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.

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 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. 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.

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.

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.

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. 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 for its investment in Inotera. 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.

(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
                            % of net                    % of net                      % of net                     % of net                     % of net
                 2009         sales          2008         sales           2009          sales           2009         sales           2008         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)

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 . . .