planned technical and production requirements. Product development and engineering organizations are located primarily in the United States, as well as in the United Kingdom and ~~Israel, with process support and customer demonstration laboratories in the United States, the United Kingdom and~~

Israel. In addition, Applied outsources certain RD&E activities, some of which are performed in other countries. Process support and customer demonstration laboratories are located in the United States, the United Kingdom and Israel.

Applied invested ~~$1.1 billion (21 percent of net sales) for fiscal 2002,~~ $921 million (21 percent of net sales) for fiscal 2003, ~~and~~ $992 million (12 percent of net sales) for fiscal 2004 and $941 million (13 percent of net sales) for fiscal 2005 in RD&E for product development and engineering programs to create new product lines and improve existing technologies and products. Applied has spent an average of 1516 percent of net sales on RD&E over the last five years. In addition to RD&E for specific product technologies, Applied maintains ongoing programs for automation control systems, materials research and environmental control that have applications to its products. In fiscal ~~2004,~~2005, Applied focused on developing systems for customers’ new chip designs with 65nm and below geometries, including systems to enable faster and denser transistor and interconnect ~~structures with 65nm and below linewidths.~~

structures.

Marketing and Sales

Because of the highly technical nature of its products, Applied markets and sells its products worldwide through a direct sales force. For fiscal ~~2004,~~2005, net sales to customers in each region as a percentage of Applied’s total net sales were: Taiwan ~~25 percent, Asia-Pacific (including China) 20 percent, Japan 17~~23 percent, North America (primarily the United States) 1721 percent, Japan 20 percent, Korea 1114 percent, Europe 13 percent and ~~Europe 10~~Asia-Pacific (including China) 9 percent. Applied’s business is usually not seasonal in nature, but it is cyclical, based on the capital equipment investment patterns of major ~~semiconductor~~integrated circuit manufacturers. These expenditure patterns are based on many factors, including anticipated market demand and pricing for integrated circuits, the development of new technologies, factory utilization and global and regional economic conditions.

During fiscal ~~2004, more than~~2005, approximately 80 percent of Applied’s net sales were to regions outside of the United States. Managing Applied’s global operations presents challenges and involves uncertainties that may affect Applied’s business, financial condition and results of operations. For further discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends, Risks and Uncertainties — Applied is exposed to the risks of operating a global business.”

Information on net sales to unaffiliated customers and long-lived assets attributable to Applied’s geographic regions is included in Note 10 of Notes to Consolidated Financial Statements. ~~Net sales to Intel Corporation represented 10 percent of Applied’s fiscal 2002 net sales.~~ During fiscal 2003, two customers individually accounted for greater than 10 percent of net sales: net sales to Intel Corporation represented 13 percent of Applied’s net sales and net sales to Samsung America, Inc. represented 12 percent of Applied’s net sales. During fiscal 2004, no individual customer accounted for more than 10 percent of Applied’s net sales.

During 2005, Samsung America, Inc. accounted for 10 percent of Applied’s net sales.

Competition

The global semiconductor equipment industry is highly competitive and is characterized by rapid technological advancements and demanding worldwide service requirements. Applied’s ability to compete primarily depends on its ability to commercialize its technology and continually improve its products, processes and services, as well as its ability to develop new products that meet constantly evolving customer requirements. Significant competitive factors for succeeding in the ~~semiconductor~~integrated circuit manufacturing equipment market include the product’s technical capability, productivity and cost-effectiveness, and the level of technical service and support. The importance of each of these factors varies depending on the specific customer’s needs, including considerations such as the customer’s process application, product requirements, timing of the purchase and particular circumstances of the purchasing decision. The pace of technological change is rapid, with customers continually moving to smaller critical dimensions and larger wafer sizes and adopting new materials for fabricating chips. Existing technology can sometimes be adapted to the new requirements, but some of these ~~new~~ requirements may create the need for an entirely different technical approach. The rapid pace of technological change ~~continually~~ creates opportunities for existing competitors and startups, and can quickly diminish the value of existing technologies.

Substantial competition exists for each of Applied’s products. Competitors range from small companies that compete with a single product and/or in a single region to global companies with multiple lines of ~~semiconductor processing~~integrated circuit

manufacturing products. ~~Competitors in a given technology tend to have different degrees of market presence in various regional markets.~~ Management believes that Applied ishas a strong ~~competitor and~~

~~that its~~ competitive position is based on the ability of its products and services to continue to address customer requirements. Success for Applied ~~will require~~requires a continued high level of investment in RD&E and in marketing, sales and customer support activities.

Patents and Licenses

Management believes that Applied’s competitive position is significantly dependent upon skills in research, development, engineering, manufacturing and marketing, and not just on its patent position. However, protection of Applied’s technological assets by obtaining and enforcing intellectual property rights, including patents, is important. Therefore, ~~Applied has a~~Applied’s practice is to file patent applications in the U.S. and other countries for inventions that Applied considers significant. Applied has a significant number of patents in the U.S. and other countries, and additional applications are pending for new developments. Although Applied does not consider its business materially dependent upon any one patent, the rights of Applied and the products made and sold under its patents taken as a whole, are a significant element of Applied’s business. In addition to patents, Applied also possesses other intellectual property, including trademarks, knowhow, trade secrets and copyrights.

Applied enters into patent and technology licensing agreements with other companies when management determines that it is in its best interest to do so. Applied pays royalties under existing patent license agreements for the use, in several of its products, of certain patented technologies that are licensed to Applied for the life of the patents. Applied also receives royalties from licenses granted to third parties. Royalties received from and paid to third parties have not been and are not expected to be material in relation to the consolidated results of operations.

In the normal course of business, Applied periodically receives and makes inquiries regarding possible patent infringement. In dealing with such inquiries, it may become necessary or useful for Applied to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to Applied on commercially reasonable terms. If Applied is not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms and/or successfully prosecute or defend its position, Applied’s business, financial condition and results of operations could be materially and adversely affected.

Environmental Matters

Two of Applied’s locations have been designated as environmental cleanup sites. In 1987, the United States Environmental Protection Agency designated one of the locations, in Santa Clara, California, as a Superfund site and named Applied as a “Responsible Party.” Cleanup activities at this site began in 1984 and were substantially completed in February 2002. The California Regional Water Quality Control Board has designated Applied as a “Discharger” with respect to another site in Sunnyvale, California. ~~Although~~ Applied was named a Discharger at the Sunnyvale site upon its acquisition of the property in ~~1997, as it currently owns the site in question,~~1997. The prior owners and operators of the site are responsible for performing cleanup and monitoring activities. Applied maintains a number of environmental, health and safety programs that are primarily preventive in nature. As part of these programs, Applied regularly monitors ongoing compliance and periodically conducts investigations of possible contamination. Neither compliance with federal, state and local provisions regulating discharge of materials into the environment, nor remedial agreements or other actions relating to the environment, has had, or is expected to have, a material effect on Applied’s capital expenditures, competitive position, financial condition or results of operations.

The most recent report on Applied’s environmental, health and safety activities can be found on the Company’s ~~web site~~website athttp://www.appliedmaterials.com/about/environment.html. This report is updated periodically. This website address is intended to be an inactive textual reference only. None of the information contained on Applied’s website is part of this report or is incorporated by reference herein.

Employees

~~None of Applied’s~~

At October 30, 2005, Applied employed 12,576 regular employees ~~is represented by a trade union,~~ and ~~management considers its relations with employees to be good.~~348 temporary employees. In the high-technology industry, competition for highly-skilled employees is intense. Applied believes that its future success is highly dependent upon its continued ability to attract, retain and motivate qualified employees. There can be no assurance that Applied will be able to attract, hire, assimilate and retain a sufficient number of qualified employees. ~~At October 31, 2004, Applied employed 12,191 regular employees and 769 temporary employees.~~

Available Information

Applied’s website ishttp://www.appliedmaterials.com. Applied makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. This website address is intended to be an inactive textual reference only; none of the information contained on Applied’s website is part of this report or is incorporated by reference herein.


~~Item 2:~~	*~~Properties~~*

Item 2: Properties

Information concerning Applied’s principal properties at October ~~31, 2004~~30, 2005 is set forth below:
Square
Location Type Principal Use Footage(1) Ownership
Santa Clara, CA Office, Plant & Warehouse Headquarters, Marketing, 1,465,000 Owned
Manufacturing, Distribution, 2,007,000 (2) Leased
Research, Development
and Engineering
Austin, TX Office, Plant & Warehouse Manufacturing 1,719,000 Owned
389,000 Leased
Rehovot, Israel Office, Plant & Warehouse Manufacturing, Research, 442,000 Owned
Development and Engineering
Hayward, CA Office, Plant & Warehouse Research, Development 342,000 Leased
and Engineering
Narita, Japan Office & Warehouse Customer Support 226,000 (3) Owned
Hsinchu, Taiwan Office & Warehouse Customer Support 81,000 Owned
127,000 Leased
Singapore Office Customer Support 200,000 Owned
Hillsboro, OR Office, Plant & Warehouse Manufacturing, Research, 177,000 Owned
Development and Engineering
Tainan, Taiwan Office & Warehouse Customer Support 148,000 Owned
Horsham, England Office, Plant & Warehouse Manufacturing, Research, 138,000 Leased
Development and Engineering
Chunan, Korea Office & Warehouse Customer Support 111,000 Owned
Pudong, China Office & Warehouse Customer Support 102,000 Leased


			Square
Location	Type	Principal Use	Footage(1)(2)		Ownership

Santa Clara, CA	Office, Plant & Warehouse	Headquarters, Marketing,		1,465,000	Owned
		Manufacturing, Distribution,		1,544,000	Leased
		Research, Development
		and Engineering
Austin, TX	Office, Plant & Warehouse	Manufacturing		1,719,000	Owned
				445,000	Leased
Rehovot, Israel	Office, Plant & Warehouse	Manufacturing, Research,		442,000	Owned
		Development and Engineering
Hayward, CA	Office, Plant & Warehouse	Customer Support		342,000	Leased
Narita, Japan	Office & Warehouse	Customer Support		226,000	Owned
Hsinchu, Taiwan	Office & Warehouse	Customer Support		90,000	Owned
				141,000	Leased
Singapore	Office	Customer Support		200,000	Owned
Hillsboro, OR	Office, Plant & Warehouse	Customer Support and		177,000	Owned
		Manufacturing
Tainan, Taiwan	Office & Warehouse	Customer Support		148,000	Owned
Horsham, England	Office, Plant & Warehouse	Manufacturing, Research,		138,000	Leased
		Development and Engineering
Chunan, Korea	Office & Warehouse	Customer Support		111,000	Owned
Pudong, China	Office & Warehouse	Customer Support		102,000	Leased


(1)	Approximately ~~1.5~~1.4 million square feet were available for lease or sublease.

(2)	Includes approximately ~~216,000~~257,000 square feet that were ~~being~~ subleased.

~~(3)~~	~~Subject to loans of $13 million, collateralized by property and equipment with a net book value of $43 million at October 31, 2004.~~

In addition to the above properties, Applied ~~leases~~leased office space for marketing, sales, engineering and customer support offices in 7997 locations throughout the world: ~~24 in Japan, 21~~26 in North America (principally the United States), 1524 in Europe, 823 in Japan, 11 in Asia-Pacific (including ~~China)~~China and India), 79 in Korea and 4 in Taiwan.

In addition, Applied owns: (1) 9694 acres of buildable land in Texas that ~~can~~could accommodate approximately ~~1,464,000~~1,433,000 square feet of additional building space; (2) 26 acres in Oregon that ~~can~~could accommodate approximately 396,000 square feet of additional building space; (3) 43 acres in California that ~~can~~could accommodate approximately 1,247,000 square feet of additional building space; (4) 9 acres in Japan that ~~can~~could accommodate approximately ~~766,000~~767,000 square feet of additional building space; and (5) 16 acres in Danvers, Massachusetts, which includes an unimproved building of approximately 280,000 square feet. Applied also leases: (1) 13 acres in Taiwan that ~~can~~could accommodate approximately ~~271,000~~270,000 square feet of additional building space; and

(2) 10 acres in Israel that ~~can~~could accommodate approximately 111,000 square feet of additional building space. ~~This additional building space is anticipated to satisfy Applied’s future needs.~~

Applied considers ~~the above facilities suitable and~~these properties adequate to meet its current and future requirements.


~~Item 3:~~	*~~Legal Proceedings~~*

~~Novellus~~

~~On June 13, 1997, after Varian Associates, Inc. (Varian) failed~~ In response to ~~respond to requests by Applied to discuss certain patent issues, Applied filed a lawsuit against Varian captioned Applied Materials, Inc. v. Varian Associates, Inc. (case no. C-97-20523-RMW)~~ongoing changes in the ~~United States District Court for~~integrated circuit industry, Applied regularly assesses the ~~Northern District~~size, capability and location of California, alleging infringement of several of Applied’s patents concerning PVD technology. On July 7, 1997, Applied amended that action to allege infringement of those same Applied PVD patents against Novellus Systems, Inc. (Novellus)its global infrastructure and to add Novellus as a defendant, as a result of Novellus’ acquisition of Varian’s thin film systems PVD business. On June 23, 1997, Novellus filed a separate lawsuit against Applied captioned Novellus Systems, Inc. v. Applied Materials, Inc. (case no. C-97-20551-EAI) in the United States District Court for the Northern District of California, alleging infringement by Applied of several PVD technology patents that were formerly owned by Varian. Novellus sought damages for past infringement, a permanent injunction, treble damages for willful infringement, pre-judgment interest and attorneys’ fees. In September 2000, Applied and Varian settled their disputes and Applied released all claims with respect to the PVD technology system, as it was made and sold as of May 7, 1997. On October 3, 2000, Applied’s claims against Varian and Varian’s claims and counterclaims against Applied were dismissed with prejudice.periodically makes adjustments accordingly.

On September 20, 2004, Applied and Novellus entered into a Memorandum of Understanding (MOU) which effects a full settlement of the pending lawsuits. Both lawsuits have been dismissed with prejudice. As part of the MOU, Applied agreed to pay Novellus $8 million and to forgive an additional $3.5 million that Applied contended was owed under a previous license and settlement agreement (TEOS Agreement) between the parties. Patent licenses previously granted under the TEOS Agreement by each of Novellus and Applied become fully paid, as well as revocable only in limited circumstances. The MOU contains additional covenants and restrictions which, in general, limit the ability of each party (including subsidiaries and permitted successors and assigns) to sue the other, the other’s customers and, with some exceptions, the other’s suppliers and distributors, for infringement of any of the parties’ respective patents covering products in technology areas in which both parties were engaged in business as of September 3, 2004 (the Effective Date), as follows: (i) for a period of five years from the Effective Date as to existing products, and (ii) for a period of two years from the Effective Date, with the possibility to extend for an additional year, as to new products introduced after the Effective Date (Covenants Not to Sue). Technology areas in which neither party or only one party engaged in business as of the Effective Date are specifically excluded from the Covenants Not to Sue (Excluded Product Areas). The parties further agreed to notice and cure periods prior to filing suit on products subject to a Covenant Not to Sue that has expired. No damages for infringement will accrue during the Covenant Not to Sue and cure periods. The MOU contains a general release of all claims arising prior to the Effective Date that either Applied or Novellus may have had against the other and the other’s customers and, with some exceptions, the other’s suppliers and distributors, relating to infringement of the party’s patents by any of the other party’s products, other than those in Excluded Product Areas. There is no license of patents, technology or trade secrets in the MOU.

~~Linear Technology~~

On March 2, 2001, Linear Technology Corp. (LTC) filed a third party complaint against Applied in the United States District Court for the Eastern District of Texas, captioned Texas Instruments, Inc. v. Linear Technology Corp. v. Applied Materials, Inc. (case no. 2-01-CV4 (DF)). The complaint against Applied alleged that Applied is obligated to indemnify LTC and defend LTC for certain claims in the underlying patent infringement lawsuit brought by Texas Instruments, Inc. (TI) against LTC. The complaint also alleged claims for breach of contract, breach of warranty, and various unfair business practices. In the complaint, LTC alleged that, before LTC purchased certain equipment from Applied, Applied failed to disclose to LTC that TI previously had won a jury verdict against Hyundai Electronics Industries Co., Ltd. (Hyundai) for patent infringement based on Hyundai’s use of certain semiconductor equipment including some Applied tools.

LTC’s Texas lawsuit against Applied sought indemnification and damages from Applied and an order requiring Applied to defend LTC in the underlying lawsuit with TI. On January 15, 2002, the court granted TI’s motion to sever Applied and the other third party defendants from the action and dismissed LTC’s action against Applied and the other third party defendants without prejudice.

Item 3: Legal Proceedings

Linear Technology

On March 12, 2002, ~~LTC~~Linear Technology Corp. (LTC) filed a complaint against Applied in the Superior Court for the County of Santa Clara, captioned Linear Technology Corp. v. Applied Materials, Inc., Novellus Systems, Inc. and Tokyo Electron Ltd., (case no. CV806004), alleging claims for breach of contract, fraud and deceit, negligent misrepresentation, suppression of fact, unfair competition, breach of warranty, express contractual indemnity, implied equitable indemnity and declaratory relief. The complaint alleged, among other things, that Applied is obligated to indemnify and defend LTC for certain claims in an underlying patent infringement lawsuit brought by Texas Instruments, Inc. (TI) against LTC. On November 12, 2002, LTC filed an amended complaint in the Santa Clara action asserting essentially the same claims as in the original complaint, but adding an additional assertion that LTC and TI have settled their litigation. Applied’s motion to dismiss the amended complaint was granted in part. LTC filed a Second ~~Amended Complaint~~ and ~~Applied’s motion to dismiss the Second Amended Complaint was granted. LTC filed a~~ Third Amended Complaint, ~~and~~each of which was dismissed upon Applied’s ~~motion to dismiss the Third Amended Complaint was granted.~~motion. On February 13, 2004, LTC filed a Fourth Amended ~~Complaint.~~Complaint, which Applied moved to ~~dismiss the Fourth Amended Complaint.~~dismiss. LTC ~~subsequently~~then filed a motion to amend its Fourth Amended Complaint, which the Court granted. On July 7, 2004, LTC filed a Fifth Amended ~~Complaint which Applied moved to dismiss.~~Complaint. On October 5, 2004, Applied’s motion to dismiss LTC’s Fifth Amended Complaint was granted with prejudice. On January 11, 2005, LTC filed a notice of appeal of the dismissal of its complaint. Applied believes it has meritorious defenses and intends to pursue them vigorously.

David Scharf

On July 31, 2001, David Scharf, an individual, filed a lawsuit against Applied in the United States District Court for the Central District of California, captioned David Scharf v. Applied Materials, Inc. (caseno. 01-06580 AHM). The lawsuit alleges that Applied has infringed, has induced others to infringe and has contributed to others’ infringement of a patent concerning color synthesizing scanning electron microscope technology. Mr. Scharf seeks a preliminary and permanent injunction, a finding of willful infringement, damages (including treble damages), and costs. Applied has answered the complaint and counterclaimed for declaratory judgment of non-infringement and invalidity. On May 10, 2002, Mr. Scharf filed a request for re-examination of his patent with the Patent and Trademark Office (PTO). On June 26, 2002, the case was removed from the Court’s active docket after the parties stipulated to stay the case pending the results of that re-examination. On July 11, 2002, Applied filed its own request for re-examination of Mr. Scharf’s patent with the PTO. Applied’s request for re-examination was granted on September 19, 2002. On April 23, 2004, the PTO notified Applied that it intended to issue a re-examination certificate. On June 14, 2004, Applied filed a second request for re-examination of Mr. Scharf’s patent with the PTO. The second request was denied on September 1, 2004. On October 1, 2004, Applied filed a petition for reconsideration of that ~~denial.~~denial, which subsequently was denied. Applied believes it has meritorious defenses and counterclaims and intends to pursue them vigorously.

~~ASMI~~

On August 27, 2002, ASM America, Inc. and ASM International, N.V. (collectively ASMI) filed a lawsuit against Applied in the United States District Court for the District of Arizona, captioned ASM America, Inc. and ASM International, N.V. v. Applied Materials, Inc. (case no. Civ’02 1660 PHX SMM). The lawsuit sought a judicial declaration that ASMI does not infringe six patents owned by Applied that relate to remote cleaning of CVD chambers and to deposition of silicon nitride. The suit also sought a judicial declaration that these patents were invalid. Applied answered the complaint by denying the allegations and counterclaiming for infringement of the six patents.

On October 3, 2003, ASMI filed a lawsuit against Applied in the United States District Court for the Eastern District of Texas, captioned ASM America, Inc. and ASM International, N.V. v. Applied Materials, Inc. (case no. 2 03CV 348 TJW). The lawsuit alleged infringement of six ASMI patents. Applied responded to the complaint by denying the allegations and counterclaiming for a declaratory judgment of invalidity, unenforceability and non-infringement of the patents. Applied also asserted that ASMI infringed seven Applied patents, including the six patents at issue in the Arizona action plus an additional patent.

In August 2004, Applied and ASMI settled the Arizona and the Texas lawsuits and stipulated to dismiss both lawsuits without prejudice. The lawsuits were settled without payment of any kind by any party and

~~without licensing any patents. The settlement has not had, and is not expected to have, a material adverse affect on Applied’s business, financial condition or results of operations.~~

~~Varian Semiconductor Equipment Associates, Inc.~~

On September 13, 2002, Varian Semiconductor Equipment Associates, Inc. (VSEA) filed a demand for arbitration with the American Arbitration Association asserting that Applied has breached a patent license agreement between VSEA and Applied dated January 1, 1992. VSEA seeks to recover royalties, interest and attorneys’ fees. The arbitration hearing on whether the products are covered by the patent license agreement has concluded. On May 2, 2003, the arbitration panel issued an interim decision finding that some, but not all, of the patent claims asserted by VSEA were invalid. On September 1, 2004, the arbitration panel issued a decision in the second phase of the arbitration finding that Applied had not proven the invalidity of certain patent claims asserted by VSEA. To date, no hearing has been set to determine the amount owed by Applied to VSEA under the agreement pursuant to the arbitration panel’s decisions. Based on Applied’s current assessment of this matter, Applied believes that the amount of back royalty payments owed in connection with this action, including interest, will not exceed $25 million, of which $23 million was paid through October 31, 2004. In addition to back royalty payments, Applied will be required to make unit-based royalty payments on future sales of certain products found to be within the scope of the agreement. Applied expects that these unit-based royalty payments will not have a material adverse effect on Applied’s business, financial condition or results of operations.

Jusung

On December 24, 2003, Applied filed a lawsuit against Jusung Engineering Co., Ltd., (Jusung Engineering) and Jusung Pacific Co., Ltd.~~, (collectively~~ (Jusung Pacific, referred to together with Jusung Engineering as Jusung) in Tao-Yuan District Court in Taiwan captioned Applied Materials, Inc. v. Jusung Engineering Co., Ltd. (case no. 92 Tsai-chuan Tzi No. 6388). The lawsuit alleges that Jusung is infringing a patent related to chemical vapor deposition owned by Applied. In the suit, Applied seeks a provisional injunction prohibiting Jusung from importing, using, manufacturing, servicing or selling in Taiwan certain flat panel display manufacturing equipment. On December 25, 2003, the Tao-Yuan District Court ruled in favor of Applied’s request for a provisional injunction and, on January 14, 2004, the Court issued a provisional injunction ~~order.~~order against Jusung Pacific. Jusung Pacific ~~has~~ appealed those ~~decisions.~~decisions, and the decisions were affirmed on appeal. On January 30, 2004, Jusung Pacific ~~sought~~requested permission to post a counterbond to have the Jusung Pacific injunction lifted. Jusung Pacific’s ~~application~~counterbond request was granted and, on March 30, 2004, the provisional injunction order was lifted. ~~Applied~~At Applied’s request, on December 11, 2004, the District Court issued a provisional injunction order against Jusung Engineering. Jusung Engineering appealed that order, and the order was affirmed on appeal. Jusung Engineering also requested permission to post a counterbond ~~decisions~~to have the Jusung Engineering injunction lifted. Jusung Engineering’s counterbond request was granted, and, on ~~May 31, 2004,~~April 25, 2005, the ~~appellate court ruled that the~~provisional injunction ~~should be reinstated pending a final decision on Applied’s appeal of the grant of the counterbond.~~order against Jusung Engineering was lifted. Applied has

appealed both counterbond decisions. On June 30, 2004, Applied filed a “main action” patent infringement complaint against Jusung in the Hsinchu District Court in Taiwan captioned Applied Materials, Inc. v. Jusung Engineering Co., Ltd. (case no. 93 Zhong Zhi No. 3). In the suit, Applied seeks damages and a permanent injunction for infringement of the same patent. On August 5, 2004, the intermediate appellate court ruled in the provisional injunction lawsuit that the injunction against Jusung Pacific should be dissolved. Applied appealed that decision, and in December 2004, the Supreme Court reversed the appellate court’s decision. The injunction against Jusung Engineering Co., Ltd remains in effect. The decisions regarding the provisional injunction and counterbond had no effect on the separate patent infringement lawsuit filed by Applied against Jusung in the Hsinchu Court. Applied believes it has meritorious claims and intends to pursue them vigorously.

Taiwan Fair Trade Commission

On April 10, 2004, the Taiwan Fair Trade Commission (TFTC) notified Applied’s subsidiary AKT ~~Inc. (AKT)~~ in Taiwan that, pursuant to a complaint filed by Jusung, the TFTC had begun an investigation into whether AKT violated the Taiwan Fair Trade Act. The investigation ~~focuses~~focused on whether AKT violated the Taiwan Guidelines for the Review of Cases Involving Enterprises Issuing Warning Letters for Infringement on Copyright, Trademark and Patent Rights by allegedly notifying customers about AKT’s patent rights and the infringement of those rights by Jusung. On June 15, 2004, the TFTC notified Applied that Applied also was the subject of the investigation. ~~Both~~By letter dated April 15, 2005, the TFTC notified Applied and AKT ~~have responded~~that there was insufficient evidence to support a claim against either company. Jusung has appealed the TFTC’s ~~inquiries.~~decision, and the appeal is pending. Although Applied ~~believes~~agrees with the TFTC’s decision that there has been no violation, neither the extent nor the outcome of the ~~investigation~~appeal can be

determined at this time.

Applied ~~believes~~does not believe that the outcome of any of the above matters will ~~not~~ have a material adverse effect on its financial condition or results of operations.

~~Axcelis Technologies~~

On January 8, 2001, Axcelis Technologies, Inc. (Axcelis), formerly a subsidiary of Eaton Corporation, filed a lawsuit against Applied in the United States District Court for the District of Massachusetts, captioned Axcelis Technologies, Inc. v. Applied Materials, Inc. (case no. 01-10029 DPW). The lawsuit alleged that Applied infringed a patent concerning ion implantation owned by Axcelis. The complaint also alleged various Massachusetts state and common law tortious interference and unfair competition claims. Axcelis sought a preliminary and permanent injunction, damages, costs and attorneys’ fees. On April 12, 2001, Applied answered the complaint by denying all allegations and counterclaimed for declaratory judgment of invalidity and non-infringement, and violations of various unfair and deceptive trade practices laws. Applied sought damages, a permanent injunction, costs and attorneys’ fees. On July 2, 2003, after a trial on the merits, a jury ruled in favor of Applied, returning a verdict that Applied’s Swift^TM ion implantation system does not infringe Axcelis’ patent. The court then entered judgment in favor of Applied on Axcelis’ infringement claim. Axcelis appealed the judgment. On March 5, 2004, Applied and Axcelis settled the lawsuit and the parties have dismissed all claims and counterclaims, including the appeal, with prejudice. The settlement has not had a material effect on Applied’s business, financial condition or results of operations.

~~Semitool~~

On June 11, 2001, Semitool, Inc. (Semitool) filed a lawsuit against Applied in the United States District Court for the Northern District of California, captioned Semitool, Inc. v. Applied Materials, Inc. (case no. CV-01-2277 CRB). The lawsuit alleged that Applied infringed a patent concerning seed repair and electroplating owned by Semitool. Semitool sought a preliminary and permanent injunction, damages, costs and attorneys’ fees. On July 12, 2001, before Applied had answered the complaint, Semitool voluntarily dismissed its action against Applied in the Northern District of California. On the same day, Semitool filed a substantially identical action against Applied in the United States District Court for the District of Oregon captioned Semitool, Inc. v. Applied Materials, Inc. (case no. CV’01-1066 AS). On July 13, 2001, Applied filed a declaratory judgment action against Semitool in the Northern District of California captioned Applied Materials, Inc. v. Semitool, Inc. (case no. CV-01-2673 BZ). In that action, Applied sought a declaration that Applied had not infringed the Semitool patent and that Semitool’s patent was invalid and unenforceable. Applied also sought costs and attorneys’ fees. The California Court transferred Applied’s action against Semitool to the District of Oregon. The actions were proceeding together in Oregon. As part of a broad technology license agreement, Applied and Semitool settled the lawsuit on February 17, 2004, and all claims and counterclaims have been dismissed. The settlement and the license agreement did not have a material effect on Applied’s business, financial condition or results of operations.

Other Legal Matters

From time to time, Applied ~~is subject to various~~receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other ~~legal proceedings and~~actions by Applied in connection with claims ~~either asserted or unasserted, that arise in the ordinary course of business.~~made against them. In addition, from time to time, Applied receives notification from ~~customers~~third parties claiming that ~~such customers are entitled to indemnification~~Applied may be or is infringing their intellectual property or other ~~obligations from~~rights. Applied ~~related~~also is subject to ~~infringement~~various other legal proceedings and claims, ~~made against~~both asserted and unasserted, that arise in the ~~customers by third parties.~~ordinary course of business. Although the outcome of these claims and proceedings cannot be predicted with certainty, Applied does not believe that any of these other existing ~~legal~~ proceedings or claims will have a material adverse effect on its consolidated financial condition or results of operations.


Item 4:	*Submission of Matters to a Vote of Security Holders*

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table and notes set forth information about Applied’s executive officers:


Name of Individual		~~Capacities in Which Served~~Position

James C. Morgan(1)		Chairman of the Board of Directors
Michael R. Splinter(2)		President, Chief Executive Officer and Director
Franz Janker(3)		Executive Vice President, Sales and Marketing
Nancy H. ~~Handel(3)~~Handel(4)		Senior Vice President, Chief Financial Officer
Manfred Kerschbaum(5)		Senior Vice President, General Manager Applied Global Services
Farhad Moghadam(6)		Senior Vice President, General Manager Thin Films Product Business Group and Foundation Engineering
Mark R. Pinto(7)		Senior Vice President, Chief Technology Officer and General Manager New Business and New Products Group
Thomas St. Dennis(8)		Senior Vice President, General Manager Etch and Front End Product Business Groups


Name of Individual		Position

Joseph J. Sweeney(9)		Senior Vice President, General Counsel and Corporate Secretary
Gilad Almogy(10)		Group Vice President, General Manager Process Diagnostics and ~~Chief Financial Officer~~Control Product Business Group
~~Franz Janker(4)~~Yvonne Weatherford(11)		~~Senior~~Corporate Vice President, ~~Sales and Marketing~~Corporate Controller


	(1)	Mr. Morgan, age ~~66,~~67, has been Chairman of the Board of Directors of Applied since 1987. Mr. Morgan served as Applied’s Chief Executive Officer from ~~1977~~1997 to April ~~2003. Mr. Morgan also served~~2003, and as Applied’s President from 1976 to 1987.

	(2)	Mr. Splinter, age ~~54, was appointed~~55, serves as President and Chief Executive Officer and a member of the Board of Directors of ~~Applied on April 30, 2003.~~Applied. Prior to joining Applied in April 2003, Mr. Splinter worked for nearly 20 years at Intel Corporation (Intel). Most recently he was Executive Vice President and Director of the Sales and Marketing Group at Intel, responsible for sales and operations worldwide. Mr. Splinter previously held various executive positions at Intel, including Executive Vice President and General Manager of the Technology and Manufacturing Group.

	(3)	Mr. Janker, age 56, has been the head of Sales and Marketing since May 2003. From May 2003 he was Senior Vice President, Sales and Marketing and in December 2004 he was promoted to Executive Vice President, Sales and Marketing. He served as Senior Vice President, Global Operations and Corporate Marketing beginning in December of 2002. From December 1998 to 2002, he served as Group Vice President, Corporate Marketing and Business Management. From 1982 to 1998, Mr. Janker served in a variety of sales and marketing management positions with Applied in the United States and Europe.

	(4)	Ms. Handel, age ~~53,~~54, was appointed ~~Group~~Senior Vice President, ~~and~~ Chief Financial Officer onin October ~~22,~~ 2004. ~~Prior to that,~~Previously, she had been Group Vice President, Deputy Chief Financial Officer and Corporate Controller since 2000. From 1994 to 2000, Ms. Handel had ~~responsibilities~~responsibility for Global Finance Operations in addition to serving as Treasurer. From 1986 to 1994, Ms. Handel served as Treasurer. Ms. Handel joined Applied in 1985.

~~(4)~~	(5)	Mr. ~~Janker,~~Kerschbaum, age ~~55,~~51, has been Senior Vice President, ~~of Sales~~General Manager Applied Global Services since January 2005. He was Group Vice President, Global Operations from July 2004 to January 2005 and ~~Marketing since~~from October 2002 to May 2003. ~~Prior~~From May 2003 to ~~that,~~July 2004, he was Group Vice President, Foundation Engineering and Operations. From March 1997 to October 2002, he held various positions in Applied Materials North America, most recently as Group Vice President, General Manager Applied Materials North America. Mr. Kerschbaum has served in various other operations, customer service and engineering positions since joining Applied in 1983.

	(6)	Dr. Moghadam, age 51, has been Senior Vice President, General Manager Thin Films Product Business Group and Foundation Engineering since September 2004. He became Group Vice President, General Manager Dielectric Systems and Modules Product Business Group and Foundation Engineering and Operations in April 2004, after serving as Group Vice President, General Manager Dielectric Systems and Modules Product Business Group since December 2002. He was named Corporate Vice President of the group in December 1999. Dr. Moghadam joined Applied in 1996 and subsequently served in several positions with the Chemical Vapor Deposition Product Business Group. Before joining Applied, he spent 15 years at Intel in various management roles. Dr. Moghadam earned his Ph.D in Materials Science and Engineering from Stanford University in 1981.

	(7)	Dr. Pinto, age 46, has served as Senior Vice President, Chief Technology Officer and General Manager New Business and New Products Group, since joining Applied in January 2004. Prior to his appointment, Dr. Pinto spent 19 years with Bell Laboratories and the Lucent Microelectronics Group, which later became Agere Systems Inc., most recently as Vice President of ~~Global Operations~~the Analog Products Division. Dr. Pinto holds a Ph.D in Electrical Engineering from Stanford University.

	(8)	Mr. St. Dennis, age 52, returned to Applied in September 2005 as Senior Vice President, General Manager Etch and Front End Product Business Groups. He previously was with Applied from 1992 to 1999, most recently as Group Vice President, President Planarization and Dielectric Deposition Product Business Group and before that as Corporate Vice President, President Physical Vapor Deposition Product Business Group. From 2003 to 2005, Mr. St. Dennis was an Executive Vice President and member of the Office of the CEO of


		Novellus Systems, Inc. He served as President and Chief Executive Officer of Wind River Systems, Inc. from 1999 to 2003.


	(9)	Mr. Sweeney, age 57, has held the position of Senior Vice President, General Counsel and Corporate ~~Marketing in December~~Secretary of ~~2002.~~Applied since July 2005, with responsibility for global legal affairs, intellectual property and security. From ~~December 1998~~April 2002 to ~~2002, he~~July 2005, Mr. Sweeney was Group Vice President, ofLegal Affairs and Intellectual Property, and Corporate ~~Marketing and Business Management. From 1982 to 1998,~~Secretary. Mr. ~~Janker served in a variety of sales and marketing management positions with~~Sweeney joined Applied in ~~the United States and in Europe.~~July 1993.


(10)	Dr. Almogy, age 40, was appointed Group Vice President, General Manager Process Diagnostics and Control Product Business Group in July 2005. He was Corporate Vice President, General Manager of the group from April 2002 to July 2005 and Vice President and Co-General Manager of the group from December 2000 to April 2002. He has held various other positions in the group since joining Applied in 1997 when Applied acquired Orbot Instruments, Ltd. Dr. Almogy holds a Ph.D in Applied Physics from the California Institute of Technology.

(11)	Ms. Weatherford, age 54, has served as Corporate Vice President, Corporate Controller since December 2004. Ms. Weatherford was Appointed Vice President, Business Operations Controller from December 2001 to December 2004 and Appointed Vice President, Financial Operations Controller from October 2000 to December 2001. She has held various other finance roles since joining Applied in 1990.

PART II


Item 5:	*Market for Registrant’s Common Equity, ~~and~~ Related Stockholder Matters and Issuer Purchases of Equity Securities*

The following table sets forth the high and low closing sale prices as reported on the Nasdaq National Market.
2003 2004
Fiscal Year High Low High Low
First quarter $ 17.49 $ 13.03 $ 25.61 $ 20.72
Second quarter $ 15.81 $ 11.60 $ 22.84 $ 18.27
Third quarter $ 19.30 $ 13.66 $ 19.97 $ 15.86
Fourth quarter $ 22.22 $ 17.88 $ 17.63 $ 15.61


	2004				2005
Fiscal Year	High		Low		High		Low

First quarter	$	25.61	$	20.72	$	17.89	$	15.17
Second quarter	$	22.84	$	18.27	$	17.92	$	14.50
Third quarter	$	19.97	$	15.86	$	18.48	$	15.08
Fourth quarter	$	17.63	$	15.61	$	18.58	$	16.36

Applied’s common stock is traded on the Nasdaq National Market under the symbol AMAT. As of November ~~28, 2004,~~27, 2005, there were ~~6,719~~6,254 directly registered holders of stock.

~~To date,~~

On March 23, 2005, Applied ~~has not~~ declared orits first quarterly cash dividend in the amount of $0.03 per share, which was paid on June 8, 2005 to stockholders of record as of May 18, 2005, for a total of $49 million. On June 23, 2005, Applied declared its second quarterly cash dividend in the amount of $0.03 per share, payable on September 7, 2005 to stockholders of record as of August 17, 2005, for a total of $49 million. On September 16, 2005, Applied declared its third quarterly cash dividend in the amount of $0.03 per share, payable on December 8, 2005 to stockholders of record as of November 17, 2005, for a total of $48 million. Applied currently anticipates that cash dividends will continue to ~~its~~be paid on a quarterly basis in the future, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination that cash dividends are in the best interest of stockholders. ~~Applied has no plans to declare and pay cash dividends.~~

The following table provides information as of October ~~31, 2004~~30, 2005 with respect to the shares of common stock repurchased by Applied during the fourth fiscal quarter of fiscal ~~2004:~~
Maximum Dollar
Total Number of Value of Shares
Average Shares Purchased as that May Yet be
Total Number of Price Paid Part of Publicly Purchased Under
Period Shares Purchased per Share Announced Program* the Program*
(Shares in (Shares in (Dollars in
thousands) thousands) millions)
Month #1
(August 2, 2004 to August 29, 2004) 10,660 $ 16.14 10,660 $ 2,828
Month #2
(August 30, 2004 to September 26, 2004) 20,333 $ 16.13 20,333 $ 2,500
Month #3
(September 27, 2004 to October 31, 2004) — $ — — $ 2,500

Total 30,993 $ 16.13 30,993

2005:


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

Month #1 (August 1, 2005 to August 28, 2005)		2,600	$	18.24		2,600	$	3,249
Month #2 (August 29, 2005 to September 25, 2005)		9,900	$	17.67		9,900	$	3,074
Month #3 (September 26, 2005 to October 30, 2005)		13,401	$	16.98		13,401	$	2,847

Total		25,901	$	17.37		25,901


*		On March ~~24, 2004, following the expiration of the prior share repurchase authorization,~~22, 2005, the Board of Directors ~~extended the~~approved a new stock repurchase program ~~and authorized the repurchase of~~for up to $3$4.0 billion of Applied’s common stock over the next three years, ending March 2008, which replaced the $3.0 billion stock repurchase program that was instituted in ~~the open market.~~March 2004.


Item 6:	*Selected Financial Data*

The following selected financial information has been derived from Applied’s historical consolidated financial statements and should be read in conjunction with the consolidated financial statements and the accompanying notes for the corresponding fiscal years:
Fiscal year ended(1) 2000(2) 2001 2002 2003 2004
(In thousands, except percentages, per share amounts and number of employees)
Net sales $ 9,564,412 $ 7,343,248 $ 5,062,312 $ 4,477,291 $ 8,013,053
Gross margin $ 4,855,728 $ 3,252,033 $ 2,056,661 $ 1,604,455 $ 3,701,245
(% of net sales) 50.8 44.3 40.6 35.8 46.2
Research, development and engineering $ 1,107,922 $ 1,198,799 $ 1,052,269 $ 920,618 $ 991,873
(% of net sales) 11.6 16.3 20.8 20.6 12.4
Marketing, selling, general and administrative $ 960,753 $ 901,924 $ 708,955 $ 625,865 $ 751,621
(% of net sales) 10.0 12.3 14.0 14.0 9.4
Income/(loss) before income taxes, equity in net income/(loss) of joint venture and cumulative effect of change in accounting principle $ 2,947,844 $ 1,103,802 $ 340,511 $ (211,556 ) $ 1,829,250
Effective tax rate (%) 30.0 29.8 21.0 29.5 26.1
Income/(loss) before cumulative effect of change in accounting principle $ 2,063,552 $ 775,228 $ 269,004 $ (149,147 ) $ 1,351,303
(% of net sales) 21.6 10.6 5.3 (3.3 ) 16.9
Cumulative effect of change in accounting principle, net of tax(2) $ — $ (267,399 ) $ — $ — $ —
Net income/(loss) $ 2,063,552 $ 507,829 $ 269,004 $ (149,147 ) $ 1,351,303

Earnings/(loss) per share(3) $ 1.20 $ 0.46 $ 0.16 $ (0.09 ) $ 0.78
Cumulative effect of change in accounting principle — (0.16 ) — — —

$ 1.20 $ 0.30 $ 0.16 $ (0.09 ) $ 0.78

Weighted average common shares and equivalents(3) 1,718,338 1,694,658 1,701,557 1,659,557 1,721,645
Order backlog $ 4,381,768 $ 2,725,406 $ 3,190,459 $ 2,495,115 $ 3,368,382
Working capital $ 6,079,436 $ 6,249,358 $ 6,571,337 $ 6,729,896 $ 7,993,538
Current ratio 3.2 5.1 5.4 5.1 4.5
Long-term debt $ 573,126 $ 564,805 $ 573,853 $ 456,422 $ 410,436
Stockholders’ equity $ 7,104,348 $ 7,606,737 $ 8,019,649 $ 8,068,034 $ 9,262,027
Book value per share(3) $ 4.37 $ 4.66 $ 4.87 $ 4.81 $ 5.51
Total assets $ 10,545,730 $ 9,828,510 $ 10,224,765 $ 10,311,622 $ 12,093,445
Capital expenditures, net of retirements $ 383,255 $ 710,620 $ 417,080 $ 211,959 $ 171,538
Regular employees 19,220 17,365 16,077 12,050 12,191


Fiscal Year Ended(1)	2001			2002		2003			2004		2005
	(In thousands, except percentages, ratios, per share amounts and number of employees)

Net sales	$	7,343,248		$	5,062,312	$	4,477,291		$	8,013,053	$	6,991,823
Gross margin	$	3,252,033		$	2,056,661	$	1,604,455		$	3,701,245	$	3,085,874
(% of net sales)		44.3			40.6		35.8			46.2		44.1
Research, development and engineering	$	1,198,799		$	1,052,269	$	920,618		$	991,873	$	940,507
(% of net sales)		16.3			20.8		20.6			12.4		13.5
Marketing, selling, general and administrative	$	901,924		$	708,955	$	625,865		$	751,621	$	697,402
(% of net sales)		12.3			14.0		14.0			9.4		10.0
Income/(loss) before income taxes and cumulative effect of change in accounting principle	$	1,103,802		$	340,511	$	(211,556	)	$	1,829,250	$	1,581,569
Effective tax rate (%)		29.8			21.0		29.5			26.1		23.5
Income/(loss) before cumulative effect of change in accounting principle	$	775,228		$	269,004	$	(149,147	)	$	1,351,303	$	1,209,900
(% of net sales)		10.6			5.3		(3.3	)		16.9		17.3
Cumulative effect of change in accounting principle, net of tax(2)	$	(267,399	)	$	—	$	—		$	—	$	—
Net income/(loss)	$	507,829		$	269,004	$	(149,147	)	$	1,351,303	$	1,209,900


Fiscal Year Ended(1)	2001			2002		2003			2004		2005
	(In thousands, except percentages, ratios, per share amounts and number of employees)

Earnings/(loss) per share(3)	$	0.46		$	0.16	$	(0.09	)	$	0.78	$	0.73
Cumulative effect of change in accounting principle per share(3)		(0.16	)		—		—			—		—

	$	0.30		$	0.16	$	(0.09	)	$	0.78	$	0.73

Weighted average common shares and equivalents(3)		1,694,658			1,701,557		1,659,557			1,721,645		1,657,493
Order backlog	$	2,725,406		$	3,190,459	$	2,495,115		$	3,368,382	$	2,570,808
Working capital	$	6,249,358		$	6,571,337	$	6,729,896		$	7,993,538	$	7,683,269
Current ratio		5.1			5.4		5.1			4.5		5.4
Long-term debt	$	564,805		$	573,853	$	456,422		$	410,436	$	407,380
Cash dividends declared per common share	$	—		$	—	$	—		$	—	$	0.09
Stockholders’ equity	$	7,606,737		$	8,019,649	$	8,068,034		$	9,262,027	$	8,928,549
Book value per share(3)	$	4.66		$	4.87	$	4.81		$	5.51	$	5.56
Total assets	$	9,828,510		$	10,224,765	$	10,311,622		$	12,093,445	$	11,269,157
Capital expenditures, net of loss on fixed asset retirements	$	710,620		$	417,080	$	211,959		$	171,538	$	177,097
Regular employees		17,365			16,077		12,050			12,191		12,576


(1)		Each fiscal year ended on the last Sunday in October.

(2)		Effective the first fiscal quarter of 2001, Applied implemented the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements.” Implementation of SAB 101 resulted in Applied recording a cumulative effect of change in accounting

principle of $267 million (net of income tax benefit of $112 million) in fiscal 2001. ~~For periods prior to fiscal 2001, data was not available to provide pro forma information as if the change in accounting principle were applied retroactively.~~

(3) Amounts ~~prior to~~for fiscal ~~2002~~2001 have been restated to reflect atwo-for-one stock split in the form of a 100 percent stock dividend, effective April 16, 2002.


Item 7:	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Introduction

Management’s Discussion and Analysis (MD&A) is intended to facilitate an understanding of Applied’s business and results of operations. This MD&A should be read in conjunction with Applied’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. MD&A consists of the following sections:


	•	Overview: a summary of Applied’s business, measurements and opportunities.

	•	Results of Operations: a discussion of operating results.

	•	Financial Condition, Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash, contractual obligations and financial position.

	•	Critical Accounting Policies: a discussion of critical accounting policies that require the exercise of judgments and estimates.

	•	Trends, Risks and Uncertainties: a discussion of significant risks that could affect Applied’s financial condition and/or operating results.

Overview

Applied develops, manufactures, markets and services integrated circuit fabrication equipment for the ~~worldwide~~global semiconductor and semiconductor-related industry. Product development and manufacturing activities occur in North America, the United Kingdom and Israel. Applied’s broad range of equipment and service products are highly technical and, as a result, are sold through a direct sales force. Customer demand for spare parts and services is fulfilled through a global spare parts distribution system and trained service engineers located around the world in close proximity to customer sites.

As a supplier to ~~the global semiconductor~~this industry, Applied’s results are primarily driven by worldwide demand for integrated circuits, which in turn depends on end-user demand for electronic products. The ~~global semiconductor~~ industry in which the Company operates is volatile. The downturn that began in fiscal 2001 and continued into fiscal 2003 constituted what management believes to be the longest and most severe downturn experienced by the ~~semiconductor equipment~~ industry. A recovery began in the fourth fiscal quarter of 2003 and continued ~~throughout~~into fiscal 2004. The growth peaked in the second half of 2004 and slowed thereafter through fiscal 2005. Applied’s results in fiscal ~~2002~~2003 through ~~2004~~2005 reflect ~~this volatility.~~

the volatility of the industry.

The following table presents certain significant measurements of the past three fiscal years:
Fiscal year 2002 2003 2004
(In millions, except per share
amounts and percentages)
New orders $ 6,142 $ 4,318 $ 8,982
Net sales $ 5,062 $ 4,477 $ 8,013
Gross margin $ 2,057 $ 1,604 $ 3,701
Gross margin percent 40.6 % 35.8 % 46.2 %
Net income/(loss) $ 269 $ (149 ) $ 1,351
Earnings/(loss) per share $ 0.16 $ (0.09 ) $ 0.78


Fiscal Year	2003			2004			2005
	(In millions, except per share amounts and percentages)

New orders	$	4,318		$	8,982		$	6,389
Net sales	$	4,477		$	8,013		$	6,992
Gross margin	$	1,604		$	3,701		$	3,086
Gross margin percent		35.8	%		46.2	%		44.1	%
Net income/(loss)	$	(149	)	$	1,351		$	1,210
Earnings/(loss) per share	$	(0.09	)	$	0.78		$	0.73

During fiscal ~~2002 and~~ 2003, lower sales volume and under absorption of manufacturing and ~~field~~ service costs resulted in lower gross margins. In response to the continued difficult economic environment, that began in fiscal 2001, Applied implemented a series of actions that were intended to better align Applied’s cost structure with anticipated business conditions. During fiscal 2003, when business conditions did not improve significantly,

Applied implemented a realignment plan in fiscal 2003, which concluded in the first fiscal quarter of 2004. Fiscal ~~2002 and~~ 2003 operating results were negatively affected by lower net sales, reduced gross margins and charges related to realignment activities.

Operating results for fiscal 2004 reflected a recovery in the semiconductor industry and the global economy, as well as Applied’s realized savings from the completed realignment activities. In addition, Applied gained market share in critical areas, including 300mm equipment and copper interconnect, improved operational efficiencies, and ~~increased~~further strengthened its cash position.

Fiscal 2005 results reflected a challenging environment as Applied’s customers decreased fab utilization globally and reduced or delayed capacity additions as a result of excess inventories and slowing demand for integrated circuits. During this period, Applied focused on lowering costs, improving efficiencies, reducing cycle time and bringing new products to market. Applied also generated strong cash ~~position.~~

flow, and returned value to stockholders by repurchasing stock and paying cash dividends.

Applied’s long-term opportunities depend in part on successful execution of aits growth strategy, including increasing market share in existing markets, expanding into related markets, and cultivating new markets and new business models. These opportunities are also subject ~~to:~~to many factors, including: (1) global economic conditions; (2) advanced technology and/or capacity requirements of ~~semiconductor~~integrated circuit manufacturers and their capital investment trends; (3) the profitability of ~~semiconductor~~integrated circuit manufacturers; (4) supply and demand for ~~semiconductors;~~integrated circuits; (5) ~~continued~~Applied’s investment in RD&E&E; and (6) the relative competitiveness of Applied’s equipment and service products. For this and other reasons set forth in the section entitled “Trends, Risks and Uncertainties,” Applied’s prior results of operations ~~may~~are not necessarily be indicative of future operating results.

Results of Operations

Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal ~~2004 contained 53 weeks, whereas fiscal 2002~~2005 and 2003 each contained 52 weeks, whereas fiscal 2004 contained 53 weeks. The first fiscal quarter of 2005 and 2003 each contained 13 weeks, whereas the first fiscal quarter of 2004 contained 14 ~~weeks, whereas the first fiscal quarter of 2002 and 2003 each contained 13~~ weeks.


	*~~Net Sales~~*

Net Sales

Applied’s business was subject to cyclical industry conditions in fiscal ~~2002,~~ 2003, 2004 and ~~2004.~~2005. As a result of these conditions, there were significant fluctuations in Applied’s quarterly new orders and net sales, both within and across the fiscal years. Demand for ~~semiconductor~~integrated circuit manufacturing equipment has historically been volatile as a result of sudden changes in ~~semiconductor~~integrated circuit supply and demand and other factors, including rapid technological advances in ~~both semiconductor devices and wafer~~integrated circuit fabrication processes.

Quarterly and full fiscal year financial information was as follows:
Fiscal Quarter
Fiscal
First Second Third Fourth Year
(In millions, except per share amounts)
2002:
New orders $ 1,119 $ 1,688 $ 1,778 $ 1,557 $ 6,142
Net sales $ 1,000 $ 1,156 $ 1,460 $ 1,446 $ 5,062
Gross margin $ 386 $ 463 $ 606 $ 602 $ 2,057
Net income/(loss) $ (45 ) $ 52 $ 115 $ 147 $ 269
Earnings/(loss) per share $ (0.03 ) $ 0.03 $ 0.07 $ 0.09 $ 0.16
2003:
New orders $ 1,016 $ 971 $ 1,054 $ 1,277 $ 4,318
Net sales $ 1,054 $ 1,107 $ 1,095 $ 1,221 $ 4,477
Gross margin $ 390 $ 373 $ 347 $ 494 $ 1,604
Net income/(loss) $ (65 ) $ (62 ) $ (37 ) $ 15 $ (149 )
Earnings/(loss) per share $ (0.04 ) $ (0.04 ) $ (0.02 ) $ 0.01 $ (0.09 )
2004:
New orders $ 1,683 $ 2,214 $ 2,462 $ 2,623 $ 8,982
Net sales $ 1,556 $ 2,018 $ 2,236 $ 2,203 $ 8,013
Gross margin $ 676 $ 939 $ 1,059 $ 1,027 $ 3,701
Net income $ 82 $ 373 $ 441 $ 455 $ 1,351
Earnings per share $ 0.05 $ 0.22 $ 0.26 $ 0.27 $ 0.78


	Fiscal Quarter											Fiscal
	First			Second			Third			Fourth		Year
	(In millions, except per share amounts)

2003:
New orders	$	1,016		$	971		$	1,054		$	1,277	$	4,318
Net sales	$	1,054		$	1,107		$	1,095		$	1,221	$	4,477
Gross margin	$	390		$	373		$	347		$	494	$	1,604
Net income/(loss)	$	(65	)	$	(62	)	$	(37	)	$	15	$	(149	)
Earnings/(loss) per share	$	(0.04	)	$	(0.04	)	$	(0.02	)	$	0.01	$	(0.09	)
2004:
New orders	$	1,683		$	2,214		$	2,462		$	2,623	$	8,982
Net sales	$	1,556		$	2,018		$	2,236		$	2,203	$	8,013
Gross margin	$	676		$	939		$	1,059		$	1,027	$	3,701
Net income	$	82		$	373		$	441		$	455	$	1,351
Earnings per share	$	0.05		$	0.22		$	0.26		$	0.27	$	0.78
2005:
New orders	$	1,675		$	1,553		$	1,468		$	1,693	$	6,389
Net sales	$	1,781		$	1,861		$	1,632		$	1,718	$	6,992
Gross margin	$	790		$	818		$	717		$	761	$	3,086
Net income	$	289		$	305		$	370		$	246	$	1,210
Earnings per share	$	0.17		$	0.18		$	0.23		$	0.15	$	0.73

Net sales by geographic region, which were attributed to the location of the customers’ facilities, were as follows:
Fiscal Year 2002 2003 2004
(In millions)
Taiwan $ 1,238 $ 583 $ 2,006
Asia-Pacific(1) 636 527 1,580
Japan 757 827 1,417
North America(2) 1,328 1,179 1,337
Korea 443 666 879
Europe 660 695 794

$ 5,062 $ 4,477 $ 8,013


Fiscal Year	2003		2004		2005
	(In millions)

Taiwan	$	583	$	2,006	$	1,608
North America(1)		1,179		1,337		1,472
Japan		827		1,417		1,396
Korea		666		879		1,021
Europe		695		794		883
Asia-Pacific(2)		527		1,580		612

	$	4,477	$	8,013	$	6,992


(1)	~~Includes China.~~

~~(2)~~	Primarily the United States.

(2)		Includes China.

~~During~~

From fiscal ~~year~~ 2001 through the third quarter of 2003, slowing worldwide demand for ~~semiconductors~~integrated circuits resulted in a rapid decline in demand for ~~semiconductor~~integrated circuit manufacturing equipment. Inventory buildups in telecommunication products, slower than expected personal computer sales and slower global economic growth caused ~~semiconductor~~integrated circuit companies to reduce their capital spending and reschedule or cancel existing orders. ~~This~~The decline in demand further deepened ~~sequentially throughout fiscal 2001~~ into a severe industry downturn due to continued weakness in the macro-economic climate and reduced consumption of electronic products, which resulted in further capital spending cutbacks by Applied’s customers. ~~This industry downturn extended from 2001 through the third fiscal quarter of 2003. Beginning~~However, beginning with the fourth fiscal quarter of 2003 and continuing into fiscal 2004, customers ~~made~~ increased their investments in capital equipment for capacity and technology, responding to higher spending for consumer electronics and business information technology and an increase in ~~semiconductor~~integrated circuit demand.

~~Applied experienced~~ The growth peaked in the second half of 2004 and slowed thereafter into fiscal 2005. As a ~~decline in~~result of excess inventories and slowing demand for ~~its products~~integrated circuits, customers reduced production and delayed capacity additions in fiscal 2005.

New orders in the first ~~fiscal quarter~~half of 2002. In the second fiscal quarter of 2002, customers ordered equipment for 200mm advanced capacity to satisfy demand driven by consumer-related and wireless devices. Customers also continued to place technology orders to invest in 300mm wafer processing, copper and smaller line-width technologies. However, second quarter demand levels proved to be unsustainable as the global economic environment weakened through the middle of the year, and customers reduced their level of capacity spending accordingly, while maintaining advanced technology spending. Net sales peaked in the third fiscal quarter of 2002 and flattened in the fourth fiscal quarter of 2002. Included in fiscal 2002 net sales was the remaining $9 million of revenue that was recognized as part of the cumulative effect of implementing SAB 101.

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

Net sales ~~increased 79 percent from $4.5 billion~~ for fiscal 2003 ~~to $8.0 billion for fiscal 2004. Orders~~were $4.5 billion.

New orders increased from $4.3 billion for fiscal 2003 to $9.0 billion for fiscal 2004, reflecting a broad-based increase in capital investment by both ~~DRAM~~advanced memory and logic manufacturers for 300mm technology to meet rising demand for ~~semiconductors.~~integrated circuits. Following the new order trends, net sales increased 79 percent from $4.5 billion for fiscal 2003 to ~~approximately~~ $8.0 billion for fiscal 2004, reflecting the fulfillment of higher levels of orders for capital equipment received in prior quarters to support customers’ manufacturing capacity expansion and new technology requirements.

New orders decreased 29 percent from $9.0 billion for fiscal 2004 to $6.4 billion for fiscal 2005, as integrated circuit manufacturers reduced their capital investments to bring inventories in line with demand. Following the trend of decreasing orders during fiscal 2005, net sales decreased by 13 percent from $8.0 billion for fiscal 2004 to $7.0 billion for fiscal 2005, reflecting lower demand for integrated circuit products.

~~Realignment Activities~~

Realignment Activities

During fiscal 2003, in response to the continuing difficult business conditions, Applied implemented a series of activities to better align Applied’s cost structure with prevailing economic conditions. Realignment activities consisted of consolidation of facilities, reductions in workforce, and refocused product ~~efforts, such as the electron-beam mask pattern product line and implementation of the global spare parts distribution system (which included the closure of a central warehouse).~~efforts. As a result of the

realignment activities, Applied vacated approximately two million square feet and reduced approximately 3,800 positions during fiscal 2003. Realignment activities resulted in charges across multiple categories, as incurred, including cost of products sold, ~~research, development and engineering (RD&E)~~RD&E expenses, and restructuring and asset impairment charges. During the first fiscal quarter of 2004, realignment activities were completed and reported as restructuring, asset impairments and other charges, as discussed below. There were no realignment charges during fiscal 2005.


	*~~Gross Margin~~*

Gross Margin

Gross margin as a percentage of net sales ~~decreased~~increased from ~~40.6 percent for fiscal 2002 to~~ 35.8 percent for fiscal 2003 ~~and then increased~~ to 46.2 percent for fiscal ~~2004.~~2004, and decreased to 44.1 percent for fiscal 2005. In fiscal 2000, Applied experienced unprecedented new order and revenue growth. Accordingly, Applied expanded its manufacturing facilities to accommodate anticipated growth. The ~~decreased~~lower business volume in fiscal 2001 ~~2002 and~~through fiscal 2003, due to the industry downturn, was insufficient to fully absorb the overhead costs of these facilities, resulting in lower gross margins for all respective periods. The continued decline in gross margin for fiscal 2003 was principally attributable to under absorption of manufacturing and field service costs as a result of prolonged ~~lower~~low business volumes, and inventory writeoffs and charges associated with refocused product ~~efforts, including an electron-beam mask pattern product and implementation of the global spare parts distribution system.~~efforts. The increase in gross margin from fiscal 2003 to fiscal 2004 was principally attributable to improved revenue levels, changes in product mix, decreased product costs, and increased manufacturing volume, resulting in higher absorption of manufacturing and field service costs and the completion of refocused product efforts discussed previously. The improvement in gross margin was partially offset by increased variable compensation costs as a result of improved operating performance. The decrease in gross margin from fiscal 2004 to fiscal 2005 was due to lower revenue levels, lower manufacturing absorption and changes in product mix, which were partially offset by initiatives for cost reduction and efficiency improvement, such as common platform architecture and parts, lower cost sourcing and cycle time reduction.


	*~~Research, Development and Engineering~~*

Research, Development and Engineering

Applied’s future operating results depend, to a considerable extent, on its ability to maintain a competitive advantage in the products and services it provides. Applied believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced ~~semiconductor~~integrated circuit designs. Applied has historically maintained its commitment to investing in RD&E in order to continue to offer new products and technologies. As a result, RD&E expenses were ~~$1.1 billion (21 percent of net sales) for fiscal 2002,~~ $921 million (21 percent of net sales) for fiscal 2003, ~~and~~ $992 million (12 percent of net sales) for fiscal ~~2004.~~2004 and $941 million (13 percent of net sales) for fiscal 2005. Development cycles range from 12 to 36 months depending on whether the product is an enhancement of an existing ~~technology~~product or a new product. Most of Applied’s existing ~~product lines are the result of~~products resulted from internal ~~product~~ development ~~activities.~~activities and innovations involving new technologies, materials and processes. In certain instances, Applied acquires technologies either in its existing areas of development or through new product opportunities to complement its existing technology capabilities and to reduce time to market. Throughout the periods covered by this report, Applied has developed products designed to enable our customers to fabricate chips with 65nm and below feature sizes, to make use of new materials such as copper and low k dielectrics, and to transition to 300mm wafer processing.

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

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

In fiscal 2004, Applied continued its investment in developing ~~new~~ technologies for future generation manufacturing. Advances were made in several key areas, including technology for enhancing transistor and interconnect performance. Applied introduced ten major ~~new~~ products in these areas, including the Endura2, Ecmp, Quantum X ~~andG2~~and G2 FIB systems, all targeted for 65nm and below chip manufacturing. In addition, Applied introduced the Gen7 AKT flat panel system.


	*~~Marketing, Selling, General and Administrative~~*

In fiscal 2005, Applied focused on developing systems for customers’ advanced chip designs, including systems to enable smaller and faster interconnect and transistor structures with 65nm, 45nm and below geometries.

For copper interconnect applications, the Company introduced the Applied Endura CuB/S system with advanced copper barrier/seed technology and the Applied Producer Black Diamond II system for next-generation low k dielectric layers. For leading-edge transistor gate applications, Applied launched the Applied AdvantEdge Etch system and the Applied Vantage RadOx RTP. New applications in strain engineering, which involves creating localized areas of stress in the transistor structure, were also developed for existing systems to meet customers’ requirements for faster transistors. In the area of inspection and metrology, Applied launched UVision, the industry’s first laser 3D brightfield inspection tool. The Applied OPC Check software is designed to automate critical OPC mask verification for customers. Applied’s AKT subsidiary developed the Gen-8 AKT-50K PECVD system for manufacturing flat panel displays. The system processes 2.2m x 2.4m glass substrates and doubles the capacity of previousGen-7 systems for producing52-inchLCD-TV screens.

Marketing, Selling, General and Administrative

Marketing, selling, general and administrative expenses ~~decreased from $709 million (14 percent of net sales) for fiscal 2002 to~~were $626 million (14 percent of net sales) for fiscal 2003, ~~and~~ increased to $752 million (9 percent of net sales) for fiscal ~~2004. The decrease from~~2004, and decreased to $697 million (10 percent of net sales) for fiscal ~~2002 to 2003 was due primarily to headcount reductions and cost reduction activities, limiting discretionary expenditures to align costs to lower business volumes.~~2005. The increase from fiscal 2003 to 2004 correlated to the increase in business volume, as well as increases in variable compensation as a result of improved operating ~~performance~~.performance. The decrease from fiscal 2004 to 2005 was due to lower business volume, reductions in variable compensation and Applied’s continued focus on cost controls.


	*~~Restructuring, Asset Impairments and Other Charges~~*

Restructuring, Asset Impairments and Other Charges

The restructuring actions taken in fiscal ~~2002,~~ 2003 and 2004 were intended to better align Applied’s cost structure with prevailing market conditions due to the industry downturn at the time. These actions, which were necessary as a result of reduced business volume, reduced Applied’s global workforce and consolidated global facilities.

Restructuring, asset impairments and other charges for fiscal 2002 totaled $85 million, consisting of a charge of $8 million for acquired in-process research and development and $77 million for restructuring and asset impairment charges. The restructuring and asset impairment charges consisted of $39 million for headcount reductions, $16 million for consolidation of facilities and $22 million for other costs, primarily fixed asset writeoffs due to facility consolidation.

Restructuring, asset impairments and other charges for fiscal 2003 totaled $372 million, consisting of $186 million for headcount reductions, $86 million for consolidation of facilities and $100 million for other costs, primarily fixed asset writeoffs due to facility ~~consolidation.~~

As of October 31, 2004, the majority of the fiscal 2002 and 2003 restructuring actions have been completed, and restructuring reserve balances consist principally of remaining lease commitments associated with facilities.

consolidations.

Restructuring, asset impairments and other charges for fiscal 2004 totaled $167 million, consisting of $65 million for facility consolidations, $6 million for severance and benefits, and $96 million for other costs, primarily fixed asset writeoffs due to facility consolidations.

As of October 30, 2005, the fiscal 2003 and 2004 restructuring actions have been completed, and restructuring reserve balances consist principally of remaining lease commitments associated with facilities.

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


	*~~Litigation Settlements, Net~~*

Litigation Settlements, Net

Litigation settlements, net were $27 million for fiscal 2004 and ~~included~~consisted of costs of $28 million related to two separate patent litigation settlements, net of a gain of $1 million related to a legal settlement in favor of Applied.


	*~~Net Interest Income~~*

During fiscal 2003 or 2005, there were no significant litigation settlements.

Net Interest Income

Net interest income was ~~$131 million for fiscal 2002,~~ $102 million for fiscal 2003, ~~and~~ $66 million for fiscal ~~2004.~~2004 and $134 million for fiscal 2005. The decrease in net interest income infrom fiscal 2003 ~~and~~to 2004 was due primarily to lower average

portfolio yields. ~~While there were increases~~The increase in net interest income in 2005 was due to a substantial increase in interest rates ~~during fiscal~~and a decrease in interest expense associated with scheduled debt maturities in September 2004 ~~the benefit to interest income on Applied’s investment portfolio was limited by the moderate rate of portfolio turnover throughout the year.~~and September 2005.


	*~~Income Taxes~~*

Income Taxes

Applied’s effective income tax provision/(benefit) rate was ~~21.0 percent for fiscal 2002,~~ (29.5) percent for fiscal 2003, ~~and~~ 26.1 percent for fiscal ~~2004. Applied’s actual effective rate of 21.0~~2004 and 23.5 percent for fiscal ~~2002 differed from the anticipated~~2005. Applied’s effective ~~rate of 29.5 percent primarily due to significant export~~ tax ~~benefits, which resulted from an increase in qualified export sales. Applied expected and experienced an actual effective benefit rate of (29.5) percent in fiscal 2003. Applied’s actual effective~~ rate of 26.1 percent for fiscal 2004 differed from ~~the anticipated effective rate of 29.5 percent primarily~~(29.5 percent) for fiscal 2003 due to ~~a change in estimates with respect to foreign tax credits,~~increased export tax benefits and foreign tax credits. Applied’s effective rate of

23.5 percent for fiscal 2005 differed from 26.1 percent for fiscal 2004 primarily due to the ~~geographical composition~~favorable resolution of ~~worldwide earnings.~~a multi-year Internal Revenue Service (IRS) tax examination of $118 million and a change in estimate with respect to export tax benefits of $14 million, partially offset by a charge of $32 million relating to the distribution of foreign earnings under the American Jobs Creation Act of 2004 (the Jobs Creation Act). Applied’s future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of Applied’s pre-tax income and non-tax deductible expenses incurred in connection with acquisitions.

Management carefully monitors these factors and timely adjusts the effective income tax rate accordingly.

In October 2004, the United States Congress enacted ~~The American~~the Jobs Creation Act ~~of 2004 (the Act). The Act~~which provides for a three year phase-out of current extraterritorial income tax (ETI) benefits and replaces ETI with a phased-in nine percent domestic production activity deduction that will not be fully effective until 2010. The Jobs Creation Act will not fully replace Applied’s current ETI tax benefits. ~~The Act also includes a deduction~~

Business Combinations

On June 28, 2005, Applied purchased certain assets of ~~85%~~SCP Global Technology, Inc. (SCP), consisting of single-wafer HF-last immersion technology and Marangoni clean/dry intellectual property, for ~~certain foreign earnings that are repatriated, as defined~~approximately $24 million in cash.

On December 16, 2004, Applied acquired the ~~Act.~~assets of ATMI, Inc.’s Treatment Systems business (EcoSys), which supports the gas abatement requirements of process equipment for integrated circuit manufacturing and other industrial applications, for approximately $16 million in cash.

On December 14, 2004, Applied ~~may elect to apply this provision to qualifying earnings repatriations. Applied is evaluating the effects~~acquired substantially all of the ~~repatriation provision. This provision~~operating subsidiaries and businesses of ~~the Act is not expected to have~~Metron Technology N.V. (Metron), a ~~material effect on Applied’s results~~provider of a range of products and services for fab-wide operations ~~or financial position~~and integrated circuit manufacturing equipment, for approximately $85 million in ~~the period of implementation.~~cash.


	*~~Business Combinations~~*

On April 18, 2003, Applied acquired Boxer Cross, Inc., a producer of in-line monitoring systems that provide customers with critical electrical measurement data for controlling semiconductor processes, for $14 million in cash. On April 8, 2002, Applied acquired Electron Vision Corporation, a designer, manufacturer and seller of e-beam stabilization and curing tools for the semiconductor, thin film head and micro-fabrication industries, for $26 million in cash.

For further details, see Note 13 of Notes to Consolidated Financial Statements.

Recent Accounting ~~Pronouncement~~Pronouncements

In ~~June 2004,~~May 2005, the Financial Accounting Standards Board (FASB) ~~ratified~~issued SFAS No. 154, “Accounting Changes and Error Corrections — a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154), which requires retrospective application to prior periods’ financial statements of every voluntary change in accounting principal unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors beginning in fiscal 2007. Applied does not expect the adoption of this standard to have a material effect on Applied’s financial position or results of operations.

In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 provides the SEC staff position regarding the application of SFAS 123R, “Share-Based Payment.” SAB 107 contains interpretive guidance relating to the interaction between SFAS 123R and certain SEC rules and regulations, as well as the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. Applied is currently evaluating SAB 107 and will be incorporating it as part of its adoption of SFAS 123R in the first fiscal quarter of 2006.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. In April 2005, the SEC extended the compliance requirement date of SFAS 123R, with the result that this requirement will be effective for Applied beginning with the first fiscal quarter of 2006. Applied is currently evaluating the expected impact of

SFAS 123R to its Consolidated Financial Statements. See Note 1 of Notes to the Consolidated Financial Statements for information related to the pro forma effect on Applied’s reported net income and net earnings per share of applying the fair value provisions of the SFAS 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” (SFAS 151). SFAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. SFAS 151 will be effective in fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material effect on Applied’s financial position or results of operations.

In March 2004, the FASB Emerging Issues Task Force (EITF) reached a consensus on EITF IssueNo. 03-1, ~~(EITF 03-1),~~ “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain ~~Investments.”~~ Investments”(EITF ~~03-1 includes new~~03-1). The guidance prescribes a three-step model for ~~evaluating~~determining whether an investment isother-than-temporarily impaired and ~~recording impairment~~requires disclosures about unrealized losses on ~~debt and equity investments, as well as new disclosure requirements~~investments. The accounting guidance became effective for ~~investments that are deemed to be temporarily impaired. Adoption of the recognition and measurement guidance of EITF 03-1 has been temporarily deferred by the FASB, but~~reporting periods beginning after June 15, 2004, while the disclosure requirements became effective for annual reporting periods ending after June 15, 2004. In September 2004, the FASB issued FASB Staff Position (FSP)EITF 03-1-1, “Effective Date ofParagraphs 10-20of EITF IssueNo. 03-1 ~~are~~ ‘The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” (FSPEITF 03-1-1). FSPEITF 03-1-1 delayed the effective date for the measurement and recognition guidance contained inparagraphs 10-20 of EITFIssue 03-1. In November 2005, the FASB issued FSPFAS 115-1 andFAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certainother-than-temporary Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether the impairment isother-than-temporary and the measurement of an impairment loss. This statement specifically nullifies the requirements ofparagraph 10-18 ofEITF 03-1 and references existingother-than-temporary impairment guidance. The guidance under this FSP is effective for reporting periods beginning after December 15, 2005. Applied continued to apply relevant“other-than-temporary” guidance as provided for in FSPEITF 03-1-1 during fiscal 2005. Applied does not expect the implementation of FSPFAS 115-1 andFAS 124-1 will have a material effect on Applied’s ~~fiscal 2004 annual consolidated~~ financial ~~statements. Accordingly, additional disclosures as required by EITF 03-1 are included in Note 2~~position or results of ~~the Notes to the Consolidated Financial Statements.~~
operations.

Financial Condition, Liquidity and Capital Resources
~~Applied increased its~~

Applied’s cash, cash equivalents and short-term investments decreased from ~~$5.5 billion at October 26, 2003 to~~ $6.6 billion at October 31, ~~2004.~~2004 to $5.9 billion at October 30, 2005 due primarily to repurchases and cash dividend distributions. Applied has not undertaken any significant external financing activities for several years.

Applied generated cash from operating activities of ~~$552 million for fiscal 2002,~~ $855 million for fiscal 2003, ~~and~~ $1.6 billion for fiscal ~~2004.~~2004 and $1.2 billion for fiscal 2005. The primary sources of cash from operating activities have been net income, as adjusted to exclude the effect of non-cash charges, and changes in working capital levels, including accounts receivable and inventories. Applied utilized programs to sell accounts receivable of ~~$689 million for fiscal 2002,~~ $556 million for fiscal 2003, ~~and~~ $859 million for fiscal ~~2004.~~2004 and $158 million for fiscal 2005. The sales of these accounts
24
~~receivables~~ receivable increased cash and reduced accounts receivable and days sales outstanding. Days sales outstanding ~~was 66 days at the end of fiscal 2002, compared to~~were 68 days at the end of fiscal 2003, ~~and~~compared to 69 days at the end of fiscal ~~2004.~~2004 and 85 days at the end of fiscal 2005. A portion of these sold accounts receivable is subject to certain limited recourse provisions. However, Applied has not experienced any losses under these ~~programs.~~programs Availability and usage of these accounts receivable sale agreements depend on many factors, including the willingness of financial institutions to purchase receivables and the cost of such arrangements. The increase in days sales outstanding in fiscal 2005 is primarily related to the change in the regional sales mix and the resulting relative decrease in the amount of sold accounts receivable. For further details regarding accounts receivable sales, see Note 11 of Notes to Consolidated Financial Statements. Inventories ~~increased~~decreased by ~~$188~~$105 million in fiscal ~~2004,~~2005, which corresponds to the ~~increase~~decrease in business volume and sales activity from fiscal ~~2003~~2004 to fiscal ~~2004.~~2005.
Applied used ~~$752 million~~$1.1 billion of cash for investing activities for fiscal ~~2002, $785~~2003, $534 million for fiscal ~~2003~~2004, and ~~$353~~$179 million for fiscal ~~2004.~~2005. Capital expenditures were ~~$476 million for fiscal 2002,~~ $265 million for fiscal 2003, ~~and~~ $191 million for fiscal 2004, and $200 million for fiscal 2005, totaling ~~$932~~$656 million for the past three years. Application laboratories, equipment and related facilities have comprised the majority of the capital spending. Fiscal ~~2002 capital expenditures also included $65 million for the purchase of properties in Santa Clara, California that were previously held under a synthetic lease. Fiscal~~ 2003 capital expenditures also

23

included $52 million for the purchase of facilities in Hillsboro, Oregon that were previously held under a synthetic lease. Fiscal 2004 capital expenditures consisted principally of laboratory and demonstration equipment. Fiscal 2005 capital expenditures included investment in laboratory equipment and upgrades to Applied’s enterprise resource planning software and network architecture. Investing activities also included purchases and sales of short-term investments and acquisitions of technology or ~~of other~~ companies to allow Applied to access new market opportunities or emerging technologies. ~~Fiscal 2004 capital expenditures consisted principally~~During fiscal 2005, Applied paid $102 million, net of ~~laboratory~~cash acquired, for the Metron and ~~demonstration equipment.~~
EcoSys acquisitions, as discussed in Note 13 of Notes to Consolidated Financial Statements.

Applied generated cash of ~~$131~~$8 million from financing activities for fiscal ~~2002 and $8 million for fiscal~~ 2003, ~~and~~ used cash of $359 million for fiscal ~~2004.~~2004 and used cash for $1.6 billion for 2005. Financing activities included issuances and repurchases of common ~~stock.~~stock and payment of dividends. Since March 1996, Applied has systematically repurchased shares of its common stock in the open market to partially fund its stock-based employee benefit and incentive plans. Cash used to repurchase shares totaled ~~$125 million for fiscal 2002,~~ $250 million for fiscal 2003, ~~and~~ $650 million for fiscal ~~2004. Cash generated from issuances of common stock totaled $199 million~~2004 and $1.7 billion for fiscal ~~2002, $323~~2005. Beginning in the second fiscal quarter of 2005, Applied’s Board of Directors declared three consecutive quarterly cash dividends, in the amount of $0.03 per share per declaration. The first two declared cash dividends totaling $98 million ~~for~~were paid during fiscal ~~2003~~2005. The declaration of any future cash dividend is at the discretion of the Board of Directors and ~~$397 million for fiscal 2004.~~will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors. Financing activities also included borrowings and repayments of debt. Applied ~~generated cash of $88 million in fiscal 2002 from debt borrowings, and~~ did not borrow any cash in fiscal years 2003, ~~and 2004.~~2004 or 2005. Cash used for debt repayments totaled ~~$32 million for fiscal 2002,~~ $64 million for fiscal 2003, ~~and~~ $105 million for fiscal ~~2004.~~
~~On March 21, 2002, Applied’s Board~~2004 and $62 million for fiscal 2005. Cash generated from issuances of ~~Directors approved a two-for-one stock split of Applied’s~~ common stock ~~which was distributed in the form of a 100 percent stock dividend on or about April 16, 2002~~pursuant to ~~stockholders of record as of April 1, 2002.~~
Applied’s equity compensation programs totaled $323 million for fiscal 2003, $397 million for fiscal 2004 and $266 million for fiscal 2005.

Although cash requirements will fluctuate based on the timing and extent of factors such as those discussed above, Applied’s management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy Applied’s liquidity requirements for the next 12 months. For further details regarding Applied’s operating, investing and financing activities for each of the three years in the period ended October ~~31, 2004,~~30, 2005, see the Consolidated Statements of Cash Flows in this ~~Annual Report on Form 10-K.~~
report.

Off-Balance Sheet Arrangements

During the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to ~~certain~~third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of October ~~31, 2004,~~30, 2005, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately ~~$55~~$60 million. Applied has not recorded any liability in connection with these guarantee arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements.

In 2001, Applied also has additional guarantee arrangements on behalf of certain subsidiaries. As of October 31, 2004, Applied has not recorded any liability related to guarantees of subsidiary obligations. Applied does not expect, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these arrangements. Subsidiary guarantees as of October 31, 2004 totaled
25
approximately $202 million and were associated with the following types of arrangements: short-term borrowing facilities, overdraft facilities, customs guarantees and leases. In the event of use and subsequent default of these facilities by Applied’s subsidiaries, such arrangements would be guaranteed by Applied. In addition, certain subsidiaries have lease arrangements guaranteed by Applied. These leases will expire between 2009 and 2014. In the event that the subsidiaries do not make the required payments, Applied could be required to pay the leases on behalf of the subsidiaries. As of October 31, 2004, annual lease obligations under these arrangements approximated $11 million.
formed Applied Materials Ventures I, L.P. (the Fund) ~~invests~~to invest in privately-held, early-stage companies engaged in developing systems, components and devices based on nanotechnology and/or communications technology for specific applications and products. The Fund iswas a limited partnership, with Applied as the sole limited partner and an independent party as the general partner. During the fourth quarter of fiscal 2004, Applied exercised its right to limit capital contributions to the Fund to $25 million and to elect to terminate the partnership. As a result, under the provisions of the partnership agreement, the ~~partnership will be dissolved, and the~~ activities of the partnership ~~will be~~ concluded ~~six months following~~and the ~~election to terminate the partnership.~~partnership was dissolved in March 2005. Applied’s cumulative capital contributions to the Fund totaled approximately ~~$16 million through October 26, 2003 and~~ $23 million through October 31, ~~2004.~~2004 and $24 million through October 30, 2005. The Fund’s assets, which primarily consisted of shares of portfolio companies, were distributed between Applied and the general partner during fiscal 2005. See Note 14 of Notes to Consolidated Financial Statements for further details on the Fund.

Applied also has operating leases for various facilities. Total rental expense for operating leases was ~~$140 million for fiscal 2002,~~ $134 million for fiscal 2003, ~~and~~ $88 million for fiscal ~~2004.~~2004 and $87 million for fiscal 2005.

Contractual Obligations


	*~~Contractual Obligations~~*

The following table summarizes Applied’s contractual obligations as of October ~~31, 2004:~~
Payments Due by Period
Less Than 1-3 3-5 More Than
Contractual obligations Total 1 Year Years Years 5 Years
(In millions)
Long-term debt obligations $ 456 $ 46 $ 204 $ 4 $ 202
Operating lease obligations 327 84 116 48 79
Purchase obligations* 704 699 5 — —
Other long-term liabilities 133 — 15 7 111

$ 1,620 $ 829 $ 340 $ 59 $ 392

30, 2005:

Payments Due by Period
Less Than
1-3
3-5
More Than

Contractual Obligations
Total 1 Year Years Years 5 Years
(In millions)
Long-term debt obligations $ 415 $ 8 $ 205 $ 2 $ 200
Interest expense associated with long-term debt obligations 199 28 42 29 100
Operating lease obligations 272 74 87 45 66
Purchase obligations* 751 739 7 5 —
Other long-term liabilities 168 8 14 11 135

$ 1,805 $ 857 $ 355 $ 92 $ 501

* Represents Applied’s agreements to purchase goods and services consisting of ~~Applied’s:~~Applied’s (a) outstanding purchase orders for goods and services; (b) contractual requirements to make specified minimum payments even if Applied does not take delivery of the contracted goods; and (c) contractual requirements to pay a penalty if the contract is cancelled. While the amount above represents Applied’s purchase agreements as of October ~~31, 2004,~~30, 2005, the actual amounts to be paid by Applied may be less in the event that any agreements are renegotiated, cancelled or terminated.
Critical Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of Applied’s consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on Applied’s financial condition ~~and~~or results of operations. Specifically, these policies have the following attributes: (1) Applied is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates Applied could reasonably have
26
used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Applied’s financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. Applied bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as Applied’s operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in the section below entitled “Trends, Risks and Uncertainties.” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Applied’s consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and provide a meaningful presentation of Applied’s financial condition and results of operations.
Management believes that the following are critical accounting policies:

~~Warranty Costs~~
Warranty Costs
Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs.

25

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


	*~~Inventory Valuation~~*

Inventory Valuation

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


	*~~Goodwill and Intangible Assets~~*

Goodwill and Intangible Assets

Applied reviews goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also reviews goodwill and intangibles with indefinite lives annually ~~in accordance with Statement of Financial Accounting Standards (SFAS) No. 142 (SFAS 142), “Goodwill and Other Intangible Assets.”~~for impairment. Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, Applied may be required to record an impairment charge to write down the asset to its realizable value. The fair value of a reporting unit is estimated using the market multiples approach, and is dependent on market values for companies in a similar industry. A severe decline in market value could result in an unexpected impairment charge for impaired goodwill, which could have a material adverse effect on Applied’s business, financial condition and results of operations.


	*~~Income Taxes~~*

Income Taxes

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

~~Applied provides for income taxes based upon an annual estimated effective income tax rate.~~

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

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Applied’s expectations could have a material impact on Applied’s results of operations and financial condition. ~~Applied accounts for income tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.”~~


	*~~Legal Matters~~*

Legal Matters

Applied is subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Applied evaluates, among other factors, the degree of probability of an unfavorable

outcome and reasonably estimates the amount of the loss. Significant judgment is required in both the determination of the probability and as to whether an exposure can be reasonably estimated. When Applied determines that it is probable that a loss has been incurred and the amount is reasonably estimable, the effect is recorded in the consolidated financial statements. Although the outcome of these claims cannot be predicted with certainty, Applied does not believe that any of the existing legal matters will have a material adverse effect on its financial condition or results of operations. However, significant changes in legal proceedings and claims or the factors considered in the evaluation of those matters could have a material adverse effect on Applied’s business, financial condition and results of operations.

Trends, Risks and Uncertainties


	*~~The industry that Applied serves is volatile and unpredictable.~~*

The industry that Applied serves is volatile and unpredictable.

As a supplier to the global semiconductor and semiconductor-related industry, Applied is subject to the industry’s business cycles, the timing, length and volatility of which are difficult to predict. The ~~semiconductor~~ industry has historically been cyclical due to sudden changes in demand for ~~semiconductors~~integrated circuits and manufacturing capacity, including capacity using the latest technology. The ~~rate~~effect on Applied of these changes in demand, including end-customer demand, is ~~accelerating, and the effect of these changes on Applied is~~ occurring ~~sooner,~~more rapidly, exacerbating the volatility of these cycles. These changes have affected the timing and amounts of customers’ capital equipment purchases and investments in technology, and continue to affect Applied’s orders, net sales, gross margin and results of operations.

Applied must effectively manage its resources and production capacity to meet changing demand. During periods of decreasing demand for integrated circuit manufacturing equipment, Applied must be able to appropriately align its cost structure with prevailing market conditions, ~~and~~ effectively motivate and retain key ~~employees. Conversely, during~~employees, and effectively manage its supply chain. During periods of increasing demand, Applied must have sufficient manufacturing capacity and inventory to meet customer demand and must be able to attract, retain and motivate a sufficient number of qualified ~~individuals.~~individuals and effectively manage its supply chain. If Applied is not able to timely and appropriately align its cost structure with business conditions and/or to effectively manage its resources and production capacity, including its supply chain during changes in demand, Applied’s business, financial condition or results of operations may be materially and adversely affected.


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

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

The ~~semiconductor~~ industry is characterized by ~~rapid~~ ongoing changes, including: (1) changes in customers’ capacity requirements, capacity utilization and capital spending, which depend in part on the demand for customers’ products and customers’ inventory levels relative to ~~demand for their products;~~demand; (2) the importance of ~~driving down~~reducing the cost of system ownership, ~~of systems; (3) more complex technology requirements; (4)~~due in part to the increasing significance of consumer electronics as a driver for ~~chip~~integrated circuit demand and the related focus on lower prices; ~~(5)~~(3) varying levels of business information technology spending; ~~(6)~~(4) increasingly complex technology requirements, including a significant rise in the number and importance of new materials; (5) the growing types and varieties of integrated circuits and applications; ~~(7)~~(6) an ~~increasing~~expanding number of applications across multiple substrate sizes, ~~in the semiconductor industry,~~ resulting in divergent ~~interests~~demands among ~~semiconductor~~integrated circuit manufacturers; (7) customers’ varying adoption rates of new technology; (8) a rising percentage of business from customers in Asia and the emergence of customers, competitors and ~~competitors~~suppliers in new geographical regions; (9) customer demands for shorter lead times for the manufacture and installation of ~~semiconductor~~integrated circuit manufacturing equipment; (10) the heightened importance to customers of system reliability and ~~(10)~~productivity; (11) the effect on system demand as a result of the increasing productivity and reliability of integrated circuit manufacturing equipment; (12) the increasing pace of changes in the mix of investments by customers in integrated circuit manufacturing equipment; (13) customers’ increasing use of partnerships, alliances, joint ventures and industry consortia that has increased the influence of key integrated circuit manufacturers in technology decisions made by their global partners; (14) higher capital requirements for new ~~semiconductor~~integrated circuit fabrication ~~plants.~~plants; (15) the rising importance of speed of product development andtime-to-market; (16) the increasing difficulty for customers to move from product design to volume manufacturing; (17) the challenge to customers of moving volume manufacturing from one technology node to the next smaller technology node; (18) the rate of growth in the industry; (19) a heightening concern among certain U.S. governmental agencies regarding possible national commercial and/or security issues posed by the growing manufacturing business in Asia, especially China; (20) the need to effectively manage a growing number of

On June 15, 2004, the Audit Committee of the Board of Directors dismissed PricewaterhouseCoopers LLP (PwC) as Applied’s independent registered public accounting firm. On June 16, 2004, the Audit Committee engaged KPMG LLP (KPMG) as Applied’s new independent registered public accounting firm

~~PwC’s reports on the Consolidated~~Accounting and Financial Statements of Applied for the fiscal years 2002 and 2003 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits of Applied’s Consolidated Financial Statements as of and for the fiscal years ended October 27, 2002 and October 26, 2003 and through June 15, 2004, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused PwC to make reference thereto in its reports on the consolidated financial statements for such years. During Applied’s fiscal years ended October 27, 2002 and October 26, 2003 and through June 15, 2004, there were no “reportable events,” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.Disclosure

~~As required by Rule 13a-15(b), Applied management, including the Chief Executive Officer~~ and ~~Chief Financial Officer, conducted an evaluation as~~Procedures

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

October 27, October 26, October 31,
Fiscal year 2002 2003 2004
(In thousands, except per share amounts)
Net sales $ 5,062,312 $ 4,477,291 $ 8,013,053
Cost of products sold 3,005,651 2,872,836 4,311,808

Gross margin 2,056,661 1,604,455 3,701,245
Operating expenses:
Research, development and engineering 1,052,269 920,618 991,873
Marketing and selling 385,693 325,189 394,376
General and administrative 323,262 300,676 357,245
Restructuring, asset impairments and other charges 85,479 371,754 167,459
Litigation settlements, net — — 26,627

Income/(loss) from operations 209,958 (313,782 ) 1,763,665
Interest expense 49,357 46,875 52,877
Interest income 179,910 149,101 118,462

Income/(loss) before income taxes 340,511 (211,556 ) 1,829,250
Provision for/(benefit from) income taxes 71,507 (62,409 ) 477,947

Net income/(loss) $ 269,004 $ (149,147 ) $ 1,351,303

Earnings/(loss) per share:
Basic $ 0.16 $ (0.09 ) $ 0.80
Diluted $ 0.16 $ (0.09 ) $ 0.78
Weighted average number of shares:
Basic 1,643,612 1,659,557 1,688,121
Diluted 1,701,557 1,659,557 1,721,645


	October 26,			October 31,		October 30,
Fiscal Year	2003			2004		2005
	(In thousands, except per share amounts)

Net sales	$	4,477,291		$	8,013,053	$	6,991,823
Cost of products sold		2,872,836			4,311,808		3,905,949

Gross margin		1,604,455			3,701,245		3,085,874
Operating expenses:
Research, development and engineering		920,618			991,873		940,507
Marketing and selling		325,189			394,376		358,524
General and administrative		300,676			357,245		338,878
Restructuring, asset impairments and other charges		371,754			167,459		—
Litigation settlements, net		—			26,627		—

Income/(loss) from operations		(313,782	)		1,763,665		1,447,965
Interest expense		46,875			52,877		37,819
Interest income		149,101			118,462		171,423

Income/(loss) before income taxes		(211,556	)		1,829,250		1,581,569
Provision for/(benefit from) income taxes		(62,409	)		477,947		371,669

Net income/(loss)	$	(149,147	)	$	1,351,303	$	1,209,900

Earnings/(loss) per share:
Basic	$	(0.09	)	$	0.80	$	0.74
Diluted	$	(0.09	)	$	0.78	$	0.73
Weighted average number of shares:
Basic		1,659,557			1,688,121		1,645,531
Diluted		1,659,557			1,721,645		1,657,493

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED BALANCE SHEETS

October 26, October 31,
2003 2004
(In thousands,
except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 1,364,857 $ 2,281,844
Short-term investments 4,128,349 4,296,152
Accounts receivable, less allowance for doubtful accounts of $1,847 and $2,533 at 2003 and 2004, respectively 912,875 1,670,153
Inventories 950,692 1,139,368
Deferred income taxes 782,823 610,095
Other current assets 231,177 283,907

Total current assets 8,370,773 10,281,519
Property, plant and equipment 3,094,427 2,953,130
Less: accumulated depreciation and amortization (1,534,597 ) (1,607,602 )

Net property, plant and equipment 1,559,830 1,345,528
Goodwill, net 223,521 257,321
Purchased technology and other intangible assets, net 92,512 50,291
Other assets 64,986 158,786

Total assets $ 10,311,622 $ 12,093,445

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 105,292 $ 45,864
Accounts payable and accrued expenses 1,319,471 1,895,061
Income taxes payable 216,114 347,056

Total current liabilities 1,640,877 2,287,981
Long-term debt 456,422 410,436
Deferred income taxes and other liabilities 146,289 133,001

Total liabilities 2,243,588 2,831,418

Commitments and contingencies (Note 11) — —
Stockholders’ equity:
Preferred stock: $.01 par value per share; 1,000 shares authorized; no shares issued — —
Common stock: $.01 par value per share; 2,500,000 shares authorized; 1,677,440 and 1,680,264 shares outstanding at 2003 and 2004, respectively 16,774 16,803
Additional paid-in capital 2,223,553 2,070,733
Deferred stock compensation, net (1,543 ) (96 )
Retained earnings 5,812,867 7,164,170
Accumulated other comprehensive income 16,383 10,417

Total stockholders’ equity 8,068,034 9,262,027

Total liabilities and stockholders’ equity $ 10,311,622 $ 12,093,445


	October 31,			October 30,
	2004			2005
	(In thousands,
	except per share amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	1,493,292		$	990,342
Short-term investments		5,084,704			4,944,999
Accounts receivable, less allowance for doubtful accounts of $2,533 and $3,649 at 2004 and 2005, respectively		1,670,153			1,615,504
Inventories		1,139,368			1,034,093
Deferred income taxes		610,095			592,742
Other current assets		283,907			271,003

Total current assets		10,281,519			9,448,683
Property, plant and equipment		2,953,130			3,011,110
Less: accumulated depreciation and amortization		(1,607,602	)		(1,736,086	)

Net property, plant and equipment		1,345,528			1,275,024
Goodwill, net		257,321			338,982
Purchased technology and other intangible assets, net		50,291			81,093
Other assets		158,786			125,375

Total assets	$	12,093,445		$	11,269,157




LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	45,864		$	7,574
Accounts payable and accrued expenses		1,895,061			1,618,042
Income taxes payable		347,056			139,798

Total current liabilities		2,287,981			1,765,414
Long-term debt		410,436			407,380
Other liabilities		133,001			167,814

Total liabilities		2,831,418			2,340,608

Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock: $.01 par value per share; 1,000 shares authorized; no shares issued		—			—
Common stock: $.01 par value per share; 2,500,000 shares authorized; 1,680,264 and 1,606,694 shares outstanding at 2004 and 2005, respectively		16,803			16,067
Additional paid-in capital		2,070,733			721,937
Deferred stock compensation, net		(96	)		—
Retained earnings		7,164,170			8,227,793
Accumulated other comprehensive income/(loss)		10,417			(37,248	)

Total stockholders’ equity		9,262,027			8,928,549

Total liabilities and stockholders’ equity	$	12,093,445		$	11,269,157

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Accumulated
Common Stock Additional Deferred Other
Paid-In Stock Retained Comprehensive
Shares Amount Capital Compensation Earnings Income/(Loss) Total
(In thousands)
Balance at October 28, 2001 1,631,540 $ 16,315 $ 1,872,967 $ — $ 5,693,010 $ 24,445 $ 7,606,737
Components of comprehensive income:
Net income — — — — 269,004 — 269,004
Change in unrealized net gain on investments — — — — — (16,491 ) (16,491 )
Change in unrealized net gain on derivative instruments — — — — — 1,366 1,366
Translation adjustments — — — — — 9,289 9,289

Comprehensive income 263,168
Net issuance under stock plans, including tax benefits of $75,253 23,283 233 274,506 — — — 274,739
Stock repurchases (6,795 ) (68 ) (124,927 ) — — — (124,995 )

Balance at October 27, 2002 1,648,028 16,480 2,022,546 — 5,962,014 18,609 8,019,649
Components of comprehensive loss:
Net loss — — — — (149,147 ) — (149,147 )
Change in unrealized net gain on investments — — — — — (17,165 ) (17,165 )
Change in unrealized net gain on derivative instruments — — — — — (4,058 ) (4,058 )
Translation adjustments — — — — — 18,997 18,997

Comprehensive loss (151,373 )
Net issuance under stock plans, including tax benefits of $124,238 44,692 447 446,509 — — — 446,956
Issuance of restricted stock to employees 308 3 4,279 (4,279 ) — — 3
Amortization of deferred stock compensation — — — 2,736 — — 2,736
Stock repurchases (15,588 ) (156 ) (249,781 ) — — — (249,937 )

Balance at October 26, 2003 1,677,440 16,774 2,223,553 (1,543 ) 5,812,867 16,383 8,068,034
Components of comprehensive income:
Net income — — — — 1,351,303 — 1,351,303
Change in unrealized net gain on investments — — — — — (12,657 ) (12,657 )
Change in unrealized net gain on derivative instruments — — — — — (1,283 ) (1,283 )
Translation adjustments — — — — — 7,974 7,974

Comprehensive income 1,345,337
Net issuance under stock plans, including tax benefits of $100,599 40,608 407 496,802 — — — 497,209
Amortization of deferred stock compensation — — — 1,447 — — 1,447
Stock repurchases (37,784 ) (378 ) (649,622 ) — — — (650,000 )

Balance at October 31, 2004 1,680,264 $ 16,803 $ 2,070,733 $ (96 ) $ 7,164,170 $ 10,417 $ 9,262,027


																Accumulated
							Additional			Deferred						Other
	Common Stock						Paid-In			Stock			Retained			Comprehensive
	Shares			Amount			Capital			Compensation			Earnings			Income/(Loss)			Total
	(In thousands)

Balance at October 27, 2002		1,648,028			16,480			2,022,546			—			5,962,014			18,609			8,019,649
Components of comprehensive loss:
Net loss		—			—			—			—			(149,147	)		—			(149,147	)
Change in unrealized net gain on investments		—			—			—			—			—			(17,165	)		(17,165	)
Change in unrealized net gain on derivative instruments		—			—			—			—			—			(4,058	)		(4,058	)
Translation adjustments		—			—			—			—			—			18,997			18,997

Comprehensive loss																				(151,373	)
Net issuance under stock plans, including tax benefits of $124,238		44,692			447			446,509			—			—			—			446,956
Issuance of restricted stock to employees		308			3			4,279			(4,279	)		—			—			3
Amortization of deferred stock compensation		—			—			—			2,736			—			—			2,736
Stock repurchases		(15,588	)		(156	)		(249,781	)		—			—			—			(249,937	)

Balance at October 26, 2003		1,677,440			16,774			2,223,553			(1,543	)		5,812,867			16,383			8,068,034
Components of comprehensive income:
Net income		—			—			—			—			1,351,303			—			1,351,303
Change in unrealized net gain on investments		—			—			—			—			—			(12,657	)		(12,657	)
Change in unrealized net gain on derivative instruments		—			—			—			—			—			(1,283	)		(1,283	)
Translation adjustments		—			—			—			—			—			7,974			7,974

Comprehensive income																				1,345,337
Net issuance under stock plans, including tax benefits of $100,599		40,608			407			496,802			—			—			—			497,209
Amortization of deferred stock compensation		—			—			—			1,447			—			—			1,447
Stock repurchases		(37,784	)		(378	)		(649,622	)		—			—			—			(650,000	)

Balance at October 31, 2004		1,680,264		$	16,803		$	2,070,733		$	(96	)	$	7,164,170		$	10,417		$	9,262,027
Components of comprehensive income:
Net income		—			—			—			—			1,209,900			—			1,209,900
Change in unrealized net loss on investments		—			—			—			—			—			(33,053	)		(33,053	)
Change in unrealized net gain on derivative instruments		—		��	—			—			—			—			8,561			8,561
Change in minimum pension liability		—			—			—			—			—			(17,868	)		(17,868	)
Translation adjustments		—			—			—			—			—			(5,305	)		(5,305	)

Comprehensive income																				1,162,235
Dividends		—			—			—			—			(146,277	)		—			(146,277	)
Net issuance under stock plans, including tax benefits of $85,361		27,638			276			351,200			—			—			—			351,476
Amortization of deferred stock compensation		—			—			—			96			—			—			96
Stock repurchases		(101,208	)		(1,012	)		(1,699,996	)		—			—			—			(1,701,008	)

Balance at October 30, 2005		1,606,694		$	16,067		$	721,937		$	—		$	8,227,793		$	(37,248	)	$	8,928,549

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

October 27, October 26, October 31,
Fiscal year 2002 2003 2004
(In thousands)
Cash flows from operating activities:
Net income/(loss) $ 269,004 $ (149,147 ) $ 1,351,303
Adjustments required to reconcile net income/(loss) to cash provided by operating activities:
Acquired in-process research and development expense 8,000 — —
Non-cash portion of restructuring, asset impairments and other charges 27,605 88,859 81,300
Depreciation and amortization 387,526 381,655 355,538
Loss on fixed asset retirements 59,377 53,321 19,039
Deferred income taxes (161 ) (208,565 ) 78,927
Tax benefits from employee stock option plans 75,253 124,238 100,599
Amortization of deferred compensation — 2,736 1,447
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable (278,387 ) 144,369 (756,193 )
Inventories 147,015 331,161 (187,925 )
Other current assets (53,289 ) 28,586 (53,315 )
Other assets (968 ) (14,332 ) (82,228 )
Accounts payable and accrued expenses (138,552 ) (59,923 ) 586,243
Income taxes payable 51,475 111,624 130,554
Other liabilities (2,383 ) 20,493 1,982

Cash provided by operating activities 551,515 855,075 1,627,271

Cash flows from investing activities:
Capital expenditures (476,457 ) (265,280 ) (190,577 )
Cash paid for acquisitions, net of cash acquired (107,462 ) (13,498 ) (7,400 )
Proceeds from sales and maturities of short-term investments 2,188,117 1,941,111 3,380,542
Purchases of short-term investments (2,356,157 ) (2,446,927 ) (3,535,327 )

Cash used for investing activities (751,959 ) (784,594 ) (352,762 )

Cash flows from financing activities:
Short-term debt borrowings 66,534 — —
Short-term debt repayments (24,770 ) (41,949 ) (861 )
Long-term debt borrowings 21,713 — —
Long-term debt repayments (7,126 ) (22,456 ) (104,553 )
Proceeds from common stock issuances 199,486 322,721 396,610
Common stock repurchases (124,995 ) (249,937 ) (650,000 )

Cash provided by financing activities 130,842 8,379 (358,804 )

Effect of exchange rate changes on cash (1,911 ) 1,206 1,282

Increase/(decrease) in cash and cash equivalents (71,513 ) 80,066 916,987
Cash and cash equivalents — beginning of year 1,356,304 1,284,791 1,364,857

Cash and cash equivalents — end of year $ 1,284,791 $ 1,364,857 $ 2,281,844

Supplemental cash flow information:
Cash payments/(refunds) for income taxes, net $ (65,470 ) $ (119,065 ) $ 179,489
Cash payments for interest $ 40,219 $ 41,967 $ 40,255


	October 26,			October 31,			October 30,
Fiscal Year	2003			2004			2005
	(In thousands)

Cash flows from operating activities:
Net income/(loss)	$	(149,147	)	$	1,351,303		$	1,209,900
Adjustments required to reconcile net income/(loss) to cash provided by operating activities:
Non-cash portion of restructuring, asset impairments and other charges		88,859			81,300			—
Depreciation and amortization		381,655			355,538			300,433
Loss on fixed asset retirements		53,321			19,039			22,553
Deferred income taxes		(208,565	)		78,927			20,310
Tax benefits from equity-based compensation plans		124,238			100,599			84,294
Amortization of deferred compensation and other equity awards		2,736			1,447			151
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable, net		144,369			(756,193	)		86,959
Inventories		331,161			(187,925	)		130,924
Other current assets		28,586			(53,315	)		48,315
Other assets		(14,332	)		(82,228	)		(10,415	)
Accounts payable and accrued expenses		(59,923	)		586,243			(444,858	)
Income taxes payable		111,624			130,554			(217,851	)
Other liabilities		20,493			1,982			16,425

Cash provided by operating activities		855,075			1,627,271			1,247,140

Cash flows from investing activities:
Capital expenditures		(265,280	)		(190,577	)		(199,650	)
Cash paid for acquisitions, net of cash acquired		(13,498	)		(7,400	)		(101,793	)
Proceeds from sales and maturities of short-term investments		1,627,167			2,852,439			3,245,686
Purchases of short-term investments		(2,417,384	)		(3,188,319	)		(3,123,366	)

Cash used for investing activities		(1,068,995	)		(533,857	)		(179,123	)

Cash flows from financing activities:
Short-term debt repayments		(41,949	)		(861	)		(13,290	)
Long-term debt repayments		(22,456	)		(104,553	)		(48,425	)
Proceeds from common stock issuances		322,721			396,610			266,115
Common stock repurchases		(249,937	)		(650,000	)		(1,677,511	)
Payments of dividends to stockholders		—			—			(98,040	)

Cash provided by (used for) financing activities		8,379			(358,804	)		(1,571,151	)

Effect of exchange rate changes on cash and cash equivalents		1,206			1,282			184

Increase/(decrease) in cash and cash equivalents		(204,335	)		735,892			(502,950	)
Cash and cash equivalents — beginning of year		961,735			757,400			1,493,292

Cash and cash equivalents — end of year	$	757,400		$	1,493,292		$	990,342

Supplemental cash flow information:
Cash payments/(refunds) for income taxes, net	$	(119,065	)	$	179,489		$	374,302
Cash payments for interest	$	41,967		$	40,255		$	32,171

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1	Summary of Significant Accounting Policies

Principles of Consolidation and Basis of PresentationThe consolidated financial statements include the accounts of Applied Materials, Inc. and its subsidiaries (Applied or the Company) after elimination of intercompany balances and transactions. All references to a fiscal year apply to Applied’s fiscal year which ends on the last Sunday in October. Fiscal 2003 and 2005 contained 52 weeks, whereas fiscal 2004 contained 53 weeks. The first fiscal quarter of 2003 and 2005 each contained 13 weeks, whereas ~~fiscal 2002 and 2003 each contained 52 weeks. The~~the first fiscal quarter of 2004 contained 14 ~~weeks, whereas the first fiscal quarter of 2002 and 2003 each contained 13~~ weeks.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

~~Certain prior year amounts~~

Reclassifications Auction rate securities in the amount of $589 million and variable rate demand notes in the amount of $200 million have been reclassified from cash and cash equivalents to short-term investments in the October 31, 2004 consolidated balance sheet to conform to the fiscal ~~2004~~2005 financial statement presentation.

Accordingly, the consolidated statements of cash flows for the fiscal years ended October 26, 2003, October 31, 2004 and October 30, 2005 reflect this presentation. Certain other reclassifications have been made within the Notes to the Consolidated Financial Statements to conform to the 2005 presentation.

Cash Equivalents and Short-Term InvestmentsAll highly-liquid investments with a remaining maturity of three months or less at the time of purchase are considered to be cash equivalents. All of Applied’s short-term investments are classified asavailable-for-sale at the respective balance sheet dates. Investments classified asavailable-for-sale are recorded at fair value based upon quoted market prices, and any temporary difference between the cost and fair value of an investment is presented as a separate component of accumulated other comprehensive income. The specific identification method is used to determine the ~~realized~~ gains and losses on investments.

InventoriesInventories are generally stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis.

Property, Plant and EquipmentProperty, plant and equipment is stated at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Estimated useful lives for financial reporting purposes are as follows: buildings and improvements, 3 to 33 years; demonstration and manufacturing equipment, 3 to 5 years; software, 3 to 5 years; and furniture, fixtures and other equipment, 3 to 15 years. Land improvements are amortized over the shorter of 15 years or the estimated useful life. Leasehold improvements are amortized over the shorter of five years or the lease term. During fiscal 2003, Applied reviewed the estimated useful lives of its fixed assets. This analysis indicated that estimated useful lives for certain assets should be increased based on historical experience and other considerations. This change in estimate resulted in approximately $23 million less depreciation expense in fiscal 2003 than would have been recognized under previous estimates.

Intangible Assets~~Applied adopted Statement of Financial Accounting Standards (SFAS) No. 142 (SFAS 142), “Goodwill~~ Goodwill and Other Intangible Assets,” in the first fiscal quarter of 2002. SFAS 142 supersedes Accounting Principles Board (APB) Opinion No. 17, “Intangible Assets,” and discontinues the amortization of goodwill. In accordance with SFAS 142, goodwill is no longerindefinite-lived assets are not amortized, but isare reviewed for impairment annually during the fourth quarter of each fiscal year. Purchased technology and other intangible assets are presented at cost, net of accumulated amortization, and are amortized over their estimated useful lives of 52 to 10 years using the straight-line method.

Long-Lived AssetsApplied reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Applied assesses these assets for impairment based on estimated future cash flows from these assets.

Research, Development and Engineering CostsResearch, development and engineering costs are expensed as incurred.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Advertising CostsAdvertising costs are expensed as incurred. Advertising costs were not material for all periods presented.

Income TaxesIncome tax expense/(benefit) is based on pretax earnings. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts.

Revenue RecognitionApplied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectibility is reasonably assured. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points. (1) For all transactions where legal title passes to the customer upon shipment, Applied recognizes revenue upon shipment for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred based on the estimated fair value, and that revenue is recognized upon completion of the installation-related tasks. (2) For products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance. (3) For transactions where legal title does not pass at shipment, revenue is recognized when legal title passes to the customer, which is typically at customer technical acceptance. (4) For arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred at estimated fair value until delivery of the deferred elements. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

Derivative Financial InstrumentsApplied uses financial instruments, such as forward exchange and currency option contracts, to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions expected to occur within 12 months. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. All of Applied’s derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments. For derivative instruments designated and qualifying as cash flow hedges of anticipated foreign currency denominated transactions, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive ~~income~~income/(loss) in stockholders’ equity, and is reclassified into earnings when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss on the associated financial instrument is recorded ~~immediately~~promptly in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded ~~immediately~~promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.

Foreign Currency TranslationApplied’s subsidiaries, with the exception primarily of the subsidiary located in the United Kingdom, use the U.S. dollar as their functional currency. Accordingly, assets and liabilities of these subsidiaries are translated using exchange rates in effect at the end of the period, except for non-monetary assets, such as inventories and property, plant and equipment, that are translated using historical exchange rates. Revenues and costs are translated using average exchange rates for the period, except for costs related to those balance sheet items that are translated using historical exchange rates. The resulting translation gains and losses are included in the Consolidated Statements of Operations as incurred. Applied’s subsidiary located in the United Kingdom operates primarily using the British pound, and therefore, the British pound has been determined to be the functional currency for the United Kingdom subsidiary.

~~APPLIED MATERIALS, INC.~~

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

Accordingly, all assets and liabilities of this subsidiary are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average exchange

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

rates for the period. The resulting translation adjustments are presented as a separate component of accumulated other comprehensive income/(loss) in stockholders’ equity.

Prior to the second fiscal quarter of 2003, Applied’s subsidiaries located in Japan and Europe operated primarily using local currencies as their functional currencies. During the second fiscal quarter of 2003, Applied reviewed the functional currencies of its subsidiaries and determined that the U.S. dollar was most appropriate for its subsidiaries, with the exception of its subsidiary located in the United Kingdom. This determination was made as a result of changes in facts, circumstances, scope of operations and business practices. The change in the functional currencies did not have a material effect on Applied’s business, results of operations or financial position for fiscal 2003.

~~Stock-Based Compensation~~~~During fiscal 2003, Statement of Financial Accounting Standards No. 148 (SFAS 148), “Accounting for~~ Stock-Based Compensation ~~— Transition and Disclosure — an Amendment of FASB Statement No. 123,” became effective for Applied.~~

Applied measures compensation expense for its stock-based employee compensation plans using the intrinsic value method. As the exercise price of all options granted under these plans was not below the fair market price of the underlying common stock on the grant date, no stock-based employee compensation cost is recognized in the Consolidated Statements of ~~Operations.~~

Operations for stock options.

In accordance with ~~SFAS~~Statement of Financial Accounting Standards (SFAS) No. 148 (SFAS 148), “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123” and SFAS No. 123 (SFAS 123), “Accounting for Stock-Based Compensation,” Applied’s pro forma option expense is computed using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Applied’s employee stock options have characteristics significantly different from those of publicly traded ~~options; therefore,~~options. Beginning in the ~~opinion~~first fiscal quarter of ~~management, the Black-Scholes option pricing model generally used to~~2006, Applied will comply with SFAS ~~148 and SFAS 123 may not necessarily provide a reliable measure of the fair value of Applied’s options.~~

~~To comply with SFAS 148, Applied is presenting the~~No. 123R (SFAS 123R), as discussed further in Recent Accounting Pronouncements.

The following table ~~to illustrate~~illustrates the effect on the net income/(loss) and earnings/(loss) per share as if itApplied had ~~applied~~implemented the fair value recognition provisions of SFAS 123, as amended by SFAS 148, to options granted under the stock-based employee compensation plans. For purposes of this pro forma disclosure, the estimated value of the options is amortized ratably to expense over the options’ vesting periods.
Fiscal year 2002 2003 2004
(In thousands, except per share amounts)
Reported net income/(loss) $ 269,004 $ (149,147 ) $ 1,351,303
Stock-based compensation expense, net of tax (316,699 ) (389,100 ) (345,897 )

Pro forma net income/(loss) $ (47,695 ) $ (538,247 ) $ 1,005,406

Earnings/(loss) per share as reported:
Basic $ 0.16 $ (0.09 ) $ 0.80
Diluted $ 0.16 $ (0.09 ) $ 0.78
Pro forma earnings/(loss) per share:
Basic $ (0.03 ) $ (0.32 ) $ 0.60
Diluted $ (0.03 ) $ (0.32 ) $ 0.58
If Applied recognized the expense of equity programs in the consolidated statement of operations, additional paid-in capital would have increased by a corresponding amount, net of applicable taxes.


Fiscal Year	2003			2004			2005
	(In thousands, except per share amounts)

Reported net income/(loss)	$	(149,147	)	$	1,351,303		$	1,209,900
Stock-based compensation expense, net of tax		(389,100	)		(345,897	)		(312,116	)

Pro forma net income/(loss)	$	(538,247	)	$	1,005,406		$	897,784

Earnings/(loss) per share as reported:
Basic	$	(0.09	)	$	0.80		$	0.74
Diluted	$	(0.09	)	$	0.78		$	0.73
Pro forma earnings/(loss) per share:
Basic	$	(0.32	)	$	0.60		$	0.55
Diluted	$	(0.32	)	$	0.58		$	0.54

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Based on the Black-Scholes option pricing model, the weighted average estimated fair value of employee stock option grants was ~~$10.87 for fiscal 2002,~~ $6.85 for fiscal 2003, ~~and~~ $10.06 for fiscal ~~2004.~~2004 and $6.46 for fiscal 2005. The weighted average estimated fair value of purchase rights granted under ~~the Employees’ Stock Purchase Plans~~

~~APPLIED MATERIALS, INC.~~

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

Applied’s employees’ stock purchase plans (ESPP) was ~~$6.29 for fiscal 2002,~~ $5.31 for fiscal 2003, ~~and~~ $5.91 for fiscal ~~2004.~~2004, and $5.65 for fiscal 2005. Beginning in the first fiscal quarter of 2005, the computation of the expected volatility assumption used in the Black-Scholes calculations for new grants changed from being based solely on historical volatility to being based on a combination of historical and implied volatilities. In calculating pro forma compensation, the fair value of each stock option grant and stock purchase right is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:


	Stock Options									ESPP
Fiscal Year	2003			2004			2005			2003			2004			2005

Dividend yield		None			None			0.11	%		None			None			0.01	%
Expected volatility		67	%		63	%		44	%		67	%		67	%		48	%
Risk-free interest rate		2.00	%		2.49	%		3.45	%		1.44	%		1.82	%		2.51	%
Expected life (in years)		3.6			3.6			4.0			1.25			1.25			1.25

On August 4, 2005, the Human Resources and Compensation Committee of the Board of Directors of Applied approved the vesting acceleration of certain unvested,out-of-the-money
Stock Options ESPP
Fiscal year 2002 2003 2004 2002 2003 2004
Dividend yield None None None None None None
Expected volatility 69 % 67 % 63 % 69 % 67 % 67 %
Risk-free interest rate 3.58 % 2.00 % 2.49 % 2.42 % 1.44 % 1.82 %
Expected life (in years) 3.6 3.6 3.6 0.5 1.25 1.25

stock options outstanding under Applied’s employee stock option plans, effective August 5, 2005. Stock options held by Applied’s five most senior executive officers, non-employee directors and consultants were not included in the vesting acceleration. Vesting was accelerated for stock options that had exercise prices greater than $17.85 per share, which was the closing price of Applied common stock on August 5, 2005. In connection with the modification of the terms of these options to accelerate their vesting, approximately $138 million was recorded as a non-cash compensation expense on a pro forma basis in accordance with SFAS 123, and this amount is included in the proforma table above for the year ended October 30, 2005. This action was taken to reduce the impact of future compensation expense that Applied would otherwise be required to recognize in future consolidated statements of operations pursuant to SFAS��123R, which is applicable to Applied beginning in the first fiscal quarter of 2006.

For additional information on Applied’s employee benefit plans, see Note 8 of Notes to Consolidated Financial Statements.

Concentrations of Credit RiskFinancial instruments that potentially subject Applied to significant concentrations of credit risk consist principally of cash equivalents, short-term investments, trade accounts receivable and derivative financial instruments used in hedging activities. Applied invests in a variety of financial instruments, such as, but not limited to, certificates of deposit, corporate and municipal bonds, and U.S. Treasury and agency securities, mortgage-backed securities, and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. Applied’s customers consist of ~~semiconductor~~integrated circuit manufacturers located throughout the world. Applied performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. Applied maintains an allowance reserve for potentially uncollectible accounts receivable based on its assessment of the collectibility of accounts receivable. Applied regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a ~~customers~~customer’s ability to pay. In addition, Applied utilizes letters of credit to mitigate credit risk when considered appropriate. Applied is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments, but does not expect any counterparties to fail to meet their obligations.

Earnings Per ShareBasic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and equivalents (representing the dilutive effect of stock ~~options)~~options and restricted stock units) outstanding during the period.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeded the average fair market value of Applied’s common stock for the period, as the effect would be anti-dilutive. Options to purchase shares of common stock that were excluded from the computation were as follows:
Fiscal year 2002 2003* 2004
(In thousands, except prices)
Number of shares excluded 77,271 129,205 80,889
Average exercise price $23.82 $21.45 $23.15


Fiscal Year	2003*		2004		2005
	(In thousands, except prices)

Number of shares excluded		129,205		80,889		124,306
Average exercise price	$	21.45	$	23.15	$	21.04


*	Fiscal 2003 amounts are presented for informational purposes only, as this period resulted in a net loss. As such, the basic loss per share computation was utilized.


	*~~Recent Accounting Pronouncement~~*

Restricted Stock During fiscal 2003, Applied issued 307,500 shares of restricted stock to two individuals, which consisted principally of an initial compensation package for Applied’s new President and Chief Executive Officer (CEO). On May 20, 2003, Applied issued 300,000 shares of restricted common stock at $0.01 per share to the new President and CEO. The closing market price of Applied’s common stock was $13.76 per share on May 20, 2003. One half of the shares vested on October 1, 2003, and the other half of the shares vested on October 1, 2004. Deferred compensation was charged for the difference between the market value of the restricted shares and the purchase price, and was presented as a reduction of stockholders’ equity in Applied’s Consolidated Balance Sheet. Deferred compensation was amortized as compensation expense over the vesting period. Applied recognized general and administrative expenses of approximately $2.7 million in fiscal 2003, $1.4 million in fiscal 2004 and $96,000 in fiscal 2005 in amortization expense related to restricted stock issuances.

Restricted Stock Units During the fourth fiscal quarter of 2005, Applied issued 75,000 shares of restricted stock units (referred to as “performance shares” under the Applied Materials, Inc. Equity Incentive Plan). The closing market price of Applied’s common stock on that day was $17.47 per share. One third of the restricted stock units will vest on each of July 15, 2007, July 15, 2008 and July 15, 2009, subject to continued service to Applied on each vesting date. Compensation expense is recognized over the vesting period, and resulted in $55,000 in general and administrative expense in fiscal 2005.

Dividends Beginning in the second fiscal quarter of 2005, Applied’s Board of Directors declared three consecutive quarterly cash dividends in the amount of $0.03 per share per declaration. The first two declared cash dividends were paid during fiscal 2005, totaling $98 million. The third quarterly cash dividend was paid on December 8, 2005, to stockholders of record on November 17, 2005 in the amount of $48 million. The declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors.

Recent Accounting Pronouncements

In ~~June 2004,~~May 2005, the Financial Accounting Standards Board (FASB) ~~ratified Emerging Issues Task Force Issue~~issued SFAS No. ~~03-1 (EITF 03-1)~~154, “Accounting Changes and Error Corrections — a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154), ~~“The Meaning~~which requires retrospective application to prior periods’ financial statements of ~~Other-Than-Temporary Impairment~~every voluntary change in accounting principal unless it is impracticable to do so. SFAS 154 is effective for accounting changes and ~~Its Application~~corrections of errors beginning in fiscal 2007. Applied does not expect the adoption of this standard to ~~Certain Investments.~~have a material effect on Applied’s financial position or results of operations.

In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 provides the SEC staff position regarding the application of SFAS 123R, “Share-Based Payment.” ~~EITF 03-1 includes new~~SAB 107 contains interpretive guidance relating to the interaction between SFAS 123R and certain SEC rules and regulations, as well as the staff’s views regarding the valuation of share-based payment arrangements for ~~evaluating and recording impairment losses on~~public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. Applied is

45
47

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~debt~~

currently evaluating SAB 107 and ~~equity investments,~~will be incorporating it as ~~well as new disclosure requirements for investments that are deemed to be temporarily impaired. Adoption~~part of its adoption of SFAS 123R in the ~~recognition and measurement guidance~~first fiscal quarter of ~~EITF 03-1 has been temporarily deferred by~~2006.

In December 2004, the FASB ~~but~~issued SFAS No. 123R, “Share-Based Payment,” which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. In April 2005, the ~~disclosure requirements~~SEC extended the compliance requirement date of ~~EITF 03-1 are~~SFAS 123R, with the result that this requirement will be effective for ~~Applied’s~~Applied beginning with the first fiscal ~~2004 annual consolidated financial statements. Accordingly, additional disclosures as required by EITF 03-1 are included in~~quarter of 2006. Applied is currently evaluating the expected impact of SFAS 123R to its Consolidated Financial Statements. See Note 21 of ~~the~~ Notes to the Consolidated Financial ~~Statements.~~Statements for information related to the pro forma effect on Applied’s reported net income and net earnings per share of applying the fair value provisions of the SFAS 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

In March 2004, the FASB Emerging Issues Task Force (EITF) reached a consensus on EITF IssueNo. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). The guidance prescribes a three-step model for determining whether an investment isother-than-temporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance became effective for reporting periods beginning after June 15, 2004, while the disclosure requirements became effective for annual reporting periods ending after June 15, 2004. In September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, “Effective Date ofParagraphs 10-20 of EITF IssueNo. 03-1 ‘The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” (FSP EITF 03-1-1). FSP EITF 03-1-1 delayed the effective date for the measurement and recognition guidance contained inparagraphs 10-20 of EITF Issue 03-1. In November 2005, the FASB issued FSPFAS 115-1 andFAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and its Application to Certainother-than-temporary Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether the impairment isother-than-temporary and the measurement of an impairment loss. This statement specifically nullifies the requirements ofparagraph 10-18 of EITF 03-1 and references existingother-than-temporary impairment guidance. The guidance under this FSP is effective for reporting periods beginning after December 15, 2005. Applied continued to apply relevant“other-than-temporary” guidance as provided for in FSP EITF 03-1-1 during fiscal 2005. Applied does not expect the implementation of FSPFAS 115-1 andFAS 124-1 will have a material effect on Applied’s financial position or results of operations.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 2	Financial Instruments


	*~~Investments~~*

Investments

Short-term investments by security type at October 30, 2005 were as follows:


			Gross		Gross
			Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(In thousands)

Obligations of states and political subdivisions	$	1,362,456	$	194	$	4,720	$	1,357,930
U.S. commercial paper, corporate bonds and medium-term notes		1,069,556		1,429		7,806		1,063,179
Bank certificates of deposit		63,847		—		—		63,847
U.S. Treasury and agency securities		1,671,396		134		16,339		1,655,191
Other debt securities		816,424		763		12,335		804,852

	$	4,983,679	$	2,520	$	41,200	$	4,944,999

Short-term investments by security type at October 31, 2004 were as follows:
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
(In thousands)
Obligations of states and political subdivisions $ 499,495 $ 2,732 $ 1,277 $ 500,950
U.S. commercial paper, corporate bonds and medium-term notes 1,517,123 6,185 1,970 1,521,338
Bank certificates of deposit 116,933 — — 116,933
U.S. Treasury and agency securities 1,501,897 3,609 2,771 1,502,735
Other debt securities 652,028 4,704 2,536 654,196

$ 4,287,476 $ 17,230 $ 8,554 $ 4,296,152

~~Short-term investments by security type at October 26, 2003 were as follows:~~

Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
(In thousands)
Obligations of states and political subdivisions $ 657,475 $ 6,508 $ 458 $ 663,525
U.S. commercial paper, corporate bonds and medium-term notes 1,370,050 10,399 5,018 1,375,431
Bank certificates of deposit 55,997 — — 55,997
U.S. Treasury and agency securities 1,312,695 2,708 1,300 1,314,103
Other debt securities 713,532 7,395 1,634 719,293

$ 4,109,749 $ 27,010 $ 8,410 $ 4,128,349


			Gross		Gross
			Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
	(In thousands)

Obligations of states and political subdivisions	$	1,246,496	$	2,732	$	1,277	$	1,247,951
U.S. commercial paper, corporate bonds and medium-term notes		1,517,123		6,185		1,970		1,521,338
Bank certificates of deposit		116,933		—		—		116,933
U.S. Treasury and agency securities		1,501,897		3,609		2,771		1,502,735
Other debt securities		693,579		4,704		2,536		695,747

	$	5,076,028	$	17,230	$	8,554	$	5,084,704

Cash and cash equivalents included investments in debt and other securities of ~~$884~~$719 million at October ~~26, 2003~~31, 2004 and ~~$1.5 billion~~$608 million at October ~~31, 2004.~~

30, 2005.

Contractual maturities of short-term investments at October ~~31, 2004~~30, 2005 were as follows:
Estimated
Cost Fair Value
(In thousands)
Due in one year or less $ 2,539,970 $ 2,537,512
Due after one through three years 1,080,417 1,082,147
Due after three years 667,089 676,493

$ 4,287,476 $ 4,296,152

~~APPLIED MATERIALS, INC.~~

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

For fiscal 2003, gross realized gains on sales of short-term investments were $44 million, and gross realized losses were $8 million. For fiscal 2004, gross realized gains on sales of short-term investments were $15 million, and gross realized losses were $7 million.

Estimated

Cost Fair Value
(In thousands)
Due in one year or less $ 1,724,984 $ 1,719,315
Due after one through three years 1,136,017 1,123,831
Due after three years 1,297,957 1,289,056
No single maturity date* 824,721 812,797

$ 4,983,679 $ 4,944,999


*	Securities with no single maturity date include mortgage- and asset-backed securities.

Applied manages its cash equivalents and short-term investments as a single portfolio of highly marketable securities that is intended to be available to meet Applied’s current cash requirements. For fiscal 2004, gross realized gains on sales of short-term investments were $15 million, and gross realized losses were $7 million. For

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

fiscal 2005, gross realized gains on sales of short-term investments were $3 million, and gross realized losses were $8 million.

The following table provides the breakdown of the short-term investments with unrealized losses at October ~~31, 2004:~~
In Loss Position for In Loss Position for
Less Than 12 Months 12 Months or Greater Total
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
(In thousands)
Obligations of states and political subdivisions $ 191,361 $ 1,135 $ 6,224 $ 142 $ 197,585 $ 1,277
U.S. commercial paper, corporate bonds and medium-term notes 776,861 1,859 3,695 111 780,556 1,970
U.S. Treasury and agency securities 962,554 2,598 7,346 173 969,900 2,771
Other debt securities 310,349 2,503 2,302 33 312,651 2,536

$ 2,241,125 $ 8,095 $ 19,567 $ 459 $ 2,260,692 $ 8,554

30, 2005:


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

Obligations of states and political subdivisions	$	536,069	$	3,939	$	20,028	$	781	$	556,097	$	4,720
U.S. commercial paper, corporate bonds and medium-term notes		571,797		4,744		147,774		3,062		719,571		7,806
U.S. Treasury and agency securities		1,188,798		10,932		294,453		5,407		1,483,251		16,339
Other debt securities		537,875		7,510		176,713		4,825		714,588		12,335

	$	2,834,539	$	27,125	$	638,968	$	14,075	$	3,473,507	$	41,200

The gross unrealized losses related to short-term investments are primarily due to a decrease in the fair value of debt securities as a result of an increase in interest rates during fiscal ~~2004.~~2005. Applied has determined that the gross unrealized losses on its short-term investments at October ~~31, 2004~~30, 2005 are temporary in nature. Applied reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, credit quality and Applied’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

Derivative Financial Instruments ~~In accordance with SFAS No. 133 (SFAS 133), “Accounting for~~ Derivative ~~Instruments and Hedging Activities,” as amended, derivative~~ instruments and hedging activities, including foreign currency exchange contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or accounts payable and accrued expenses.

Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as Japanese yen, British pound, euro and Israeli shekel. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged.

Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur within the next 12 months. Hedges related to anticipated transactions are designated and documented at the inception of

~~APPLIED MATERIALS, INC.~~

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

the hedge as cash flow hedges, and are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income in stockholders’ equity, and is reclassified into earnings when the hedged transaction affects earnings. ~~All such amounts~~Amounts included in accumulated other comprehensive income at October ~~31, 2004~~30, 2005 will generally be reclassified tointo earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness, and are recognized in cost of products sold. The change in option and forward time value was not material for fiscal ~~2002,~~ 2003, 2004 or ~~2004.~~2005. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, Applied ~~immediately~~promptly recognizes the gain or loss on the associated financial instrument in

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

general and administrative expenses. The amounts recognized due to anticipated transactions failing to occur were not material for all periods presented.

Forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are not designated for ~~SFAS 133~~ hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded ~~immediately~~promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

Derivative-related activity in accumulated other comprehensive income was as follows:
2003 2004
(In thousands)
Unrealized gain, net, on derivative instruments at beginning of period $ 5,987 $ 1,929
Increase in fair value of derivative instruments 4,700 13,701
Gains reclassified to earnings, net (8,758 ) (14,984 )

Unrealized gain, net, on derivative instruments at end of period $ 1,929 $ 646


	2004			2005
	(In thousands)

Unrealized gain, net, on derivative instruments at beginning of period	$	1,929		$	646
Increase in fair value of derivative instruments		13,701			10,105
Gains reclassified into earnings, net		(14,984	)		(1,544	)

Unrealized gain, net, on derivative instruments at end of period	$	646		$	9,207

Fair Value of Financial Instruments The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments. At October ~~26, 2003,~~31, 2004, the carrying amount of long-term debt ~~was $562 million, and the estimated fair value was $625 million. At October 31, 2004, the carrying amount~~ was $456 million, and the estimated fair value was $510 million. At October 30, 2005, the carrying amount of long-term debt was $415 million, and the estimated fair value was $432 million. The estimated fair value of long-term debt is based primarily on quoted market prices for the same or similar issues.

~~APPLIED MATERIALS, INC.~~

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


Note 3	Balance Sheet Detail

2003 2004
(In thousands)
Inventories

Customer service spares $ 480,770 $ 427,403
Raw materials 115,481 179,630
Work-in-process 143,130 222,663
Finished goods* 211,311 309,672

$ 950,692 $ 1,139,368

Property, Plant and Equipment, Net

Land and improvements $ 265,571 $ 277,597
Buildings and improvements 1,396,976 1,371,078
Demonstration and manufacturing equipment 645,740 680,551
Furniture, fixtures and other equipment 562,020 530,606
Construction in progress 224,120 93,298

Gross property, plant and equipment 3,094,427 2,953,130
Accumulated depreciation (1,534,597 ) (1,607,602 )

$ 1,559,830 $ 1,345,528

Accounts Payable and Accrued Expenses

Accounts payable $ 258,416 $ 350,105
Compensation and employee benefits 168,993 423,859
Installation and warranty 172,921 224,531
Deferred revenue 204,980 301,220
Customer deposits 37,246 125,466
Restructuring reserve 106,820 100,111
Other 370,095 369,769

$ 1,319,471 $ 1,895,061


	2004				2005
	(In thousands)

Inventories
Customer service spares	$	427,403			$	383,003
Raw materials		179,630				136,371
Work-in-process		222,663				129,778
Finished goods*		309,672				384,941

	$	1,139,368			$	1,034,093

Property, Plant and Equipment, Net
Land and improvements	$	277,597			$	280,391
Buildings and improvements		1,371,078				1,424,922
Demonstration and manufacturing equipment		680,551				684,268
Furniture, fixtures and other equipment		530,606				535,609
Construction in progress		93,298		��		85,920

Gross property, plant and equipment		2,953,130				3,011,110
Accumulated depreciation		(1,607,602	)			(1,736,086	)

	$	1,345,528			$	1,275,024

Accounts Payable and Accrued Expenses
Accounts payable	$	350,105			$	347,559
Compensation and employee benefits		423,859				291,721
Installation and warranty		224,531				171,419

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2004 2005
(In thousands)

Deferred revenue 301,220 318,106
Customer deposits 125,466 50,291
Restructuring reserve 100,111 69,482
Other 369,769 369,464

$ 1,895,061 $ 1,618,042


*	Included in finished goods inventory is ~~$76 million at October 26, 2003 and~~ $88 million at October 31, 2004 and $117 million at October 30, 2005 of newly introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria, as set forth in Note 1 of the Notes to Consolidated Financial Statements.


	*~~Goodwill, Purchased Technology and Other Intangible Assets~~*

Goodwill, Purchased Technology and Other Intangible Assets

Details of unamortized intangible assets ~~which consisted solely of goodwill,~~ were as follows:
2003 2004
(In thousands)
Gross carrying amount $ 269,391 $ 303,191
Accumulated amortization (45,870 ) (45,870 )

$ 223,521 $ 257,321

~~In connection with the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” as of the beginning of fiscal 2002, goodwill~~


	2004								2005
				Other								Other
				Intangible								Intangible
	Goodwill			Assets		Total			Goodwill			Assets		Total
	(In thousands)

Gross carrying amount	$	303,191		$	—	$	303,191		$	384,852		$	17,860	$	402,712
Accumulated amortization		(45,870	)		—		(45,870	)		(45,870	)		—		(45,870	)

	$	257,321		$	—	$	257,321		$	338,982		$	17,860	$	356,842

Goodwill is ~~no longer~~not amortized but reviewed for impairment annually during the

~~APPLIED MATERIALS, INC.~~

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

fourth quarter of each fiscal year. Applied conducted goodwill impairment tests in fiscal ~~2003~~2004 and fiscal ~~2004,~~2005, and the results of these tests indicated that Applied’s goodwill assets were not impaired. From October ~~26, 2003~~31, 2004 to October ~~31, 2004,~~30, 2005, the change in goodwill was ~~$34~~$82 million, ~~which consisted of $11 million for~~due primarily to the acquisition of ~~Torrex Equipment Corporation~~all of the operating subsidiaries and ~~$23 million~~businesses of ~~adjustments~~Metron Technology N.V. (Metron Technology) and the assets of ATMI, Inc.’s Treatment Systems business (EcoSys). Other assets that are not subject to amortization consist primarily of a trade name associated with the ~~purchase price for prior acquisitions containing contingent purchase price provisions.~~Metron Technology acquisition. For additional details, see Note 13 of the Notes to the Consolidated Financial Statements.

Details of amortized intangible assets were as follows:
2003 2004
Other Other
Purchased Intangible Purchased Intangible
Technology Assets Total Technology Assets Total
(In thousands)
Gross carrying amount $ 324,193 $ 23,600 $ 347,793 $ 331,693 $ 23,600 $ 355,293
Accumulated amortization (244,331 ) (10,950 ) (255,281 ) (290,492 ) (14,510 ) (305,002 )

$ 79,862 $ 12,650 $ 92,512 $ 41,201 $ 9,090 $ 50,291


	2004									2005
				Other									Other
	Purchased			Intangible						Purchased			Intangible
	Technology			Assets			Total			Technology			Assets			Total
	(In thousands)

Gross carrying amount	$	331,693		$	23,600		$	355,293		$	356,933		$	37,270		$	394,203
Accumulated amortization		(290,492	)		(14,510	)		(305,002	)		(308,816	)		(22,154	)		(330,970	)

	$	41,201		$	9,090		$	50,291		$	48,117		$	15,116		$	63,233

Purchased technology and other intangible assets are amortized over their estimated useful lives of 52 to 10 years using the straight-line method. From October 31, 2004 to October 30, 2005 the change in amortized intangible assets was approximately $39 million, primarily due to the acquisition associated with Metron Technology and certain assets of ATMI, Inc. and SCP Global Technology, Inc. Aggregate amortization expense was ~~$48~~$50 million and ~~$50~~$26 million for fiscal ~~2003~~2004 and ~~2004,~~2005, respectively. As of October ~~31, 2004,~~30, 2005, future estimated amortization expense is

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

expected to be ~~$21 million for fiscal 2005, $15~~$25 million for fiscal 2006, $7$13 million for fiscal 2007, $4$10 million for fiscal 2008, $2$8 million for fiscal 2009, $5 million for fiscal 2010, and $1$2 million thereafter.


Note 4	Borrowing Facilities

At October 30, 2005, Applied ~~has~~had credit facilities for unsecured borrowings in various currencies of up to approximately ~~$673~~$415 million, of which ~~$500~~$250 million iswas comprised of ~~two~~a revolving credit ~~agreements~~agreement in the United States with a group of ~~banks. One agreement is a $250 million line of credit that expires in September 2005, and is expected to be renewed, and the other is a $250 million line of credit~~banks that expires in September 2006. The ~~agreements provide~~agreement provides for borrowings at various rates, including the lead bank’s prime reference rate, and ~~include~~includes financial and other covenants with which Applied was in compliance at October ~~31, 2004.~~30, 2005. No ~~amounts were~~amount was outstanding under ~~these agreements~~this agreement at October ~~26, 2003 or at October 31, 2004.~~30, 2005. The remaining credit facilities of approximately ~~$173~~$165 million are with Japanese banks at rates indexed to their prime reference rate and are denominated in Japanese yen. No amounts were outstanding under these Japanese credit facilities at October ~~26, 2003 or at October 31, 2004.~~

~~APPLIED MATERIALS, INC.~~30, 2005.

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


Note 5	Long-Term Debt

Long-term debt outstanding at the end of the fiscal year was as follows:
Fiscal year 2003 2004
(In thousands)
Japanese debt, 3.00%-4.25%, maturing 2004-2011 $ 18,714 $ 13,300
6.70-7.00% medium-term notes due 2005, interest payable March 15 and September 15 43,000 43,000
8.00% unsecured senior notes due 2004, interest payable March 1 and September 1 100,000 —
6.75% unsecured senior notes due 2007, interest payable April 15 and October 15 200,000 200,000
7.125% unsecured senior notes due 2017, interest payable April 15 and October 15 200,000 200,000

561,714 456,300
Current portion (105,292 ) (45,864 )

$ 456,422 $ 410,436

~~At October 31, 2004, $13 million of Japanese debt was collateralized by property and equipment with a net book value of $43 million.~~


Fiscal Year	2004			2005
	(In thousands)

1.61% installment note payable to Tokyo Electron Ltd., face amount $5,400, maturing 2006 - 2008, interest payable March 17, June 17, September 17 and December 17	$	—		$	4,971
Japanese debt, 3.00%-4.25%, maturing 2005-2011		13,300			9,983
6.70-7.00% medium-term notes due 2005, interest payable March 15 and September 15		43,000			—
6.75% unsecured senior notes due 2007, interest payable April 15 and October 15		200,000			200,000
7.125% unsecured senior notes due 2017, interest payable April 15 and October 15		200,000			200,000

		456,300			414,954
Current portion		(45,864	)		(7,574	)

	$	410,436		$	407,380

Applied has debt agreements that contain financial and other covenants. These covenants require Applied to maintain certain minimum financial ratios. At October ~~31, 2004,~~30, 2005, Applied was in compliance with all covenants.

Aggregate debt maturities at October ~~31, 2004~~30, 2005 were: ~~$46~~$8 million in fiscal ~~2005; $2 million in fiscal 2006;~~2006, $202 million in fiscal ~~2007; $2~~2007, $3 million in fiscal ~~2008; $2~~2008, $1 million in fiscal ~~2009;~~2009, $1 million in fiscal 2010, and ~~$202~~$200 million thereafter.


Note 6	Restructuring, Asset Impairments and Other Charges

~~Restructuring, asset impairments and other charges included the following:~~

Fiscal year 2002 2003 2004
(In thousands)
Restructuring and asset impairment charges $ 77,479 $ 371,754 $ 167,459
Acquired in-process research and development expense 8,000 — —

$ 85,479 $ 371,754 $ 167,459

~~APPLIED MATERIALS, INC.~~

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

Restructuring, asset impairments and other charges for fiscal 2004 totaled $167 million, consisting of $65 million for facility consolidations, $6 million for severance and benefits, and $96 million for other costs, primarily related to fixed asset writeoffs due to facility consolidations.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The restructuring actions in fiscal ~~2002,~~ 2003 and 2004 were taken to align Applied’s cost structure with prevailing market conditions due to the industry downturn at the time. These actions, which were necessary as a result of reduced business volume, decreased Applied’s global workforce and consolidated Applied’s global facilities.

There were no restructuring, asset impairments or other charges for fiscal 2005.

As of October 30, 2005, the majority of the fiscal 2003 and 2004 restructuring actions have been completed, and restructuring reserve balances consisted principally of remaining lease commitments associated with facilities.

Changes in restructuring reserves for fiscal 2003, 2004 and ~~2004~~2005 were as follows:
Severance
and Benefits Facilities Other Total
(In thousands)
Balance, October 27, 2002 $ 1,993 $ 32,015 $ 3,300 $ 37,308
Provision for fiscal 2003 185,733 86,105 99,916 371,754
Cash paid (175,789 ) (26,276 ) (43,768 ) (245,833 )
Non-cash charges — (1,949 ) (54,460 ) (56,409 )

Balance, October 26, 2003 11,937 89,895 4,988 106,820
Provision for fiscal 2004 6,200 65,400 95,859 167,459
Cash paid (18,137 ) (57,290 ) (5,824 ) (81,251 )
Non-cash charges — — (92,917 ) (92,917 )

Balance, October 31, 2004 $ — $ 98,005 $ 2,106 $ 100,111


	Severance
	and Benefits			Facilities			Other			Total
	(In thousands)

Balance, October 27, 2002	$	1,993		$	32,015		$	3,300		$	37,308
Provision for fiscal 2003		185,733			86,105			99,916			371,754
Cash paid		(175,789	)		(26,276	)		(43,768	)		(245,833	)
Non-cash charges		—			(1,949	)		(54,460	)		(56,409	)

Balance, October 26, 2003		11,937			89,895			4,988			106,820
Provision for fiscal 2004		6,200			65,400			95,859			167,459
Cash paid		(18,137	)		(57,290	)		(5,824	)		(81,251	)
Non-cash charges		—			—			(92,917	)		(92,917	)

Balance, October 31, 2004		—			98,005			2,106			100,111
Cash paid		—			(28,523	)		(2,106	)		(30,629	)

Balance, October 30, 2005	$	—		$	69,482		$	—		$	69,482

~~Note 7 Stockholders’ Equity~~

Note 7 Stockholders’ Equity

~~Stock Split~~On March 21, 2002, Applied’s Board of Directors approved a two-for-one stock split of Applied’s common stock, which was distributed in the form of a 100 percent stock dividend on or about April 16, 2002 to stockholders of record as of April 1, 2002. All prior period common stock and applicable share and per share amounts have been restated to reflect this stock dividend.

Accumulated Other Comprehensive ~~Income~~Income/(Loss) See the Consolidated Statements of Stockholders’ Equity for the components of comprehensive income. Accumulated other comprehensive ~~income~~income/(loss) consisted of the following components:

Fiscal year 2003 2004
(In thousands)
Unrealized gain on investments $ 24,092 $ 11,435
Unrealized gain on derivative instruments qualifying as cash flow hedges 1,929 646
Cumulative translation adjustments (9,638 ) (1,664 )

$ 16,383 $ 10,417


Fiscal Year	2004			2005
	(In thousands)

Unrealized gain/(loss) on investments	$	11,435		$	(21,618	)
Unrealized gain on derivative instruments qualifying as cash flow hedges		646			9,207
Minimum pension liability		—			(17,868	)
Cumulative translation adjustments		(1,664	)		(6,969	)

	$	10,417		$	(37,248	)

Stock Repurchase ProgramSince March 1996, Applied has systematically repurchased shares of its common stock in the open market to partially fund its stock-based employee benefit and incentive plans. Upon the expiration of the previous authorization on March 24, 2004, the Board of Directors extended the share repurchase program and authorized the repurchase of up to $3.0 billion of Applied’s common stock in the open market over the succeeding three years. ~~In fiscal 2002, there were 6,795,000 shares repurchased at an average price~~On March 22, 2005, the Board of ~~$18.40 per share.~~Directors approved a new stock repurchase program for up to $4.0 billion over the next three years ending March 2008. In fiscal 2003, there were 15,588,000 shares repurchased at an average price of $16.03 per share. In fiscal 2004, there were 37,784,000 shares repurchased at an average price of $17.20 per share. In fiscal 2005, there were 101,208,000 shares repurchased at an average price of $16.80 per share.

52
54

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Dividends During fiscal 2005, Applied’s Board of Directors declared cash dividends for three consecutive quarters beginning in the second fiscal quarter of 2005, in the amount of $0.03 per share per declaration. The first two declared cash dividends were paid during fiscal 2005, totaling $98 million. The third declared cash dividend was paid on December 8, 2005 to stockholders of record on November 17, 2005 in the amount of $48 million. The declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors.

~~Note 8 Employee Benefit Plans~~

Note 8 Employee Benefit Plans

Stock OptionsApplied grants options to employees and non-employee directors to purchase shares of its common stock, at future dates, at the fair market value on the date of grant. Options generally vest over one to four years, and generally expire no later than seven years from the date of grant. There were ~~96,874,000~~74,793,000 shares available for grant at October ~~27, 2002, 74,793,000~~26, 2003; 133,878,000 at October ~~26, 2003~~31, 2004 and ~~133,878,000~~138,377,000 shares available for grant at October ~~31, 2004.~~30, 2005. Stock option activity was as follows:
2002 2003 2004
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
(In thousands, except per share amounts)
Outstanding, beginning of year 301,274 $ 15.57 268,562 $ 16.00 252,035 $ 16.56
Granted and assumed 8,802 $ 20.92 52,407 $ 13.61 37,089 $ 21.21
Exercised (19,156 ) $ 6.82 (38,480 ) $ 6.67 (35,298 ) $ 9.85
Canceled (22,358 ) $ 20.06 (30,454 ) $ 18.96 (26,238 ) $ 20.30

Outstanding, end of year 268,562 $ 16.00 252,035 $ 16.56 227,588 $ 17.93

Exercisable, end of year 114,188 $ 11.10 117,491 $ 15.94 105,252 $ 18.45


	2003					2004					2005
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
	(In thousands, except per share amounts)

Outstanding, beginning of year		268,562		$	16.00		252,035		$	16.56		227,588		$	17.93
Granted and assumed		52,407		$	13.61		37,089		$	21.21		24,186		$	16.97
Exercised		(38,480	)	$	6.67		(35,298	)	$	9.85		(22,759	)	$	8.49
Canceled		(30,454	)	$	18.96		(26,238	)	$	20.30		(29,008	)	$	19.48

Outstanding, end of year		252,035		$	16.56		227,588		$	17.93		200,007		$	18.67

Exercisable, end of year		117,491		$	15.94		105,252		$	18.45		135,714		$	20.21

The following table summarizes information with respect to options outstanding and exercisable at October ~~31, 2004:~~
Options Outstanding Options Exercisable
Weighted
Weighted Average Weighted
Average Remaining Average
Number of Exercise Contractual Number of Exercise
Range of exercise prices Shares Price Life Shares Price
(In thousands) (In years) (In thousands)
$ 0.01 - $ 4.99 331 $ 2.67 2.0 331 $ 2.67
$ 5.00 - $ 9.99 20,221 $ 7.27 0.8 20,220 $ 7.27
$10.00 - $19.99 123,148 $ 16.17 4.1 35,274 $ 17.22
$20.00 - $29.99 76,305 $ 21.74 4.2 41,875 $ 21.61
$30.00 - $59.99 7,583 $ 37.31 2.5 7,552 $ 37.30

227,588 $ 17.93 3.8 105,252 $ 18.45

30, 2005:


	Options Outstanding						Options Exercisable
					Weighted
			Weighted		Average				Weighted
			Average		Remaining				Average
	Number of		Exercise		Contractual		Number of		Exercise
Range of Exercise Prices	Shares		Price		Life		Shares		Price
	(In thousands)				(In years)		(In thousands)

$ 0.01 - $ 4.99		186	$	2.82		1.4		186	$	2.82
$ 5.00 - $ 9.99		1,714	$	7.87		0.2		1,714	$	7.87
$10.00 - $19.99		127,141	$	16.31		3.7		64,576	$	17.39
$20.00 - $29.99		64,216	$	21.71		3.2		62,488	$	21.68
$30.00 - $59.99		6,750	$	37.32		1.6		6,750	$	37.32

		200,007	$	18.67		3.4		135,714	$	20.21

Employees’ Stock Purchase PlanApplied sponsors two ~~employee stock purchase plans~~Employees’ Stock Purchase Plans for the benefit of United States (U.S.) and international ~~employees.~~employees, respectively. The U.S. plan is qualified under Section 423 of the Internal Revenue Code. Under the ~~employee stock purchase plan (ESPP),~~ESPP substantially all employees may purchase Applied’s common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value at the beginning of the offering period or at the end of each applicable purchase period. Beginning in December 2002, Applied amended the ESPP to extend the offering period from 6 months to 24 months, composed of four six-month purchase periods. ESPP contributions are limited to a maximum of 10 percent of an employee’s eligible compensation, up to a

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

maximum of $6,500, per six-month purchase period. ESPP participants are also limited to purchasing a maximum of 1,000 shares per purchase period. Shares issued under the ESPP were ~~4,127,000 for fiscal 2002,~~ 6,212,000 for fiscal 2003, ~~and~~ 5,308,000 for fiscal ~~2004.~~2004 and 4,879,000 for fiscal 2005. At October ~~31, 2004,~~30, 2005, there were ~~19,618,000~~14,735,000 shares reserved for future issuance under the ESPP.

Stock-Based CompensationSee Note 1 of Notes to Consolidated Financial Statements.

~~APPLIED MATERIALS, INC.~~

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

Restricted StockDuring fiscal 2003, Applied issued 307,500 shares of restricted stock to two individuals, which consisted principally of an initial compensation package for Applied’s new President and Chief Executive Officer (CEO). On May 20, 2003, Applied issued 300,000 shares of restricted common stock at $0.01 per share to the new President and CEO. The closing market price of Applied’s common stock was $13.76 per share on May 20, 2003. One half of the shares vested on October 1, 2003, and the other half of the shares vested on October 1, 2004. Deferred compensation was charged for the difference between the market value of the restricted shares and the ~~sales~~purchase price, and was presented as a reduction of stockholders’ equity in Applied’s Consolidated Balance Sheet. Deferred compensation iswas amortized as compensation expense over the vesting period. Applied recognized general and administrative expenses of approximately $2.7 million in fiscal 2003, ~~and~~ $1.4 million in fiscal 2004 and $96,000 in fiscal 2005 in amortization expense related to restricted stock issuances.

Employee Bonus PlansApplied has various employee bonus plans. A profit-sharing plan provides for the distribution of a percentage of pre-tax profits to substantially all Applied employees not eligible for other performance-based incentive plans, up to a maximum percentage of compensation. Other plans award annual bonuses to Applied’s executives and key contributors based on the achievement of profitability and other specific performance criteria. Applied also has agreements with key technical employees that provide for additional compensation related to the success of new product development and achievement of specified profitability criteria. Charges to expense under these plans were ~~$99 million for fiscal 2002, were~~ not material for fiscal 2003, ~~and~~ were $309 million for fiscal ~~2004.~~

2004 and were $138 million for fiscal 2005.

Employee Savings and Retirement PlanThe Employee Savings and Retirement Plan is qualified under Sections 401(a) and (k) of the Internal Revenue Code. Applied contributes a percentage of each participating employee’s salary deferral contributions. These matching contributions generally become 20 percent vested at the end of an employee’s second year of service with Applied, and vest 20 percent per year of service thereafter until they become fully vested at the end of six years of service. ~~Prior to January 1, 2002, Company matching contributions vested beginning at the end of an employee’s third year of service and became fully vested at the end of seven years of service.~~ Effective January 1, 2004, each participant may elect to have the Company matching contributions invested in any of the diversified investment funds available under the plan or in Applied’s common stock. Prior to 2004, the Company matching contributions were invested in Applied’s common stock. Applied’s matching contributions under this plan were approximately ~~$27 million for fiscal 2002,~~ $13 million, net of $12 million in forfeitures, for fiscal 2003, ~~and~~ $17 million, net of $8 million in forfeitures, for fiscal ~~2004. Forfeitures were not material~~2004, and $25 million, net of $1 million in forfeitures, for fiscal ~~2002.~~

2005.

Defined Benefit Pension Plans of Foreign SubsidiariesSeveral of Applied’s foreign subsidiaries have defined benefit pension plans covering substantially all of their eligible employees. Benefits under these plans are typically based on years of service and final average compensation levels. ~~These~~Applied uses August 31 as a measurement date. The plans are managed in accordance with applicable local statutes and practices. Applied deposits funds for certain of these plans with insurance companies, pension trustees, government-managed accounts, and/or accrues the expense for the unfunded portion of the benefit obligation on its consolidated financial statements. Where appropriate, the pension plans retain professional investment managers that invest plan

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assets in equity securities, fixed income securities, cash and other institutional investments. Applied’s practice is to fund the various pension plans in amounts sufficient to meet the minimum requirements as established by applicable local governmental oversight and taxing authorities. Depending on the design of the plan, local custom and market circumstances, the liabilities of a plan may exceed qualified plan assets. The differences between the aggregate accumulated benefit obligations and aggregate plan assets of these plans ~~totaled $69 million at October 26, 2003 and $81 million at October 31, 2004, which~~ have been recorded as liabilities by Applied and are included in accrued expenses and other liabilities in the Consolidated Balance Sheets.

~~APPLIED MATERIALS, INC.~~

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

A summary of the changes in benefit obligations and plan assets for fiscal ~~2003~~2004 and ~~2004~~2005 is presented below.
2003 2004
(In thousands, except
percentages)
Change in projected benefit obligation

Beginning projected benefit obligation $ 116,144 $ 123,726
Service cost 12,998 12,744
Interest cost 5,246 5,842
Plan participants’ contributions 560 716
Net actuarial (gain)/loss 8,922 13,170
Curtailment loss to be recognized (12,093 ) —
Benefits paid (8,051 ) (6,330 )

Ending projected benefit obligation $ 123,726 $ 149,868

Change in plan assets

Beginning fair value of plan assets $ 30,302 $ 33,585
Actual return on plan assets 488 5,281
Employer contributions 10,286 9,368
Plan participants’ contributions 560 716
Benefits paid (8,051 ) (6,330 )

Ending fair value of plan assets $ 33,585 $ 42,620

Funded status $ (90,141 ) $ (107,248 )
Unrecognized transition obligations 861 698
Unrecognized prior service costs 1,190 1,055
Unrecognized net actuarial (gain)/loss 33,105 38,076

Net amount recognized $ (54,985 ) $ (67,419 )

Plans with accumulated benefit obligations in excess of plan assets

Projected benefit obligation $ 123,726 $ 149,868
Accumulated benefit obligation $ 102,363 $ 123,620
Fair value of plan assets $ 33,585 $ 42,620
Plan assets — allocation

Equity securities 52 % 53 %
Fixed income 32 % 33 %
Cash 16 % 14 %


	2004			2005
	(In thousands, except percentages)

Change in projected benefit obligation
Beginning projected benefit obligation	$	123,726		$	149,868
Service cost		12,744			11,935
Interest cost		5,842			6,841
Plan participants’ contributions		716			939
Actuarial loss		3,415			27,454
Curtailments, settlements and special termination benefits		—			—
Foreign currency exchange rate changes		9,755			(3,291	)
Benefits paid		(6,330	)		(7,311	)
Plan amendments and business combinations		—			—

Ending projected benefit obligation	$	149,868		$	186,435

Ending accumulated benefit obligation	$	123,620		$	152,564

Weighted average assumptions to determine benefit obligations
Discount rate		2.0% - 5.6	%		2.0% - 6.3	%
Rate of compensation increase		2.0% - 5.0	%		2.0% - 5.0	%
Change in plan assets
Beginning fair value of plan assets	$	33,585		$	42,620
Return on plan assets		2,102			8,232
Employer contributions		9,368			21,243
Plan participants’ contributions		716			939
Foreign currency exchange rate changes		3,179			(1,572	)
Divestitures, settlements and business combinations		—			—
Benefits paid		(6,330	)		(7,311	)

Ending fair value of plan assets	$	42,620		$	64,151

Funded status	$	(107,248	)	$	(122,283	)
Unrecognized transition obligations		698			424
Unrecognized prior service costs		1,055			1,034
Unrecognized net actuarial loss		38,076			57,884
Employer contributions after the measurement date		—			1,360

Net amount recognized	$	(67,419	)	$	(61,581	)

55
57

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2004 2005
(In thousands, except percentages)

Amounts recognized in the consolidated balance sheets

Prepaid benefit cost $ 166 $ 226
Accrued benefit cost (68,996 ) (89,595 )
Intangible asset 1,411 1,212
Additional other comprehensive loss — 26,576

Net amount recognized $ (67,419 ) $ (61,581 )

Plans with projected benefit obligations in excess of plan assets

Projected benefit obligation $ 149,868 $ 186,435
Fair value of plan assets $ 42,620 $ 64,151
Plans with accumulated benefit obligations in excess of plan assets

Accumulated benefit obligation $ 121,771 $ 149,460
Fair value of plan assets $ 39,123 $ 59,362
Plan assets — allocation

Equity securities 53 % 57 %
Debt securities 33 % 36 %
Cash 14 % 7 %

Applied’s investment strategy for its defined benefit plans is to invest assets in a prudent manner, maintaining well-diversified portfolios with the long-term objective of meeting the obligations of the plans as they come due. Asset allocation decisions are typically made by plan fiduciaries with input from Applied’s pension committee. Applied’s asset allocation strategy incorporates a sufficient equity exposure in order for the plans to benefit from the expected long-term outperformance of equities relative to the plans’ liabilities. Applied retains investment managers, where appropriate, to manage the assets of the plans. Performance of investment managers is monitored by plan fiduciaries with the assistance of local investment consultants. The investment managers make investment decisions within the guidelines set forth by plan fiduciaries. Risk management practices include diversification across asset classes and investment styles, and periodic rebalancing toward target asset allocation ranges. Investment managers may use derivative instruments for efficient portfolio management purposes. Plan assets do not include any of Applied’s own equity or debt securities.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the components of net periodic pension costs and the weighted average assumptions used for net periodic pension cost and benefit obligation calculations for fiscal ~~2002,~~ 2003, 2004 and ~~2004~~2005 is presented below.
2002 2003 2004
(In thousands, except percentages)
Components of net periodic pension cost

Service cost $ 12,079 $ 12,998 $ 12,744
Interest cost 4,960 5,246 5,842
Expected return on plan assets (2,631 ) (1,986 ) (2,261 )
Amortization of transition obligation 100 158 163
Amortization of prior service costs 100 122 135
Curtailment loss to be recognized — 58 —
Amortization of net (gain)/loss 1,301 1,446 1,635

Net periodic pension cost $ 15,909 $ 18,042 $ 18,258

Weighted average assumptions

Discount rate 2.3% - 7.0 % 2.0% - 6.5 % 2.0% - 5.6 %
Expected long-term return on assets 4.0% - 8.0 % 3.0% - 7.5 % 3.5% - 7.5 %
Rate of compensation increase 2.3% - 5.0 % 2.0% - 5.4 % 2.0% - 5.0 %


	2003			2004			2005
	(In thousands, except percentages)

Components of net periodic pension cost
Service cost	$	12,998		$	12,744		$	13,835
Interest cost		5,246			5,842			7,440
Expected return on plan assets		(1,986	)		(2,261	)		(2,727	)
Amortization of transition obligation		158			163			67
Amortization of prior service costs		122			135			140
Curtailment loss to be recognized		58			—			—
Amortization of net loss		1,446			1,635			1,641

Net periodic pension cost	$	18,042		$	18,258		$	20,396

Weighted average assumptions
Discount rate		2.0% - 6.5	%		2.0% - 5.6	%		2.0% - 6.3	%
Expected long-term return on assets		3.0% - 7.5	%		3.5% - 7.5	%		3.5% - 7.5	%
Rate of compensation increase		2.0% - 5.4	%		2.0% - 5.0	%		2.0% - 5.0	%

Asset return assumptions are derived based on actuarial and statistical methodologies, from analysis of long-term historical data relevant to the country in which each plan is in effect and the investments applicable to the corresponding plan.

The discount rate for each plan was derived by reference to appropriate benchmark yields on high quality corporate bonds, allowing for the approximate duration of both plan obligations and the relevant benchmark index.

Future expected benefit payments over the next ten fiscal years are: ~~$4 million in fiscal 2005;~~ $5 million in fiscal ~~2006;~~2006, $6 million in fiscal ~~2007;~~2007, $6 million in fiscal ~~2008; $7~~2008, $6 million in fiscal ~~2009;~~2009, $6 million in fiscal 2010, and ~~$41~~$39 million collectively for fiscal years ~~2010~~2011 through ~~2014.~~2015. Company contributions to these plans for fiscal ~~2005~~2006 are expected to be approximately $8$21 million.

Executive Deferred Compensation ~~Plan~~Plans ~~Under~~Applied sponsors two unfunded deferred compensation plans, the Executive Deferred Compensation Plan (Predecessor EDCP) and the 2005 Executive Deferred Compensation Plan (2005 EDCP), under which certain employees may elect to defer a portion of their following year’s eligible earnings. The Predecessor EDCP was frozen as of December 31, 2004 such that no new deferrals could be made under the plan after that date and the plan would qualify for “grandfather” relief under Section 409A of the Internal Revenue Code. The Predecessor EDCP participant accounts continue to be maintained under the plan and credited with deemed interest. The 2005 EDCP was adopted by Applied effective as of January 1, 2005 and is intended to comply with the requirements of Code Section 409A. Amounts payable, including accrued deemed interest, ~~under the Executive Deferred Compensation Plan~~ totaled ~~$77 million at October 26, 2003 and~~ $81 million at October 31, 2004 and $83 million at October 30, 2005, which were included in other long-term liabilities in the Consolidated Balance Sheets.

Post-Retirement BenefitsOn January 1, 1999, Applied adopted a plan that provides certain medical and vision benefits to eligible retirees who are at least age 55 and who have at least 10 years of service at their date of retirement. An eligible retiree may elect coverage for an eligible spouse or domestic partner who is not eligible for Medicare. Coverage under the plan generally ends for both the retiree and spouse or domestic partner upon becoming eligible for Medicare. This plan has not had, and is not expected to have, a material effect on Applied’s consolidated financial condition or results of operations.

56
59

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Note 9 Income Taxes~~

Note 9

Income Taxes

The components of income/(loss) from operations before income taxes were as follows:
Fiscal year 2002 2003 2004
(In thousands)
U.S. $ 131,818 $ (345,081 ) $ 1,474,143
Foreign 208,693 133,525 355,107

$ 340,511 $ (211,556 ) $ 1,829,250


Fiscal Year	2003			2004		2005
	(In thousands)

U.S.	$	(345,081	)	$	1,474,143	$	1,256,572
Foreign		133,525			355,107		324,997

	$	(211,556	)	$	1,829,250	$	1,581,569

The components of the provision for/(benefit from) income taxes were as follows:
Fiscal year 2002 2003 2004
(In thousands)
Current:
U.S. $ (4,781 ) $ (45,765 ) $ 273,988
Foreign 80,406 55,204 116,351
State (3,957 ) 8,646 8,681

71,668 18,085 399,020

Deferred:
U.S. (21,002 ) (76,804 ) 102,886
Foreign 15,157 2,929 (29,692 )
State 5,684 (6,619 ) 5,733

(161 ) (80,494 ) 78,927

$ 71,507 $ (62,409 ) $ 477,947


Fiscal Year	2003			2004			2005
	(In thousands)

Current:
U.S.	$	(45,765	)	$	273,988		$	233,755
Foreign		55,204			116,351			62,824
State		8,646			8,681			16,918

		18,085			399,020			313,497

Deferred:
U.S.		(76,804	)		102,886			95,899
Foreign		2,929			(29,692	)		13,505
State		(6,619	)		5,733			(51,232	)

		(80,494	)		78,927			58,172

	$	(62,409	)	$	477,947		$	371,669

A reconciliation between the statutory U.S. federal income tax rate of 35 percent and Applied’s actual effective income tax provision/(benefit) rate is as follows:
Fiscal year 2002 2003 2004
Tax provision at U.S. statutory rate 35.0 % (35.0 )% 35.0 %
Effect of foreign operations taxed at various rates (4.0 ) 5.8 (1.3 )
State income taxes, net of federal benefit 0.3 0.6 0.5
Research and other tax credits (0.4 ) — (0.8 )
Export sales benefit (11.2 ) (4.2 ) (5.7 )
Other 1.3 3.3 (1.6 )

21.0 % (29.5 )% 26.1 %


Fiscal Year	2003			2004			2005

Tax provision/(benefit) at U.S. statutory rate		(35.0	)%		35.0	%		35.0	%
Favorable settlement from IRS examination		—			—			(7.5	)
Foreign earnings repatriation under the American Jobs Creation Act of 2004		—			—			2.0
Effect of foreign operations taxed at various rates		5.8			(1.3	)		(1.2	)
State income taxes, net of federal benefit		0.6			0.5			0.6
Research and other tax credits		—			(0.8	)		(1.2	)
Export sales benefit		(4.2	)		(5.7	)		(5.9	)
Other		3.3			(1.6	)		1.7

		(29.5	)%		26.1	%		23.5	%

The 2005 reconciling items included benefits of $118 million due to a favorable resolution of a multi-year I.R.S. tax examination and $14 million relating to a change in estimate with respect to export benefits, partially offset by a charge of $32 million relating to the distribution of foreign earnings under the American Jobs Creation Act of 2004.

57
60

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities are as follows:
2003 2004
(In thousands)
Deferred tax assets:
Inventory reserves and basis difference $ 96,007 $ 123,704
Installation and warranty reserves 51,564 75,284
Accrued liabilities 178,698 208,766
Restructuring reserves 49,256 42,903
Deferred revenue 50,815 74,489
Tax credit and net operating loss carryforwards 365,103 163,117
Deferred compensation 31,539 32,823
Intangibles 9,956 24,079

832,938 745,165

Deferred tax liabilities:
Depreciation (21,984 ) (41,397 )
Purchased technology (24,216 ) (9,435 )
Other (19,185 ) (5,707 )

(65,385 ) (56,539 )

$ 767,553 $ 688,626


	2004			2005
	(In thousands)

Deferred tax assets:
Inventory reserves and basis difference	$	123,704		$	100,306
Installation and warranty reserves		75,284			51,913
Accrued liabilities		208,766			229,008
Restructuring reserves		42,903			28,829
Deferred revenue		74,489			118,144
Tax credit carryforwards		163,117			146,498
Deferred compensation		32,823			31,943
Intangibles		24,079			25,015

		745,165			731,656

Deferred tax liabilities:
Depreciation		(41,397	)		(42,242	)
Purchased technology		(9,435	)		(16,926	)
Other		(5,707	)		(25,718	)

		(56,539	)		(84,886	)

	$	688,626		$	646,770

The following table presents the breakdown between current and non-current deferred tax assets/(liabilities):
2003 2004
(In thousands)
Current $ 782,823 $ 610,095
Non-current (15,270 ) 78,531

$ 767,553 $ 688,626

~~APPLIED MATERIALS, INC.~~

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

2004 2005
(In thousands)
Current $ 610,095 $ 592,742
Non-current 78,531 54,028

$ 688,626 $ 646,770

The American Jobs Creation Act of 2004 created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. In the fourth fiscal quarter of 2005, Applied’s foreign subsidiaries distributed $270 million to Applied Materials, Inc. The distribution increased the provision for income taxes by $32 million and income taxes payable by $14 million. The charge resulted in a corresponding increase in additional paid-in capital as it related primarily to stock option compensation of employees working in foreign subsidiaries from which earnings were repatriated. Except for the items described previously, U.S. income taxes have not been provided for approximately ~~$370~~$165 million of cumulative undistributed earnings of several non-U.S. subsidiaries. Applied intends to reinvest these earnings indefinitely in operations outside of the U.S.

As of October ~~31, 2004,~~30, 2005, Applied’s federal tax credit carryforwards for tax return purposes were ~~$163~~$146 million. Management believes that tax credit carryforwards will be utilized in future periods. ~~If not utilized, the federal~~Federal tax credit carryforwards will begin to expire in ~~fiscal~~ 2011.

Applied’s income taxes payable have been reduced ~~and deferred tax assets have been increased,~~ by the tax benefits associated with employee stock option transactions. These benefits, credited directly to stockholders’ equity, amounted to ~~$124 million for fiscal 2003 and~~ $101 million for fiscal 2004 and

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$85 million for fiscal 2005, with a corresponding ~~increase to deferred tax assets of $124 million in fiscal 2003 and a~~ reduction to taxes payable of $101 million in fiscal ~~2004.~~

2004 and a reduction to taxes payable of $85 million in fiscal 2005.

Applied’s federal income tax returns for fiscal years ~~1998~~2002 through ~~2001~~2004 are under ~~examination and the~~ Internal Revenue Service ~~has proposed certain adjustments.~~examination. Management believes that adequate amounts have been accrued for any adjustments that may ultimately result from these examinations.


Note 10	Industry Segment and Foreign Operations

Applied operates in one reportable segment for the manufacture, marketing and servicing of integrated circuit fabrication equipment. In accordance with SFAS No. 131 (SFAS 131), “Disclosures About Segments of an Enterprise and Related Information,” Applied’s chief operating decision-maker has been identified as the President and CEO, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. All material operating ~~units~~segments qualify for aggregation under SFAS 131 due to ~~their identical~~similarities in the following: customer ~~base and similarities in:~~base; economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since Applied operates in one reportable segment and in one group of similar products and services, all financial segment and product line information required by SFAS 131 can be found in the ~~consolidated financial statements.~~

Consolidated Financial Statements.

~~APPLIED MATERIALS, INC.~~

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

For geographical reporting, revenues are attributed to the geographic location in which the customers’ facilities are located. Long-lived assets consist primarily of property, plant and equipment, and are attributed to the geographic location in which they are located. Net sales and long-lived assets by geographic region were as follows:
Long-lived
Net Sales Assets
(In thousands)
2002:
North America(1) $ 1,327,886 $ 1,497,247
Taiwan 1,238,504 41,497
Japan 756,700 107,424
Europe 660,042 119,105
Korea 443,099 21,298
Asia-Pacific(2) 636,081 33,981

$ 5,062,312 $ 1,820,552

2003:
North America(1) $ 1,179,131 $ 1,341,485
Taiwan 583,439 41,064
Japan 827,193 92,830
Europe 695,085 95,818
Korea 665,502 20,125
Asia-Pacific(2) 526,941 33,494

$ 4,477,291 $ 1,624,816

2004:
North America(1) $ 1,337,050 $ 1,172,298
Taiwan 2,006,402 21,869
Japan 1,416,639 87,784
Europe 794,026 93,543
Korea 879,333 19,300
Asia-Pacific(2) 1,579,603 30,988

$ 8,013,053 $ 1,425,782


			Long-lived
��	Net Sales		Assets
	(In thousands)

2003:
North America(1)	$	1,179,131	$	1,341,485
Taiwan		583,439		41,064
Japan		827,193		92,830
Europe		695,085		95,818
Korea		665,502		20,125
Asia-Pacific(2)		526,941		33,494

	$	4,477,291	$	1,624,816

2004:
North America(1)	$	1,337,050	$	1,172,298
Taiwan		2,006,402		21,869
Japan		1,416,639		87,784
Europe		794,026		93,543
Korea		879,333		19,300
Asia-Pacific(2)		1,579,603		30,988

	$	8,013,053	$	1,425,782

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-lived

Net Sales Assets
(In thousands)

2005:
North America(1) $ 1,472,020 $ 1,110,178
Taiwan 1,608,161 17,669
Japan 1,395,056 81,705
Europe 882,964 88,098
Korea 1,021,553 18,811
Asia-Pacific(2) 612,069 29,911

$ 6,991,823 $ 1,346,372


(1)	Primarily the United States.

(2)	Includes China.

~~Net sales to Intel Corporation represented 10 percent of Applied’s fiscal 2002 net sales.~~

During fiscal 2003, two customers individually accounted for more than 10 percent of net sales: net sales to Intel Corporation represented 13 percent of Applied’s net sales; and net sales to Samsung America, Inc. represented 12 percent of Applied’s net sales. During fiscal 2004, no individual customer accounted for more than 10 percent of Applied’s net sales.

~~APPLIED MATERIALS, INC.~~ During fiscal 2005, net sales to Samsung America, Inc. represented 10 percent of Applied’s net sales.

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


Note 11	Commitments and Contingencies


	*~~Leases~~*

Leases

Applied leases some of its facilities and equipment under non-cancelable operating leases and has options to renew most leases, with rentals to be negotiated. Total rent expense was ~~$140 million for fiscal 2002,~~ $134 million for fiscal 2003, ~~and~~ $88 million for fiscal ~~2004.~~2004, and $87 million for fiscal 2005. Future minimum lease payments at October ~~31, 2004~~30, 2005 were: ~~$84 million for fiscal 2005; $66~~$74 million for fiscal 2006; ~~$50~~$54 million for fiscal 2007; ~~$27~~$33 million for fiscal 2008; ~~$21~~$26 million for fiscal 2009; $19 million for fiscal 2010; and ~~$79~~$66 million collectively for all periods thereafter.


	*~~Accounts Receivables Sales~~*

Accounts Receivables Sales

Applied has agreements with various financial institutions to sell accounts receivable from selected customers. Applied also discounts letters of credit through various financial institutions. Under these agreements, Applied sold accounts receivable and discounted letters of credit in the amounts of ~~$689 million for fiscal 2002,~~ $556 million for fiscal 2003, ~~and~~ $859 million for fiscal ~~2004.~~2004 and $158 million for fiscal 2005. Discounting fees were not material for fiscal ~~2002,~~ 2003, ~~and 2004.~~2004 or 2005. At October ~~31, 2004, $51~~30, 2005, $2 million of sold accounts receivable remained outstanding under these agreements. A portion of these sold accounts receivable is subject to certain recourse provisions. Applied has not experienced any losses under these recourse provisions.


	*~~Guarantees~~*

Guarantees

Applied products are generally sold with a12-month warranty period following installation. The provision for the estimated cost of warranty is recorded when revenue is recognized. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in the warranty reserves were as follows:
2003 2004
(In thousands)
Beginning balance $ 168,175 $ 138,407
Provisions for warranty 110,775 192,956
Consumption of reserves (140,543 ) (152,445 )

Ending balance $ 138,407 $ 178,918


	2004			2005
	(In thousands)

Beginning balance	$	138,407		$	178,918
Provisions for warranty		192,956			155,426
Consumption of reserves		(152,445	)		(197,731	)

Ending balance	$	178,918		$	136,613

As noted above, Applied’s products are generally sold with a12-month warranty. Accordingly, current warranty provisions are related to the current year’s net sales, and warranty consumption is associated with current and prior year’s net sales.

During the ordinary course of business, Applied also provides standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either Applied or its subsidiaries. As of October ~~31, 2004,~~30, 2005, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately ~~$55~~$60 million. Applied has not recorded any liability in connection with these guarantee arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements.

Applied also has ~~additional guarantee~~agreements with various global banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, ~~on behalf~~issuance of ~~certain subsidiaries.~~bank guarantees, and letters of credit. As of October ~~31, 2004,~~30, 2005, Applied Materials Inc. has ~~not in the past recorded any liability related~~provided parent guarantees to ~~guarantees of subsidiary obligations. Applied does not expect, based on historical experience and information currently available, that it is probable that any amounts will be required~~banks for approximately $65 million to ~~be paid in the future under~~cover these ~~arrangements. Subsidiary guarantees as of~~

~~APPLIED MATERIALS, INC.~~services.

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

October 31, 2004 totaled approximately $202 million and were associated with the following types of arrangements: short-term borrowing facilities, overdraft facilities, customs guarantees and leases. In the event of use and subsequent default of these facilities by Applied’s subsidiaries, such arrangements would be guaranteed by Applied. In addition, certain subsidiaries have lease arrangements guaranteed by Applied. These leases will expire between 2009 and 2014. In the event that the subsidiaries do not make the required payments, Applied could be required to pay the leases on behalf of the subsidiaries. As of October 31, 2004, annual lease obligations under these arrangements approximated $11 million.


	*~~Legal Matters~~*

On June 13, 1997, after Varian Associates, Inc. (Varian) failed to respond to requests by Applied to discuss certain patent issues, Applied filed a lawsuit against Varian alleging infringement of several of Applied’s patents concerning physical vapor deposition (PVD) technology. On July 7, 1997, Applied amended that action to allege infringement of those same Applied PVD patents against Novellus Systems, Inc. (Novellus) and to add Novellus as a defendant, as a result of Novellus’ acquisition of Varian’s thin film systems PVD business. On June 23, 1997, Novellus filed a separate lawsuit against Applied, alleging infringement by Applied of several PVD technology patents that were formerly owned by Varian. Novellus was seeking damages for past infringement, a permanent injunction, treble damages for willful infringement, pre-judgment interest and attorneys’ fees. In September 2000, Applied and Varian settled their disputes, and Applied released all claims with respect to the Inova System, as it was made and sold as of May 7, 1997. On October 3, 2000, Applied’s claims against Varian and Varian’s claims and counterclaims against Applied were dismissed with prejudice.

On September 20, 2004, Applied and Novellus entered into a Memorandum of Understanding (MOU) which effects a full settlement of the pending lawsuits. Both lawsuits have been dismissed with prejudice. As part of the MOU, Applied agreed to pay Novellus $8 million and to forgive an additional $3.5 million that Applied contended was owed under a previous license and settlement agreement (TEOS Agreement) between the parties. Patent licenses previously granted under the TEOS Agreement by each of Novellus and Applied become fully paid, as well as revocable only in limited circumstances. The MOU contains additional covenants and restrictions which, in general, limit the ability of each party (including subsidiaries and permitted successors and assigns) to sue the other, the other’s customers and, with some exceptions, the other’s suppliers and distributors, for infringement of any of the parties’ respective patents covering products in technology areas in which both parties engaged in business as of September 3, 2004 (the Effective Date), as follows: (i) for a period of five years from the Effective Date as to existing products, and (ii) for a period of two years from the Effective Date (with the possibility to extend for an additional year) as to new products introduced after the Effective Date (Covenants Not to Sue). Technology areas in which neither party or only one party were engaged in business as of the Effective Date are specifically excluded from the Covenants Not to Sue (Excluded Product Areas). The parties further agreed to notice and cure periods prior to filing suit on products subject to a Covenant Not to Sue that has expired. No damages for infringement will accrue during the Covenant Not to Sue and cure periods. The MOU contains a general release of all claims arising prior to the Effective Date that either Applied or Novellus may have had against the other and the other’s customers and, with some exceptions, the other’s suppliers and distributors, relating to infringement of the party’s patents by any of the other party’s products, other than those in Excluded Product Areas. There is no license of patents, technology or trade secrets in the MOU.

Legal Matters

On March 12, 2002, Linear Technology Corp. (LTC) filed a lawsuit against Applied in the Superior Court of the County of Santa Clara, California, alleging claims for breach of contract, fraud and deceit, negligent misrepresentation, suppression of fact, unfair competition, breach of warranty, express contractual indemnity, implied equitable indemnity and declaratory ~~relief.~~relief related to LTC’s assertion that Applied is obligated to indemnify and defend LTC for certain claims in an underlying patent infringement lawsuit brought by Texas Instruments, Inc. After the court dismissed many of its claims, LTC amended its complaint. LTC’s Amended Complaint, as well as its Second, Third and Fourth Amended Complaints, ~~have all been~~were dismissed by the

~~APPLIED MATERIALS, INC.~~

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

Court in whole or in part. On July 7, 2004, LTC filed a Fifth Amended Complaint, which the Court ~~has~~ dismissed with ~~prejudice.~~prejudice on October 5, 2004. On January 11, 2005, LTC filed a notice of appeal of the dismissal of its complaint. Applied believes it has meritorious defenses and intends to pursue them vigorously.

On July 31, 2001, David Scharf, an individual, filed a lawsuit against Applied alleging that Applied has infringed, has induced others to infringe and has contributed to others’ infringement of a patent concerning color synthesizing scanning electron microscope technology. Mr. Scharf seeks a preliminary and permanent injunction, a finding of willful infringement, damages (including treble damages), and costs. Applied has answered the complaint and counterclaimed for declaratory judgment of non-infringement and invalidity. On May 10, 2002, Mr. Scharf filed a request for re-examination of his patent with the Patent and Trademark ~~Office.~~Office (PTO). On June 26, 2002, the case was removed from the Court’s active docket after the parties stipulated to stay the case pending the results of that re-examination. On July 11, 2002, Applied filed its own request for re-examination of Mr. Scharf’s patent with the Patent and Trademark Office. Applied’s request for re-examination was granted on September 19, 2002. On April 23, 2004, the PTO notified Applied that it intended to issue a re-examination certificate. On June 14, 2004, Applied filed a second request for re-examination of Mr. Scharf’s patent with the PTO. The second request was denied on September 1, 2004. On October 1, 2004, Applied filed a petition for reconsideration of that denial,

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

which subsequently was denied. Applied believes it has meritorious defenses and counterclaims and intends to pursue them vigorously.

On September 13, 2002, Varian Semiconductor Equipment Associates, Inc. (VSEA) filed a demand for arbitration with the American Arbitration Association asserting that Applied has breached a patent license agreement between Varian and Applied dated January 1, 1992. Varian seeks to recover royalties, interest and attorneys’ fees. The arbitration hearing on whether the products are covered by the license agreement has concluded. On May 2, 2003, the arbitration panel issued an interim decision finding that some, but not all, of the products at issue were subject to the agreement. On September 1, 2004, the arbitration panel issued a decision in the second phase of the arbitration finding that some, but not all, of the patent claims asserted by VSEA were invalid. No hearing has been set to determine the amount owed by Applied to VSEA under the agreement pursuant to the arbitration panel’s decisions. Based on Applied’s current assessment of this matter, Applied believes that the amount of back royalty payments owed in connection with this action, including interest, will not exceed $25 million, of which $23 million was paid through October 31, 2004. In addition to back royalty payments, Applied will be required to make unit-based royalty payments on future sales of certain products found to be within the scope of the Agreement. Applied expects that these unit-based royalty payments will not have a material adverse effect on Applied’s business, financial condition or results of operations.

On December 24, 2003, Applied filed a ~~provisional injunction~~ lawsuit against Jusung Engineering Co., Ltd., (Jusung Engineering) and Jusung Pacific Co., Ltd., ~~(collectively~~(Jusung Pacific, and referred to together with Jusung Engineering as Jusung) in Tao-Yuan District Court in Taiwan, ~~alleging infringement of~~captioned Applied Materials, Inc. v. Jusung Engineering Co., Ltd. (case no. 92 Tsai-chuan Tzi No. 6388). The lawsuit alleges that Jusung is infringing a patent related to chemical vapor ~~deposition. On January 14, 2004,~~deposition owned by Applied. In the ~~Court issued~~suit, Applied seeks a provisional injunction ~~order~~ prohibiting Jusung from importing, using, manufacturing, servicing or selling in Taiwan certain flat panel display manufacturing equipment. On December 25, 2003, the Tao-Yuan District Court ruled in favor of Applied’s request for a provisional injunction and, on January 14, 2004, the Court issued a provisional injunction order against Jusung Pacific. Jusung Pacific appealed ~~that decision~~those decisions, and the decisions were affirmed on appeal. On January 30, 2004, Jusung Pacific requested permission to post a counterbond to have the Jusung Pacific injunction lifted. Jusung Pacific’s counterbond request was granted and, on ~~August 5,~~March 30, 2004, the ~~intermediate appellate court ruled that~~provisional injunction order was lifted. At Applied’s request, on December 11, 2004, the District Court issued a provisional injunction order against Jusung ~~Pacific should be dissolved. The~~Engineering. Jusung Engineering appealed that order, and the order was affirmed on appeal. Jusung Engineering also requested permission to post a counterbond to have the Jusung Engineering injunction ~~against~~lifted. Jusung ~~Pacific previously had been lifted after Jusung Pacific posted a counterbond. In December 2004,~~Engineering’s counterbond request was granted, and, on April 25, 2005, the ~~Taiwan Supreme Court reversed the intermediate appellate court’s decision. The~~provisional injunction order against Jusung Engineering was ~~not affected by these~~lifted. Applied has appealed both counterbond decisions. On June 30, 2004, Applied filed ~~another lawsuit~~a “main action” patent infringement complaint against Jusung in ~~a different court~~the Hsinchu District Court in Taiwan, ~~seeking~~captioned Applied Materials, Inc. v. Jusung Engineering Co., Ltd. (case no. 93 Zhong Zhi No. 3). In the lawsuit, Applied seeks damages and a permanent injunction for infringement of the same patent. The decisions regarding the provisional injunction and counterbond have no effect on the separate patent infringement lawsuit filed by Applied against Jusung in the Hsinchu Court. Applied believes it has meritorious claims and intends to pursue them vigorously.

On April 10, 2004, the Taiwan Fair Trade Commission (TFTC) notified Applied’s subsidiary AKT ~~Inc. (AKT)~~ that, pursuant to a complaint filed by Jusung, the TFTC had begun an investigation into whether AKT had violated the Taiwan Fair Trade Act. The investigation focuses on whether AKT violated the Taiwan Guidelines for the Review of Cases Involving Enterprises Issuing Warning Letters for Infringement on Copyright, Trademark and Patent Rights by allegedly notifying customers about AKT’s patent rights and the infringement of those rights by Jusung. On June 15, 2004, the TFTC notified Applied that Applied also was

~~APPLIED MATERIALS, INC.~~

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

the subject of the investigation. ~~Both~~By letter dated April 15, 2005, the TFTC notified Applied and AKT ~~have responded~~that there was insufficient evidence to support a claim against either company. Jusung has appealed the TFTC’s ~~inquiries.~~decision, and the appeal is pending. Although Applied ~~believes~~agrees with the TFTC’s decision that there has been no violation, neither the extent nor the outcome of the ~~investigation~~appeal can be determined at this time.

Applied ~~believes~~does not believe that the outcome of any of the above matters will ~~not~~ have a material adverse effect on its financial condition or results of operations.

From time to time, Applied ~~is subject to various~~receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other ~~legal proceedings and~~actions by Applied in connection with claims ~~either asserted or unasserted, that arise in the ordinary course of business.~~made against them. In addition, from time to time, Applied receives notification from ~~customers~~third parties claiming that ~~such customers are entitled to indemnification~~Applied may be or is infringing their intellectual property or other ~~obligations from~~rights. Applied ~~related~~also is subject to ~~infringement~~various other legal proceedings and claims, ~~made against~~both asserted and unasserted, that arise in the ~~customers by third parties.~~ordinary course of business. Although the outcome of these claims and proceedings cannot be predicted with certainty, Applied does not believe that any of these other existing ~~legal matters~~proceedings or claims will have a material adverse effect on its consolidated financial condition or results of operations.


Note 12	Litigation Settlements, Net

Net litigation settlement expense of $27 million reported in the fiscal 2004 Consolidated Statement of Operations consisted of costs of $28 million related to the two patent litigation settlements with ~~VSEA~~Varian

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Semiconductor Equipment Associates, Inc. and Novellus ~~as discussed in Note 11 of the Consolidated Financial Statements,~~Systems, Inc., net of a gain of $1 million related to a legal settlement in favor of Applied.

During fiscal 2003 or 2005, there were no significant litigation settlements.


Note 13	Business Combinations

On June 28, 2005, Applied purchased certain assets of SCP Global Technology, Inc., consisting of single-wafer HF-last immersion technology and Marangoni clean/dry intellectual property, for approximately $24 million in cash. In connection with this asset purchase, Applied recorded purchased technology and other intangible assets of $20 million and other items of $4 million.

On December 16, 2004, Applied acquired the assets of ATMI, Inc.’s Treatment Systems business (EcoSys), which supported the gas abatement requirements of process equipment for integrated circuit manufacturing and other industrial applications, for approximately $16 million in cash. In connection with this acquisition, Applied recorded goodwill of $5 million, purchased technology and other intangible assets of $8 million and other items of $3 million, including liabilities assumed upon acquisition.

On December 14, 2004, Applied acquired substantially all of the operating subsidiaries and businesses of Metron Technology N.V., a provider of a wide range of outsource solutions to the integrated circuit industry, for approximately $85 million in cash. In connection with this acquisition, Applied recorded goodwill of $76 million and other intangible assets of $31 million, partially offset by other items of $22 million, primarily for net liabilities assumed upon acquisition.

On June 14, 2004, Applied acquired Torrex Equipment Corporation, a developer of a multi-wafer system that utilizes chemical vapor deposition and atomic layer deposition processes to address front-end ~~semiconductor~~integrated circuit manufacturing applications, for $7 million in cash. In connection with this acquisition, Applied recorded goodwill of $11 million, net of adjustments to the initial purchase price allocation, partially offset by other items of $4 million, primarily for net liabilities assumed upon acquisition. The in-process research and development expense related to this transaction was not material.

On April 18, 2003, Applied acquired Boxer Cross, Inc., a producer of in-line monitoring systems that provide customers with critical electrical measurement data for controlling ~~semiconductor~~integrated circuit processes, for $14 million in cash. In connection with this acquisition, Applied recorded goodwill of $18 million, net of adjustments to the initial purchase price allocation, and purchased technology of $3 million, partially offset by other items of $7 million, primarily for deferred tax assets and other liabilities. The in-process research and development expense was not material.

On April 8, 2002, Applied acquired Electron Vision Corporation, a designer, manufacturer and seller of e-beam stabilization and curing tools for the semiconductor, thin film head and micro-fabrication industries, for $26 million in cash. In connection with this acquisition, Applied recorded goodwill of $13 million, net of adjustments to the initial purchase price allocation, and purchased technology of $16 million, partially offset by other items of $3 million, primarily for deferred tax liabilities.

For all of the purchase business combinations discussed above, the results of operations prior to the acquisition dates were not material in relation to those of Applied for any of the periods presented herein. Goodwill is not amortized but is reviewed periodically for impairment ~~in accordance with SFAS 142,~~ and purchased technology is amortized over its useful life of 52 to 10 years. These acquisitions have not had, and are not expected to have, a material effect on Applied’s financial condition or results of operations.


Note 14	Consolidation of Variable Interest Entities

In fiscal 2001, Applied ~~has a venture capital fund,~~formed Applied Materials Ventures I, L.P. (the Fund), ~~that invests~~to invest in privately-held, early-stage companies engaged in developing systems, components and devices relating to nanotechnology and/or communications technology for specific applications and products. The Fund iswas formed as a limited partnership, with Applied as the sole limited partner and an independent party as the general partner.

~~APPLIED MATERIALS, INC.~~

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

During the fourth quarter of fiscal 2004, Applied exercised its right to limit capital contributions to the Fund to $25 million and to ~~elect to~~ terminate the partnership. As a result, under the provisions of the partnership agreement, the ~~partnership will be dissolved, and the~~ activities of the partnership ~~will be~~ concluded ~~six months following~~and the ~~election to terminate the partnership.~~partnership was dissolved in March 2005. Applied’s cumulative capital contributions to the Fund

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

through dissolution totaled approximately ~~$16 million through~~$24 million. The Fund’s assets, which primarily consisted of shares of portfolio companies, were distributed between Applied and the general partner during fiscal 2005. Applied recorded its investment in the portfolio companies as other long-term assets on its consolidated balance sheet at October ~~26, 2003 and $23 million through October 31, 2004.~~

30, 2005.

FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” as amended, provides guidance on the identification, classification and accounting of variable interest entities. The Fund ~~qualifies~~qualified for consolidation under FIN 46 and was consolidated in Applied’s consolidated financial statements ~~during~~starting in the first ~~fiscal~~ quarter of ~~2004.~~fiscal 2004 until it was dissolved. The consolidation and dissolution of the Fund did not have a material impact on Applied’s consolidated financial condition or results of operations for the ~~fiscal year ended October 31, 2004.~~periods presented.


Note 15	Subsequent Event

On ~~August 16, 2004, Applied~~November 29, 2005, Applied’s wholly-owned subsidiary, Metron Technology, Inc., announced that it ~~had entered into a definitive agreement~~has agreed to ~~acquire substantially~~purchase all of the ~~operating subsidiaries~~outstanding shares of ChemTrace Corporation and ~~businesses of Metron Technology N.V.~~ChemTrace Precision Cleaning, Inc. (collectively ChemTrace), ~~which provides a wide range of outsource solutions to the semiconductor industry,~~both privately-held companies, for ~~approximately $85 million and to assume certain of its liabilities,~~an undisclosed amount, subject to certain closing conditions. ~~The acquisition was completed on December 14, 2004.~~ChemTrace provides customers with precision parts cleaning and materials testing solutions. The results of operations of ~~the acquired operating subsidiaries and businesses of Metron Technology N.V.~~ChemTrace are not expected to have a material effect on Applied’s fiscal ~~2005~~2006 financial condition or results of operations.


Note 16	Unaudited Quarterly Consolidated Financial Data

Fiscal Quarter
First Second Third Fourth Fiscal Year
(In thousands, except per share amounts)
2003:
Net sales $ 1,054,209 $ 1,107,177 $ 1,094,907 $ 1,220,998 $ 4,477,291
Gross margin $ 390,382 $ 372,774 $ 346,928 $ 494,371 $ 1,604,455
Net income/(loss) $ (65,670 ) $ (62,126 ) $ (36,802 ) $ 15,451 $ (149,147 )
Earnings/(loss) per share $ (0.04 ) $ (0.04 ) $ (0.02 ) $ 0.01 $ (0.09 )
2004:
Net sales $ 1,555,448 $ 2,018,105 $ 2,236,152 $ 2,203,348 $ 8,013,053
Gross margin $ 676,169 $ 938,641 $ 1,059,232 $ 1,027,203 $ 3,701,245
Net income $ 82,376 $ 373,348 $ 440,571 $ 455,008 $ 1,351,303
Earnings per share $ 0.05 $ 0.22 $ 0.26 $ 0.27 $ 0.78


	Fiscal Quarter
	First		Second		Third		Fourth		Fiscal Year
	(In thousands, except per share amounts)

2004:
Net sales	$	1,555,448	$	2,018,105	$	2,236,152	$	2,203,348	$	8,013,053
Gross margin	$	676,169	$	938,641	$	1,059,232	$	1,027,203	$	3,701,245
Net income	$	82,376	$	373,348	$	440,571	$	455,008	$	1,351,303
Earnings per share	$	0.05	$	0.22	$	0.26	$	0.27	$	0.78
2005:
Net sales	$	1,780,576	$	1,861,189	$	1,631,938	$	1,718,120	$	6,991,823
Gross margin	$	790,225	$	818,430	$	717,089	$	760,130	$	3,085,874
Net income	$	288,765	$	304,830	$	369,591	$	246,714	$	1,209,900
Earnings per share	$	0.17	$	0.18	$	0.23	$	0.15	$	0.73

65
67

~~REPORT OF MANAGEMENT~~

Management is responsible for the preparation and integrity of the consolidated financial statements appearing in this Annual Report on Form 10-K. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America appropriate under the circumstances and, accordingly, include some amounts based on management’s best judgments and estimates. Financial information in this Annual Report on Form 10-K is consistent with that in the consolidated financial statements.

Management is responsible for maintaining a system of internal business controls and procedures to provide reasonable assurance, at an appropriate cost/benefit relationship, that assets are safeguarded and that transactions are authorized, recorded and reported properly. The internal control system is augmented by appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written code of business ethics applicable to all employees of Applied and its subsidiaries. Management believes that Applied’s internal controls provide reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition and that the financial records are reliable for preparing financial statements and other data and maintaining accountability for assets.

The Audit Committee of the Board of Directors, composed solely of Directors who are not employees or officers of Applied, meets on a regular periodic basis with the independent registered public accounting firm, internal auditors and management to discuss internal business controls, auditing and financial reporting matters. The Committee reviews with the independent registered public accounting firm the scope and results of the audit effort. The Committee also meets with the independent registered public accounting firm without management present to ensure that the independent registered public accounting firm has free access to the Audit Committee.

The independent registered public accounting firm, KPMG LLP, is engaged to audit the consolidated financial statements of Applied and to conduct such tests and related procedures as they deem necessary in accordance with generally accepted auditing standards. The opinion of the independent registered public accounting firm, based upon its audits of the consolidated financial statements, is contained in this Annual Report on Form 10-K.

~~/s/ MICHAEL R. SPLINTER~~
~~Michael R. Splinter~~
~~President and Chief Executive Officer~~
~~/s/ NANCY H. HANDEL~~
~~Nancy H. Handel~~
~~Group Vice President and Chief Financial Officer~~

~~December 14, 2004~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~To the~~

The Stockholders and Board of Directors of Applied Materials, Inc.

We have audited the accompanying consolidated balance ~~sheet~~sheets of Applied Materials, Inc. and subsidiaries (the Company) as of October 30, 2005 and October 31, 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for the ~~year~~years then ended. In connection with our ~~audit~~audits of the consolidated financial statements, we also have audited the financial statement schedule as of and for each of the years in the two year period ended October ~~31, 2004,~~30, 2005, listed at Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our ~~audit.~~

audits.

We conducted our ~~audit~~audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our ~~audit provides~~audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied Materials, Inc. and subsidiaries as of October 30, 2005 and October 31, 2004, and the results of their operations and their cash flows for the ~~year~~years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule as of and for each of the years in the two year period ended October ~~31, 2004,~~30, 2005, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Applied Materials, Inc.’s internal control over financial reporting as of October 30, 2005, based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 14, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ ~~KPMG LLP~~

KPMG LLP

Mountain View, California

December 14, ~~2004~~2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Applied Materials, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) on page 3738 present fairly, in all material respects, the ~~financial position~~results of operations and cash flows of Applied Materials, Inc. and its subsidiaries ~~at October 26, 2003, and~~for the ~~results of their operations and their cash flows for each of the two years in the period~~year ended October 26, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 3738 presents fairly, in all material respects, the information set forth therein for ~~each of~~ the ~~two years in the period~~year ended October 26, 2003, when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule data based on our ~~audits.~~audit. We conducted our ~~audits~~audit of these statements in accordance with auditing standards of the Public Company Accounting Oversight Board ~~of the United States.~~(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our ~~audits provide~~audit provides a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

San Jose, California

November 12, 2003

INDEX TO EXHIBITS

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


~~Exhibit No.~~			~~Description~~

	~~3.1~~		Certificate of Incorporation of Applied Materials, Inc., as amended and restated through March 31, 2000, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 30, 2000 (file no. 002-45028) filed June 8, 2000.
	~~3.2~~		Certificate of Designation, Preferences and Rights of the Terms of the Series A Junior Participating Preferred Stock dated as of July 9, 1999, incorporated by reference to Applied’s Form 10-Q for the quarter ended August 1, 1999 (file no. 000-06920) filed September 14, 1999.
	~~3.3~~		Bylaws of Applied Materials, Inc., as amended and restated through November 28, 2001, incorporated by reference to Applied’s Form 10-K for fiscal year 2001 (file no. 002-45028) filed January 23, 2002.
	~~4.1~~		Form of Indenture (including form of debt security) between Applied Materials, Inc. and Harris Trust Company of California, as Trustee, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed August 17, 1994.
	~~4.2~~		Rights Agreement, dated as of July 7, 1999, between Applied Materials, Inc. and Harris Trust and Savings Bank, as Rights Agent, incorporated by reference to Applied’s Registration Statement on Form 8-A (file no. 000-06920) dated July 13, 1999.
	~~4.3~~		First Amendment to Rights Agreement, dated as of November 6, 2002, between Applied Materials, Inc. and Computershare Investor Services, LLC, as Rights Agent, incorporated by reference to Applied’s Registration Statement on Form 8-A/ A (file no. 000-06920) dated November 25, 2002.
	10.1*		~~The 1976 Management Stock Option Plan, as amended to October 5, 1993, incorporated by reference to Applied’s Form 10-K for fiscal year 1993 (file no. 000-06920) filed December 21, 1993.~~
	10.2*		Applied Materials, Inc. Supplemental Income Plan, as amended, including Participation Agreements with James C. Morgan, Walter Benzing, and Robert Graham, incorporated by reference to Applied’s Form 10-K for fiscal year 1981 (file no. 000-06920) filed January 22, 1982.
	10.3*		~~Amendment to Supplemental Income Plan, dated July 20, 1984, incorporated by reference to Applied’s Form 10-K for fiscal year 1984 (file no. 000-06920) filed January 25, 1985.~~
	10.4*		~~The Applied Materials, Inc. Employee Financial Assistance Plan, incorporated by reference to Applied’s Definitive Proxy Statement (file no. 000-06920) filed February 5, 1981.~~
	10.5*		Applied Materials, Inc. Supplemental Income Plan as amended to December 15, 1988, including the Participation Agreement with James C. Morgan, incorporated by reference to Applied’s Form 10-K for fiscal year 1988 (file no. 000-06920) filed January 23, 1989.
	~~10.6~~		License Agreement dated January 1, 1992, between Applied Materials and Varian Associates, Inc., incorporated by reference to Applied’s Form 10-K for fiscal year 1992 (file no. 000-06920) filed December 16, 1992.
	10.7*		Amendment dated December 9, 1992 to Applied Materials, Inc. Supplemental Income Plan dated June 4, 1981 (as amended to December 15, 1988), incorporated by reference to Applied’s Form 10-K for fiscal year 1993 (file no. 000-06920) filed December 21, 1993.
	10.8*		Applied Materials, Inc. Executive Deferred Compensation Plan, as amended and restated on April 1, 1995, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 30, 1995 (file no. 000-06920) filed June 7, 1995.
	~~10.9~~		Applied Materials, Inc. Medium-Term Notes, Series A Distribution Agreement, dated August 24, 1995, incorporated by reference to Applied’s Form 10-K for fiscal year 1995 (file no. 000-06920) filed January 12, 1996.
	~~10.10~~	*	Amendment No. 1 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 26, 1998 (file no. 000-06920) filed September 9, 1998.


Exhibit No.			Description

	3	.1	Certificate of Incorporation of Applied Materials, Inc., as amended and restated through March 31, 2000, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 30, 2000 (file no. 002-45028) filed June 8, 2000.


	3	.2	Certificate of Designation, Preferences and Rights of the Terms of the Series A Junior Participating Preferred Stock dated as of July 9, 1999, incorporated by reference to Applied’sForm 10-Q for the quarter ended August 1, 1999 (file no. 000-06920) filed September 14, 1999.


	3	.3	Bylaws of Applied Materials, Inc., as amended and restated through November 28, 2001, incorporated by reference to Applied’sForm 10-K for fiscal year 2001 (file no. 002-45028) filed January 23, 2002.


	4	.1	Form of Indenture (including form of debt security) between Applied Materials, Inc. and Harris Trust Company of California, as Trustee, incorporated by reference to Applied’sForm 8-K (file no. 000-06920) filed August 17, 1994.


	4	.2	Rights Agreement, dated as of July 7, 1999, between Applied Materials, Inc. and Harris Trust and Savings Bank, as Rights Agent, incorporated by reference to Applied’s Registration Statement onForm 8-A (file no. 000-06920) filed July 13, 1999.


	4	.3	First Amendment to Rights Agreement, dated as of November 6, 2002, between Applied Materials, Inc. and Computershare Investor Services, LLC, as Rights Agent, incorporated by reference to Applied’s Registration Statement onForm 8-A/A (file no. 000-06920) filed November 25, 2002.


	10	.1*	The 1976 Management Stock Option Plan, as amended to October 5, 1993, incorporated by reference to Applied’sForm 10-K for fiscal year 1993 (file no. 000-06920) filed December 21, 1993.


	10	.2*	Applied Materials, Inc. Supplemental Income Plan, as amended, including Participation Agreements with James C. Morgan, Walter Benzing, and Robert Graham, incorporated by reference to Applied’sForm 10-K for fiscal year 1981 (file no. 000-06920) filed January 22, 1982.


	10	.3*	Amendment to Supplemental Income Plan, dated July 20, 1984, incorporated by reference to Applied’sForm 10-K for fiscal year 1984 (file no. 000-06920) filed January 25, 1985.


	10	.4*	The Applied Materials, Inc. Employee Financial Assistance Plan, incorporated by reference to Applied’s Definitive Proxy Statement (file no. 000-06920) filed February 5, 1981.


	10	.5*	Applied Materials, Inc. Supplemental Income Plan as amended to December 15, 1988, including the Participation Agreement with James C. Morgan, incorporated by reference to Applied’sForm 10-K for fiscal year 1988 (file no. 000-06920) filed January 23, 1989.


	10	.6	License Agreement dated January 1, 1992, between Applied Materials and Varian Associates, Inc., incorporated by reference to Applied’sForm 10-K for fiscal year 1992 (file no. 000-06920) filed December 16, 1992.


	10	.7*	Amendment dated December 9, 1992 to Applied Materials, Inc. Supplemental Income Plan dated June 4, 1981 (as amended to December 15, 1988), incorporated by reference to Applied’sForm 10-K for fiscal year 1993 (file no. 000-06920) filed December 21, 1993.


	10	.8*	Applied Materials, Inc. Executive Deferred Compensation Plan, as amended and restated on April 1, 1995, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 30, 1995 (file no. 000-06920) filed June 7, 1995.


	10	.9	Applied Materials, Inc. Medium-Term Notes, Series A Distribution Agreement, dated August 24, 1995, incorporated by reference to Applied’sForm 10-K for fiscal year 1995 (file no. 000-06920) filed January 12, 1996.


	10	.10*	Amendment No. 1 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 26, 1998 (fileno. 000-06920) filed September 9, 1998.


~~Exhibit No.~~			~~Description~~

	~~10.11~~	*	Amendment No. 2 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 26, 1998 (file no. 000-06920) filed September 9, 1998.
	~~10.12~~		Receivables Purchase Agreement dated October 22, 1998, between Applied Materials, Inc. and Deutsche Financial Services Corporation, incorporated by reference to Applied’s Form 10-K for fiscal year 1998 (file no. 000-06920) filed January 20, 1999.
	~~10.13~~	*	~~Applied Materials, Inc. amended and restated Employees’ Stock Purchase Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2002 (file no. 000-06920) filed January 23, 2003.~~
	~~10.14~~		Amendment dated January 26, 1999 to Receivables Purchase Agreement dated October 22, 1998, between Applied Materials, Inc. and Deutsche Financial Services Corporation, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 31, 1999 (file no. 000-06920) filed March 9, 1999.
	~~10.15~~		Receivables Purchase Agreement dated January 26, 1999, between Applied Materials, Inc. and Deutsche Financial Services (UK) Limited, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 31, 1999 (file no. 000-06920) filed March 9, 1999.
	~~10.16~~		Second Amendment dated April 28, 1999 to Receivables Purchase Agreement dated October 22, 1998, between Applied Materials, Inc. and Deutsche Financial Services Corporation, incorporated by reference to Applied’s Form 10-Q for the quarter ended May 2, 1999 (file no. 000-06920) filed June 15, 1999. (Confidential treatment has been granted for Certain portions of the agreement.)
	~~10.17~~		Amendment dated April 28, 1999 to Receivables Purchase Agreement dated January 26, 1999, between Applied Materials, Inc. and Deutsche Financial Services Corporation (UK) Limited, incorporated by reference to Applied’s Form 10-Q for the quarter ended May 2, 1999 (file no. 000-06920) filed June 15, 1999 (Confidential treatment has been granted for Certain portions of the agreement.)
	~~10.18~~	*	Applied Materials, Inc. Nonqualified Stock Option Agreement related to the Employee Stock Incentive Plan, as amended (formerly named the “Applied Materials, Inc. 1995 Equity Incentive Plan”), incorporated by reference to Applied’s Form 10-Q for the quarter ended May 2, 1999 (file no. 000-06920) filed June 15, 1999.
	~~10.19~~		Form of Indemnification Agreement between Applied Materials, Inc. and Non-Employee Directors, dated June 11, 1999, incorporated by reference to Applied’s Form 10-K for fiscal year 1999 (file no. 333-88777) filed January 31, 2000.
	~~10.20~~		Form of Indemnification Agreement between Applied Materials, Inc. and James C. Morgan and Dan Maydan, dated June 11, 1999, incorporated by reference to Applied’s Form 10-K for fiscal year 1999 (file no. 333-88777) filed January 31, 2000.
	~~10.21~~		Form of Indemnification Agreement between Applied Materials, Inc. and certain of its officers, incorporated by reference to Applied’s Form 10-K for fiscal year 1999 (file no. 333-88777) filed January 31, 2000.
	~~10.22~~	*	~~Applied Materials, Inc. amended and restated Senior Executive Bonus Plan, incorporated by reference to Applied’s Definitive Proxy Statement (file no. 000-06920) filed February 15, 2002.~~
	~~10.23~~	*	Form of Applied Materials, Inc. Nonqualified Stock Option Grant Agreement for use under the Employee Stock Incentive Plan, as amended (formerly named the “Applied Materials Inc. 1995 Equity Incentive Plan”) incorporated by reference to Applied’s Form 10-Q for the quarter ended April 29, 2001 (file no. 002-45028) filed June 7, 2001.
	~~10.24~~	*	~~Applied Materials, Inc. amended and restated Stock Purchase Plan for Offshore Employees, incorporated by reference to Applied’s S-8 (file no. 033-63847) filed October 31, 1995.~~
	~~10.25~~	*	~~Applied Materials, Inc. amended and restated 30th Anniversary Stock Option Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2002 (file no. 000-06920) filed January 23, 2003.~~
	~~10.26~~	*	Applied Materials, Inc. amended and restated 1998 Non-Executive Employee Retention Stock Option Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2002 (file no. 000-06920) filed January 23, 2003.


Exhibit No.			Description

	10	.11*	Amendment No. 2 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 26, 1998 (fileno. 000-06920) filed September 9, 1998.


	10	.12	Receivables Purchase Agreement dated October 22, 1998, between Applied Materials, Inc. and Deutsche Financial Services Corporation, incorporated by reference to Applied’sForm 10-K for fiscal year 1998 (file no. 000-06920) filed January 20, 1999.


	10	.13*	Applied Materials, Inc. amended and restated Employees’ Stock Purchase Plan, incorporated by reference to Applied’sForm 10-K for fiscal year 2002 (file no. 000-06920) filed January 23, 2003.


	10	.14	Amendment dated January 26, 1999 to Receivables Purchase Agreement dated October 22, 1998, between Applied Materials, Inc. and Deutsche Financial Services Corporation, incorporated by reference to Applied’sForm 10-Q for the quarter ended January 31, 1999 (file no. 000-06920) filed March 9, 1999.


	10	.15	Receivables Purchase Agreement dated January 26, 1999, between Applied Materials, Inc. and Deutsche Financial Services (UK) Limited, incorporated by reference to Applied’sForm 10-Q for the quarter ended January 31, 1999 (file no. 000-06920) filed March 9, 1999.


	10	.16	Second Amendment dated April 28, 1999 to Receivables Purchase Agreement dated October 22, 1998, between Applied Materials, Inc. and Deutsche Financial Services Corporation, incorporated by reference to Applied’sForm 10-Q for the quarter ended May 2, 1999 (file no. 000-06920) filed June 15, 1999. (Confidential treatment has been granted for certain portions of the agreement.)


	10	.17	Amendment dated April 28, 1999 to Receivables Purchase Agreement dated January 26, 1999, between Applied Materials, Inc. and Deutsche Financial Services Corporation (UK) Limited, incorporated by reference to Applied’sForm 10-Q for the quarter ended May 2, 1999 (fileno. 000-06920) filed June 15, 1999 (Confidential treatment has been granted for certain portions of the agreement.)


	10	.18*	Applied Materials, Inc. Nonqualified Stock Option Agreement related to the Employee Stock Incentive Plan, as amended (formerly named the ‘Applied Materials, Inc. 1995 Equity Incentive Plan”), incorporated by reference to Applied’sForm 10-Q for the quarter ended May 2, 1999 (file no. 000-06920) filed June 15, 1999.


	10	.19	Form of Indemnification Agreement between Applied Materials, Inc. and Non-Employee Directors, dated June 11, 1999, incorporated by reference to Applied’sForm 10-K for fiscal year 1999 (file no.333-88777) filed January 31, 2000.


	10	.20	Form of Indemnification Agreement between Applied Materials, Inc. and James C. Morgan and Dan Maydan, dated June 11, 1999, incorporated by reference to Applied’sForm 10-K for fiscal year 1999 (file no.333-88777) filed January 31, 2000.


	10	.21	Form of Indemnification Agreement between Applied Materials, Inc. and certain of its officers, incorporated by reference to Applied’sForm 10-K for fiscal year 1999 (file no.333-88777) filed January 31, 2000.


	10	.22*	Applied Materials, Inc. amended and restated Senior Executive Bonus Plan, incorporated by reference to Applied’s Definitive Proxy Statement (file no. 000-06920) filed February 15, 2002.


	10	.23*	Form of Applied Materials, Inc. Nonqualified Stock Option Grant Agreement for use under the Employee Stock Incentive Plan, as amended (formerly named the ‘‘Applied Materials Inc. 1995 Equity Incentive Plan”) incorporated by reference to Applied’sForm 10-Q for the quarter ended April 29, 2001 (file no. 002-45028) filed June 7, 2001.


	10	.24*	Applied Materials, Inc. amended and restated Stock Purchase Plan for Offshore Employees, incorporated by reference to Applied’s S-8 (file no.033-63847) filed October 31, 1995.


	10	.25*	Applied Materials, Inc. amended and restated 1998 Non-Executive Employee Retention Stock Option Plan, incorporated by reference to Applied’sForm 10-K for fiscal year 2002 (fileno. 000-06920) filed January 23, 2003.


	10	.26*	Applied Materials, Inc. amended and restated 2000 Global Equity Incentive Plan, incorporated by reference to Applied’sForm 10-K for fiscal year 2002 (file no. 000-06920) filed January 23, 2003.


	10	.27*	Applied Materials, Inc. Profit Sharing Scheme (Ireland), incorporated by reference to Applied’s S-8 (file no.333-45011) filed January 27, 1998.


~~Exhibit No.~~			~~Description~~

	~~10.27~~	*	~~Applied Materials, Inc. amended and restated 2000 Global Equity Incentive Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2002 (file no. 000-06920) filed January 23, 2003.~~
	~~10.28~~	*	~~Applied Materials, Inc. Profit Sharing Scheme (Ireland), incorporated by reference to Applied’s S-8 (file no. 333-45011) filed January 27, 1998.~~
	~~10.29~~	*	Applied Materials, Inc. Stock Purchase Plan for Offshore Employees, as amended through April 16, 2002, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 27, 2003 (file no. 000-06920) filed June 11, 2003.
	~~10.30~~	*	~~Term Sheet for employment of Michael R. Splinter, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 27, 2003 (file no. 000-06920) filed June 11, 2003.~~
	~~10.31~~	*	~~Restricted Stock Agreement for Michael R. Splinter, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 27, 2003 (file no. 000-06920) filed June 11, 2003.~~
	~~10.32~~		Program for Accounts Receivable Transfer Agreement dated April 9, 2003 between Applied Materials, Inc. and Bank of America, N.A., incorporated by reference to Applied’s Form 10-Q for the quarter ended April 27, 2003 (file no. 000-06920) filed June 11, 2003. (Confidential treatment has been granted for the redacted portion of the agreement.)
	~~10.33~~		$250,000,000 364-Day Credit Agreement dated September 19, 2003 among Applied Materials, Inc., Citicorp USA, Inc., as administrative agent, and the lenders listed therein, incorporated by reference to Applied’s Form 10-K for fiscal year 2003 (file no. 000-06920) filed January 13, 2004. (Confidential treatment has been granted for the redacted portions of the agreement.)
	~~10.34~~		$250,000,000 Three-Year Credit Agreement dated as of September 19, 2003 among Applied Materials, Inc., Citigroup USA, Inc., as administrative agent, and the lenders listed therein, incorporated by reference to Applied’s Form 10-K for fiscal year 2003 (file no. 000-06920) filed January 13, 2004. (Confidential treatment has been requested for redacted portions of the agreement.)
	~~10.35~~	*	Applied Materials, Inc. Employee Stock Incentive Plan, as amended (formerly named the “Applied Materials, Inc. 1995 Equity Incentive Plan”) incorporated by reference to Applied’s Definitive Proxy Statement (file no. 000-06920) filed February 17, 2004.
	~~10.36~~		~~Amendment No. 1 to $250,000,000 364-Day Credit Agreement dated September 17, 2004 among Applied Materials, Inc., Citicorp USA, Inc., as administrative agent, and the lenders listed therein.~~
	~~10.37~~		~~Amendment No. 1 to $250,000,000 Three-Year Credit Agreement dated as of September 17, 2004 among Applied Materials, Inc., Citicorp USA, Inc., as administrative agent, and the lenders listed therein.~~
	~~10.38~~		Binding Memorandum of Understanding between Applied Materials, Inc. and Novellus Systems, Inc. dated September 20, 2004, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed September 24, 2004. (Confidential treatment has been requested for redacted portions of the agreement.)
	~~10.39~~		~~Separation Agreement between Applied Materials, Inc. and Joseph R. Bronson dated November 30, 2004.~~
	12		~~Ratio of Earnings to Fixed Charges.~~
	21		~~Subsidiaries of Applied Materials, Inc.~~
	~~23.1~~		~~Consent of Independent Registered Public Accounting Firm, KPMG LLP.~~
	~~23.2~~		~~Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.~~
	24		~~Power of Attorney.~~
	~~31.1~~		~~Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
	~~31.2~~		~~Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~


Exhibit No.			Description

	10	.28*	Applied Materials, Inc. Stock Purchase Plan for Offshore Employees, as amended through April 16, 2002, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 27, 2003 (file no. 000-06920) filed June 11, 2003.


	10	.29*	Term Sheet for employment of Michael R. Splinter, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 27, 2003 (file no. 000-06920) filed June 11, 2003.


	10	.30*	Restricted Stock Agreement for Michael R. Splinter, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 27, 2003 (file no. 000-06920) filed June 11, 2003.


	10	.31	Program for Accounts Receivable Transfer Agreement dated April 9, 2003 between Applied Materials, Inc. and Bank of America, N.A., incorporated by reference to Applied’sForm 10-Q for the quarter ended April 27, 2003 (file no. 000-06920) filed June 11, 2003. (Confidential treatment has been granted for the redacted portion of the agreement.)


	10	.32	$250,000,000364-Day Credit Agreement dated September 19, 2003 among Applied Materials, Inc., Citicorp USA, Inc., as administrative agent, and the lenders listed therein, incorporated by reference to Applied’sForm 10-K for fiscal year 2003 (file no. 000-06920) filed January 13, 2004. (Confidential treatment has been granted for the redacted portions of the agreement.)


	10	.33	$250,000,000 Three-Year Credit Agreement dated as of September 19, 2003 among Applied Materials, Inc., Citigroup USA, Inc., as administrative agent, and the lenders listed therein, incorporated by reference to Applied’sForm 10-K for fiscal year 2003 (file no. 000-06920) filed January 13, 2004. (Confidential treatment has been granted for the redacted portions of the agreement.)


	10	.34*	Applied Materials, Inc. Employee Stock Incentive Plan, as amended (formerly named the ‘‘Applied Materials, Inc. 1995 Equity Incentive Plan”) incorporated by reference to Applied’s Definitive Proxy Statement (file no. 000-06920) filed February 17, 2004.


	10	.35	Amendment No. 1 to $250,000,000364-Day Credit Agreement dated September 17, 2004 among Applied Materials, Inc., Citicorp USA, Inc., as administrative agent, and the lenders listed therein, incorporated by reference to Applied’sForm 10-K for fiscal year 2004 (fileno. 000-06920) filed December 15, 2004.


	10	.36	Amendment No. 1 to $250,000,000 Three-Year Credit Agreement dated as of September 17, 2004 among Applied Materials, Inc., Citicorp USA, Inc., as administrative agent, and the lenders listed therein, incorporated by reference to Applied’sForm 10-K for fiscal year 2004 (fileno. 000-06920) filed December 15, 2004.


	10	.37	Binding Memorandum of Understanding between Applied Materials, Inc. and Novellus Systems, Inc. dated September 20, 2004, incorporated by reference to Applied’sForm 8-K (fileno. 000-06920) filed September 24, 2004. (Confidential treatment has been granted for the redacted portions of the agreement.)


	10	.38	Separation Agreement between Applied Materials, Inc. and Joseph R. Bronson dated November 30, 2004, incorporated by reference to Applied’sForm 10-K for fiscal year 2004 (fileno. 000-06920) filed December 15, 2004.


	10	.39*	Performance Goals and Bonus Formulas for Fiscal Year 2005 under the Senior Executive Bonus Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended January 30, 2005 (file no. 000-06920) filed March 1, 2005.


	10	.40*	Lead Independent Director Annual Retainer,incorporated by reference to Applied’sForm 10-Q for the quarter ended January 30, 2005 (file no. 000-06920) filed March 1, 2005.


	10	.41*	Nonemployee Director Share Purchase Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended May 1, 2005 (file no. 000-06920) filed May 31, 2005.


	10	.42*	Election form for use under Nonemployee Director Share Purchase Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended May 1, 2005 (file no. 000-06920) filed May 31, 2005.


	10	.43*	Applied Materials, Inc. amended and restated Relocation Policy, incorporated by reference to Applied’sForm 8-K (file no. 000-06920) filed October 31, 2005.


	10	.44*	Form of Restricted Stock Agreement for use under Applied Materials, Inc.’s Employee Stock Incentive Plan, as amended.


Exhibit No.			Description

	10	.45*	Form of Performance Share Agreement for use under Applied Materials, Inc.’s Employee Stock Incentive Plan, as amended.


	10	.46*	Amendment No. 3 to the Applied Materials, Inc. Executive Deferred Compensation Plan.


	10	.47*	Amendment No. 4 to the Applied Materials, Inc. Executive Deferred Compensation Plan.


	10	.48*	Vesting Acceleration of Certain Stock Options.


	12		Ratio of Earnings to Fixed Charges.


	21		Subsidiaries of Applied Materials, Inc.


	23	.1	Consent of Independent Registered Public Accounting Firm, KPMG LLP.


	23	.2	Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.


	24		Power of Attorney.


	31	.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


	31	.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


	32	.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	32	.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


~~Exhibit No.~~		~~Description~~

	~~32.1~~	~~Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
	~~32.2~~	~~Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

* Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a)3.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

~~APPLIED MATERIALS, INC.~~

APPLIED MATERIALS, INC.


	By:	/s/ MICHAEL R. SPLINTER



	Michael R. Splinter
	President and Chief Executive Officer

Dated: December ~~15, 2004~~

14, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


	Title	Date


/s/ MICHAEL R. SPLINTER Michael R. Splinter	President, Chief Executive Officer and Director (Principal Executive Officer)	December ~~15, 2004~~14, 2005

/s/ NANCY H. HANDEL Nancy H. Handel	~~Group~~Senior Vice President and Chief Financial Officer (Principal Financial ~~Officer~~Officer)	December 14, 2005

/s/ YVONNE WEATHERFORD Yvonne Weatherford	Corporate Vice President and Corporate Controller (Principal Accounting Officer)	December ~~15, 2004~~14, 2005

Directors:

* James C. Morgan	Chairman of the Board	December ~~15, 2004~~14, 2005

* Michael H. Armacost	Director	December ~~15, 2004~~14, 2005

* Deborah A. Coleman	Director	December ~~15, 2004~~14, 2005

* Herbert M. Dwight, Jr.	Director	December ~~15, 2004~~14, 2005

* Philip V. Gerdine	Director	December ~~15, 2004~~14, 2005

* ~~Paul R. Low~~ Thomas J. Iannotti	Director	December ~~15, 2004~~14, 2005

* ~~Dan Maydan~~ Charles Y.S. Liu	Director	December ~~15, 2004~~14, 2005


		Title	Date


* ~~Steven L. Miller~~Paul R. Low		Director	December ~~15, 2004~~14, 2005

* ~~Gerhard H. Parker~~ Dan Maydan		Director	December ~~15, 2004~~14, 2005

* Gerhard H. Parker		Director	December 14, 2005

* Willem P. Roelandts		Director	December ~~15, 2004~~14, 2005

Representing a majority of the members of the Board of ~~Directors.~~Directors

*By	/s/ MICHAEL R. SPLINTER Michael R. Splinter Attorney-in-Fact Attorney-in-Fact

** By authority of the power of attorney filed herewith.

** ~~By authority of the power of attorney filed herewith.~~

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS

(In thousands)

Balance at Additions — Balance at
Fiscal Year Beginning of Year Charged to Income Deductions End of Year
2002 $ 2,700 $ — $ (625 ) $ 2,075
2003 $ 2,075 $ — $ (228 ) $ 1,847
2004 $ 1,847 $ 686 $ — $ 2,533


Fiscal		Balance at		Additions —		Additions —					Balance at
Year		Beginning of Year		Charged to Income		Business Combinations		Deductions			End of Year

	2003	$	2,075	$	—	$	—	$	(228	)	$	1,847
	2004	$	1,847	$	686	$	—	$	—		$	2,533
	2005	$	2,533	$	213	$	1,220	$	(317	)	$	3,649


(Mark one)

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

		For the fiscal year ended October ~~31, 2004~~30, 2005
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


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

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


~~Title of Class~~		~~Name of Each Exchange on Which Registered~~

~~None~~		~~None~~


PART I
	Item 1: Business
	Item 2: Properties
	Item 3: Legal Proceedings
	Item 4: Submission of Matters to a Vote of Security Holders
PART II
	Item 5: Market for Registrant’s Common Equity, ~~and~~ Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6: Selected Financial Data
	Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A: Quantitative and Qualitative Disclosures About Market Risk
	Item 8: Financial Statements and Supplementary Data
	Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A: Controls and Procedures
	Item 9B: Other Information
PART III
	Item 10: Directors and Executive Officers of the Registrant
	Item 11: Executive Compensation
	Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13: Certain Relationships and Related Transactions
	Item 14: Principal ~~Accounting~~Accountant Fees and Services
PART IV
	Item 15: Exhibits and Financial Statement Schedules
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
APPLIED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~REPORT OF MANAGEMENT~~
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INDEX TO EXHIBITS
SIGNATURES
SCHEDULE II ~~VALUATION AND QUALIFYING ACCOUNTS~~
EXHIBIT ~~10.36~~10.44
EXHIBIT ~~10.37~~10.45
EXHIBIT ~~10.39~~10.46
EXHIBIT 10.47
EXHIBIT 10.48
EXHIBIT 12
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 24
EXHIBIT 31.1
~~EXHIBIT~~EXHBITI 31.2
EXHIBIT 32.1
EXHIBIT 32.2


(1)	Includes only options and restricted stock units (referred to as “performance shares” under the Applied Materials, Inc. Equity Incentive Plan) outstanding under Applied’s ~~stock option~~equity compensation plans, as no stock warrants or other rights were outstanding as of October ~~31, 2004.~~30, 2005.

(2)	The weighted average exercise price of outstanding options, warrants and rights does not take restricted stock units into account as restricted stock units have a de minimus purchase price.

(3)	Includes ~~13,558~~9,892 shares of Applied’s common stock reserved for future issuance under the Applied Materials, Inc. Employees’ Stock Purchase Plan.

~~(3)~~(4)	Includes options to purchase ~~1,520~~897 shares of Applied’s common stock assumed through various mergers and acquisitions, after giving effect to the applicable exchange ratios. These assumed options had a weighted average exercise price of ~~$13.58~~$12.55 per share. No further shares are available for issuance under these assumed plans.

~~(4)~~(5)	Includes ~~6,063~~4,843 shares of Applied’s common stock reserved for future issuance under the Applied Materials, Inc. Stock Purchase Plan for Offshore Employees.


	~~Critical Dimension and Defect Review Scanning Electron Microscopes (CD-SEMs and DR-SEMs)~~


Fiscal year ended(1)		2000(2)		2001			2002		2003			2004


		(In thousands, except percentages, per share amounts and number of employees)
Net sales		$	9,564,412	$	7,343,248		$	5,062,312	$	4,477,291		$	8,013,053
Gross margin		$	4,855,728	$	3,252,033		$	2,056,661	$	1,604,455		$	3,701,245
	(% of net sales)		50.8		44.3			40.6		35.8			46.2
Research, development and engineering		$	1,107,922	$	1,198,799		$	1,052,269	$	920,618		$	991,873
	(% of net sales)		11.6		16.3			20.8		20.6			12.4
Marketing, selling, general and administrative		$	960,753	$	901,924		$	708,955	$	625,865		$	751,621
	(% of net sales)		10.0		12.3			14.0		14.0			9.4
Income/(loss) before income taxes, equity in net income/(loss) of joint venture and cumulative effect of change in accounting principle		$	2,947,844	$	1,103,802		$	340,511	$	(211,556	)	$	1,829,250
Effective tax rate (%)			30.0		29.8			21.0		29.5			26.1
Income/(loss) before cumulative effect of change in accounting principle		$	2,063,552	$	775,228		$	269,004	$	(149,147	)	$	1,351,303
	(% of net sales)		21.6		10.6			5.3		(3.3	)		16.9
Cumulative effect of change in accounting principle, net of tax(2)		$	—	$	(267,399	)	$	—	$	—		$	—
Net income/(loss)		$	2,063,552	$	507,829		$	269,004	$	(149,147	)	$	1,351,303

Earnings/(loss) per share(3)		$	1.20	$	0.46		$	0.16	$	(0.09	)	$	0.78
Cumulative effect of change in accounting principle			—		(0.16	)		—		—			—

		$	1.20	$	0.30		$	0.16	$	(0.09	)	$	0.78

Weighted average common shares and equivalents(3)			1,718,338		1,694,658			1,701,557		1,659,557			1,721,645
Order backlog		$	4,381,768	$	2,725,406		$	3,190,459	$	2,495,115		$	3,368,382
Working capital		$	6,079,436	$	6,249,358		$	6,571,337	$	6,729,896		$	7,993,538
Current ratio			3.2		5.1			5.4		5.1			4.5
Long-term debt		$	573,126	$	564,805		$	573,853	$	456,422		$	410,436
Stockholders’ equity		$	7,104,348	$	7,606,737		$	8,019,649	$	8,068,034		$	9,262,027
Book value per share(3)		$	4.37	$	4.66		$	4.87	$	4.81		$	5.51
Total assets		$	10,545,730	$	9,828,510		$	10,224,765	$	10,311,622		$	12,093,445
Capital expenditures, net of retirements		$	383,255	$	710,620		$	417,080	$	211,959		$	171,538
Regular employees			19,220		17,365			16,077		12,050			12,191


	principle of $267 million (net of income tax benefit of $112 million) in fiscal 2001. ~~For periods prior to fiscal 2001, data was not available to provide pro forma information as if the change in accounting principle were applied retroactively.~~

(3)		Amounts ~~prior to~~for fiscal ~~2002~~2001 have been restated to reflect atwo-for-one stock split in the form of a 100 percent stock dividend, effective April 16, 2002.



	Payments Due by Period

			Less Than		1-3		3-5		More Than
Contractual obligations	Total		1 Year		Years		Years		5 Years


	(In millions)
Long-term debt obligations	$	456	$	46	$	204	$	4	$	202
Operating lease obligations		327		84		116		48		79
Purchase obligations*		704		699		5		—		—
Other long-term liabilities		133		—		15		7		111

	$	1,620	$	829	$	340	$	59	$	392


*		Represents Applied’s agreements to purchase goods and services consisting of ~~Applied’s:~~Applied’s (a) outstanding purchase orders for goods and services; (b) contractual requirements to make specified minimum payments even if Applied does not take delivery of the contracted goods; and (c) contractual requirements to pay a penalty if the contract is cancelled. While the amount above represents Applied’s purchase agreements as of October ~~31, 2004,~~30, 2005, the actual amounts to be paid by Applied may be less in the event that any agreements are renegotiated, cancelled or terminated.


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


	*~~Applied operates in a highly competitive industry characterized by increasingly rapid technological changes.~~*


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


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


	*~~The failure to successfully implement outsourcing activities~~operations could ~~adversely affect results of operations.~~*


~~Item 1:~~	*~~Business~~*


	*~~Deposition~~*


	~~Atomic Layer Deposition~~


	~~Chemical Vapor Deposition~~


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


	*~~Changes in tax rates or tax liabilities could affect future results.~~*


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


	*~~Applied will become subject to internal controls evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.~~*


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


~~Item 7A:~~	*~~Quantitative and Qualitative Disclosures About Market Risk~~*


~~Item 8:~~	*~~Financial Statements and Supplementary Data~~*


~~Item 9:~~	Item 9: Changes ~~in and Disagreements with Accountants on Accounting and Financial Disclosure~~


Item 10:	*Directors and Executive Officers of the Registrant*


Item 12:	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*


~~Item 13:~~	*~~Certain Relationships and Related Transactions~~*


~~Item 14:~~	*~~Principal Accounting Fees and Services~~*


~~Item 15:~~	*~~Exhibits and Financial Statement Schedules~~*


			~~Page Number~~

~~(1) Financial Statements:~~
	Page Number

(1) Financial Statements:
Consolidated Statements of Operations for each of the three years in the period ended October ~~31, 2004~~30, 2005		3839
	Consolidated Balance Sheets at October ~~26, 2003~~31, 2004 and October ~~31, 2004~~30, 2005			3940
	Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended October ~~31, 2004~~30, 2005			4041
	Consolidated Statements of Cash Flows for each of the three years in the period ended October ~~31, 2004~~30, 2005			4142
	Notes to Consolidated Financial Statements			4243
	~~Report of Management~~			66
	Report of KPMG LLP, Independent Registered Public Accounting Firm			6768
	Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm			6869
(2) Financial Statement Schedule:
	Schedule II — Valuation and Qualifying Accounts for each of the three years in the period ended October ~~31, 2004~~30, 2005			7576
(3) Exhibits:
	The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Annual Report onForm ~~10-K.~~10-K


		October 27,		October 26,			October 31,
Fiscal year		2002		2003			2004


		(In thousands, except per share amounts)
Net sales		$	5,062,312	$	4,477,291		$	8,013,053
Cost of products sold			3,005,651		2,872,836			4,311,808

Gross margin			2,056,661		1,604,455			3,701,245
Operating expenses:
	Research, development and engineering		1,052,269		920,618			991,873
	Marketing and selling		385,693		325,189			394,376
	General and administrative		323,262		300,676			357,245
	Restructuring, asset impairments and other charges		85,479		371,754			167,459
	Litigation settlements, net		—		—			26,627

Income/(loss) from operations			209,958		(313,782	)		1,763,665
Interest expense			49,357		46,875			52,877
Interest income			179,910		149,101			118,462

Income/(loss) before income taxes			340,511		(211,556	)		1,829,250
Provision for/(benefit from) income taxes			71,507		(62,409	)		477,947

Net income/(loss)		$	269,004	$	(149,147	)	$	1,351,303

Earnings/(loss) per share:
	Basic	$	0.16	$	(0.09	)	$	0.80
	Diluted	$	0.16	$	(0.09	)	$	0.78
Weighted average number of shares:
	Basic		1,643,612		1,659,557			1,688,121
	Diluted		1,701,557		1,659,557			1,721,645


	2003			2004


	(In thousands, except
	percentages)
Change in projected benefit obligation
Beginning projected benefit obligation	$	116,144		$	123,726
Service cost		12,998			12,744
Interest cost		5,246			5,842
Plan participants’ contributions		560			716
Net actuarial (gain)/loss		8,922			13,170
Curtailment loss to be recognized		(12,093	)		—
Benefits paid		(8,051	)		(6,330	)

Ending projected benefit obligation	$	123,726		$	149,868

Change in plan assets
Beginning fair value of plan assets	$	30,302		$	33,585
Actual return on plan assets		488			5,281
Employer contributions		10,286			9,368
Plan participants’ contributions		560			716
Benefits paid		(8,051	)		(6,330	)

Ending fair value of plan assets	$	33,585		$	42,620

Funded status	$	(90,141	)	$	(107,248	)
Unrecognized transition obligations		861			698
Unrecognized prior service costs		1,190			1,055
Unrecognized net actuarial (gain)/loss		33,105			38,076

Net amount recognized	$	(54,985	)	$	(67,419	)

Plans with accumulated benefit obligations in excess of plan assets
Projected benefit obligation	$	123,726		$	149,868
Accumulated benefit obligation	$	102,363		$	123,620
Fair value of plan assets	$	33,585		$	42,620
Plan assets — allocation
Equity securities		52	%		53	%
Fixed income		32	%		33	%
Cash		16	%		14	%


	~~/s/ MICHAEL R. SPLINTER~~

	~~Michael R. Splinter~~
	~~President and Chief Executive Officer~~

	~~/s/ NANCY H. HANDEL~~

	~~Nancy H. Handel~~
	~~Group Vice President and Chief Financial Officer~~


*		Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a)3.