could differ materially from the Company’s historical results and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in “PART II. OTHER INFORMATION – Item 1A. Risk Factors.” This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes and with the Company’s Annual Report on Form 10-K for the year ended August 28, 2008. All period references are to the Company’s fiscal periods unless otherwise indicated. The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31. The Company’s fiscal 2009, which ends on September 3, 2009, contains 53 weeks. All production data reflects production of the Company and its consolidated joint ventures.

Overview

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

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

The semiconductor memory industry is experiencing a severe downturn due to a significant oversupply of products. The downturn has been exacerbated by global economic conditions which have adversely affected demand for semiconductor memory products. Average selling prices per gigabit for the Company’s DRAM and NAND Flash products for the first nine months of 2009 decreased 53% and 58%, respectively, compared to the first nine months of 2008. Average selling prices per gigabit for the Company’s DRAM and NAND Flash products in 2008 were down 51% and 67%, respectively, compared to 2007 and down 63% and 85%, respectively, in 2008 compared to 2006. These declines significantly outpaced the long-term historical pricing trend. As a result of these market conditions, the Company and other semiconductor memory manufacturers have generally reported negative gross margins and substantial losses in recent periods. In the first nine months of 2009, the Company reported a net loss of $1.7 billion after reporting a net loss of $1.6 billion for its entire fiscal 2008.

In response to adverse market conditions, the Company initiated restructure plans in 2009, primarily attributable to the Company’s Memory segment. In the first quarter of 2009, IM Flash, a joint venture between the Company and Intel, terminated its agreement with the Company to obtain NAND Flash memory supply from the Company’s Boise facility, reducing the Company’s NAND Flash production by approximately 35,000 200mm wafers per month. In addition, the Company and Intel agreed to suspend tooling and the ramp of NAND Flash production at IM Flash’s Singapore wafer fabrication facility. In the second quarter of 2009, the Company announced that it will phase out all remaining 200mm wafer manufacturing operations at its Boise, Idaho, facility by the end of 2009. The Company has also undertaken additional cost savings measures to increase its competitiveness, including reductions in executive and employee salary and bonuses, a continued hiring freeze, suspension of matching contributions under the Company’s 401(k) employee savings plan, and reductions of other discretionary costs such as outside services, travel and overtime.

The state of the global economy and credit markets are also making it increasingly difficult for semiconductor memory manufacturers to obtain external sources of financing to fund their operations. Although the Company believes that it is better positioned than some of its competitors, it faces challenges that require it to continue to make significant improvements in its competitiveness. Additionally, the Company is considering further financing alternatives, continuing to limit capital expenditures and implementing further cost reduction initiatives.

DRAM joint ventures with Nanya Technology Corporation (“Nanya”): The Company has a partnering arrangement with Nanya Technology Corporation (“Nanya”) pursuant to which the Company and Nanya jointly develop process technology and designs to manufacture stack DRAM products. Each party generally bears its own development costs and the Company’s development costs are expected to exceed Nanya’s development costs in the near term by a significant amount. In addition, the Company has transferred and licensed certain intellectual property related to the manufacture of stack DRAM products to Nanya and licensed certain intellectual property from Nanya. As a result, the Company is to receive an aggregate of $207 million from Nanya through 2010. The Company recognized $25 million and $79 million of license revenue in net sales from this agreement in the third quarter and first nine months of 2009, respectively, and from May 2008 through June 4, 2009 has recognized $115 million of cumulative license revenue. In addition, the Company expects to receive royalties in future periods from Nanya for sales of stack DRAM products manufactured by or for Nanya.

Inotera and MeiYa each have fiscal years that end on December 31. As these fiscal years differ from that of the Company’s fiscal year, the Company recognizes its share of Inotera’s and MeiYa’s quarterly earnings or losses for the calendar quarter that ends within the Company’s fiscal quarter. This results in the recognition of the Company’s share of earnings or losses from these entities for a period that lags the Company’s fiscal periods by approximately two months.

In connection with the acquisition of the shares in Inotera, the Company and Nanya entered into a supply agreement with Inotera (the “Supply Agreement”) pursuant to which Inotera will sell trench and stack DRAM products to the Company and Nanya. In addition, Inotera charges the Company and Nanya for a portion of the costs associated with its underutilized capacity. The Company has rights and obligations to purchase up to 50% of Inotera’s wafer production capacity. Inotera’s actual wafer production will vary from time to time based on market and other conditions and its trench production capacity is expected to transition to the Company’s stack process technology. The pricing formula in the Supply Agreement is based upon manufacturing costs and margins associated with the resale of purchased DRAM products. Under the Supply Agreement, the Company will purchase 50% of Inotera’s aggregate trench DRAM production (less the trench DRAM products sold to Qimonda pursuant to a separate supply agreement between Inotera and Qimonda (the “Qimonda Supply Agreement”)) and 50% of the aggregate stack DRAM production. Under the Qimonda Supply Agreement, Qimonda was obligated to purchase trench DRAM products resulting from wafers started for it by Inotera through July 2009 in accordance with a ramp down schedule specified in the Qimonda Supply Agreement. In the second quarter of 2009, Qimonda filed for bankruptcy and defaulted on its obligations to purchase products from Inotera. Pursuant to the Company’s obligations under the Supply Agreement, the Company recorded $15 million and $66 million of charges in cost of goods sold in the third quarter and first nine months of 2009 related to underutilized capacity.

(See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Supplemental Balance Sheet Information – Equity Method Investments”)

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

Aptina Imaging Business (“Aptina”): On July 10, 2009, the Company sold a 65% interest in Aptina, a wholly-owned subsidiary of the Company and a significant component of its Imaging segment, to Riverwood Capital (“Riverwood”) and TPG Capital (“TPG”). Under the agreement, the Company received approximately $35 million in cash and retained a 35% minority stake in Aptina after Riverwood and TPG contributed significant debt-free capital to the independent, privately-held, company. The Company also retained all cash held by Aptina and its subsidiaries. The Company will account for its remaining interest in Aptina under the equity method. The Company’s Imaging segment will continue to manufacture products for Aptina under a wafer supply agreement and will provide services to Aptina at its worldwide facilities. The Company anticipates that pricing under the wafer supply agreement will generally result in lower gross margins than historically realized on sales of Imaging products to end customers. The Company also anticipates that the sale of Aptina will significantly reduce the Imaging segment’s research and development costs and other operating expenses. In the third quarter of 2009, the Company recorded a charge of $53 million, the estimated loss on the transaction, to write down Aptina intangible assets and property, plant and equipments to estimated fair values.

Results of Operations

	Third Quarter														Second Quarter							Nine Months
	2009			% of net sales				2008			% of net sales				2009			% of net sales				2009			% of net sales				2008			% of net sales
	(amounts in millions and as a percent of net sales)
Net sales:
Memory	$	979			89		%	$	1,327			89		%	$	910			92		%	$	3,111			89		%	$	3,917			89		%
Imaging		127			11		%		171			11		%		83			8		%		390			11		%		475			11		%
	$	1,106			100		%	$	1,498			100		%	$	993			100		%	$	3,501			100		%	$	4,392			100		%

Gross margin:
Memory	$	104			11		%	$	(11	)		(1	)	%	$	(269	)		(30	)	%	$	(667	)		(21	)	%	$	(126	)		(3	)	%
Imaging		3			2		%		59			35		%		2			2		%		58			15		%		136			29		%
	$	107			10		%	$	48			3		%	$	(267	)		(27	)	%	$	(609	)		(17	)	%	$	10			0		%

SG&A	$	80			7		%	$	116			8		%	$	90			9		%	$	272			8		%	$	348			8		%
R&D		162			15		%		170			11		%		168			17		%		508			15		%		513			12		%
Restructure		19			2		%		8			1		%		105			11		%		58			2		%		29			1		%
Goodwill impairment		--			--				--			--				58			6		%		58			2		%		463			11		%
Other operating (income) expense, net		92			8		%		(21	)		(1	)	%		20			2		%		121			3		%		(86	)		(2	)	%
Net income (loss)		(290	)		(26	)	%		(236	)		(16	)	%		(751	)		(76	)	%		(1,747	)		(50	)	%		(1,275	)		(29	)	%

Net Sales

Total net sales for the third quarter of 2009 increased 11% as compared to the second quarter of 2009 primarily due to an 8% increase in Memory sales and a 53% increase in Imaging sales. Both Memory and Imaging sales for the third quarter of 2009 reflect significant increases in sales volumes as compared to the second quarter of 2009. Memory sales were 89% of total net sales for the third quarter of 2009 as compared to 92% and 89%, respectively, for the second quarter of 2009 and third quarter of 2008. Total net sales for the third quarter of 2009 decreased 26% as compared to the third quarter of 2008 due to a 26% decrease in both Memory and Imaging sales. Total net sales for the first nine months of 2009 decreased 20% as compared to the first nine months of 2008 due to a 21% decrease in Memory sales and an 18% decrease in Imaging sales.

In response to adverse market conditions, the Company began to shut down production of NAND for IM Flash at the Company’s Boise fabrication facility in the second quarter of 2009 and announced that it would shut down the remainder of its production at the Boise fabrication facility by the end of 2009. In addition, the Company implemented production slowdowns at some of its manufacturing facilities during the third and second quarters of 2009. Production of Memory and Imaging products in the third and second quarters of 2009 was affected by the ongoing shutdown of the Boise fabrication facility and slowdowns at other facilities. The Company expects that production for the fourth quarter of 2009 will also be affected by these factors. The Company will adjust utilization of 200mm wafer processing capacity as product demand varies.

The Company has formed partnering arrangements under which it has sold and/or licensed technology to other parties. The Company recognized royalty and license revenue of $32 million in the third quarter of 2009, $33 million in the second quarter of 2009 and $10 million in the third quarter of 2008.

Memory: Memory sales for the third quarter of 2009 increased 8% from the second quarter of 2009 as sales of DRAM products increased by 14% while sales of NAND Flash products were relatively unchanged.

Sales of DRAM products for the third quarter of 2009 increased from the second quarter of 2009 primarily due to an 18% increase in gigabit sales. Overall average selling prices for DRAM for the third quarter of 2009 were relatively flat compared to the second quarter of 2009 as increases in average selling prices for both specialty DRAM products and DDR2 and DDR3 DRAM products were offset by the effect of a shift in product mix to a higher percentage of DDR2 and DDR3 DRAM products which generally realize lower selling prices per bit than specialty DRAM products. Gigabit production of DRAM products increased approximately 15% for the third quarter of 2009 as compared to the second quarter of 2009, primarily due to production efficiencies achieved through transitions to higher density, advanced geometry devices. Sales of DDR2 and DDR3 DRAM products were 30% of the Company’s total net sales in the third quarter of 2009, as compared to 26% for the second quarter of 2009 and 29% for the third quarter of 2008.

The Company sells NAND Flash products in three principal channels: 1) to Intel Corporation (“Intel”) through its IM Flash consolidated joint venture at long-term negotiated prices approximating cost, 2) to original equipment manufacturers (“OEM’s”) and other resellers and 3) to retail customers. Aggregate sales of NAND Flash products for the third quarter of 2009 were relatively unchanged from the second quarter of 2009 and represented 39% of the Company’s total net sales for the third quarter of 2009 as compared to 43% for the second quarter of 2009 and 37% for the third quarter of 2008.

Sales through IM Flash to Intel were $195 million for the third quarter of 2009, $215 million for the second quarter of 2009 and $280 million for the third quarter of 2008. IM Flash sales to Intel were $728 million for the first nine months of 2009 and $744 million for the first nine months of 2008. In the third quarter of 2009, average selling prices for IM Flash sales to Intel decreased significantly due to reduction in costs per gigabit of approximately 35%. However, gigabit sales to Intel were 55% higher in the third quarter compared to the second quarter due to a 36% increase in gigabit production of NAND Flash products over the same period primarily due to the Company’s continued transition to higher density 34 nanometer (nm) NAND Flash products and other improvements in product and process technologies.

Aggregate sales of NAND Flash products to the Company’s OEM, resellers and retail customers were approximately 10% higher in the third quarter of 2009 compared to the second quarter of 2009 primarily due to a 13% increase in average selling prices, partially offset by a slight decrease in gigabit sales. Average selling prices to the Company’s OEM and reseller customers in the third quarter of 2009 increased approximately 27% compared to the second quarter of 2009 while average selling prices of the Company’s Lexar brand, directed primarily at the retail market, were relatively unchanged.

Memory sales for the third quarter of 2009 decreased 26% from the third quarter of 2008 as sales of DRAM products decreased by 29% and sales of NAND Flash products decreased 23%. The decrease in sales of DRAM products for the third quarter of 2009 from the third quarter of 2008 was primarily the result of a 55% decline in average selling prices mitigated by a 50% increase in gigabits sold. Gigabit production of DRAM products increased 49% for the third quarter of 2009 as compared to the third quarter of 2008, primarily due to production efficiencies from the Company’s improvements in product and process technologies. The decrease in sales of NAND Flash products for the third quarter of 2009 from the third quarter of 2008 was primarily due to a 55% decline in average selling prices mitigated by a 71% increase in gigabits sold. The significant increase in gigabit sales of NAND Flash products was primarily due to a 69% increase in production primarily as a result of the continued ramp of NAND Flash products at the Company’s 300mm fabrication facilities and transitions to higher density, advanced geometry devices. The increase in NAND Flash production was achieved despite the shutdown of 200mm NAND Flash production, which began in the second quarter of 2009.

Memory sales for the first nine months of 2009 decreased 21% from the first nine months of 2008 as sales of DRAM products decreased by 27% and sales of NAND Flash products decreased 10%. The decrease in sales of DRAM products for the first nine months of 2009 from the first nine months of 2008 was primarily the result of a 53% decline in average selling prices mitigated by a 46% increase in gigabits sold. Gigabit production of DRAM products increased 49% for the first nine months of 2009 as compared to the first nine months of 2008, primarily due to production efficiencies from improvements in product and process technologies. The decrease in sales of NAND Flash products for the first nine months of 2009 from the first nine months of 2008 was primarily due to a 58% decline in average selling prices mitigated by a 112% increase in gigabits sold. The significant increase in gigabit sales of NAND Flash products was primarily due to a 94% increase in production primarily as a result of the continued ramp of NAND Flash products at the Company’s 300mm fabrication facilities and transitions to higher density, advanced geometry devices. The increase in NAND Flash production was achieved despite the shutdown of 200mm NAND Flash production which began in the second quarter of 2009.

Imaging: Imaging sales for the third quarter of 2009 increased 53% as compared to the second quarter of 2009 primarily due to a 51% increase in unit sales. Imaging sales for the third quarter and first nine months of 2009 decreased by 26% and 18%, respectively, from the corresponding periods of 2008 primarily due to decreased unit sales, particularly for products with 2-megapixel or lower resolution, and declines in average selling prices. Demand for Imaging products in 2009 was adversely impacted by weakness in the mobile phone markets. Imaging sales were 11% of the Company’s total net sales for the third quarter of 2009 as compared to 8% for the second quarter of 2009 and 11% for the third quarter of 2008.

Gross Margin

The Company’s overall gross margin percentage for the third quarter of 2009 improved to 10% from negative 27% for the second quarter of 2009, primarily due to an improvement in the gross margin for Memory as a result of cost reductions and the effect of selling products in the current quarter that were subject to inventory write-downs in previous quarters. The Company’s overall gross margin percentage in the third quarter of 2009 improved from 3% for the third quarter of 2008 primarily due to an improvement in the gross margin for Memory partially offset by a decline in the gross margin for Imaging. The Company’s overall gross margin percentage declined from essentially breakeven for the first nine months of 2008 to negative 17% for the first nine months of 2009 due to declines in the gross margins for both Memory and Imaging. Production slowdowns and shutdowns implemented at some of the Company’s manufacturing facilities during the third and second quarters of 2009 adversely affected per gigabit costs of Memory products and per unit costs of Imaging products, and the continuation of these slowdowns is expected to have an adverse effect on product costs in the fourth quarter of 2009.

Memory: The Company’s gross margin percentage for Memory products improved to 11% for the third quarter of 2009 from negative 30% for the second quarter of 2009 primarily due to significant improvements in the gross margins for both DRAM and NAND Flash products. Gross margins for the third quarter of 2009 reflected significant cost reductions for DRAM and NAND Flash products and the effects of selling products in the current quarter that were subject to inventory write-downs in prior quarters, as discussed in more detail below. Gross margins for Memory products for the third and second quarters of 2009 were also adversely affected by $39 million and $67 million, respectively, of costs associated with underutilized capacity primarily from Inotera and IM Flash’s Singapore facility.

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

	Third Quarter				Second Quarter			Nine Months
	2009		2008		2009			2009			2008
	(amounts in millions)

Period-end inventory write-downs	$	--	$	--	$	(234	)	$	(603	)	$	(77	)
Estimated effect of previous inventory write-downs		242		21		277			676			85
Net effect of inventory write-downs	$	242	$	21	$	43		$	73		$	8

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

The Company’s gross margin for NAND Flash products for the third quarter of 2009 improved from the second quarter of 2009, despite a 17% decrease in overall average selling prices per gigabit, primarily due to the effects of inventory write-downs and a 35% reduction in costs per gigabit. The reduction in NAND Flash costs per gigabit was primarily due to lower manufacturing costs as a result of increased production of higher-density, advanced-geometry devices. Gross margins on sales of NAND Flash products reflect sales of approximately half of IM Flash’s output to Intel at long-term negotiated prices approximating cost.

The Company’s gross margin for DRAM products for the third quarter of 2009 improved from the second quarter of 2009, primarily due to reductions in cost per gigabit partially offset by the 2% decrease in average selling prices per gigabit. The Company’s DRAM costs per gigabit were 39% lower in the third quarter of 2009 compared to the second quarter of 2009 (24% of which was due to the effects of previous inventory write-downs) due to production efficiencies achieved through transitions to higher-density, advanced-geometry devices.

The Company’s gross margin percentage for Memory products improved to 11% for the third quarter of 2009 from negative 1% for the third quarter of 2008 primarily due to improvements in the gross margins for NAND Flash products partially offset by slight declines in the gross margins for DRAM products. Gross margins on NAND Flash products for the third quarter of 2009 improved from the third quarter of 2008 primarily due to per gigabit cost reductions of 66% partially offset by the 55% decline in overall average selling prices. Declines in gross margins on sales of DRAM products for the third quarter of 2009 as compared to the third quarter of 2008 were primarily due to the 55% decline in average selling prices mitigated by per gigabit cost reductions of 52% (19% of which was due to the effects of previous inventory write-downs).

The Company’s gross margin percentage for Memory products declined from negative 3% for the first nine months of 2008 to negative 21% for the first nine months of 2009 primarily due to declines in the gross margin for DRAM products. Declines in gross margins on sales of DRAM products for the first nine months of 2009 as compared to the first nine months of 2008 were primarily due to the 53% decline in average selling prices mitigated by per gigabit cost reductions. The Company’s DRAM costs per gigabit were 34% lower in the first nine months of 2009 compared to the first nine months of 2008. Gross margins on NAND Flash products for the first nine months of 2009 were approximately the same as for the first nine months of 2008 as the 58% decline in average selling prices was offset by per gigabit cost reductions.

Imaging: The Company’s gross margin percentage for Imaging for the third quarter of 2009 remained approximately the same as for the second quarter of 2009 due to relatively stable average selling prices and production costs. Imaging production costs for the third and second quarters of 2009 were adversely affected by production slowdowns implemented by the Company in response to reduced market demand. The Company’s gross margin percentage for Imaging declined from 35% for the third quarter of 2008, primarily due to declines in average selling prices and increased costs due to production slowdowns. The Company’s gross margin percentage for Imaging declined from 29% for the first nine months of 2008 to 15% for the first nine months of 2009 primarily due to declines in average selling prices mitigated by a shift in product mix to products with 3-megapixels or more, which realized higher margins.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the third quarter of 2009 decreased 11% from the second quarter of 2009 due to lower bad debt expense and lower expenses as a result of the Company’s restructure initiatives. SG&A expenses for the third quarter of 2009 decreased 31% from the third quarter of 2008 primarily due to lower payroll expenses and other costs related to the Company’s restructure initiatives and lower legal expenses. SG&A expenses for the first nine months of 2009 decreased 22% from the first nine months of 2008, primarily due to lower payroll expenses and other costs related to the Company’s restructure initiatives and lower legal expenses. Future SG&A expense is expected to vary, potentially significantly, depending on, among other things, the number of legal matters that are resolved relatively early in their life-cycle and the number of matters that progress to trial. SG&A expenses as a percent of net sales were as follows:

	Third Quarter						Second Quarter			Nine Months
	2009			2008			2009			2009			2008
	(SG&A expenses as a percent of net sales)

Memory segment		7	%		7	%		9	%		8	%		8	%
Imaging segment		7	%		11	%		12	%		9	%		11	%

Research and Development

Research and development (“R&D”) expenses vary primarily with the number of development wafers processed, the cost of advanced equipment dedicated to new product and process development, and personnel costs. Because of the lead times necessary to manufacture its products, the Company typically begins to process wafers before completion of performance and reliability testing. The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability. R&D expenses can vary significantly depending on the timing of product qualification as costs incurred in production prior to qualification are charged to R&D.

R&D expenses for the third quarter of 2009 decreased 4% from the second quarter of 2009 primarily due to decreases in development wafers processed. R&D expenses for the third quarter of 2009 decreased 5% from the third quarter of 2008 primarily due to lower payroll costs from the Company’s cost reduction initiatives. R&D expenses for the first nine months of 2009 were relatively unchanged from the first nine months of 2008, as decreases in costs of development wafers processed and lower payroll costs were offset by lower reimbursements under a NAND Flash R&D cost-sharing arrangement with Intel Corporation. As a result of reimbursements received under this cost-sharing arrangement, R&D expenses were reduced by $26 million for the third quarter of 2009, $25 million for the second quarter of 2009, $34 million for the third quarter of 2008, $83 million for the first nine months of 2009 and $116 million for the first nine months of 2008. The Company anticipates R&D expenses to approximate between $140 million to $150 million in the fourth quarter of 2009. The Company expects that R&D expenses in future periods will be lower due to the sale in of a majority interest in Aptina in the fourth quarter of 2009. R&D expenses as a percent of net sales were as follows:

Third Quarter		Second Quarter	Nine Months
2009	2008	2009	2009	2008