UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

ALTERA CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		77-0016691 (I.R.S. Employer Identification No.)
101 Innovation Drive, San Jose, California (Address of Principal Executive Offices)		95134 (Zip Code)

Registrant’s Telephone Number, Including Area Code:
(408) 544-7000

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share
(Title of Class)
Name of Each Exchange on which registered:
The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $4,067,455,979 as of June 26, 2009 based upon the closing sale price on the NASDAQ Global Select Market for that date. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed affiliates. This determination is not necessarily conclusive.

There were 297,388,263 shares of the registrant’s common stock, $0.001 par value per share, issued and outstanding as of January 29, 2010.

Item 5 of Part II, Items 10, 11, 12, 13, and 14 of Part III incorporate information by reference from the Proxy Statement for the Annual Meeting of Stockholders which will be held on May 6, 2010 at 1:30 p.m. local time, at Altera’s offices at 101 Innovation Drive, San Jose, California.

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			2
Item 1A. Risk Factors			11
Item 1B. Unresolved Staff Comments			16
Item 2. Properties			16
Item 3. Legal Proceedings			16
Item 4. Submission of Matters to a Vote of Security Holders			16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities			17
Item 6. Selected Consolidated Financial Data			19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			34
Item 8. Financial Statements and Supplementary Data			36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			63
Item 9A. Controls and Procedures			63
Item 9B. Other Information			63
PART III
Item 10. Directors, Executive Officers and Corporate Governance			64
Item 11. Executive Compensation			64
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			64
Item 13. Certain Relationships and Related Transactions and Directors’ Independence			64
Item 14. Principal Accountant Fees and Services			64
PART IV
Item 15. Exhibits and Financial Statement Schedules			65
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING STATEMENTS

This report and certain information incorporated herein by reference contains forward-looking statements, which are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include statements regarding:

•

the growth prospects of the semiconductor industry and PLD market, including the FPGA and CPLD product sub-segments (see “Item 1: Business — Strategy and Competition” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview”);

•

trends in our future sales, including our opportunities for growth by displacing ASICs, ASSPs and other fixed chip alternatives (see “Item 1: Business — Strategy and Competition” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview”);

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the commercial success of our new products (see “Item 1: Business” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview”);

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our market share in relation to competitors (see “Item 1: Business” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview”);

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the timing of initial shipments of our Cyclone IV FPGAs (see “Item 1: Business”);

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the risk of exposure to product liability claims (see “Item 1A: Risk Factors — We may be subject to product liability claims”);

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our plan to continue making purchases under the stock purchase program (see “Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities”);

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our ability to weather the economic downturn (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview”);

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the opportunities to further expand our position outside of the United States (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview”);

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our research and development costs and efforts (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations”);

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the growth of our revenues generally and revenues from specific products such as HardCopy® devices (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview”);

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projections regarding if and when certain product sales may peak or decline (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview”);

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our gross margins and factors that affect gross margins (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations”);

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our provision for tax liabilities and other critical accounting estimates (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates”);

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our capital expenditures (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition, Liquidity, Credit Facility and Capital Resources”);

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our exposure to market risks related to changes in interest rates, equity prices and foreign currency exchange rates (see “Item 7A: Quantitative and Qualitative Disclosure About Market Risk”);

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future payments required pursuant to other agreements and commitments (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” and “Note 8 — Commitments and Contingencies to our consolidated financial statements”);

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anticipated payments of the remaining restructuring obligations (see “Note 16 — Restructuring Charges to our consolidated financial statements”).

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information currently available to us and expectations and assumptions that we deem reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks set forth in Item 1A: Risk Factors.

PART I

Item 1. Business

Founded in 1983, Altera Corporation is a global semiconductor company, serving over 12,000 customers within the Telecom and Wireless, Industrial Automation, Military and Auto, Networking, Computer and Storage, and Other market segments. The Other market segment includes sub-segments of broadcast, consumer, medical and test. Our headquarters facility is located at 101 Innovation Drive, San Jose, California 95134, and our website is www.altera.com. Our common stock trades on the NASDAQ Global Select Market under the symbol ALTR.

Altera designs, manufactures, and markets a variety of products:

•

Programmable logic devices (“PLDs”), which consist of field-programmable gate arrays (“FPGAs”) and complex programmable logic devices (“CPLDs”), are standard semiconductor integrated circuits, or chips, that our customers program to perform desired logic functions in their electronic systems.

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HardCopy® application-specific integrated circuits (“ASICs”) transition customer designs from high-density FPGAs to low-cost non-programmable implementations for volume production. Because they are customized only on the last few mask layers, HardCopy ASICs deliver performance that can be an alternative to traditional ASICs, but with reduced development costs and shorter production lead times.

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Pre-defined design building blocks, known as intellectual property (“IP”) cores, can be licensed by customers to add standard functions to their PLD designs.

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Proprietary development software, which operates on personal computers and engineering workstations, is used by customers to develop, compile, and verify their designs, and then program their designs into our PLDs.

We were one of the first suppliers of complementary metal oxide semiconductor (“CMOS”) PLDs and are currently a global leader in this market. Our broad range of PLDs offer unique features as well as differing densities and performance specifications, and serve a wide range of customers. An overview of typical PLD applications within these markets is shown in the table below.

Market Segment		Market Sub-Segment		Application/Product
Telcom and Wireless		Telecom Wireless		•     Optical •     Metro •     Access •     Cellular infrastructure •     Wireless local area networks (“LANs”)
Industrial Automation, Military and Auto		Industrial Automation Military Automotive		•     Process control •     Security/energy •     Safety •     Secure communications •     Radar •     Intelligence •     Navigation •     Entertainment
Networking, Computer and Storage		Networking Computer Storage Office Automation		•     Routers •     Switches •     Servers •     Mainframes •     Redundant array of inexpensive disks (“RAID”) systems •     Storage area networks (“SANs”) •     Copiers •     Printers
Other		Broadcast Consumer Medical Test		•     Studio •     Audio/video •     Set-top decoder boxes •     High definition television (“HDTV”) •     Diagnostic •     Imaging •     Semiconductor •     Communications

Digital Logic Overview

Most electronic systems use three types of digital integrated circuits:

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Processors, which include microprocessors, microcontrollers, and digital signal processors, control central computing tasks and signal processing.

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Memory stores programming instructions and data.

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Logic manages the interchange and manipulation of digital signals within a system.

System designers typically use standard architectures to meet their processor and memory needs, but need a wide variety of logic circuits to differentiate their end products. Most applications use one or more of the following types of logic in their designs:

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ASICs—Often referred to as standard cells, ASICs are manufactured with custom designs created by the customer. As a result, each ASIC has a fixed function used by a single customer in a single application.

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Application-specific standard products (“ASSPs”)—ASSPs are standard devices that usually cannot be customized by the end user. In contrast to an ASIC, which is built for a single customer, an ASSP is built for a specific type of application targeted to a small number of customers. ASSPs are sometimes described as ASICs developed for multiple customers.

•

PLDs—Unlike ASICs and ASSPs, PLDs are standard products that can be customized for a wide range of applications. As a result, PLDs are typically sold to hundreds or thousands of customers. This flexibility offers many advantages, including simple design changes, shorter design cycles, and lower development costs.

In a broad sense, these products compete with each other as they may be used in the same types of applications in electronic systems. However, differences in cost, performance, density, flexibility, ease-of-use, and time-to-market dictate how much they directly compete for particular applications. The table below summarizes key characteristics of ASICs, ASSPs, and PLDs.

		ASIC		ASSP		PLD
Customizable		Yes, by chip fabrication facility		No		Yes, by end user
Erasability/Reprogrammability		No		No		Yes
Relative Time to Market		Slow		Immediate		Fast
Relative Unit Cost		Low		Moderate		Moderate to high
Customer’s Development Cost		High		Low		Moderate
Field Upgradability		No		No		Yes

PLDs vs. ASICs and ASSPs

In contrast to ASICs, PLD designs are programmed directly into the PLD. This means that the PLD is fully functional and verified when the design is completed, avoiding the lengthy and complex cycles required to verify and fabricate ASICs. This user programmability allows PLD customers to test and revise their designs quickly and with minimal development cost. In addition to these ease-of-use and time-to-market advantages, PLDs can be upgraded in the field, which allows customers to modify the PLD design after the electronic system has been shipped.

Customers use ASSPs when they need specific fixed functions with little differentiation, for example when implementing certain electronic industry standards. However, ASSPs have fixed functionality, which limits the range of applications they can address. In contrast to ASSPs, PLD flexibility allows customers to define functionality to suit their needs, rather than restrict their system architecture based on ASSP manufacturer specifications. Furthermore, PLD designers can add IP design blocks to execute standardized functions otherwise performed by ASSPs.

These design flexibility advantages historically resulted in a relatively high unit cost for PLDs. Programmability required a larger die size, which typically translated into a higher per-unit cost when compared to ASICs or ASSPs manufactured using the same process technology. As a result, unit volume for PLDs was typically lower than for ASICs or ASSPs. For our most current designs, PLD process technology is typically two or three process generations more advanced than ASIC and ASSP process technology. As chip manufacturing becomes more advanced, the total cost of chip development increases, reducing the cost advantage of ASICs and ASSPs. As a result, some ASIC and ASSP suppliers choose to use non-leading-edge process technology for new designs to reduce costs. We believe this has brought us to a “tipping point” with respect to our opportunity to displace ASICs and ASSPs. It is no longer technologically feasible for ASIC and ASSP suppliers to continue to use old process generations for technically advanced systems, and at the same time it is not economically feasible for them to use new generations of technology for low and mid-range volume applications. The “process technology gap” between PLDs and ASIC and ASSP alternatives will increase over time and, when combined with the traditional PLD advantages of greater flexibility, lower development cost, and faster time-to-market, should drive the accelerated adoption of PLDs in the years ahead.

In addition, we believe that innovations in PLD architecture and PLD development tools have also contributed to the increasing use of PLDs over ASICs and ASSPs. Newer PLD capabilities, such as high speed transceivers, Programmable Power Technology, and embedded digital signal processing (“DSP”), help electronics engineers use PLDs to meet increasingly complex system requirements for performance, power consumption and cost. Consequently, we believe that customers will increasingly use PLDs not only for prototyping, but also for production quantities rather than ASICs or ASSPs.

Strategy and Competition

Our greatest growth opportunity is in the displacement of ASICs and ASSPs in the development of next generation electronic systems. We believe that the increasing cost of advanced chip manufacturing technology drives the development and use of standard programmable digital integrated circuits. As with microprocessors and memory, PLDs provide the flexibility for the customer to define and change functions without incurring the cost, risk, and delays of custom chip fabrication.

To capture a larger share of the chips purchased by our customers, we focus on providing the most advanced programmable solutions:

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PLDs with the speed, density, low power consumption, functionality, and package types to meet customer needs

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PLDs optimized for low-cost and high-volume applications

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HardCopy ASICs to enable our customers to move easily from our largest PLDs to a low-cost ASIC

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Optimized, pre-verified system-level IP cores to speed the design process

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State-of-the-art development tools that offer low cost, ease of use, and compatibility with other industry-standard electronic design automation (“EDA”) tools

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A complete customer support system

As a result, our strategy in recent years has not only been to add more prototyping customers, but more importantly, to use cost-optimized products to increase our penetration into higher-volume applications and end markets. PLD vendors have innovated and used the most advanced process technology to rapidly reduce PLD cost structure and power consumption while increasing device speed and density. This makes programmable logic an increasingly competitive alternative to ASICs and ASSPs and will increase the use of PLDs. In addition, the ability to quickly and efficiently integrate system-level IP within a PLD not only provides advantages relative to ASICs and ASSPs, but it also allows the displacement of other semiconductor products including digital signal processors and microcontrollers. As a result, we may encounter a variety of semiconductor vendors during a given customer engagement. Semiconductor companies we may compete with include International Business Machines Corp. (“IBM”), NEC Corporation, Toshiba Semiconductor Company, LSI Logic Corporation, Texas Instruments Inc., Freescale Semiconductor Inc. and Microchip Technology Inc..

We compete directly with other PLD vendors to realize the ASIC and ASSP displacement opportunity and for market share within the PLD market. Using publicly available data and information obtained from Gartner Dataquest, we estimate that two vendors—Altera and Xilinx, Inc.—account for 87% of the total PLD market. The smaller vendors, including Lattice Semiconductor Corporation and Actel Corporation, together represent approximately 13% of the PLD market.

Two distinct sub-segments of the PLD market, CPLDs and FPGAs, comprise the majority of revenues but, due to product differences, usually do not compete directly for the same customer designs. The FPGA market has outgrown the CPLD market over the last several years. FPGAs now account for approximately 81% of total PLD sales and are expected to continue to be the fastest growing segment of the PLD market. Based on our estimates, we believe that our share of the FPGA market increased from 30% in 2004 to 34% in 2009, and that maintaining or increasing our FPGA market share is important to our long-term growth.

Competition among PLD vendors is most intense in the “design-win” phase of the customer’s design, when customers select products for use in their systems. Because each vendor’s products are proprietary, the cost to switch PLDs after a system has been designed and prototyped is very high. Therefore, customers rarely switch PLD vendors after the initial selection for a particular design. From the time a design win is secured, it can be two or more years before the customer starts volume purchases of our devices. Typically, the customer selects the PLD vendor relatively early in the design process, but it may take several years to complete system design, build prototypes, sample the marketplace for customer acceptance, make modifications, and manufacture in volume. Thus, there is a delay between developing a competitive advantage and experiencing a shift in PLD market share, meaning that market share is a lagging indicator of relative competitive strength. Because it is extremely difficult to forecast the success or timing of a customer’s product, and because the end markets are highly fragmented (we have over 12,000 PLD customers), it is difficult even for PLD vendors to gauge their competitive strength in winning designs at a particular point in time.

The principal competitive factors in the PLD market include:

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Technical innovation

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Device performance, power consumption, and features

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Capability and productivity of software development tools and IP cores

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Pricing and availability

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Quality and reliability

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Technical service and customer support

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Manufacturing and operational competence

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Customer familiarity with existing vendors and entrenched products

We believe that we compete favorably with respect to these factors and that our proprietary device architecture and installed base of software development systems provides some competitive advantage. Due to unique architectural innovation and advanced technologies, our new product families provide greater functionality and lower power consumption at a lower price for any given density compared to their predecessors. Newer product features such as multi-gigabit transceivers and Programmable Power Technology have enhanced our design win rate relative to other PLD vendors.

We also believe that our new product families compete favorably against ASICs and ASSPs, as well as against other types of chips such as microcontrollers, microprocessors, and digital signal processors. Designers can add some of the functionality of these other chips to PLDs using pre-built and pre-verified IP cores. An IP core is typically offered in either a “hard” or “soft” form. A hard IP core is embedded into the actual circuitry of our chips. A soft IP core is a licensed design file that our customers incorporate into their design and program onto the PLD. By incorporating more functionality and logic capacity on a programmable chip while providing the necessary design tools and IP cores to design a reliable system, we believe we can enhance the advantages of PLDs over competing solutions.

As is true of the semiconductor industry as a whole, the digital logic segment and the PLD sub-segment are intensely competitive, and each successive product generation is characterized by rapid technological change and price decline. All of these factors may adversely affect our future operating results.

Products

Our products consist primarily of devices, IP cores, and proprietary development tools. A brief overview of these products follows.

Devices

Our devices fall into the following four categories, spanning multiple architectures and families with numerous product options:

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FPGAs

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CPLDs

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HardCopy ASICs

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Configuration devices that store the programming code for our FPGAs

Our percentage of net sales by product category is as follows:

Product		2009				2008				2007
FPGAs			77	%			74	%			71	%
CPLDs			15	%			18	%			19	%
Other products (1)			8	%			8	%			10	%

Each device family has unique functional benefits and different density and performance specifications. Some of our latest device families, typically designed into new equipment, are summarized and described below.

Stratix III and Stratix IV High-End, System-Level FPGAs

Our Stratix^® product families are built using advanced CMOS process technology and address a broad range of applications requiring system integration across all our markets. Stratix FPGAs provide high logic density and performance and low power consumption, while offering high speed and flexible embedded system functionality such as memory and DSP blocks. Additionally, our Stratix IV GX and Stratix IV GT FPGAs offer advanced transceiver capabilities for applications that require reliable, multi-gigabit serial data transfer rates of up to 11.3 Gbps. Programmable Power Technology allows customer designs to meet stringent requirements for both low power and high speed.

Arria and Arria II GX Mid-Range, Transceiver-Equipped FPGAs

Our Arria^® product families are built using advanced CMOS process technology and enable a simplified transceiver-based design for applications requiring high-performance data transfer protocols. Arria II GX FPGAs offer best-in-class signal integrity with data transfer rates of up to 3.75 Gbps, providing designers a high-quality and reliable solution for next-generation high-bandwidth systems across all our markets.

Cyclone III and Cyclone IV Low-Cost FPGAs

Our Cyclone^® product families are built using advanced CMOS process technology and bring programmable flexibility to cost-sensitive applications in all our markets. Our Cyclone III and Cyclone IV FPGAs use low-power process technology to meet market requirements for low power consumption. Additionally, our Cyclone IV GX FPGAs incorporate up to eight integrated transceivers with data rates up to 3.125 Gbps. Initial shipments of our Cyclone IV FPGAs are expected in the first quarter of 2010. Architectural innovation allows Cyclone FPGAs to combine a low-cost structure with abundant device resources, making them ideal for high-volume applications.

MAX II CPLDs

Our MAX^® families are instant-on, non-volatile CPLDs that are used in high-speed glue logic functions for a broad range of electronics equipment. “Glue logic” permits multiple subsystem components to interact. Our MAX II CPLDs have a revolutionary architecture that reduces costs by 50% or more, consumes 90% less power, and increases performance by as much as 50% over the previous-generation MAX family. For the most demanding low-power and battery-operated portable applications, our MAX IIZ CPLDs offer microamp standby current in ultra-small-chip packaging.

HardCopy ASICs

Our HardCopy ASICs offer customers a migration path from high density FPGA families to a low-cost ASIC for high-volume production. For a given process technology, HardCopy ASICs deliver nearly the performance of comparable cell-based ASICs, but with reduced development costs and shorter production lead-times.

In contrast to traditional cell-based ASICs, in which every mask layer is custom and unique to the customer’s design, our HardCopy ASICs share a common set of base layers so only the last few mask layers are customized to implement the customer’s design. By removing the configuration circuitry, programmable routing, and programmability for logic and memory, we reduce the die size and therefore device cost, but deliver functionality, performance and power characteristics that are equivalent to or more favorable than that of an FPGA.

As a result, customers get the flexibility and time-to-market advantages of a high-density FPGA during the prototyping and early production phases, and then seamlessly convert the design to a HardCopy ASIC for high volume. This allows HardCopy ASICs to be used in high-volume cost-sensitive applications historically served by traditional cell-based ASICs.

Intellectual Property Cores

IP cores are pre-verified building blocks that execute system-level functions. Customers integrate IP cores in their PLD designs with our proprietary development software. Soft IP cores available for use in our devices include our Nios^® series of embedded processors, our portfolio of MegaCore^® functions that we license to our customers, and our Altera Megafunction Partners Program (“AMPP^SM”) cores, which are pre-verified by us and licensed to our customers by third parties.

The Nios series of embedded processors use a reduced instruction-set computing (“RISC”) architecture and can be efficiently used in our FPGAs and HardCopy ASIC devices as a cost-competitive and flexible alternative to discrete microcontroller solutions. The Nios series of embedded processors compete favorably with many discrete microcontrollers.

With IP cores, system designers can focus more time and energy on improving and differentiating the unique aspects of their system designs, rather than spending time designing common off-the-shelf functions. IP cores are essential to providing solutions with higher levels of integration and faster time to market. Today, we offer a broad range of soft IP cores for DSP algorithms, bus interfaces, memory controllers, telecommunications, data communications, microprocessors, and peripherals. Before licensing a soft IP core, customers can download an encrypted soft IP core from our website and verify that it works in their own system designs. While licensing soft IP cores represents a small portion of our net sales, we believe a broad product offering in this area is necessary to compete with ASIC and ASSP vendors as well as other PLD vendors.

Development Tools

To enhance engineering productivity, customers use our proprietary development tools, consisting primarily of the Quartus^® II software, for design entry, design compilation, design verification, and device programming.

Designers can use our development tools on a variety of computing platforms—including Microsoft Windows, UNIX (including Solaris and HP-UX), and Linux operating environments—with built-in interfaces to many industry-standard EDA tools offered by Cadence Design Systems, Inc., Mentor Graphics Corporation, Synopsys, Inc., and others.

Like IP cores, our development tools generate less than 10% of our net sales, but are a critical and necessary element of our product portfolio because they are used to program our devices and can drive our success in competing for design wins against PLD, ASIC, and ASSP vendors.

Research and Development

Our research and development activities focus primarily on PLDs, IP cores, development software, and hardware. We develop these related products in parallel to provide comprehensive design support to customers. As a result of our research and development efforts, we introduced a number of new families in recent years, including the Stratix IV (including E, GX and GT), Stratix III, Cyclone IV (including E and GX), Cyclone III (including LS), Arria II GX, MAX IIZ, MAX II, HardCopy IV and HardCopy III device families, as well as major enhancements to our IP core offerings and the Quartus II development platform.

Our research and development costs, which are charged to expense as incurred, were $260.2 million in 2009, $257.7 million in 2008, and $261.8 million in 2007.

Patents, Trademarks, and Licenses

We rely on intellectual property laws—including patent, copyright, trademark, and trade secret laws—to establish and maintain our proprietary rights in products and technology. Activities include:

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Patents—As of December 31, 2009, we owned more than 2,060 United States and 235 foreign patents. We also had more than 1,140 patent applications pending worldwide.

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Trademarks—We use, register, and apply to register certain trademarks and service marks in the United States and foreign countries.

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Product registrations—We file registrations in the United States under the Semiconductor Chip Protection Act to protect our chip designs.

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When appropriate, we file lawsuits to protect our intellectual property rights.

We have also licensed technology that allows us to design, manufacture, and sell products using certain intellectual property owned by others.

Marketing and Sales

We market our products worldwide through a network of distributors, independent sales representatives, and direct sales personnel. We add or remove independent sales representatives or distributors from our selling organization as we deem appropriate.

Altera Distributors

In all of the major geographic markets that we serve, we work with distributors to provide demand creation for the broad customer base and order-fulfillment services for most of our customers. These distributors are franchised by component manufacturers to sell a wide variety of products to many customers, and they may sell competing products or solutions. We have contracts with our distributors that can be terminated by either party upon notice.

All of our distributors stock inventory of our products. Distributors purchase products from us at a set distributor cost denominated in U.S. dollars. Title and risk of loss transfer upon shipment from our stocking locations, which are located in the Asia Pacific region at the independent subcontractors we employ for test and assembly services or at our warehouse in San Jose. When products are shipped to a distributor, we defer revenue on the sale until the distributor sells the products in accordance with our revenue recognition policy. Consequently, the deferred revenue and the corresponding deferred cost of sales are recorded as a current liability under the caption Deferred income and allowances on sales to distributors. All payments to us are denominated in U.S. dollars. For a detailed discussion of our revenue recognition policy, see Note 2 — Significant Accounting Policies — Revenue Recognition to our consolidated financial statements.

Our sales cycle begins with a “design-win” phase, which can be lengthy, is not always certain and often requires the ongoing participation of sales, engineering, and managerial personnel. Once customer demand has been created and a design is ready to move to prototyping or production, the order-fulfillment process begins. Customer orders are primarily processed and fulfilled by a local distributor. For these orders, our distributors are the legal sellers of the products and therefore bear all risks related to the sale of commercial goods, such as credit loss, inventory shrinkage and theft, and foreign currency fluctuations. For certain arrangements, Altera drop ships products to fulfill orders processed through our primary distributor.

Our distributors periodically return certain amounts of unsold product and receive price concessions for unsold product if we reduce prices. For high-volume or competitive situations, we often provide price concessions to our distributors. Typically, a customer purchasing a small quantity of product from a distributor will pay list price. However, a customer using our products in volume production, purchasing thousands or even hundreds of thousands of units, will often negotiate a substantial price discount from the distributor. Under these circumstances, the distributor will often negotiate and receive a price concession from Altera. These price concessions are negotiated in U.S. dollars. Average aggregate price concessions typically range from 65% to 80% of our list price on an annual basis, depending upon the composition of our sales, volume and factors associated with timing. This is a standard practice in the semiconductor industry, and we generally provide some level of price concession to every distributor.

Our net sales are the sum of our own direct sales to original equipment manufacturers, or OEMs, plus our distributors’ resale of Altera products. For 2009, 2008 and 2007, worldwide sales through distributors for subsequent resale to OEMs or their subcontract manufacturers accounted for 82%, 91% and 94%, respectively, of our net sales. Arrow Electronics, Inc. including its affiliates (“Arrow”), our largest distributor, accounted for 45% of our net sales in 2009, 46% in 2008, and 45% in 2007. Our second largest distributor, Macnica, Inc. including its affiliates (“Macnica”), located in Japan, accounted for 15% of our net sales in 2009, 14% in 2008, and 13% in 2007. No other distributor accounted for more than 10% of our net sales in 2009, 2008, or 2007.

See Note 3 — Accounts Receivable, Net and Significant Customers to our consolidated financial statements.

Altera Sales, Marketing, and Customer Support

Altera has a dedicated global sales and marketing organization to create customer demand and manage our network of distributors and independent sales representatives. We focus our direct demand creation efforts on a limited number of key accounts, and provide technical, business, and marketing support to distributors and independent sales representatives. Independent sales representatives, who are mostly located in North America and in select European countries, create demand and provide customer support in a defined territory and often with a defined set of customers. They do not stock inventory or fulfill orders. All of our contracts with independent sales representatives can be terminated by either party upon notice.

Customer support and service are important to selling and marketing our products. We provide several levels of technical support, including application assistance, design services, and customer training. We also publish data sheets and application notes, conduct technical seminars, and provide design assistance to customers via the Internet and electronic links.

We have domestic sales offices in numerous major metropolitan areas throughout the United States, and we maintain international sales support offices in Bangalore, Beijing, Cork, Chengdu, Helsinki, Hong Kong, London, Munich, Osaka, Ottawa, Paris, Seoul, Shanghai, Shenzhen, Singapore, Stockholm, Taipei, Tokyo, Toronto and Turin.

Huawei Technologies Co., Ltd. (“Huawei”), an OEM, individually accounted for 11% of net sales in 2009. No other individual OEM accounted for more than 10% of net sales in 2009. No single end customer accounted for more than 10% of net sales in 2008 or 2007. See Note 3 — Accounts Receivable, Net and Significant Customers to our consolidated financial statements.

International Sales

Sales outside of the U.S. and Canada constituted 80% of net sales in 2009, 77% of net sales in 2008, and 78% of net sales in 2007. Sales to Japan accounted for 18% of net sales in 2009, 19% of net sales in 2008, and 20% of net sales in 2007. Sales to China accounted for 27% of net sales in 2009, 19% of net sales in 2008, and 17% of net sales in 2007. Except for the United States, China, and Japan, no other country accounted for sales in excess of 10% of net sales during 2009, 2008, or 2007. For a detailed description of our sales by geographic region, see Item 7: Results of Operations — Sales by Geography and Note 13 — Segment and Geographic Information to our consolidated financial statements.

Backlog

Our backlog consists mostly of distributor orders, as well as limited OEM orders, that are for delivery within the next three months. Our backlog of orders on December 31, 2009, was approximately $1.6 billion, compared to $0.8 billion on December 31, 2008.

Historically, backlog is a poor predictor of future sales or customer demand for the following reasons:

•

While our backlog increases during periods of high demand and supply constraints, in most cases, purchasers may cancel product orders up to 30 days before the scheduled delivery date without incurring significant cancellation penalties.

•

Our backlog is valued at list price, which in most cases is substantially higher than the price ultimately recognized as revenue.

Manufacturing

Wafer Supply

Die, cut from silicon wafers, are the essential components of all our devices and comprise a significant portion of the total device cost. Our manufacturing strategy is known as a “fabless” business model since we purchase our silicon wafers from independent semiconductor foundries instead of manufacturing them ourselves. This strategy allows us to take advantage of these suppliers’ economies of scale and gives us direct and timely access to advanced process technology. We purchase nearly all of our silicon wafers from Taiwan Semiconductor Manufacturing Company (“TSMC”), an independent semiconductor foundry. We have no formalized long-term supply or allocation commitments from TSMC. In the past, we have used other foundry vendors, and we may establish additional foundry relationships as they become economically beneficial or technically necessary.

Testing and Assembly

After wafer manufacturing is completed, each silicon wafer is tested using a variety of test and handling equipment that is owned by us and consigned to our partners. The vast majority of our silicon wafer testing is performed at TSMC. Our San Jose facility is used primarily for new product development.

The wafers are then shipped to various assembly suppliers in Asia, where they are divided into good die and encapsulated in packages. We use a number of independent assembly suppliers to take advantage of their economies of scale and supply flexibility, and to give us direct and timely access to advanced packaging technology. We purchase almost all of our assembly services from Amkor Electronics, Inc. (“Amkor”), in Korea and the Philippines, and Advanced Semiconductor Engineering, Inc. (“ASE”) in Malaysia and Taiwan.

Following assembly, each packaged unit completes final testing, marking, and inspection before being packaged for storage as finished goods. We also use Amkor and ASE for almost all of our final test and back-end operation services. These suppliers perform final testing using our proprietary test software operating on hardware that is consigned to or owned by our suppliers.

The majority of our inventory, including finished goods, is warehoused in Asia at our subcontract test and assembly partners with a smaller portion located at our corporate facility in San Jose, California. These suppliers also ship our products to OEMs and distributors.

Executive Officers

Our executive officers and their ages as of February 17, 2010 are as follows:

Name		Age				Position
John P. Daane			46			Chairman, President, and Chief Executive Officer
Danny K. Biran			53			Senior Vice President, Marketing
Misha R. Burich			62			Senior Vice President, Research and Development
William Y. Hata			50			Senior Vice President, Worldwide Operations and Engineering
Lance M. Lissner			60			Senior Vice President, Business Development
Kevin H. Lyman			55			Vice President, Human Resources
George A. Papa			61			Senior Vice President, Worldwide Sales
Ronald J. Pasek			49			Senior Vice President and Chief Financial Officer
Jordan S. Plofsky			49			Senior Vice President and General Manager, Altera Penang
Katherine E. Schuelke			47			Vice President, General Counsel, and Secretary

There are no family relationships among our executive officers or between any executive officer and any of our directors.

John P. Daane joined us as our president and chief executive officer in November 2000 and was elected as one of our directors in December 2000 and as chairman of the board in May 2003. Before joining us, Mr. Daane spent 15 years at LSI Logic Corporation, a semiconductor manufacturer, most recently as executive vice president, communications products group, with responsibility for ASIC technology development and the computer, consumer, and communications divisions.

Danny K. Biran joined us in January 2005 as vice president, product and corporate marketing and became senior vice president, product and corporate marketing in May 2007. He became senior vice president, marketing in March 2009. Prior to joining us, Mr. Biran was president and CEO of Silverback Systems from 2001 to 2005. Mr. Biran has 25 years of semiconductor experience, including positions at LSI Logic Corporation and National Semiconductor.

Misha R. Burich joined us as our senior vice president of software engineering in December 2000, and assumed the role of senior vice president research and development in March 2007. Before joining us, he served as vice president of research and development at various electronic design automation (“EDA”) companies, including Cadence Design Systems, Mentor Graphics, Silicon Compiler Systems, and Silicon Design Labs, which he co-founded in 1984. Dr. Burich began his career at Bell Laboratories Research in 1978.

William Y. Hata joined us as vice president of product engineering in December 1999. In March of 2007, Mr. Hata was promoted to vice president, worldwide operations and engineering and in 2008 he was promoted to senior vice president, worldwide operations and engineering. Before joining us, he was director of foundry operations and product engineering at National Semiconductor.

Lance M. Lissner joined us in May 1998 as vice president of business development and investor relations and was appointed senior vice president, business development in November 2000. Before that time, Mr. Lissner was a corporate officer of Measurex Corporation, a developer of computer-integrated measurement, control, and information systems, where he was employed since 1973 and held various positions in sales, marketing, engineering, and business development.

Kevin H. Lyman joined us in January 2008 as our vice president of human resources. Before joining us, Mr. Lyman most recently served as senior vice president of corporate human resources at Advanced Micro Devices. Before that, Mr. Lyman held a variety of human resources management roles at Lockheed, GenRad, and General DataComm Industries.

George A. Papa joined us in February 2002 as senior vice president, worldwide sales. From February 2000 to February 2002, Mr. Papa served as vice president of worldwide sales of the communications business group of Marvell Semiconductor, Inc., a semiconductor company. From March 1997 to February 2000, he served as vice president of worldwide sales for Level One Communications, Inc., a subsidiary of Intel Corporation, a semiconductor company. From February 1991 to March 1997, Mr. Papa served as vice president of North American sales for Siemens Corporation, a diversified global technology company.

Ronald J. Pasek joined us in December 2009 as senior vice president and chief financial officer. Before joining us, Mr. Pasek served as vice president and corporate treasurer of Sun Microsystems, from February 2008 to December 2009. He held a variety of other positions in finance at Sun Microsystems over a nineteen year period, including vice president of worldwide field finance, worldwide manufacturing and U.S. field finance.

Jordan S. Plofsky joined us in February 2001 as senior vice president, vertical markets and embedded processor products and became senior vice president, applications business groups in March 2002, senior vice president, marketing in November 2004, and senior vice president and general manager, Altera Penang in March 2009. Before joining us, Mr. Plofsky was employed by LSI Logic Corporation from October 1996 to February 2001, most recently as executive vice president, enterprise infrastructure group from November 2000 to February 2001 and vice president and general manager, networking products division from June 1998 to November 2000.

Katherine E. Schuelke joined us in March 1996 as corporate attorney. She became senior corporate attorney in July 1997 and assistant general counsel and assistant secretary in July 1999. In October 2001, she was appointed vice president, general counsel, and secretary. Before joining us, Ms. Schuelke was an attorney at the law firm of Morrison & Foerster LLP for seven years.

Employees

As of December 31, 2009, we had 2,551 employees, of which 1,156 were located in the United States. None of our employees are represented by a labor union or collective bargaining agreement. We have not had any work stoppages, and we believe that our employee relations are good.

Access to Altera’s Reports

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed to comply with Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, are available free of charge on our website at www.altera.com, as soon as possible after they are filed with the Securities and Exchange Commission (“SEC”). To get a free copy, contact Altera Corporation, Attn: Investor Relations, 101 Innovation Drive, San Jose, California 95134.

Our SEC filings are available at the SEC’s website at www.sec.gov, and may be read and copied at the SEC’s public reference room at 100 F Street NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for more information.

Item 1A. Risk Factors.

The following risk factors, among others that are not presently known or that we currently believe unimportant, could affect our future results and could cause our actual results to differ materially from those expressed in our forward-looking statements. Before you decide to buy, hold, or sell our common stock, you should carefully consider these risks, in addition to the other information contained in this report. Our business, financial condition, and operations results could be seriously harmed if any of the events described here actually occurs. In that situation, the market price for our common stock could decline, and you may lose all or part of your investment.

Our financial results are affected by general economic conditions and the highly cyclical nature of the semiconductor industry.

Semiconductor companies, such as Altera, experience significant fluctuations in sales and profitability. The semiconductor industry has experienced economic downturns and business contractions from time to time, such as the 2009 downturn. Downturns in the semiconductor industry can be severe and prolonged. These downturns can result in significant reductions in product demand and excess customer inventories.

During the 2009 downturn, general worldwide economic conditions significantly deteriorated due to credit conditions resulting from the recent financial crisis. It is difficult for our customers, our vendors and us to accurately forecast and plan future business activities in this economic environment. In 2009, we experienced lower sales than in 2008. Although business conditions improved during the second half of 2009, that trend may not continue.

Our ability to predict the quantity and type of products our customers will need in the future is challenging because our customers face volatile pricing and unpredictable demand for their own products and are increasingly focused on cash preservation and tighter inventory management. These factors could affect the timing of customer orders and the overall level of demand for our products. Because it is extremely difficult to forecast the success or timing of a customer’s product, and because our end markets are highly fragmented (we have over 12,000 PLD customers), our ability to forecast end customer demand is difficult. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell as quickly as estimated, if at all. As a result we could hold excess or obsolete inventory, which would reduce our profit margins and adversely affect our financial results.

In addition, the disruptions in financial markets may continue to adversely affect the ability of our distributors or their customers (original equipment manufacturers or subcontract manufacturers) to obtain financing for significant purchases and operations, which could adversely affect demand for our products. Our operating cash flows are highly dependent on the continued collection of receivables and our ability to sell inventories. Further declines in overall economic conditions could lead to deterioration in the quality of our receivables. In addition to reductions in sales and elevated risk associated with the collection of receivables, our profitability and cash flows may suffer during downturns because we may not be able to reduce costs at the same rate as our sales decline.

As further described below, we depend entirely on independent subcontractors to supply us with finished silicon wafers and to assemble, test and ship our semiconductor products. The tightening of global credit markets may adversely affect the ability of our suppliers to obtain financing for operations. If our subcontractors’ capital structures weaken, they may fail to satisfy our demand and our business could be materially disrupted.

If global economic and market conditions remain uncertain or persist, spread or deteriorate further, we could experience a material impact on our business, financial condition, results of operations or cash flows.

Our gross margins are subject to fluctuations due to many factors.

Our gross margins may fluctuate due to many factors, including:

•

Geographic and/or market-segment pricing mix

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Changes in the mix of our prototyping- and production-based business

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Competitive pricing dynamics and customer mix

•

Various manufacturing cost variables including product yields, wafer prices, package and assembly costs, provisions for excess and obsolete inventory, and absorption of manufacturing overhead

Additionally, since the majority of our sales are booked and shipped through our distributors within the same quarter, forecasting our gross margins is difficult.

Our failure to compete successfully in the highly competitive semiconductor industry would adversely affect our financial results and business prospects.

The semiconductor industry, including the PLD market, is intensely competitive. Our ability to compete successfully in the semiconductor industry depends on our ability to provide our customers with solutions providing greater value than those offered by competing programmable logic vendors, such as Xilinx and Lattice, and other semiconductor companies that indirectly compete with us.

Because we develop PLDs for applications that are presently served by ASIC, ASSP, microcontroller, and digital signal processing (“DSP”) vendors, we compete against these vendors. Many of these vendors have substantially more financial, technical, and marketing resources than we do and have well-established market positions and solutions that have proven technically feasible and economically competitive over several decades. We may be unable to displace these vendors in the targeted applications and densities. Further, other programmable logic vendors are targeting these applications and may be successful in securing market share from us. In addition, customers may replace one or more of our FPGAs with a standard cell ASIC for cost reduction and that would adversely impact our revenue.

The length of our design-in and sales cycles could affect our ability to forecast future sales.

Our sales depend on our products being designed into end customers’ products, and on those products being produced in volume. Our products are very complex, and the time from design-in to volume production ranges from six months to three years or more. From initial product design-in to volume production, many factors can affect the timing and/or volume of our sales. These factors include, but are not limited to, changes in the competitive position of our technology, the competitiveness of our end customers’ products in the markets they serve, our customers’ financial stability, end customer program delays and cancellations, and our ability to ship products according to customer schedules.

Our business is characterized by a general decline in semiconductor product selling prices that may materially and adversely affect our profitability.

The selling prices of our products have decreased over time. We have offset the selling price decreases by reducing manufacturing costs, improving yields, and increasing unit sales. However, our ongoing efforts may not be successful or may not keep pace with the anticipated, continued decline in product selling prices, which could ultimately reduce revenues and gross margins.

Because we depend on international sales for a majority of our total sales, we may be subject to political, economic, and other conditions that could increase our operating expenses and disrupt our business.

Our operations outside of the United States are subject to risks that are inherent in conducting business under non-U.S. laws, regulations and customs. During 2009, sales outside of the U.S. and Canada constituted approximately 80% of our net sales, and we expect that international sales will continue to account for a significant portion of our net sales. Risks related to our foreign operations include:

•

Unfavorable economic, market, political, and social conditions in a specific country or region

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Fluctuation in foreign currency exchange rates

•

Adverse changes in tax laws

•

Increased freight costs

•

Interruptions in air transportation

•

Reduced protection for intellectual property rights in some countries

•

Longer receivable collection periods

•

Natural or man-made disasters in the countries or regions where we sell our products

•

Different labor regulations

Our business must comply with a variety of foreign laws and take risks associated with legislation and regulations for importing and exporting semiconductor products. In the future, the United States or other countries may impose quotas, duties, tariffs, taxes, or other charges, restrictions, or trade barriers for the import or export of our products.

We rely heavily on distributors to generate a significant portion of our sales and fulfill our customer orders. The failure of our distributors to perform as expected could materially reduce our future sales.

Worldwide sales through distributors accounted for 82% of our net sales during 2009. We rely on many distributors to help us create end customer demand, provide technical support and other value-added services to end customers, fill customer orders, and stock our products. Our contracts with our distributors may be terminated by either party upon notice.

Our distributors are located all over the world and are of various sizes and financial conditions. Lower sales, lower earnings, debt downgrades, the inability to access capital markets, and higher interest rates could potentially affect our distributors’ operations.

We are highly dependent on Arrow Electronics, Inc. including its affiliates (“Arrow”), in many locations across the world, particularly in North America.

During 2009, Arrow accounted for approximately 45% of net sales on a worldwide basis, while our next-largest distributor, Macnica, Inc. including its affiliates (“Macnica”), accounted for approximately 15% of net sales. As of December 31, 2009, accounts receivable from Arrow and Macnica individually accounted for 36% and 17%, respectively, of our net accounts receivable.

Our ability to add or replace distributors is limited.

Our distributors are contracted by Altera to perform two primary, yet distinct, functions that are difficult to replace:

•

Distributors provide logistics support, such as order entry, credit, forecasting, inventory management, and shipment of product, to end customers. The process of integrating systems to allow for electronic data interchange is complex and can be time consuming.

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Distributors create demand for our products at the engineering level. This mandates the training of an extended distributor sales force, as well as hiring and training specialized applications engineers skilled in promoting and servicing products at the engineering level.

In addition, our distributors’ expertise in the determination and stocking of acceptable inventory levels may not be easily transferable to a new distributor. Also, end customers may be hesitant to accept the addition or replacement of a distributor.

We depend entirely on independent subcontractors to supply us with finished silicon wafers. The failure of these subcontractors to satisfy our demand could materially disrupt our business.

Nearly all of our silicon wafers are produced by TSMC in its manufacturing facilities located primarily in Taiwan and the U.S. Silicon wafer production facilities have a fixed capacity that is allocated solely by our vendors and beyond our direct control. We have no formalized long-term supply or allocation commitments from our foundry suppliers. Our operations would be disrupted if TSMC ended its relationship with us and we were unable to arrange a satisfactory and cost-effective alternative to quickly fulfill customer orders.

To ensure continued wafer supply, we may establish other wafer supply sources as these arrangements become economically advantageous or technically necessary. However, only a few foundry vendors have the capability to manufacture our most advanced products. If we engage alternative supply sources, we may encounter start-up difficulties and incur additional costs. In addition, shipments could be significantly delayed while these sources are qualified for volume production.

Furthermore, because we rely on third-party foundries, we have little or no direct control over production costs, delivery schedules, and wafer quality. We also face increased exposure to potential misappropriation of our intellectual property.

Wafer shortages and/or increased wafer and assembly material costs could lower our gross margins, reduce our sales, or otherwise materially disrupt our business.

If market demand for silicon wafers or assembly material suddenly exceeds market supply, our supply of silicon wafers or assembly material could quickly become limited. A shortage in manufacturing capacity could hinder our ability to meet product demand. Moreover, silicon wafers constitute more than half of our product cost. If we are unable to purchase wafers at favorable prices, our gross margins will be adversely affected.

Product manufacturing is complex, and our foundries may not achieve the necessary yields or product reliability that our business requires.

Manufacturing our products is a highly complex and precise process, requiring production in a tightly controlled environment. We depend not only on sufficient foundry manufacturing capacity and wafer prices, but also good production yields (the number of good die per wafer) and timely wafer delivery to meet customer demand and maintain profit margins. Wafer production yields depend on a wide variety of factors including the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. As a result, we may experience problems with achieving acceptable production yields and timely delivery from our foundry vendor.

Difficulties in production yields can often occur when we begin new product production, when we transition to new processes, or when our principal wafer supplier, TSMC, moves production of a product from one manufacturing plant to another, or manufactures the same product at multiple factories. As a result of manufacturing defects, TSMC has also occasionally scrapped wafers, resulting in longer manufacturing lead times. Further, production throughput times vary considerably among the various factories used by our wafer suppliers, and we may occasionally experience production delays. These difficulties and delays can potentially cause significantly higher costs and lower product availability.

We depend on independent subcontractors, located in Asia, to assemble, test, and ship our semiconductor products. The failure of these subcontractors to satisfy our demand could materially disrupt our business.

Because we rely on independent subcontractors to assemble, test, and ship our semiconductor products and to provide package piece parts, we cannot directly control our product delivery schedules or quality levels. We are dependent upon sufficient subcontractor assembly and test capacities, both in raw materials and services, to meet the demand for our own products. Our future success also depends on the financial viability of our independent subcontractors. If market demand for subcontractor material and services exceeds available supply or if the subcontractors’ capital structures weaken, we may experience product shortages, quality assurance problems, and/or increased manufacturing costs.

Conditions outside the control of our independent subcontractors and distributors may impact their business operations and thereby adversely interrupt our manufacturing and sales processes.

The economic, market, social, and political situations in countries where certain independent subcontractors and distributors are located are unpredictable, can be volatile, and can have a significant impact on our business because we may be unable to obtain or distribute product in a timely manner. Market and political conditions, including currency fluctuation, terrorism, political strife, war, labor disruption, and other factors, including natural or man-made disasters, adverse changes in tax laws, tariff, import or export quotas, power and water shortages, or interruption in air transportation, in areas where our independent subcontractors and distributors are located also could have a severe negative impact on our operating capabilities. For example, because we rely heavily on TSMC to produce a significant portion of our silicon wafers, earthquakes or other natural disasters in Taiwan and Asia could limit our wafer supply and thereby harm our business, financial condition, and operational results.

Our failure to define, develop, and manufacture technologically advanced products would adversely affect the success and growth of our company.

We operate in a dynamic market characterized by rapid technological change. Our products are manufactured using a highly complex and precise process, requiring production in a tightly controlled environment. Our current product development efforts focus on developing new PLDs, related development software and hardware, and advanced semiconductor wafer fabrication processes. Our development efforts may impact the timely introduction of competitive new products or product enhancements. Additionally, we may not be successful in developing new products or using and converting established products to new and more advanced process technologies. For example, our current generation product families, the Stratix IV (including E, GX and GT) families, are manufactured on a 40-nanometer process technology, but our next-generation product families will be manufactured on smaller circuit geometries we have not used before. The use of advanced process technology has technological risks and start-up difficulties that can adversely affect research and development spending, yields, product costs, and product delivery timeliness.

Any prolonged disruption to our global communications infrastructure could impair our ability to plan factory activity and respond to customer demand.

Demand for our products is highly volatile, especially at the detailed ordering code level. To achieve short delivery lead times and superior levels of customer service while maintaining low levels of inventory, we constantly adjust our manufacturing subcontractors’ production schedules. We develop and adjust these schedules based on end customer demand as communicated by our distributors and based on our inventory levels, manufacturing cycle times, component lead times, and projected production yields. We combine and distribute all of this information electronically over a complex global communications network. Our ability to estimate demand and to adjust our production schedules is highly dependent on this network; we have no manual back-up. A prolonged disruption or service failure in a portion of this network would impair our ability to plan factory activity and respond to demand.

Product quality problems could lead to reduced revenue, gross margins, and net income.

We produce highly complex hardware and software products that incorporate leading-edge technology. Our pre-shipment testing programs may not detect all defects. Because our product warranties against materials and workmanship defects and non-conformance to our specifications are for varying lengths of time, we have occasionally been required to replace components or refund the purchase price paid due to product defects. If the costs for customer or warranty claims increase significantly compared with our historical experience, our revenue, gross margins, and net income may be adversely affected. For example, if we cannot fix a product defect in a timely manner, we may incur product reengineering expenses, increased inventory costs, or damage to our reputation, any of which could materially affect our revenue, gross margins, and net income.

We may be subject to product liability claims.

Our devices are used in automotive, military, aerospace, avionics, medical equipment, and other systems where system failure could cause damage to property or people. We may receive product liability claims if our devices cause system failures. Based on our historical experience, we believe that the risk of exposure to product liability claims is currently low, but could be higher if both the sales volume in these applications and the frequency of system failures caused by our devices increases.

Our business is subject to the risks of earthquakes and other catastrophic events.

Our corporate headquarters in San Jose, California is located near major earthquake faults. Some of our international facilities and those of our key suppliers, including TSMC which produces nearly all of our silicon wafers, are also located near major earthquake faults. Any catastrophic event, such as an earthquake or other natural disaster, could make it difficult for Altera and our independent subcontractors to meet product design deadlines, maintain our records, pay our suppliers, or manufacture or ship our products.

As we carry only limited insurance coverage, any incurred liability resulting from uncovered claims could adversely affect our financial condition and operating results.

Our insurance policies may not be adequate to fully offset losses from covered incidents, and we do not have coverage for certain losses. We believe our existing insurance coverage is consistent with common practice and economic and availability considerations. If our insurance coverage is inadequate to protect us against unforeseen catastrophic losses, any uncovered losses could adversely affect our financial condition and operating results.

Legislative action in the United States could materially and adversely affect us from a tax perspective.

Legislative action may be taken by the U.S. Congress which, if ultimately enacted, would adversely affect our effective tax rate and/or require us to take further action, at potentially significant expense, to seek to preserve our effective tax rate. In 2009 and 2010, President Obama’s administration announced budgets, which included proposed future tax legislation that could substantially modify the rules governing the U.S. taxation of certain non-U.S. affiliates. These potential changes include, but are not limited to, curbing the deferral of U.S. taxation of certain foreign earnings and limiting the ability to use foreign tax credits. Many details of the proposal remain unknown, and any legislation enacting such modifications would require Congressional support and approval. We cannot predict the outcome of any specific legislative proposals. However, if any of these proposals are enacted into law, they could significantly impact our effective tax rate.

The failure of our intellectual property rights to provide meaningful protection from our competitors could harm our competitive position.

We rely on patent, trademark, trade secret, copyright, and mask work laws to protect our intellectual property, proprietary information, and technology rights. As of December 31, 2009, we owned more than 2,060 U.S. patents and 235 foreign patents, and had more than 1,140 patents applications pending worldwide. Our patents and patent applications may not protect us from our competition, which may be able to circumvent our patents or develop new patentable technologies that displace our products. In addition, other parties, including our former employees or consultants, may try to disclose, obtain, or use our proprietary information or technologies without our authorization despite our best efforts at prevention. If other companies obtain this information or develop similar information or technologies, they may develop products that compete against ours.

Moreover, the laws of certain countries where we sell, manufacture, or distribute products may not protect our products and intellectual property rights to the same extent as U.S. laws. Policing the unauthorized use of our products is difficult and costly and could divert the efforts of our technical and management personnel. Even if we spend significant resources and efforts to protect our intellectual property, we may be unable to prevent misappropriation of our technology. If others use our proprietary rights, it could materially harm our business and require expensive litigation to enforce our intellectual property rights.

Intellectual property infringement claims could adversely affect our ability to manufacture and market our products.

We occasionally receive inquiries about possible patent infringements that may require us to obtain licenses relating to our current or future products. We may be unable to obtain licenses on reasonable terms, or the license agreements may have set durations or may not provide complete protection against infringement claims involving all of our current or future products. If we are sued for patent infringement, the costs and outcome of litigation will be unpredictable and may have a negative impact on our financial results. Intellectual property claims, regardless of their merit, can result in costly litigation and divert the efforts of our technical and management personnel. Legal proceedings are also unpredictable and may be affected by events outside of our control. If our defense against intellectual property infringement claims is unsuccessful, we may be required to pay significant monetary damages or be subject to an injunction against the manufacture and sale of one or more of our product families. Alternatively, we could be required to spend significant resources to develop non-infringing technology, the success of which may be uncertain. Intellectual property litigation may have an adverse effect on our financial position, results of operations, and cash flows.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our headquarters facility currently consists of four interconnected buildings totaling approximately 500,000 square feet, located on approximately 25 acres of land that we own in San Jose, California. Design, research, marketing, administrative, and limited manufacturing activities are performed in this facility. We also have a 465,000-square-foot design, test engineering and administrative facility in Penang, Malaysia, located on land leased on a long-term basis. Also, we lease our domestic and international offices, including our technology centers in the United Kingdom and Toronto, Canada. We believe that our facilities are adequate for our current and foreseeable future needs.

Item 3. Legal Proceedings.

We are named as a party to a lawsuit concerning our historical stock option practices and related accounting and reporting.

In May and July 2006, we were notified that three shareholder derivative lawsuits had been filed in the Superior Court of the State of California, County of Santa Clara, by persons identifying themselves as Altera shareholders and purporting to act on behalf of Altera, naming Altera Corporation as a nominal defendant and naming some of our current and former officers and directors as defendants. On July 12, 2006, one of these derivative actions was voluntarily dismissed by the plaintiff shareholder. The remaining two derivative lawsuits pending in Santa Clara Superior Court were consolidated into a single action on September 5, 2006. Plaintiffs filed a second amended consolidated complaint on December 15, 2006. On January 30, 2007, Altera and the defendants filed a motion to stay this action pending resolution of the federal derivative action (discussed below). On February 11, 2009, one of the remaining derivative plaintiffs voluntarily dismissed his derivative claims and, on March 20, 2009, the other remaining derivative plaintiff filed a third amended complaint. In June 2009, Altera and the defendants demurred to the third amended complaint. After the court issued a tentative ruling in favor of Altera, the parties agreed to stay the action in order to allow plaintiff to serve a demand on Altera’s board of directors. The plaintiff served the demand on November 4, 2009. The board of directors is reviewing the demand and will respond after it has had a reasonable time to consider the allegations in the demand.

Plaintiff asserts claims against the individual defendants for breach of fiduciary duty, waste of corporate assets, unjust enrichment, violations of California Corporation Code section 25402, breach of fiduciary duty for insider selling and misappropriation of information, and deceit. Plaintiff’s claims concern the granting of stock options by Altera between 1994 and 2001 and the alleged filing of false and misleading financial statements between 1994 and 2006. All of these claims are asserted derivatively on behalf of Altera. Plaintiff seeks, among other relief, an indeterminate amount of damages from the individual defendants and a judgment directing Altera to reform its corporate governance practices.

During the months of May, June, and July 2006, four other derivative lawsuits were filed by purported Altera shareholders, on behalf of Altera, in the United States District Court for the Northern District of California. On August 8, 2006, these actions were consolidated, and the plaintiffs filed a consolidated complaint on November 30, 2006. On September 15, 2008, the plaintiffs voluntarily agreed to dismiss the case. On September 18, 2008, the court entered an order dismissing the case.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Our common stock trades on the NASDAQ Global Select Market under the symbol ALTR. As of January 29, 2010, there were approximately 449 stockholders of record. The majority of our shares are held by brokers and other institutions on behalf of approximately 74,944 stockholders as of January 29, 2010.

The closing price of our common stock on January 29, 2010 was $21.32 per share as reported by the NASDAQ Global Select Market. The following table sets forth, for the periods indicated, the high and low closing sale prices for our common stock as reported by the NASDAQ Global Select Market:

		2009								2008
		High				Low				High				Low
First Quarter		$	18.40			$	13.97			$	19.42			$	16.78
Second Quarter		$	18.08			$	15.01			$	23.86			$	18.11
Third Quarter		$	21.01			$	15.41			$	24.14			$	19.01
Fourth Quarter		$	23.14			$	19.61			$	20.68			$	13.40

Our policy has been to reinvest our earnings to fund future growth and to repurchase shares of our common stock. In the second quarter of 2008, we increased our quarterly cash dividend from $0.04 to $0.05 per common share.

On January 25, 2010, our board of directors declared a cash dividend of $0.05 per common share payable on March 1, 2010 to stockholders of record on February 10, 2010. We periodically review our policy regarding share repurchases and cash dividends.

Equity Compensation Plan Information

Information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders under the caption “Equity Compensation Plan Information,” and is incorporated by reference into this report.

Issuer Purchases of Equity Securities

No shares were repurchased in 2009. We repurchase shares under our stock purchase program announced on July 15, 1996, which has no specified expiration. No existing repurchase plans or programs have expired, nor have we decided to terminate any repurchase plans or programs prior to expiration. We plan to continue making purchases under our stock purchase program. See Note 10 - Stockholders’ Equity to our consolidated financial statements for additional information.

During 2008, we entered into agreements pursuant to SEC Rule 10b5-1 under which we authorized third-party brokers to purchase shares on our behalf during our normal blackout periods according to predetermined trading instructions. In addition, we repurchased shares of our common stock under the guidelines of SEC Rule 10b-18.

Company Performance

The following graph shows a comparison, since December 31, 2004, of cumulative total return for Altera, the Standard and Poor’s 500 Index, and the Standard and Poor’s 500 Semiconductors Sub-Industry Index.

COMPARISON OF CUMULATIVE TOTAL RETURN*

Assumes $100 invested in our common stock, Standard & Poor’s 500 Index and Standard and Poor’s 500 Semiconductors Sub-Industry Index on January 3, 2005, the first trading day subsequent to December 31, 2004.

Item 6. Selected Consolidated Financial Data.

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and related notes thereto.

(In thousands, except per share amounts)		2009(1)				2008(1)				2007(1)				2006 (1)				2005
Statements of Income Data
Net sales		$	1,195,413			$	1,367,224			$	1,263,548			$	1,285,535			$	1,123,739
Cost of sales			396,584				449,750				447,969				427,876				365,937
Gross margin			798,829				917,474				815,579				857,659				757,802
Research and development expense			260,208				257,717				261,786				246,104				208,648
Selling, general, and administrative expense			234,074				255,391				272,141				304,582				224,528
Compensation expense (benefit) — deferred compensation plan			11,776				(18,106	)			6,699				5,898				2,459
(Gain) loss on deferred compensation plan securities			(11,776	)			18,106				(6,699	)			(5,898	)			(2,459	)
Interest income and other			(6,083	)			(30,300	)			(57,681	)			(53,609	)			(32,433	)
Interest expense			5,092				15,492				1,705				912				23
Income before income taxes			305,538				419,174				337,628				359,670				357,036
Income tax expense			54,476				59,523				47,605				36,434				78,207
Net income		$	251,062			$	359,651			$	290,023			$	323,236			$	278,829
Net income per share:
Basic		$	0.85			$	1.20			$	0.84			$	0.90			$	0.75
Diluted		$	0.84			$	1.18			$	0.82			$	0.88			$	0.74
Shares used in computing per share amounts
Basic			294,493				300,951				345,382				361,096				370,164
Diluted			297,180				304,604				351,906				367,372				376,302
Cash dividends declared per common share		$	0.20			$	0.19			$	0.12			$	—			$	—
Balance Sheet Data
Working capital		$	1,551,809			$	1,241,139			$	1,044,430			$	1,139,869			$	955,058
Total assets		$	2,293,231			$	1,879,907			$	1,769,918			$	2,233,260			$	1,843,207
Long-term credit facililty		$	500,000			$	500,000			$	250,000			$	—			$	—
Other non-current liabilities		$	217,934	(2)		$	194,008	(2)		$	168,810	(2)		$	13,916			$	13,168
Stockholders’ equity		$	1,085,336			$	799,877			$	861,450			$	1,608,161			$	1,259,588
Book value per share		$	3.66			$	2.73			$	2.74			$	4.46			$	3.50

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

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included in Item 8 and the Risk Factors included in Item 1A of this annual report.

Executive Overview

Company and Market Overview

We are a global semiconductor company, serving over 12,000 customers within the Telecom and Wireless, Industrial Automation, Military and Auto, Networking, Computer and Storage, and Other market segments. The Other market segment includes sub-segments of broadcast, consumer, medical and test. We design, manufacture, and market a variety of products:

•

Programmable logic devices (“PLDs”), which consist of field-programmable gate arrays (“FPGAs”) and complex programmable logic devices (“CPLDs”), are standard semiconductor integrated circuits, or chips, that our customers program to perform desired logic functions in their electronic systems.

•

HardCopy application-specific integrated circuit (“ASIC”) devices transition customer designs from high-density FPGAs to low-cost non-programmable devices for volume production.

•

Pre-defined design building blocks, known as intellectual property (“IP”) cores, can be licensed by customers to easily implement standard functions in their PLD designs.

•

Proprietary development software, which operates on personal computers and engineering workstations, is used by customers to develop, compile, and verify their designs, and then program their designs into our PLDs.

In 2009, sales of PLDs generated 92% of our net sales, with FPGA and CPLD sales comprising approximately 77% and 15% of our net sales, respectively. The remainder of our sales is comprised of our HardCopy devices and configuration devices used in conjunction with our FPGAs, as well as licensing of IP cores and proprietary development tools.

Driving Operational Excellence

Since the PLD market was created in the 1980s, the financial business models of the leading PLD suppliers have generally been favorable when compared to most other semiconductor companies. Fabless strategies, high barriers to entry, and proprietary architectures have helped drive strong financial results for PLD suppliers.

As the semiconductor industry and the PLD market have matured, revenue growth in the PLD segment, while still higher than many other semiconductor segments, has expectedly slowed. We regularly engage in a strategic review of our business to improve operations and financial returns. We are focused on maximizing return on invested capital by pursuing greater efficiencies in all aspects of our operations while seeking balance with our commitment to continued investment in advanced technology for the development of new products. In recent years, we have increased our focus on enhancing our business model to simplify our business processes while also growing PLD market share.

We believe that our early and continued focus on cost reduction and productivity enhancement before the business slowdown related to the global financial crisis during 2008 and 2009 may provide us with some benefits compared to other semiconductor companies. Our ability to maintain investment in the research and development of future products, which has been aided by our early and ongoing cost savings initiatives, is a vital factor for our future earnings growth. In addition, our prior work in analyzing business processes has not only allowed us to effectively identify and implement simplification and cost reduction initiatives, but the concept of “workflow efficiency” is an increasingly valued aspect of our business culture. This work and our evolving culture may be an asset as we navigate our company through the economic downturn.

Market Opportunity

Based on publicly available data and information derived from Gartner Dataquest, we estimate that the PLD market was approximately $3.3 billion in 2009 and the accessible ASIC and ASSP market was approximately $28.0 billion. The total ASIC and ASSP market is estimated to be $76.0 billion; the accessible portion of the ASIC and ASSP market excludes cell phones and certain consumer applications including PC-related equipment, video games and portable media applications. We believe that our greatest opportunity for growth is displacing ASICs and ASSPs.

For our most current designs, PLD process technology is typically two or three process generations more advanced than ASIC and ASSP process technology. As chip manufacturing becomes more advanced, the total cost of chip development increases, reducing the cost advantage of ASICs and ASSPs. As a result, some ASIC and ASSP suppliers choose to use non-leading-edge process technology for new designs to reduce development costs. We believe this has brought us to a “tipping point” with respect to our opportunity to displace ASICs and ASSPs. It is no longer technologically feasible for many ASIC and ASSP suppliers to continue to use old process generations for technically advanced systems, and at the same time it is not economically feasible for them to use new generations of technology for low and mid-range volume applications. The “process technology gap” between PLDs and ASIC and ASSP alternatives will increase over time and, when combined with the traditional PLD advantages of greater flexibility, lower development cost, and faster time-to-market, should drive the accelerated adoption of PLDs in the years ahead. We have seen evidence of the tipping point with the introduction of our Stratix IV FPGA products. An increasing number of ASIC and ASSP opportunities are being displaced by Stratix IV FPGAs and, to date, the Stratix IV family has been the fastest ramping FPGA product in the history of the PLD industry. In the initial fifteen months of customer designs, our Stratix IV products are well ahead of any previous Stratix product generation (at the same point in time) with respect to design opportunity value and design win value. In fact, using the initial 15-month benchmark, the value of Stratix IV FPGA design opportunities has already reached the level that any prior Stratix generation attained in its lifetime.

Leveraging Our Global Structure

We believe that we have opportunities to further expand our position outside of the United States. Our organization and management structure integrates our U.S. and non-U.S. operations and provides our management team with a global perspective on our markets. We believe that this infrastructure provides opportunities to develop and commercialize new products that meet global needs and can be rapidly launched in multiple markets. Our global organizational focus should allow us to continue to grow outside of the United States faster than within the United States.

Competing for Design Wins

We compete with other PLD vendors to displace fixed-chip logic alternatives and for market share within the PLD market. Competition between PLD vendors is most intense in the “design-win” phase of the customer’s design, when customers select products for use in the customer’s electronic system. Because each PLD vendor’s products are proprietary, the cost to switch PLDs after a system has been designed and prototyped is very high. Therefore, a design win can provide the PLD vendor with a profitable revenue stream through the life of the customer’s program.

From the time a design win is secured, it can be two or more years before a customer starts volume production of its system. Typically, the customer selects the PLD vendor relatively early in a customer’s design process, but it may take several years to complete system design, build prototypes, sample the marketplace for customer acceptance, make modifications, and manufacture in volume. Thus, there is a delay between developing a competitive advantage and experiencing a shift in the PLD market, meaning that market share is a lagging indicator of relative competitive strength. Because it is extremely difficult to forecast the success and timing of customer programs, and because the end markets are highly fragmented (we have over 12,000 PLD customers), it is difficult even for PLD vendors to gauge their own competitive strength in winning designs at a particular point in time.

Developing Competitive Products

A PLD vendor’s ability to secure design wins and to maintain or increase market share is highly dependent on the cost and quality of its products, particularly the effectiveness and reliability of its proprietary development software. Development software, working in tandem with device logic architecture and features, creates the functionality desired by the customer. As customers gain familiarity with a particular PLD vendor’s software, they often want to use that same software again in another design, giving that PLD vendor a potential advantage as the next system is designed. We develop our software in parallel with our devices, and there are schedule and integration risks between the two processes. If we fail to create adequate software to support our new devices as they are introduced, we weaken our competitive position, which can have long-lasting effects if customers switch to competing solutions and become less familiar and less skilled with our software.

We focus the majority of our research and development resources on next-generation FPGAs because increasing our FPGA market share is important to our long-term growth and profitability. Due to the higher integration density and lower cost per function, the FPGA market has outgrown the CPLD market in recent years, and industry participants and observers believe this trend will continue. Since the initial introduction of our Stratix and Cyclone FPGA families in 2002, we have introduced several more FPGA families in the Stratix, Cyclone and Arria series of products. As a result of these product introductions, we estimate, based on publicly available data and with information derived from Gartner Dataquest, that our market share has increased as follows:

Market Share		2009				2004
PLD			36	%			33	%
FPGA			34	%			30	%
CPLD			40	%			38	%

Complementing our Stratix FPGAs is our HardCopy family of ASICs. We first shipped HardCopy devices in 2001, offering customers low-cost, non-programmable production devices that use our highest density FPGAs as an integrated development vehicle. HardCopy devices are targeted specifically at those applications and customers that have used PLDs for prototyping and development and traditional cell-based ASICs from other vendors for their volume production needs. In 2009, our HardCopy ASIC sales were less than 5% of net sales, and we believe the HardCopy family may increase as a percentage of net sales over the long term.

The availability of a HardCopy conversion path for high-density FPGA designs is a competitive advantage. Since 2001, we have introduced newer versions of the HardCopy family to support newer generations of FPGAs. Our latest generation of HardCopy devices offers transceiver functionality for the first time, thereby increasing the appeal of a HardCopy-based solution. Our approach is unique in the industry, but may underperform our expectations. As we develop new generations of FPGAs, we may create parallel HardCopy devices, which would entail ongoing engineering effort and expense.

We have improved our CPLD offering by introducing the MAX II family in 2004 and the MAX IIZ family in 2007. MAX II CPLDs offer pricing and features that we believe are competitively attractive, with cost, performance, power consumption, and density that are superior to our previous offerings.

An FPGA family typically reaches peak sales four to five years after initial product shipment. As a result, the Stratix II and Cyclone II families we introduced in 2004, which comprised approximately 27% of our net sales in 2009, may be at or near peak sales. We believe that the products we introduced from 2006 to 2009 have yet to reach peak sales, but will eventually experience sales declines. To improve or even sustain our growth rate, we must successfully introduce successor generations of devices. The degree to which other PLD vendors improve the competitiveness and execution of their products may impair our ability to improve our growth rate.

Within the next several quarters, we plan to ship newer FPGA families using more advanced production techniques that will further improve product performance and lower cost. Our foundry partner, Taiwan Semiconductor Manufacturing Company (“TSMC”), will manufacture these die using production processes that are new to the industry. Given the extreme complexity of semiconductor fabrication, TSMC may encounter difficulties that could delay our product launch or limit supply so that we would be unable to meet customer commitments. We may discover manufacturing errors after we begin shipping, which would harm customer relations and cause us to incur additional unforeseen costs. Simultaneous introduction of new PLD architectures and ramp of new technology processes are inherently risky. Diagnosing failures, identifying root causes, and implementing corrective actions in a production wafer fabrication facility are expensive and time-consuming. We may not successfully commercialize our new products, or our new products may not enable us to maintain or increase market share. Some of our competitive offerings may be offered later than the competition and it is possible that our competitive offerings will be less effective, thus weakening our market share.

It is also possible that our primary competitor may have secured design wins that, when they enter production, will reverse some of our recent market share gains. Our main competitor is larger in size with more sales, and research and development resources, and we may not enjoy the same success that we saw with previous FPGA generations.

Customer Intimacy and Cost-Optimized Product Strategy

We rely on customer interaction to gain product development insights, and we make development decisions years before a product begins to ship. We have been able to gain market share on the strength of our product definition methodology and the successful rollout of new products. However, because our products are complex, we assume considerable risk with every new product introduction. If we misinterpret customer requirements or demand changes, our products may become uncompetitive. Our competitors are knowledgeable and skilled and, in some cases, larger than we are. Since it is difficult to gauge competitive success until the design-win phase is well underway, it may be too late to make changes to a generation of products if those products are uncompetitive. If a product generation is uncompetitive and we lose market share, regaining customers is very challenging.

Since 2002 and following the semiconductor industry correction early in this decade, our strategy to displace ASICs and ASSPs has included the development of cost-optimized products. These products have contributed to growth across all of our market segments and are increasingly being used by our customers in production volumes, not just as prototyping or low-volume solutions. Production volumes vary by industry, but customers that buy our products in production volumes expect lower unit pricing. Consequently, our business today is subject to a wider gross margin range than the gross margin range associated with a less diverse, largely prototyping business. Depending on the market segment mix, our gross margins can vary more quarter to quarter than in the past. Since the majority of our business books and ships in the same quarter, forecasting our gross margins has also become more difficult. While we believe that growth will occur across all of our market segments, our gross margins could move up or down if the mix shifts between smaller, higher-margin segments versus larger, lower-margin segments.

Critical Accounting Estimates

The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires our management to make certain judgments and estimates that affect the amounts reported in our consolidated financial statements. Our management believes that we consistently apply these judgments and estimates and the consolidated financial statements fairly represent all periods presented. However, any differences between these judgments and estimates and actual results could have a material impact on our consolidated statements of income and financial condition. Critical accounting estimates, as defined by the Securities and Exchange Commission (“SEC”), are those that are most important to the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition; (2) valuation of inventories; and (3) income taxes.

Revenue Recognition

We sell more than 80% of our products to distributors for subsequent resale to OEMs or their subcontract manufacturers. In most cases, sales to distributors are made under agreements allowing for subsequent price adjustments and returns. We defer recognition of revenue and costs until the products are resold by the distributor. Our revenue reporting is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provide us with periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. We maintain system controls to validate distributor data and to verify that reported data is accurate. At times, we must use estimates and apply judgments to reconcile distributors’ reported inventories to their activities. This reconciliation process requires us to estimate the amount of in-transit shipments (net of in-transit returns) to our distributors. In-transit days can significantly vary among geographies and individual distributors. We also apply judgment when estimating the total value of price concessions earned by our distributors but not claimed by the end of the reporting period. This is because there is a time lag between the price concessions earned and claimed by the distributors for any underlying resale of products. Any error in our judgment could lead to inaccurate reporting of our revenues, deferred income and allowances on sales to distributors, and net income.

Valuation of Inventories

Inventories are recorded at the lower of cost determined on a first-in-first-out basis (approximated by standard cost) or market. We routinely compare our inventory against projected demand and record provisions for excess and obsolete inventories as necessary. We establish provisions for inventory for technological obsolescence or if inventory levels on hand are in excess of projected customer demand. The recording of such provisions results in a write-down of inventory to net realizable value and a charge to cost of goods sold. Historically, it has been difficult to forecast customer demand. Actual demand may materially differ from our projected demand, and this difference could have a material impact on our gross margin and inventory balances based on additional provisions for excess or obsolete inventory or a benefit from inventory previously written down. Many of the orders we receive from our customers and distributors request delivery of product on relatively short notice and with lead times less than our manufacturing cycle time. In order to provide competitive delivery times to our customers, we build and stock a certain amount of inventory in anticipation of customer demand that may not materialize. Moreover, as is common in the semiconductor industry, we generally allow customers to cancel orders with minimal advance notice. Thus, even product built to satisfy specific customer orders may not ultimately be required to fulfill customer demand.

Income Taxes

We record a tax provision for the anticipated tax consequences of the reported results of operations. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax carryforwards. We record valuation allowances, when necessary, to reduce our deferred tax assets to the amount that management estimates is more likely than not to be realized. If, in the future, we determine that we are not likely to realize all or part of our net deferred tax assets, an adjustment to the deferred tax asset valuation allowance would be recorded as a charge to earnings in the period such determination is made.

We measure and recognize uncertain tax positions in accordance with U.S. GAAP, whereby we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the merits of the position.

The calculation of our tax liabilities involves the inherent uncertainty associated with the application of U.S. GAAP and complex tax laws. We are subject to examination by various taxing authorities. We believe we have adequately provided in our financial statements for additional taxes that we estimate may be required to be paid as a result of such examinations. If the payment ultimately proves to be unnecessary, the reversal of the tax liabilities would result in tax benefits being recognized in the period we determine the liabilities are no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense will result. See Note 12 — Income Taxes to our consolidated financial statements for additional information.

Results of Operations

On September 23, 2008, our board of directors approved a change in our fiscal year end from the Friday nearest December 31 to December 31 of each year. This change was effective beginning with our fiscal year 2008 and had no impact on our consolidated financial statements for any previously reported period. As a result of the change in our fiscal year end, our fiscal years ended December 31, 2008 (2008) and December 28, 2007 (2007) contain 369 days and 364 days, respectively. Our fiscal year ended December 31, 2009 (2009) contains 365 days.

Results of operations expressed as a percentage of net sales were as follows:

		2009				2008				2007
Net sales			100.0	%			100.0	%			100.0	%
Cost of sales			33.2	%			32.9	%			35.5	%
Gross margin			66.8	%			67.1	%			64.5	%
Research and development expense			21.8	%			18.8	%			20.7	%
Selling, general, and administrative expense			19.6	%			18.7	%			21.5	%
Compensation expense (benefit) — deferred compensation plan			1.0	%			-1.3	%			1.0	%
(Gain) loss on deferred compensation plan securities			-1.0	%			1.3	%			-1.0	%
Interest income and other			-0.5	%			-2.2	%			-4.6	%
Interest expense			0.4	%			1.0	%			—
Income tax expense			4.6	%			4.4	%			3.8	%
Net income			21.0	%			26.3	%			23.0	%

Sales Overview

Net sales were $1.20 billion in 2009, $1.37 billion in 2008 and $1.26 billion in 2007. Net sales decreased by 13% in 2009 from 2008, and increased by 8% in 2008 from 2007. The decrease in Net sales in 2009 from 2008 was due to a general decline in demand associated with the economic conditions experienced in the first half of 2009, offset by the recovery we began to experience in the third and fourth quarters. 2008 and 2007 sales trends were characterized by strong double-digit growth in New Products; PLD expansion into new applications enabled by advances in technology and performance; increasing programmable content in electronic systems and displacement of alternative products; and periods of rising demand in emerging markets. These favorable trends were offset by varying degrees of declines in the Mainstream and Mature product categories in both 2008 and 2007.

Huawei Technologies Co., Ltd. (“Huawei”), an OEM, individually accounted for 11% of net sales in 2009. No other individual OEM accounted for more than 10% of net sales in 2009. No single end customer accounted for more than 10% of net sales in 2008 or 2007. See also Note 3 — Accounts Receivable, Net and Significant Customers to our consolidated financial statements.

Sales by Product Category

We classify our products into three categories: New, Mainstream, and Mature and Other Products. The composition of each product category is as follows:

•

New Products include the Stratix II (and GX), Stratix III, Stratix IV (including E, GX and GT), Arria, Arria II GX, Cyclone II, Cyclone III (including LS), MAX II and HardCopy devices;

•

Mainstream Products include the Stratix (and GX), Cyclone, and MAX 3000A devices; and

•

Mature and Other Products include the Classic™, MAX 7000, MAX 7000A, MAX 7000B, MAX 7000S, MAX 9000, FLEX® series, APEX™ series, Mercury™, Excalibur™, configuration and other devices, intellectual property cores, and software and other tools.

The product categories above have been assigned based upon the approximate relative life cycle stages of our products. The product categories’ compositions are adjusted approximately every two to three years. New Products are primarily comprised of our most advanced products. Customers typically select these products for their latest generation of electronic systems. Demand is generally driven by prototyping and production needs. Mainstream Products are somewhat older products that are generally no longer design-win vehicles. Demand for these products is driven by customers’ later stage production-based needs. Mature Products are yet older products with demand generated by the oldest customer systems still in production. This category also includes sales of software, intellectual property, and other miscellaneous devices.

Net Sales by product category were as follows:

														Annual Growth Rate
		2009				2008				2007				2009				2008
New			58	%			44	%			32	%			16	%			51	%
Mainstream			21	%			26	%			30	%			-29	%			-7	%
Mature and Other			21	%			30	%			38	%			-40	%			-15	%
Net Sales			100	%			100	%			100	%			-13	%			8	%

Sales by Market Segment

During 2009, we modified market segment classifications to more closely align with end customer products and product requirements. In addition, we refined our methodology for assigning net sales to market segments to better align distributor price discounts with end customer markets. Accordingly, prior year data has been adjusted to conform to the current year presentation. The following market segment data is derived from data that is provided to us by our distributors and end customers. With a broad base of customers, who in some cases manufacture end products spanning multiple market segments, the assignment of net sales to a market segment requires the use of estimates, judgment, and extrapolation. As such, actual results may differ from those reported.

Net Sales by market segment were as follows:

														Annual Growth Rate
		2009				2008				2007				2009				2008
Telecom & Wireless			44	%			36	%			34	%			4	%			16	%
Industrial Automation, Military & Auto			22	%			24	%			22	%			-18	%			16	%
Networking, Computer & Storage			14	%			16	%			17	%			-20	%			1	%
Other			20	%			24	%			27	%			-28	%			-3	%
Net Sales			100	%			100	%			100	%			-13	%			8	%

In 2009, net sales in the Telecom & Wireless segment advanced versus 2008, primarily as a result of strong sales to wireless equipment customers, including those selling second and third generation equipment in Asia. Net sales to end customers outside the Telecom & Wireless segment declined for 2009 versus 2008, primarily as a result of lower demand resulting from the 2009 worldwide economic downturn.

Sales in the Telecom and Wireless, and Industrial Automation, Military and Auto segments, each advanced by 16% in 2008 compared to 2007, primarily as a result of strong traction in ASIC and ASSP replacement. Additionally, 2007 sales in these market segments were lower due to wide-spread customer inventory reduction programs. Sales in the Other segment declined in 2008 compared to 2007, primarily due to customer program transitions and a slowdown in the world-wide economy.

Sales of FPGAs and CPLDs

Our PLDs consist of field-programmable gate arrays, or FPGAs, and complex programmable logic devices, or CPLDs. FPGAs consist of our Stratix, Cyclone, Arria, APEX, FLEX, and ACEX series, as well as our Excalibur and Mercury families. CPLDs consist of our MAX, MAX II, and Classic families. Our other products consist of HardCopy, HardCopy II and other masked programmed logic devices, configuration devices, software and other tools and IP cores (collectively, “Other Products”).

Net sales of FPGAs and CPLDs, and Other Products were as follows:

														Annual Growth Rate
		2009				2008				2007				2009				2008
FPGA			77	%			74	%			71	%			-9	%			13	%
CPLD			15	%			18	%			19	%			-27	%			2	%
Other Products			8	%			8	%			10	%			-18	%			-11	%
Net Sales			100	%			100	%			100	%			-13	%			8	%

Sales by Geography

The following table is based on the geographic location of the original equipment manufacturers or the distributors who purchased our products. The geographic location of distributors may be different from the geographic location of the ultimate end users.

Net Sales by geography were as follows:

														Annual Growth Rate
		2009				2008				2007				2009				2008
North America			20	%			23	%			22	%			-23	%			13	%
Asia Pacific			40	%			35	%			34	%			1	%			12	%
Europe			22	%			23	%			24	%			-18	%			3	%
Japan			18	%			19	%			20	%			-18	%			4	%
Net Sales			100	%			100	%			100	%			-13	%			8	%

Price Concessions and Product Returns from Distributors

We sell the majority of our products to distributors worldwide at a list price. However, distributors resell our products to end customers at a very broad range of individually negotiated prices based on a variety of factors, including customer, product, quantity, geography and competitive differentiation. The majority of our distributors’ sales to their customers are priced at a discount from our list price. Under these circumstances, we remit back to the distributor a portion of its original purchase price after the resale transaction is completed and we validate the distributor’s resale information, including end customer, device, quantity and price, against the distributor price concession that we have approved in advance. To receive price concessions, distributors must submit the price concession claims to us for approval within 60 days of the resale of the product to an end customer. Primarily because of the uncertainty related to the final price, we defer revenue recognition on sales to distributors until our products are sold from the distributor to the end customer, which is when our price is fixed or determinable. Accordingly, these pricing uncertainties impact our results of operations, liquidity and capital resources. Total price concessions earned by distributors were $3.5 billion and $3.9 billion for 2009 and 2008, respectively. See Note 7 — Deferred Income and Allowances on Sales to Distributors to our consolidated financial statements. Average aggregate price concessions typically range from 65% to 80% of our list price on an annual basis, depending upon the composition of our sales, volume and factors associated with timing of shipments to distributors or payment of price concessions.

Our distributors have certain rights under our contracts to return defective, overstocked, obsolete and discontinued products. Our stock rotation program generally allows distributors to return unsold product to Altera, subject to certain contract limits, based on a percentage of sales occurring over various periods prior to the stock rotation. Products resold by the distributor to end customers are no longer eligible for return, unless specifically authorized by us. In addition, we generally warrant our products against defects in material, workmanship and non-conformance to our specifications. Returns from distributors totaled $182.4 million and $129.0 million for 2009 and 2008, respectively. See Note 7 — Deferred Income and Allowances on Sales to Distributors to our consolidated financial statements.

Gross Margin

		2009				2008				2007
Gross Margin Percentage			66.8	%			67.1	%			64.5	%

Gross margin rates are heavily influenced by both market segment mix and the timing of material cost improvements. Gross margin percentages decreased in 2009 compared to 2008 primarily as a result of a disproportionate decrease in revenue from our smaller, higher margin customer base. We also experienced a more pronounced decline in our highest margin market segments. While these variables will continue to fluctuate on a quarterly basis, we continue to target a 65% gross margin over the long term. We believe the 65% gross margin target affords us the right mix of growth opportunities across all served markets.

Gross margin percentages increased in 2008 compared to 2007 primarily as a result of material cost improvements, as well as favorable market segment mix.

Stock-based compensation expense included in Cost of sales did not have a significant impact on our gross margin in 2009, 2008 or 2007.

Research and Development Expense

Research and development expense includes costs for compensation and benefits (including stock-based compensation), development masks, prototype wafers, and depreciation and amortization. These expenditures are for the design of new PLD and ASIC families, the development of process technologies, new package technology, software to support new products and design environments, and IP cores.

We will continue to make significant investments in the development of new products and focus our efforts on the development of new programmable logic devices that use advanced semiconductor wafer fabrication processes, as well as related development software. We are currently investing in the development of future silicon products, as well as our Quartus II software, our library of IP cores, and other future products.

														2009 vs.				2008 vs.
($ in millions)		2009				2008				2007				2008 Change				2007 Change
Research and Development Expense		$	260.2			$	257.7			$	261.8				1	%			-2	%
Percentage of Net Sales			21.8	%			18.8	%			20.7	%

Research and development expense for 2009 increased by $2.5 million, or 1%, when compared with 2008. The increase was primarily attributable to a $21.4 million increase in spending on masks and wafers as a result of tape-outs of various new products in 2009, and a $4.2 million increase in stock-based compensation expense resulting from higher awards in 2009 and a change in estimate of our expected forfeiture rate. These increases were partially offset by a $2.6 million decrease in labor costs due to $6.7 million of cost savings from reduced headcount associated with the restructuring activities in 2009, partially offset by $4.1 million of restructuring charges, a gain of $3.6 million from the substantive termination of our retiree medical plan, a $5.8 million decrease in variable compensation expense based on lower 2009 operating results, a $3.3 million decrease in spending on prototype and package tooling and a combined $6.5 million decrease in rental, travel and consulting expenses. See Note 11 — Stock-Based Compensation to our consolidated financial statements for more information on the change in our expected forfeiture rate, Note 14 — Employee Benefit Plans for a detailed discussion of the substantive termination of our retiree medical plan and Note 16 — Restructuring Charges for further information about our restructuring activities during 2009.

Research and development expense decreased $4.1 million in 2008 compared to 2007. This decrease was attributable to lower spending in 2008 on new product development masks of $21.4 million due mainly to the product launch of the Stratix III and Cyclone III device families in 2007. The decrease in spending on development masks was partially offset by an increase in compensation and benefits of $11.9 million due to variable compensation expense associated with 2008 operating results and an increase in stock-based compensation expense of $2.5 million.

Selling, General, and Administrative Expense

Selling, general, and administrative expense primarily includes compensation and benefits (including stock-based compensation) related to sales, marketing, and administrative employees, commissions and incentives, depreciation, legal, advertising, facilities, and travel expenses.

														2009 vs.				2008 vs.
($ in millions)		2009				2008				2007				2008 Change				2007 Change
Selling, General and Administrative Expense		$	234.1			$	255.4			$	272.1				-8	%			-6	%
Percentage of Net Sales			19.6	%			18.7	%			21.5	%

Selling, general, and administrative expense for 2009 decreased by $21.3 million, or 8%, when compared with 2008. The decrease was primarily due to a gain of $2.6 million from the substantive termination of our retiree medical plan, a $4.0 million decrease in variable compensation expense based on lower 2009 operating results, a benefit of $2.3 million from a change in estimate of our allowance for doubtful accounts, an $11.1 million decrease in commission expenses due to lower sales for 2009 and a combined $9.3 million decrease in maintenance, travel, advertising, depreciation and legal expenses due to our ongoing efforts to improve operating efficiency. These decreases were partially offset by an $11.1 million increase in stock-based compensation expense resulting from higher awards in 2009 and a change in estimate of our expected forfeiture rate. Labor costs for 2009 were relatively flat compared with 2008. The $5.7 million of restructuring charges incurred in 2009 were offset by the savings in labor costs as a result of the restructuring activities. See Note 3 — Accounts Receivable, Net and Significant Customers to our consolidated financial statements for a detailed discussion of the change in estimate of our allowance for doubtful accounts, Note 11 — Stock-Based Compensation for more information on the change in our expected forfeiture rate, Note 14 — Employee Benefit Plans for a detailed discussion of the substantive termination of our retiree medical plan and Note 16 — Restructuring Charges for further information about our restructuring activities during 2009.

Selling, general, and administrative expense decreased by $16.7 million in 2008 compared to 2007. The decrease was attributable to our continued efforts to increase efficiency and reduce cost in legal and consulting services, stock-based compensation, compensation and benefits, and other areas. Consulting costs decreased by $6.3 million due primarily to the absence in 2008 of costs incurred in 2007 related to implementation of our enterprise resource planning system. Stock-based compensation decreased by $4.2 million in 2008 compared to 2007. Compensation and benefits expenses decreased by $2.0 million in 2008 compared to 2007. The decrease in compensation and benefits is the net result of a decrease of $9.4 million, resulting from our cost-reduction efforts described above, substantially offset by an increase of $7.4 million in variable compensation expense associated with 2008 operating results. The absence in 2008 of $3.5 million of restructuring charges recognized in 2007 was substantially offset by a $2.6 million increase in non-recurring charges related to the elimination of certain external sales representatives and employee termination costs.

Deferred Compensation Plan

We allow our U.S.-based officers and director-level employees to defer a portion of their compensation under the Altera Corporation Non-Qualified Deferred Compensation Plan (“NQDC Plan”). Since the inception of the NQDC Plan, we have not made any contributions to the NQDC Plan and we have no commitments to do so in the future. There are no NQDC Plan provisions that provide for any guarantees or minimum return on investments. Investment income or loss earned by the NQDC Plan is recorded as (Gain) loss on deferred compensation plan securities in our consolidated statements of income. We reported losses (gains) on NQDC Plan assets of $(11.8) million, $18.1 million and $(6.7) million in 2009, 2008 and 2007, respectively. These amounts resulted from the overall market performance of the underlying securities. The investment loss (gain) also represents a decrease (increase) in the future payout to employees and is recorded as Compensation expense (benefit) — deferred compensation plan in our consolidated statements of income. The compensation expense (benefit) associated with our deferred compensation plan obligations is offset by losses (gains) from related securities. The net effect of the investment income or loss and related compensation expense or benefit has no impact on our income before income taxes, net income, or cash balances. See Note 14 — Employee Benefits Plans to our consolidated financial statements for a detailed discussion of our NQDC Plan.

Interest Income and Other

Interest income and other consists mainly of interest income generated from investments in high-quality fixed income securities. The year-over-year decrease in Interest income and other was primarily due to a decrease in interest income as a result of lower returns on our money market funds, partially offset by the effect of an increase in invested balances.

Interest Expense

The decrease of $10.4 million in Interest expense from 2008 to 2009 was due primarily to the decrease in 2009 of the LIBOR rate, which represents the principal basis of our interest rate on the outstanding borrowings under our long term credit facility.

The increase of $13.8 million in Interest expense from 2007 to 2008 was due primarily to the increase in weighted-average outstanding borrowings under our long term credit facility, partially offset by changes in the LIBOR rate. See Note 15 — Long-term Credit Facility to our consolidated financial statements.

Income Tax Expense

Our effective tax rate reflects the impact of significant amounts of our earnings being taxed in foreign jurisdictions at rates substantially below the U.S. statutory rate. Our effective tax rates were 17.8% for 2009, 14.2% for 2008 and 14.0% for 2007. The significant net increase in our effective tax rate in 2009 was primarily due to the impact of two discrete income tax expense charges. First, on May 27, 2009, the Ninth Circuit Court of Appeals issued its ruling in the case of Xilinx, Inc. v. Commissioner (“Xilinx Case”), holding that stock-based compensation was required to be included in certain transfer pricing arrangements between a U.S. company and its foreign subsidiary. As a result of the ruling in the Xilinx Case, we recognized a discrete income tax expense charge of $11.5 million during 2009. On January 13, 2010, the Court withdrew its prior opinion in the Xilinx Case. At this point, further actions by the Court remain unknown and there has been no conclusive action with respect to the ultimate treatment of stock based compensation in transfer pricing arrangements between a U.S. company and its foreign subsidiary. As such, no adjustments to our income tax expense have been made. Secondly, on February 20, 2009, California enacted changes in tax laws that are expected to have a beneficial impact on our effective tax rate beginning in 2011. As a result, we revalued our state deferred tax assets that are expected to reverse after the effective date of the change and recognized discrete income tax expense charges of $3.7 million during 2009. These adjustments were partially offset by proportionately higher earnings in foreign jurisdictions taxed at rates below the U.S. statutory tax rate. See Note 12 — Income Taxes to our consolidated financial statements for further information.

Restructuring Charges

During 2009, we announced a net reduction of approximately 120 positions. We incurred restructuring-related charges of approximately $10.0 million in 2009. The charges were comprised of employee severance costs of approximately $7.6 million, charges related to the termination of certain external sales representatives of approximately $2.3 million and operating lease impairments of approximately $0.1 million. As a result of the workforce reduction, we expect to achieve annual net cost savings of approximately $20.0 million.

No significant restructuring activities were initiated in 2008.

In 2007, we announced a restructuring of our operations in order to lower our overall cost structure and enhance near and long term profitability of the company. The restructuring plan included the elimination of 67 jobs and the consolidation of excess facilities resulting in the restructuring of our office leases in San Diego and Santa Cruz, California; Ottawa, Canada; and Hong Kong. Annual cost savings from the 2007 restructuring action approximate $10.0 million.

The restructuring charges are included in our consolidated statements of income as follows:

(In thousands)		2009				2008				2007
Cost of sales		$	137			$	—			$	—
Research and development expense			4,104				—				1,767
Selling, general, and administrative expense			5,728				—				3,472
		$	9,969			$	—			$	5,239

We anticipate that the remaining restructuring obligations of $1.1 million as of December 31, 2009 will be substantially paid prior to December 31, 2010. See Note 16 — Restructuring Charges to our consolidated financial statements for additional information.

Financial Condition, Liquidity, Credit Facility and Capital Resources

Overview

We derive our liquidity and capital resources primarily from our cash flows from operations. We have a $750 million unsecured revolving credit facility (the “Facility”), which has been used primarily to fund common stock repurchases and to realign our capital structure. As of December 31, 2009, we have borrowed $500 million under the Facility. The remaining capacity of $250 million available under the Facility also represents a source of liquidity. The terms of the Facility require compliance with certain financial and non-financial covenants. Financial covenants require us to maintain certain financial ratios related to interest coverage and financial leverage. As of December 31, 2009, we were in compliance with all such covenants. See Note 15 — Long-term Credit Facility to our consolidated financial statements for further discussion of the Facility.

We use cash from operations and available amounts under the Facility for repurchases of our common stock, cash dividends, and capital expenditures. Based on past performance and current expectations, we believe our current available sources of funds including cash, cash equivalents, and the Facility, plus anticipated cash generated from operations, will be adequate to finance our operations, stock repurchases, cash dividends and capital expenditures for at least the next year.

Our cash and cash equivalents balance increased by $329.9 million during the year ended December 31, 2009. The change in cash and cash equivalents for 2009, 2008 and 2007 was as follows:

(In millions)		2009				2008				2007
Net cash provided by operating activities		$	372.7			$	449.3			$	271.6
Net cash (used in) provided by investing activities			(13.9	)			100.5				721.2
Net cash used in financing activities			(28.9	)			(223.1	)			(841.1	)
Net increase in cash and cash equivalents		$	329.9			$	326.6			$	151.7

Total cash and cash equivalents accounted for 67% and 65% of total assets at December 31, 2009 and 2008, respectively.

Operating Activities

In 2009, our operating activities provided $372.7 million in cash, primarily attributable to net income of $251.1 million, adjusted for non-cash stock-based compensation expense of $59.8 million (net of related tax effects), depreciation and amortization of $29.0 million, deferred income tax benefit of $5.9 million and a non-cash gain on the substantive termination of our retiree medical plan of $6.5 million. Significant changes in working capital accounts (excluding cash and cash equivalents) included a $136.1 million increase in Accounts receivable, net, a $7.9 million increase in Accounts payable and other liabilities, a $77.6 million increase in Deferred income and allowances on sales to distributors, a $14.9 million decrease in Inventories, a $38.9 million decrease in Other assets and a $39.9 million increase in Income tax payable.

Our sales to distributors are primarily made under agreements allowing for subsequent price adjustments and returns, and we defer recognition of revenue until the products are resold by the distributor. At the time of shipment to distributors, we (1) record a trade receivable at the list selling price since there is a legally enforceable obligation from the distributor to pay us currently for product delivered, (2) relieve inventory for the carrying value of goods shipped since legal title has passed to the distributor, and (3) record deferred revenue and deferred cost of sales in Deferred income and allowances on sales to distributors in the liability section of our condensed consolidated balance sheets. Accordingly, increases in Accounts receivable, net associated with higher billings are generally offset by corresponding increases in Deferred income and allowances on sales to distributors. However, timing differences between gross billings, advances to distributors, discounts earned, collections, revenue recognition and changes in the mix of sales to OEMs and distributors may result in a temporary interruption to the normal relationship between these two accounts.

The $136.1 million increase in Accounts receivable, net, principally related to increased gross billings to distributors and OEMs associated with an upward trend in demand for our products in December 2009 compared with December 2008. The $77.6 million increase in Deferred income and allowances on sales to distributors was not as significant an increase as was experienced in Accounts receivable, net, from the increased gross billings, due to the timing factors as discussed above. As previously mentioned, gross billings were significantly higher in December 2009 than in December 2008, but were outpaced by sell-through to end customers when comparing the same periods, thus lessening the impact of the increase in gross billings on Deferred income and allowances on sales to distributors. Another contributing factor was a significant decrease in advances to distributors. Repayments of advances by distributors primarily resulted from changes in distributor working capital requirements and changes in the terms of certain distributor funding arrangements. See Note 7 — Deferred Income and Allowances on Sales to Distributors to our consolidated financial statements.

The $14.9 million decrease in Inventories resulted from proactive management of inventory levels, primarily in work-in-process inventory, and the effects of increased sales out volume at the end of 2009. The $38.9 million decrease in Other assets is primarily due to $30.3 million in repayments of advances from distributors made in previous periods to, in substance, finance distributors’ accounts receivable and inventory. The repayment of advances resulted from changes in distributor working capital requirements and changes in the terms of certain distributor funding arrangements. See Note 7 — Deferred Income and Allowances on Sales to Distributors to our consolidated financial statements for a detailed discussion. The $39.9 million increase in Income tax payable is primarily due to taxes accrued on our income before income taxes and the recognition of a discrete income tax expense charge of $11.5 million as a result of the ruling in the Xilinx Case. See Note 12 — Income Taxes to our consolidated financial statements for a detailed discussion.

In 2008 our operating activities provided $449.3 million in cash, primarily attributable to net income of $359.7 million, adjusted for non-cash stock-based compensation expense of $43.2 million (net of related tax effects), and depreciation and amortization of $30.0 million. Significant changes in working capital accounts (excluding cash) included a $115.5 million decrease in Accounts receivable, net, substantially offset by a $74.8 million decrease in Deferred income and allowances on sales to distributors, a $10.5 million increase in Inventories, and a $26.2 million increase in Other assets, net.

Investing Activities

Cash used for investing activities in 2009 primarily consisted of net purchases of deferred compensation plan securities of $2.1 million and purchases of property and equipment of $11.1 million. We completed construction of a new office building in Penang, Malaysia and incurred total capital expenditures of $28.5 million, which were principally incurred in 2008.

Cash provided by investing activities in 2008 primarily consisted of proceeds from the maturities and sales of available-for-sale investments of $131.0 million and sale of land for $9.1 million, partially offset by purchases of property and equipment of $40.3 million. 2008 capital expenditures primarily reflect $22.9 million of non-recurring expenditures associated with the construction of a new office building in Penang, Malaysia. As of December 31, 2008, we no longer held any available-for-sale investments.

Financing Activities

Cash used for financing activities in 2009 primarily consisted of cash dividend payments of $58.9 million, principal payments on capital lease obligations of $2.4 million and minimum statutory withholding for vested restricted stock units of $10.7 million, partially offset by proceeds of $42.1 million from the issuance of common stock to employees through our employee stock plans.

Cash used for financing activities in 2008 primarily consisted of repurchases of our common stock of $473.2 million, cash dividend payments of $57.1 million, principal payments on capital lease obligations of $8.2 million and minimum statutory withholding for vested restricted stock units of $8.2 million, partially offset by proceeds from the Facility of $250.0 million and $67.1 million from the issuance of common stock to employees through our stock option and employee stock purchase plans.

Our dividend policy could be impacted in the future by, among other items, future changes in our cash flows from operations and our capital spending needs such as those relating to research and development, investments and acquisitions, common stock repurchases, and other strategic investments.

Contractual Obligations

The following table summarizes our significant contractual cash obligations as of December 31, 2009, and the effect that such obligations are expected to have on liquidity and cash flows in future periods:

						Payments Due by Period
						Less than												More than
(In millions)		Total				1 Year				1-3 Years				3-5 Years				5 Years
Operating lease obligations (1)		$	22.1			$	8.2			$	9.2			$	4.4			$	0.3
Capital lease obligations			2.9				2.9
Wafer purchase obligations (2)			158.3				158.3
Long-term credit facility			500.0								500.0
Interest on long-term credit facility (3)			11.2				4.2				7.0
Obligations under service award program (4)			8.2				2.9				0.6				1.2				3.5
Total contractual cash obligations		$	702.7			$	176.5			$	516.8			$	5.6			$	3.8

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits as of December 31, 2009, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $211.0 million of unrecognized tax benefits classified as Income tax payable- non-current in the accompanying consolidated balance sheet as of December 31, 2009, have been excluded from the contractual obligations table above. See Note 12 — Income Taxes to our consolidated financial statements for a discussion of income taxes.

In addition to the above obligations, in the normal course of business, we enter into a variety of agreements and financial commitments. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments pursuant to such agreements have not been material. We believe that any future payments required pursuant to such agreements would not be significant to our consolidated financial condition or operating results.

Impact of Foreign Currency and Inflation

We have international operations and incur expenditures in currencies other than U.S. dollars. For non-U.S. subsidiaries and branches, foreign currency transaction gains and losses and the impact of the remeasurement of local currency assets and liabilities into U.S. dollars for 2009, 2008 or 2007 was not significant. During 2008, we entered into forward foreign exchange contracts to reduce our exposure to foreign currency rate changes related to the construction cost for our new building in Penang, Malaysia. As of December 31, 2008 all forward contracts had matured. The realized loss from the settlement of the forward contracts was $1.7 million for 2008. We did not enter into any forward contracts in 2009 or 2007. We do not enter into foreign exchange transactions for trading or speculative purposes.

Common Stock Repurchases

We repurchase shares under our stock purchase program announced on July 15, 1996, which has no specified expiration. No existing repurchase plans or programs have expired, nor have we decided to terminate any repurchase plans or programs prior to expiration. Since the inception of our stock repurchase program through December 31, 2009, our board of directors has authorized 183.0 million shares for repurchase and we have repurchased a total of 178.3 million shares of our common stock for an aggregate cost of $3.7 billion. As of December 31, 2009, 4.7 million shares remained authorized for repurchase under our stock repurchase program.

No shares were repurchased in 2009. Common stock repurchase activities for 2008 and 2007 were as follows:

(In millions, except per share amounts)		2008				2007
Shares repurchased			26.6				58.0
Cost of shares repurchased		$	473.2			$	1,226.3
Average price per share		$	17.78			$	21.16

During 2008, we entered into agreements pursuant to SEC Rule 10b5-1 under which we authorized third-party brokers to purchase shares on our behalf during our normal blackout period according to predetermined trading instructions. In addition, we repurchased shares of our common stock under the guidelines of SEC Rule 10b-18.

Off-balance Sheet Arrangements

As of December 31, 2009, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Subsequent Events

We evaluated subsequent events through February 17, 2010 when the financial statements were issued.

On January 25, 2010, our board of directors declared a cash dividend of $0.05 per common share payable on March 1, 2010 to stockholders of record on February 10, 2010.

On January 28, 2010, our board of directors approved a 10 million share increase to the number of shares authorized for repurchase under our share repurchase program.

New Accounting Pronouncements

Accounting Standards Adopted in 2009

Fair Value Measurements and Disclosures

In August 2009, the FASB issued guidance on the measurement of liabilities at fair value. The guidance provides clarification that in circumstances in which a quoted market price in an active market for an identical liability is not available, an entity is required to measure fair value using a valuation technique that uses the quoted price of an identical liability when traded as an asset or, if unavailable, quoted prices for similar liabilities or similar assets when traded as assets. If none of this information is available, an entity should use a valuation technique in accordance with existing fair valuation principles. We adopted the guidance in 2009, and there was no material impact on our consolidated financial statements or related footnotes.

In April 2009, the FASB issued additional guidance for estimating fair value when the market activity for an asset or liability has declined significantly. We adopted the guidance in 2009 with no significant impact on our consolidated financial statements or related footnotes. See Note 17 — Fair Value Measurements to our consolidated financial statements.

In April 2009, the FASB issued authoritative fair value disclosure guidance for financial instruments. The guidance requires disclosures for interim reporting periods of publicly traded companies as well as in annual financial statements. The guidance also requires those disclosures in summarized financial information at interim reporting periods. We adopted the guidance in 2009 with no significant impact on our consolidated financial statements or related footnotes. See Note 17 — Fair Value Measurements to our consolidated financial statements.

In September 2006, the FASB issued authoritative guidance for fair value measurements, which defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Effective December 29, 2007, we adopted the guidance as it applies to our financial instruments. Effective January 1, 2009, we adopted the guidance for our non-financial assets and non-financial liabilities. The adoption of the guidance did not have a significant impact on our consolidated financial statements or related footnotes. See Note 17 — Fair Value Measurements to our consolidated financial statements.

Subsequent Events

In May 2009, the FASB issued authoritative guidance for subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. The guidance also requires the disclosure of the date through which an entity has evaluated subsequent events and whether that date represents the date the financial statements were issued or were available to be issued. We adopted the guidance in 2009 with no significant impact on our consolidated financial statements or related footnotes. See Note 18 — Subsequent Events to our consolidated financial statements.

Derivatives and Hedging

In March 2008, the FASB issued authoritative guidance for enhanced disclosures for derivative instruments, including those used in hedging activities. Effective January 1, 2009, we adopted the guidance. The adoption of the guidance did not have any impact on our consolidated financial statements or related footnotes.

Recent Accounting Developments

In October 2009, the FASB issued guidance which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. This guidance should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. Full retrospective application of the new guidance is optional. This guidance must be adopted in the same period that we adopt the amended accounting for arrangements with multiple deliverables described in the preceding paragraph. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

In October 2009, the FASB amended revenue recognition guidance for arrangements with multiple deliverables. The guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE) is unavailable. Under the guidance, non-software components of tangible products and certain software components of tangible products have been removed from the scope of existing software revenue recognition guidance and will be recognized in a manner similar for other tangible products. This guidance should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. Full retrospective application of the guidance is optional. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

While we are exposed to interest rate fluctuations in many of the world’s leading industrialized countries, our interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. Our investment strategy is focused on preservation of capital and supporting our liquidity requirements. Our exposure to market risk as a result of changes in interest rates relates primarily to our cash and cash equivalents, certain interest-rate sensitive assets held under the NQDC Plan and our long-term credit facility. Our NQDC Plan assets include holdings of various issuers, types and maturity dates.

The market value of these investments on any given day during the investment term may vary as a result of market interest rate fluctuations. A hypothetical 10% movement in interest rates during the investment term would not likely have a material impact on the fair value of the portfolio. The actual impact on the fair value of the portfolio in the future may differ materially from this analysis, depending on actual balances and changes in the timing and the amount of interest rate movements.

Our consolidated operating results are affected by, among other factors, interest income on our cash equivalents. If the interest rate declines, our consolidated operating results may be negatively impacted.

In addition to our cash flows from operations, we derive our liquidity from our long-term credit facility (the “Facility”). Our total borrowings under the Facility as of December 31, 2009 were $500 million. Borrowings under this Facility bear a variable interest rate at either a Eurodollar rate (“LIBOR”) or a Prime rate, at our option, plus an applicable margin based upon certain financial ratios, determined and payable quarterly. The interest rate as of December 31, 2009 was LIBOR plus 0.425%. In addition, we pay a facility fee on the entire Facility. This facility fee varies with certain financial ratios and was 0.125% as of December 31, 2009.

Our consolidated operating results and cash flows are exposed to changes in interest rates that could adversely affect the amount of interest expense incurred and paid on the Facility in any given period. Due to the variable interest rate on the Facility, the fair value of the Facility would not likely be materially affected by any future changes in interest rates.

Equity Price Risk

We are exposed to equity price risk inherent in the marketable equity securities held in our NQDC Plan. A hypothetical 10% adverse change in the stock prices of these equity securities would not result in a material impact on our consolidated financial position, operating results or cash flows.

Foreign Currency Risk

We have international operations and incur expenditure in currencies other than U.S. dollars. To date, our exposure to exchange rate volatility, resulting from foreign currency transaction gains and losses and remeasurement of local currency assets and liabilities into U.S. dollars, has been insignificant. If foreign currency rates were to fluctuate by 10% from rates in effect at December 31, 2009, the resulting transaction gains or losses and the effects of remeasurement would not materially affect our consolidated financial position, operating results or cash flows.

Item 8. Financial Statements and Supplementary Data.  

		Page
Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008			37
Consolidated Statements of Income for each of the three years in the period ended December 31, 2009			38
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2009			39
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2009			40
Notes to the Consolidated Financial Statements			41
Report of Independent Registered Public Accounting Firm			61
Financial Statement Schedules
All schedules have been omitted as they are either not applicable or the required information is included in the financial statements or notes thereto.
Supplementary Financial Data (unaudited)			62

ALTERA CORPORATION

		December 31,				December 31,
(In thousands, except par value amount)		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	1,546,672			$	1,216,743
Accounts receivable, net			218,144				83,430
Inventories			69,705				84,637
Deferred income taxes — current			79,164				85,777
Deferred compensation plan — marketable securities			50,905				38,593
Deferred compensation plan — restricted cash equivalents			18,986				17,397
Other current assets			58,194				100,584
Total current assets			2,041,770				1,627,161
Property and equipment, net			174,516				192,262
Deferred income taxes — non-current			59,249				50,611
Other assets, net			17,696				9,873
Total assets		$	2,293,231			$	1,879,907
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	50,520			$	33,834
Accrued liabilities			32,256				29,951
Accrued compensation and related liabilities			49,862				58,450
Deferred compensation plan obligations			69,891				55,990
Deferred income and allowances on sales to distributors			281,885				205,674
Income taxes payable			5,547				2,123
Total current liabilities			489,961				386,022
Income taxes payable — non-current			210,967				173,880
Long-term credit facility			500,000				500,000
Other non-current liabilities			6,967				20,128
Total liabilities			1,207,895				1,080,030
Commitments and contingencies (See “Note 8–Commitments and Contingencies”)
Stockholders’ equity:
Common stock: $.001 par value; 1,000,000 shares authorized; outstanding — 296,817 at December 31, 2009 and 292,733 shares at December 31, 2008			297				293
Capital in excess of par value			372,098				272,424
Retained earnings			712,941				528,278
Accumulated other comprehensive loss			—				(1,118	)
Total stockholders’ equity			1,085,336				799,877
Total liabilities and stockholders’ equity		$	2,293,231			$	1,879,907

See accompanying notes to consolidated financial statements.

ALTERA CORPORATION

		YEARS ENDED
		December 31,				December 31,				December 28,
(In thousands, except per share amounts)		2009				2008				2007
Net sales		$	1,195,413			$	1,367,224			$	1,263,548
Cost of sales			396,584				449,750				447,969
Gross margin			798,829				917,474				815,579
Research and development expense			260,208				257,717				261,786
Selling, general, and administrative expense			234,074				255,391				272,141
Compensation expense (benefit) — deferred compensation plan			11,776				(18,106	)			6,699
(Gain) loss on deferred compensation plan securities			(11,776	)			18,106				(6,699	)
Interest income and other			(6,083	)			(30,300	)			(57,681	)
Interest expense			5,092				15,492				1,705
Income before income taxes			305,538				419,174				337,628
Income tax expense			54,476				59,523				47,605
Net income		$	251,062			$	359,651			$	290,023
Net income per share:
Basic		$	0.85			$	1.20			$	0.84
Diluted		$	0.84			$	1.18			$	0.82
Shares used in computing per share amounts:
Basic			294,493				300,951				345,382
Diluted			297,180				304,604				351,906
Cash dividends per common share		$	0.20			$	0.19			$	0.12

See accompanying notes to consolidated financial statements.

ALTERA CORPORATION

		YEARS ENDED
		December 31,				December 31,				December 28,
(In thousands)		2009				2008				2007
Cash Flows from Operating Activities:
Net income		$	251,062			$	359,651			$	290,023
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			29,022				29,969				31,082
Stock-based compensation			64,446				48,630				50,203
Deferred income tax (benefit) expense			(5,890	)			737				(14,367	)
Tax effect of employee stock plans			(3,648	)			1,311				12,871
Excess tax benefit from employee stock plans			(990	)			(6,767	)			(13,177	)
Gain on sale of land			—				(112	)			—
Gain on substantive termination of retiree medical plan			(6,488	)			—				—
Changes in assets and liabilities:
Accounts receivable, net			(136,115	)			115,459				(105,626	)
Inventories			14,931				(10,527	)			4,367
Other assets			38,862				(26,173	)			(14,505	)
Accounts payable and other liabilities			7,918				2,810				6,250
Deferred income and allowances on sales to distributors			77,611				(74,766	)			(17,638	)
Income taxes payable			39,860				9,717				43,419
Deferred compensation plan obligations			2,125				(673	)			(1,309	)
Net cash provided by operating activities			372,706				449,266				271,593
Cash Flows from Investing Activities:
Purchases of property and equipment			(11,060	)			(40,273	)			(31,171	)
Purchases of available-for-sale investments			—				—				(113,540	)
Proceeds from the maturities and sales of available-for-sale investments			—				131,060				864,853
Proceeds from sale of land			—				9,063				—
(Purchases) sales of deferred compensation plan securities, net			(2,125	)			673				1,309
Purchases of intangible assets			(690	)			—				(240	)
Net cash (used in) provided by investing activities			(13,875	)			100,523				721,211
Cash Flows from Financing Activities:
Proceeds from issuance of common stock through various stock plans			42,144				67,138				170,320
Shares withheld for employee taxes			(10,738	)			(8,229	)			(4,696	)
Repurchases of common stock			—				(473,229	)			(1,226,343	)
Payment of dividends to stockholders			(58,925	)			(57,051	)			(41,277	)
Excess tax benefit from stock-based compensation			990				6,767				13,177
(Decrease) increase in book overdrafts			—				(320	)			319
Proceeds from long-term credit facility			—				250,000				250,000
Principal payments on capital lease obligations			(2,373	)			(8,217	)			(2,621	)
Net cash used in financing activities			(28,902	)			(223,141	)			(841,121	)
Net increase in cash and cash equivalents			329,929				326,648				151,683
Cash and cash equivalents at beginning of period			1,216,743				890,095				738,412
Cash and cash equivalents at end of period		$	1,546,672			$	1,216,743			$	890,095
Cash paid during the period for:
Income taxes paid, net		$	7,310			$	66,503			$	8,240
Interest paid		$	4,503			$	15,666			$	1,433
Noncash Investing and Financing Activities:
Assets acquired under capital leases		$	—			$	11,871			$	—