UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended May 29, 2011.

or

   

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from                  to                 .

Commission File Number: 1-6453

NATIONAL SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE   95-2095071
(State of Incorporation)   (I.R.S. Employer
Identification Number)

2900 SEMICONDUCTOR DRIVE, P.O. BOX 58090
SANTA CLARA, CALIFORNIA 95052-8090
(Address of principal executive offices)

Registrant's telephone number, including area code: (408) 721-5000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered

Common stock, par value $0.50 per share

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

                                    None                                     
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ý    No o

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 ý

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 ý    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 ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act (check one):

  Large Accelerated filer ý   Non-accelerated filer o   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 Exchange Act).

Yes o    No ý

The aggregate market value of our common stock held by non-affiliates of the registrant as of November 28, 2010 was approximately $2,379,839,178 based on the last reported sale price on the last trading date prior to that date. Shares of common stock held by each officer and director and by each person who owns 5 percent or more of the outstanding common stock have been excluded because these persons may be considered to be affiliates. This determination of affiliate status for purposes of this calculation is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant's common stock, $0.50 par value, as of June 26, 2011 was 253,273,331 shares.


Table of Contents

NATIONAL SEMICONDUCTOR CORPORATION

TABLE OF CONTENTS

 
   
  Page No

PART I

       

Item 1.

 

Business

 
3

Item 1A.

 

Risk Factors

  13

Item 1B.

 

Unresolved Staff Comments

  21

Item 2.

 

Properties

  22

Item 3.

 

Legal Proceedings

  23

Item 4.

 

[REMOVED AND RESERVED]

  24

PART II

       

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 
25

Item 6.

 

Selected Financial Data

  28

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  29

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

  47

Item 8.

 

Financial Statements and Supplementary Data

  48

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  104

Item 9A.

 

Controls and Procedures

  104

Item 9B.

 

Other Information

  105

PART III

       

Item 10.

 

Directors, Executive Officers and Corporate Governance

 
106

Item 11.

 

Executive Compensation

  110

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  142

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  145

Item 14.

 

Principal Accountant Fees and Services

  146

PART IV

       

Item 15.

 

Exhibits and Financial Statement Schedules

 
147

Signatures

      149

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Table of Contents

PART I

ITEM 1.    BUSINESS

 This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Part I "Item 1A. Risk Factors" of this Form 10-K. These statements relate to, among other things, the pending merger, sales, gross margins, operating expenses, capital expenditures, economic and market conditions, research and development efforts, asset dispositions, and acquisitions of and investments in other companies, and are indicated by words or phrases such as "anticipate," "expect," "outlook," "foresee," "believe," "could," "should," "intend," "will," and similar words or phrases. These statements involve risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. For a discussion of some of the factors that could cause actual results to differ materially from our forward-looking statements, see the discussion on risk factors that appears in Part I, Item 1A. of this Form 10-K and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission (SEC). We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so.

The Merger

 On April 4, 2011, we entered into a definitive agreement (the Merger Agreement) with Texas Instruments Incorporated (TI) and Orion Merger Corp., a wholly owned subsidiary of TI (Merger Sub), under which Merger Sub will, subject to the satisfaction or waiver of the conditions in the Merger Agreement, merge with and into National, and National will be the surviving corporation in the merger and a wholly owned subsidiary of TI. Pursuant to the terms and subject to the conditions of the Merger Agreement, at the effective time of the merger (the Effective Time), each share of National common stock issued and outstanding immediately prior to the Effective Time (other than shares (i) held in treasury of National, (ii) owned by TI or Merger Sub or (iii) owned by shareholders who have perfected and not withdrawn a demand for appraisal rights under Delaware law) will be converted into the right to receive $25.00 in cash, without interest. Our Board of Directors unanimously approved the Merger Agreement and the merger on April 4, 2011, and on June 21, 2011, the Merger Agreement was adopted by our shareholders at a special meeting. The completion of the merger is subject to various closing conditions, including receiving certain foreign antitrust approvals. The transaction is expected to close before the end of the calendar year.

            The Merger Agreement contains customary representations, warranties and covenants by us. It also contains certain termination rights whereby we would pay TI a cash termination fee of $200.0 million or TI would pay us a cash termination fee of $350.0 million upon the termination of the Merger Agreement under certain circumstances as set forth in the Merger Agreement. We retained the services of Qatalyst Partners LP (Qatalyst) to act as financial advisor to our Board of Directors for purposes of advising us in connection with the merger and to evaluate whether the consideration to be received in the merger by our shareholders was fair, from a financial point of view, to such holders. We agreed to pay Qatalyst a fee of $28.0 million, $5.0 million of which was paid upon delivery of Qatalyst's opinion and the remainder of which will be paid upon, and subject to, the consummation of the merger. In the event the merger is not consummated and we receive a termination fee from TI, we would be obligated to pay Qatalyst up to the remainder of the $28.0 million fee.

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Overview

 We are one of the world's leading semiconductor companies focused on analog and mixed-signal integrated circuits and sub-systems, particularly in the area of power management. Founded in 1959, we design, develop, manufacture and market high-value, high-performance, analog-intensive solutions that improve performance and energy efficiency in electronic systems. We have a diversified product portfolio which includes power management circuits, audio and operational amplifiers, communication interface products and data conversion solutions. Our portfolio of over 13,000 products is sold to a diversified group of end-customers, ranging from smaller customers serviced by an extensive distribution network to large original equipment manufacturers (OEMs). Energy-efficiency is our overarching theme and our PowerWise® products enable systems that consume less power, extend battery life and generate less heat. We target a broad range of markets and applications such as:

•  wireless handsets (including smart phones)   •  automotive applications
    and other portable applications   •  factory and office automation
•  wireless basestations   •  medical applications
•  network infrastructure   •  photovoltaic systems
•  industrial and sensing applications   •  LED lighting

            We benefit from an extensive intellectual property portfolio that includes more than 3,000 patents. We are focused on supporting the innovation needed for a strong new product development pipeline.

            For fiscal 2011, our net sales were $1.5 billion, our operating income was $451.6 million and our net income was $298.8 million. A large portion of our sales come from analog products that are classified within the general purpose analog categories (as defined by the World Semiconductor Trade Statistics or WSTS). General purpose analog products are defined by WSTS as amplifiers, signal conversion, power management and interface products, representing the fundamental circuits that electronic systems need in order to deal with continuously varying signals of the real world, such as light, sound, pressure, temperature and speed. Within the general purpose analog market, our strengths have historically been in the power management, amplifier and interface areas where higher performance coupled with ease of use typically result in higher gross margins. In addition to general purpose analog products, we also develop application-specific analog sub-systems that typically carry higher values and are often targeted at high-growth markets.

            Approximately 93 percent of our revenue in fiscal 2011 was generated from Analog segment products. Our product line operations are organized under one group called the Product Group, which is responsible for designing and developing a wide range of analog integrated circuits, many of which convert and regulate voltages to ensure that electronic systems operate to their fullest potential with the lowest overall power consumption or the highest energy efficiency. It also designs and develops integrated circuits that handle the requisite analog technology for information or data as it travels from the point where it enters the electronic system, is conditioned, converted and processed to the point where it is sent out. In addition to providing real world interfaces, these products are used extensively in signal conditioning, signal conversion (from analog to digital and vice versa) and high-speed interfacing applications.

            National Semiconductor Corporation was incorporated in the state of Delaware in 1959 and our headquarters have been in Santa Clara, California since 1967. Our common stock is listed on the New York Stock Exchange under the trading symbol "NSM." Our fiscal year ends on the last Sunday of May and references in this document to fiscal 2011 refer to our fiscal year ended May 29, 2011. References to fiscal 2010 refer to our fiscal year ended May 30, 2010 and references to fiscal 2009

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refer to our fiscal year ended May 31, 2009. Fiscal 2011 and 2010 were each a 52-week year. Fiscal 2009 was a 53-week year. Operating results for this additional week in fiscal 2009 were considered immaterial to our consolidated results of operations in fiscal 2009. Our internet address is www.national.com. We post the following filings in the "Investor Relations" section of our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statement and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All of the filings on our website are available free of charge. We also maintain certain corporate governance documents on our website, including our Code of Business Conduct and Ethics, Governance Committee Charter, Compensation Committee Charter, Audit Committee Charter and other governance policies. We do not intend for information found on our website to be part of this document or part of any other report or filing with the SEC.

            References in this report to "National," "we", "us," "our" and "the company" mean National Semiconductor Corporation and its consolidated subsidiaries.

Recent Highlights

 As the global economy continued to slowly recover throughout fiscal 2011, we experienced revenue growth from our core analog product areas. As a part of our business focus, we periodically identify opportunities to improve our cost structure or to divest or reduce involvement in product areas that are not in line with our business objectives, as well as pursue acquisitions or business investments to gain access to key technologies that we believe augment our existing technical capability and support our business objectives. Those activities in fiscal 2011 included the acquisition of substantially all of the assets of GTronix Inc. in June 2010 (See Note 7 to the Consolidated Financial Statements), as well as our efforts to sell our manufacturing facilities in China and Texas that were closed in fiscal 2010 (See Note 6 to the Consolidated Financial Statements).

Products

 Semiconductors are integrated circuits (in which a number of transistors and other elements are combined to form a more complicated circuit) or discrete devices (such as individual transistors). In an integrated circuit, various components are fabricated in a small area or "chip" of silicon, which is then encapsulated in plastic, ceramic or other advanced forms of packaging and can then be connected to a circuit board or substrate.

            We manufacture an extensive range of analog intensive and mixed-signal integrated circuits, which are used in numerous applications. While no precise industry definition exists for analog and mixed-signal devices, we consider products which process analog information or convert analog-to-digital or digital-to-analog as analog and mixed-signal devices.

            We are a leading supplier of analog and mixed-signal products, serving both broad-based markets such as the consumer, industrial, medical, automotive and communications, and more narrowly defined markets such as wireless handsets (including smart phones) and other portable applications, LED lighting, renewable energy, portable medical and communications infrastructure. Our analog and mixed-signal devices include:

•  operational and audio amplifiers   •  lighting and display circuits
•  power references, regulators and   •  adaptive voltage scaling circuits
    switches   •  radio frequency integrated circuits
•  analog-to-digital or digital-to-analog    
    converters    
•  communication interface circuits    

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            Other product offerings that are not analog or mixed-signal include microcontrollers and embedded BluetoothTM solutions that collectively serve a wide variety of applications in the wireless, personal computer, industrial, automotive, consumer and communication markets. These products represent our older products for which we no longer invest our research and development effort.

            Our diverse portfolio of intellectual property enables us to develop building block products, application-specific standard products and custom large-scale integrations for our customers. Our high-performance building blocks and application-specific standard products allow our customers to solve challenging technical problems and to differentiate their systems in a way that is beneficial to the end user.

            With our leadership in innovative packaging and analog process technology, we can address growth opportunities that depend upon the critical elements of efficiency, physical size and performance. We directly service top-tier OEMs in a number of markets, and we reach a broader range of customers through our franchised distributors.

Corporate Organization

 Our product line operations are organized under one group called the Product Group. Within this group are all of our various product line business units. Many of our products are part of our PowerWise® portfolio of products, which are parts that are deemed to be highly energy efficient relative to the function they are performing.

            In addition to our Product Group, our corporate organization in fiscal 2011 included the Worldwide Marketing and Sales Group and the Manufacturing Operations Group.

Product Group

 Beginning in fiscal 2011, we combined the activities of the former Key Market Segments Group together with certain emerging product lines that were previously a part of two separate power business units to form a new product line business unit called the strategic growth markets business unit. This business unit concentrates its efforts on selected high-growth emerging markets that represent promising opportunities to the company. The remaining product lines that were previously a part of the former performance power products business unit were combined with the remaining product lines within the infrastructure power business unit and were renamed the power products business unit. As a result, product line business units that make up the Product Group include custom solutions, high-speed products, mobile devices power, power products, precision signal path and strategic growth markets business units.

            We have three different business units that address the power management area: mobile devices power, power products and strategic growth markets. Power management refers to the conversion and management of power consumption in electronic systems. Integrated circuits such as digital processors, analog-to-digital converters and light emitting diodes each require different power sources to operate efficiently. Power management integrated circuits convert and regulate voltages to ensure that electronic systems operate properly. Our high-performance power management portfolio provides valuable solutions to our customers to solve design problems in space and energy-constrained applications from feature-rich portable devices to large line-powered systems.

            The three business units that address power management design, develop and manufacture a wide range of products including:

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            We are targeting growth in our power management business by balancing our focus between broad customer needs and specific target markets. We continue to strengthen our broad portfolio of power management integrated circuits which can address customer needs in a variety of end markets such as consumer, industrial, medical, automotive and communications infrastructure. At the same time, we focus on markets, such as personal mobile devices or high-power LEDs, which can provide more rapid growth opportunities from customers that value the performance our products deliver, such as energy efficiency and size or heat reduction.

            We continue to enhance the performance of power management building blocks in terms of providing greater efficiency, increased power density, tighter accuracy and wider voltage ranges. These building block products can also be leveraged into the development of highly integrated application-specific standard products for high volume applications.

            There are also two business units that address the signal path area: precision signal path and high-speed products. Signal path refers to the analog technology that is applied to the path that information or data travels along from the point where it enters the electronic equipment and is conditioned, converted and processed to the point where it is sent out. Our signal path products provide a vital technology link that allows the user to connect to digital information and are used to enable and enrich the user experience of sight and sound from many electronic applications. In addition to providing the real-world interfaces, signal path products are used extensively in signal conditioning, signal conversion (from analog-to-digital and vice versa) and high-speed signal interfacing applications.

            The two business units that focus on signal path design, develop and manufacture a wide range of products including:

            We continually develop more high-performance analog products that can address applications in the portable, consumer, industrial, medical, automotive and communications infrastructure markets. With our growing product portfolio of high-performance building blocks, we continue to improve performance by providing greater precision, higher speed and lower power which our customers value. These building block products can also be leveraged into the development of highly integrated application-specific standard products for high volume applications.

            There is also a custom solutions business unit within the Product Group, which supplies user-designed application-specific products in the form of standard cells, gate arrays and full custom

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devices. This business unit also supplies key telecommunications components for analog and digital line cards, as well as 8-bit and 16-bit microcontrollers. Although this business unit supplies these products, it no longer develops new products.

            The Product Group organization is also responsible for technology infrastructure which provides a range of process libraries, product cores and software, and the selection and support of computer aided design tools used in the design, layout and simulation of our products.

Worldwide Marketing and Sales Group and Manufacturing Operations Group

 The Worldwide Marketing and Sales Group is our global sales and marketing organization organized around the four major regions of the world where we operate. We define our four major regions as the Americas, Asia Pacific (which excludes Japan), Europe and Japan. Reference to these regions elsewhere in this document is based on this definition.

            The Manufacturing Operations Group is a centralized worldwide organization that manages all production, including outsourced manufacturing, global logistics, and is responsible for quality assurance, purchasing and supply chain management. The Manufacturing Operations Group is also responsible for process development and packaging technology.

Segment Financial Information and Geographic Information

 Under the criteria defined by generally accepted accounting principles (GAAP), Analog is our only reportable segment for fiscal 2011. The remaining business units that are not included in the Analog reportable segment are grouped as "All Others."

            Our business is dependent on the success of our Analog segment, which represented approximately 93 percent of our sales in fiscal 2011. Consequently, the Analog segment faces the same risks as those for the company as a whole, including risks attendant to our foreign operations. For a more complete discussion of those risks, see the discussion that appears in Part I, "Item 1A. Risk Factors," of this Form 10-K.

            For further financial information on the Analog reportable segment, as well as geographic information, refer to the information contained in Note 16, "Segment and Geographic Information," in the Notes to the Consolidated Financial Statements included in Item 8.

Marketing and Sales

 We market our products globally to OEMs and original design manufacturers (ODMs) through a direct sales force. Some of our major OEMs include:

  Apple     Motorola     Research in Motion Ltd
  Continental     Nokia     Robert Bosch
  Huawei     Nokia Siemens Network     Samsung
  LG Electronics     Novero     Siemens
  L.M. Ericsson     Panasonic     Sony Ericsson Mobile
                    Communications

            It is common in the technology industry for OEMs to use contract manufacturers to build their products and ODMs to design and build products. As a result, our design wins with major OEMs, particularly in the computing and cellular phone markets, can ultimately result in sales to a third party contract manufacturer or ODM.

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            In addition to our direct sales force, we use distributors in our four geographic business regions, and approximately 71 percent of our fiscal 2011 net sales were made to distributors, which includes approximately 9 percent of sales made through dairitens in Japan under local business practices. The dairitens typically provide fulfillment services for the sale of our products to customers in Japan. In line with industry practices, we generally credit distributors for the effect of price reductions on their inventory of our products and, under specific conditions, we repurchase products that we have discontinued. Distributors do not have the right to return product except under customary warranty provisions. The programs we offer to our distributors include the following:

            Under the contract sales debit program, products are sold to distributors at standard prices published in price books that are broadly provided to our various distributors. Distributors are required to pay for this product within our standard commercial terms. After the initial purchase of the product, the distributor has the opportunity to request a price allowance for a particular part number depending on the current market conditions for that specific part as well as volume considerations. This request is made prior to the distributor reselling the part. Once we have approved an allowance to the distributor, the distributor proceeds with the resale of the product and credits are issued to the distributor in accordance with the specific allowance that we approved. Periodically, we issue new distributor price books. For those parts for which the standard prices have been reduced, we provide an immediate credit to distributors for inventory quantities they have on hand.

            Under the scrap allowance program, certain distributors are given a contractually defined allowance to cover the cost of any scrap they might incur. The amount of the allowance is specifically agreed upon with each distributor.

            Our regional facilities in the United States, Europe, Japan and Asia Pacific handle local customer support. These customer support centers respond to inquiries on product pricing and availability, pre-sale customer technical support requests, order entry and scheduling, and post-sale support under our product warranty provisions. The technical support provided to our customers consists of marketing activities that occur prior to sale of product to our customers and for which we have no contractual obligation and no fees are charged. Technical support consists primarily of aiding customers in product selection and answering questions about our products.

            We augment our sales effort with application engineers based in the field. These engineers are specialists in various aspects of our product portfolio and work with customers to identify and design our integrated circuits into customers' products and applications. These engineers also help identify emerging markets for new products and are supported by our design centers in the field or at manufacturing sites.

            We also provide web-based, on-line tools that allow customers and potential customers to select our devices, create a design using our parts, and simulate performance of that design.

Customers

 Our top ten customers combined represented approximately 61 percent of total accounts receivable at May 29, 2011 and approximately 58 percent at May 30, 2010.

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            Net sales to major customers as a percentage of total net sales were as follows:

 
  2011
  2010
  2009
 
 
     

Distributor:

                   
 

Avnet

    20 %   17 %   15 %
 

Arrow

    16 %   15 %   13 %

            Although we do not have any other customers with sales greater than 10 percent, we do have several other large customers that manufacture and market wireless handsets and other electronic products. All of these customers typically purchase a range of different products from us. If any one of these customers were to cease purchasing products from us within a very short timeframe, such as within one quarter, it could have a negative impact on our financial results for that period.

Backlog

 In accordance with industry practice, we frequently revise semiconductor backlog quantities and shipment schedules under outstanding purchase orders to reflect changes in customer needs. We rarely formally enforce binding agreements for the sale of specific quantities at specific prices that are contractually subject to price or quantity revisions, consistent with industry practice. For these reasons, we believe it would not be meaningful to disclose the amount of backlog at any particular date.

Seasonality

 We are affected by the seasonal trends in the semiconductor and related industries. We typically experience sequentially lower sales in our first and third fiscal quarters, primarily due to customer vacation and holiday schedules. Sales usually reach a seasonal peak in our fourth fiscal quarter. This seasonal trend did not occur during fiscal 2011 since sales in our first quarter of fiscal 2011 were 3 percent higher than sales in the preceding fourth quarter of fiscal 2010, but sales declined sequentially in the following second and third quarters by 5 percent and 12 percent, respectively. We then experienced a more typical seasonal peak in the fourth quarter of fiscal 2011 when sales increased by 9 percent over the preceding quarter.

Manufacturing

 The design of semiconductor and integrated circuit products is shaped by general market needs and customer requirements. Following product design and development, we generally produce integrated circuits in the following steps:

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            Our product line business units are supported by our global manufacturing infrastructure. We have developed a number of proprietary manufacturing processes and packaging technologies to support our broad portfolio of analog products. In March 2009, we announced the closure of our wafer fabrication facility in Texas and our assembly and test plant in China that we sold in June 2011 after the end of fiscal 2011 (See Note 6 to the Consolidated Financial Statements). Production activity in these two facilities ceased by the end of fiscal 2010 and their production volume was consolidated into our remaining manufacturing facilities in Maine, Scotland and Malaysia. Substantially all of our products are manufactured in our two wafer fabrication facilities in Maine and Scotland, and our assembly and test facility in Malaysia. However, at times and as needed, we outsource certain manufacturing functions to address capacity, capability or other economic issues.

            Our wafer manufacturing processes include Bipolar, Metal Oxide Silicon, Complementary Metal Oxide Silicon and Bipolar Complementary Metal Oxide Silicon technologies, including Silicon Germanium. Our efforts are heavily focused on proprietary processes that support our analog portfolio of products, which address wireless handsets, other personal mobile devices and a broad variety of other electronic applications. The feature size of the individual transistors on a chip is measured in microns; one micron equals one millionth of a meter. As products decrease in size and increase in functionality, our wafer fabrication facilities must be able to manufacture integrated circuits with sub-micron circuit pattern widths. This precision fabrication carries over to assembly and test operations, where advanced packaging technology and comprehensive testing are required to address the ever increasing performance and complexity embedded in integrated circuits.

Raw Materials

 Our manufacturing processes use certain key raw materials critical to our products. These include silicon wafers, certain chemicals and gases, ceramic and plastic packaging materials and various precious metals. We also rely on subcontractors to supply finished or semi-finished products which we then market through our sales channels. We obtain raw materials and semi-finished or finished products from various sources, although the number of sources for any particular material or product is relatively limited. We believe our current supply of essential materials is sufficient to meet our needs. However, shortages have occurred from time to time and could occur again. Significant increases in demand, rapid product mix changes or natural disasters could affect our ability to procure materials or goods.

Research and Development

 Our research and development efforts consist of research in metallurgical, electro-mechanical and solid-state sciences, manufacturing process development and product design. Total research and development expenses were $278.6 million for fiscal 2011, or 18 percent of net sales, compared to $272.7 million for fiscal 2010, or 19 percent of net sales, and $306.0 million for fiscal 2009, or 21 percent of net sales.

            The increase in research and development expenses in fiscal 2011 compared to fiscal 2010 primarily reflects higher annual payroll expenses. Share-based compensation expense included in R&D expense for fiscal 2011 was $15.8 million compared to $17.8 million in fiscal 2010. We are continuing to concentrate our research and development spending on analog products and underlying analog capabilities with particular emphasis on circuits that enable greater energy efficiency. We continue to invest in the development of new analog products that can serve applications in a wide variety of end markets such as portable electronics, industrial, communications infrastructure, renewable energy products and medical applications. Because of our focus on markets that require or involve greater energy efficiency, a significant portion of our research and development is directed at power management technology.

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Patents

 We own numerous United States and non-U.S. patents and have many patent applications pending. We consider the development of patents and the maintenance of an active patent program advantageous to the conduct of our business. However, we believe that continued success will depend more on engineering, production, marketing, financial and managerial skills than on our patent program. We license certain of our patents to other manufacturers and participate in a number of cross licensing arrangements and agreements with other parties. Each license agreement has unique terms and conditions, with variations as to length of term, royalties payable, permitted uses and scope. The majority of these agreements are cross-licenses in which we grant a broad license to our intellectual property in exchange for receiving a similar corresponding license from the other party, and none are exclusive. The amount of income we have received from licensing agreements has varied in the past, and we cannot precisely forecast the amount and timing of future income from licensing agreements. On an overall basis, we believe that no single license agreement is material to us, either in terms of royalty payments due or payable or intellectual property rights granted or received.

Employees

 At May 29, 2011, we employed approximately 5,700 people of whom approximately 2,200 were employed in the United States, 600 in Europe, 2,800 in Southeast Asia and 100 in other areas. We believe that our future success depends fundamentally on our ability to recruit and retain skilled technical and professional personnel. Our employees in the United States are not covered by collective bargaining agreements. We consider our employee relations worldwide to be favorable.

Competition

 Competition in the semiconductor industry is intense. With our focus on high-value analog, our major competitors include Analog Devices, Intersil Corporation, Linear Technology, Maxim Integrated Products and TI. As described elsewhere in this report, on April 4, 2011, we entered into the Merger Agreement with TI and Merger Sub, a wholly owned subsidiary of TI, under which Merger Sub will, subject to the satisfaction or waiver of the conditions in the Merger Agreement, merge with and into National, and National will be the surviving corporation in the merger and a wholly owned subsidiary of TI. In some cases, we may also compete with our customers. Competition is based on design and quality of products, product performance, price and service, with the relative importance of these factors varying among products and markets. We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased competition.

Environmental Regulations

 To date, our compliance with foreign, federal, state and local laws and regulations that have been enacted to regulate the environment has not had a material adverse effect on our capital expenditures, earnings, competitive or financial position. For more information, see Item 3, "Legal Proceedings" and Note 15, "Commitments and Contingencies" to the Consolidated Financial Statements in Item 8. However, we could be subject to fines, suspension of production, alteration of our manufacturing processes or cessation of our operations if we fail to comply with present or future statutes and regulations governing the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes.

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ITEM 1A.    RISK FACTORS

 A description of the risk factors associated with our business is set forth below. The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business operations, results or financial condition.

            You should read the following risk factors in conjunction with the factors discussed elsewhere in this and our other filings with the SEC and in materials incorporated by reference in these filings. These risk factors are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply to companies like National with broad international operations. Like other companies, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance and the performance of our customers. Similarly, the price of our stock is subject to volatility due to fluctuations in general market conditions, differences in our results of operations from estimates and projections generated by the investment community, and other factors beyond our control.

RISK FACTORS RELATING TO THE MERGER

There are risks and uncertainties associated with the pending merger with a wholly owned subsidiary of TI.

 On April 4, 2011, we announced that we had signed the Merger Agreement, under which a wholly owned subsidiary of TI will, subject to the satisfaction or waiver of the conditions in the Merger Agreement, merge with and into National, and National will be the surviving corporation in the merger and a wholly owned subsidiary of TI. There are a number of risks and uncertainties relating to the merger. For example:

            In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed merger, and many of these fees and costs are payable by us regardless of whether the merger is consummated.

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RISK FACTORS RELATING TO GENERAL BUSINESS CONDITIONS

Significant deterioration in the global economy has reduced demand for our products, and our business has been and may continue to be adversely affected.

 As a result of the credit market crisis and other macro-economic challenges affecting the economy of the United States and other parts of the world, customers have modified, delayed and cancelled plans to purchase our products. Consequently, we experienced a significant reduction in order rates during fiscal 2009. Although near-term market conditions have shown some improvement since then, our order rates have not returned to pre-crisis levels as business conditions have fluctuated. Global economic conditions remain uncertain, and could be adversely affected by the earthquake and tsunami in Japan, unrest in the Middle East, debt related actions taken or not taken by the U.S. Government and the European Union, and other geopolitical factors, and it is possible that current conditions could remain or worsen.

A large portion of our revenues is dependent on the wireless handset market.

 The wireless handset market (including smart phones) is a significant source of our overall sales. Global economic difficulties have affected the sales of handsets and have adversely affected our revenues and profitability. This environment may continue even though we continue to develop new products to address new features and functionality in handsets. The worldwide handset market is large and future trends and other variables are difficult to predict. As a consumer-driven market, changes in the economy that adversely affect consumer demand for wireless handsets will impact demand for our products and adversely affect our business and operating results.

Conditions inherent in the semiconductor industry may cause periodic fluctuations in our operating results.

 Rapid technological change and frequent introduction of new technology leading to more complex and integrated products characterize the semiconductor industry. The result is a cyclical environment with potentially short product life cycles, characterized by significant and rapid increases and decreases in product demand. Substantial capital and R&D investment are required to support products and manufacturing processes in the semiconductor industry, which amplify the effect of this cyclicality. As a result of this environment, we may experience rapid and significant fluctuations in our operating results. Market or other shifts in our product mix toward or away from higher margin products, including analog products, or reductions in our product margins may also have a significant impact on our operating results.

Our business will be harmed if we are unable to compete successfully in our markets.

 Competition in the semiconductor industry is intense. Our major competitors include Analog Devices, Intersil Corporation, Linear Technology, Maxim Integrated Products and TI. In some cases, we may also compete with our customers. Competition is based on design and quality of products, product performance, price and service, with the relative importance of these factors varying among products, markets and customers. We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased competition.

RISK FACTORS RELATING TO INTERNATIONAL OPERATIONS

We operate in the global marketplace and face risks associated with worldwide operations.

 During fiscal 2011, approximately 77 percent of our sales were derived from customers in international markets. We expect that international sales will continue to account for a significant majority of our total revenue in future years. We have manufacturing facilities outside the United States in Scotland and Malaysia. We are subject to the economic and political risks inherent in

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international operations, including the risks associated with ongoing uncertainties and political and economic instability in many countries around the world. In addition, the management of global operations subjects us to risks associated with legal and regulatory requirements, trade balance issues, currency controls, differences in local business and cultural factors, fluctuations in interest and currency exchange rates, and difficulties in staffing and managing foreign operations.

Global disruptions and events could adversely affect our financial performance and operating results.

 Terrorist activities worldwide and hostilities in and between nation states, including the continuing hostilities and violence in Iraq and Afghanistan, unrest in the Middle East and the threat of future hostilities involving the United States and other countries, may cause uncertainty and instability in the overall state of the global economy or in the industries in which we operate. We have no assurance that the consequences from these events will not disrupt our operations in either the United States or other regions of the world. Significant destabilization of relations between the United States and other countries where we operate or between the countries where we operate and other countries could result in restrictions and prohibitions in the countries where we operate. Continued increases in oil prices, as well as spreading subprime mortgage failures, could also affect our operations. Pandemic illnesses that spread globally and/or substantial natural disasters such as the earthquake and tsunami in Japan, as well as geopolitical events, may also affect our future costs, operating capabilities and revenues.

We have significant manufacturing operations in Malaysia and, as a result, are subject to risks.

 We have significant assembly and test facilities in Melaka, Malaysia. We may be adversely affected by laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We cannot assure you that we will be able to maintain compliance with all of these laws and regulations, that new, stricter laws or regulations will not be imposed or that interpretations of existing regulations will not be changed, each of which would require additional expenditures or result in other adverse effects. Changes in the political environment or government policies could result in laws or regulations that impact us adversely. A significant destabilization of relations between the United States and Malaysia or with either of these countries and other countries could result in restrictions or prohibitions on our operations in that country.

We are subject to fluctuations in the exchange rate of the U.S. dollar and foreign currencies.

 While we transact business primarily in U.S. dollars, and most of our revenues are denominated in U.S. dollars, a portion of our costs and revenues is denominated in other currencies, such as the euro, the Japanese yen, pound sterling and certain other Asian currencies. As a result, changes in the exchange rates of these or any other applicable currencies to the U.S. dollar will affect our net sales, costs of goods sold and operating margins. We have a program to hedge our exposure to currency rate fluctuations, but our hedging program may not be fully effective in preventing foreign exchange losses.

We are subject to export restrictions and laws affecting trade and investments.

 As a global company headquartered in the United States, we are subject to U.S. laws and regulations that limit and restrict the export of some of our products and related product information. Compliance with these laws has limited our operations and sales in the past and could significantly limit them in the future. We maintain a compliance program but there are risks of noncompliance exposing us to significant legal liabilities. We must also comply with export restrictions and laws imposed by other countries affecting trade and investments which may conflict with the laws and

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regulations in the United States or other countries in which we do business. There is a risk that these restrictions and laws could significantly restrict our operations in the future.

RISK FACTORS RELATING TO SALES AND OPERATIONS

Our increased focus on revenue growth could adversely impact margins over time.

 Our current priority is to grow revenues at an annual rate greater than the rate of growth we have achieved in recent fiscal years. During those recent fiscal years our rate of revenue growth was consistently below that of our competitors, as we directed more of our efforts on maintaining and increasing our profit margins. By focusing on our relationship with our customers and delivering exceptional value to our customers we hope to increase sales while retaining our overall profitability. It is possible, however, that elevating our priority on increasing sales could come at the expense of gross margin. If a decrease in gross margin is not offset by sufficient increased revenue it would adversely affect our overall profitability. In addition, we may not achieve increased revenue growth rates.

Our performance depends on the availability and cost of raw materials, utilities, critical manufacturing equipment and third-party manufacturing services.

 Our manufacturing processes and critical manufacturing equipment require that certain key raw materials and utilities be available. Limited or delayed access to or increases in the cost of these items, or the inability to implement new manufacturing technologies or install manufacturing equipment on a timely basis, could adversely affect our results of operations. We subcontract a portion of our wafer fabrication and assembly and testing of our integrated circuits. We depend on a limited number of third parties, most of whom are located outside of the United States, to perform these subcontracted functions. We do not have long-term contracts with all of these third parties. Reliance on these third parties involves risks, including possible shortages of capacity in periods of high demand. We have had difficulties in the past with suppliers and subcontractors and could experience them in the future, including as a result of weak global economic conditions or the pending merger, whether or not the merger is consummated.

A substantial portion of our sales are made to distributors and the termination of an agreement with one or more distributors could result in a negative impact on our business.

 In fiscal 2011, our distributors accounted for approximately 71 percent of our sales, which includes approximately 9 percent of sales made through dairitens (fulfillment service providers) in Japan under local business practices. Two of our distributors together accounted for 36 percent of total sales. Distributors typically sell products from several of our competitors along with our products. A significant reduction of effort to sell our products, the termination of our relationship with one or more distributors or distributor cash flow problems or other financial difficulties could reduce our access to certain end-customers and adversely impact our ability to sell our products. The termination of the distributor relationship agreement with a specific distributor could also result in the return of our inventory held by the distributor.

Our profit margins may vary over time.

 Our profit margins may be adversely affected by a number of factors, including decreases in our shipment volume, reductions in, or obsolescence of our inventory, and shifts in our product mix or strategy. Because we own most of our manufacturing capacity, a significant portion of our operating costs is fixed, including costs associated with depreciation expense. In general, these costs do not decline proportionally with reductions in customer demand or utilization of our manufacturing capacity, nor do they increase proportionally as volume increases. Failure to maintain utilization rates of our manufacturing facilities or maintain the fixed costs associated with these facilities at current levels will result in higher average unit costs and lower gross margins.

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We make forecasts of customer demand that may be inaccurate.

 Our ability to match inventory and production mix with the product mix needed to fill current orders and orders to be delivered in any given quarter may affect our ability to meet that quarter's revenue forecast. To be able to accommodate customer requests for shorter shipment lead times, we manufacture product based on customer forecasts. These forecasts are based on multiple assumptions. While we believe our relationships with our customers, combined with our understanding of the end markets we serve, provide us with the ability to make reliable forecasts, if we inaccurately forecast customer demand, it could result in inadequate, excess or obsolete inventory that would reduce our profit margins.

We are subject to warranty claims, product recalls and product liability.

 We could be subject to warranty or product liability claims that could lead to significant expenses as we defend such claims or pay damage awards. In the event of a warranty claim, we may also incur costs if we compensate the affected customer. We maintain product liability insurance, but there is no guarantee that such insurance will be available or adequate to protect against all such claims. We may incur costs and expenses relating to a recall of one of our customers' products containing one of our devices. Any future costs or payments made in connection with warranty claims or product recalls could materially affect our results of operations and financial condition in future periods.

We may be harmed by natural disasters and other disruptions.

 Our worldwide operations could be subject to natural disasters and other disruptions. Our corporate headquarters are located near major earthquake fault lines in California. In the event of a major earthquake, or other natural or manmade disaster, we could experience loss of life of our employees, destruction of facilities or other business interruptions. The operations of our suppliers could also be subject to natural disasters and other disruptions, which could cause shortages and price increases in various essential materials. We use third party freight firms for nearly all of our shipments from vendors and from our wafer manufacturing facilities to assembly and test sites and for shipments to customers of our final product. This includes ground, sea and air freight. Any significant disruption of our freight shipments globally or in certain parts of the world, particularly where our operations are concentrated, would materially affect our operations. We maintain property and business interruption insurance, but there is no guarantee that such insurance will be available or adequate to protect against all costs associated with such disasters and disruptions.

We may incur a loss in connection with the sale of, or we may be unable to sell, our manufacturing facility in Texas.

 In fiscal 2009, we announced the eventual closure of our wafer fabrication facility in Texas and have since ceased production activity in the facility. We are actively engaged in locating a buyer to purchase the manufacturing facility. In selling the property, we are faced with the inherent volatility in the industrial real estate market, which is a function of the supply and demand for industrial properties in the micro-market where the facility is located. Although we believe we will be able to sell the facility, this may not be the case or it may take longer than we currently expect. If we must incur additional costs to maintain the facility over a longer time frame than we currently expect, if we are forced to accept a lower price than we originally estimated, or if we are unable to locate a buyer for the facility, our operating results will be negatively affected.

We may be subject to information technology system failures, network disruptions and breaches in data security.

 Information technology system failures, network disruptions and breaches of data security could disrupt our operations by causing delays or cancellation of customer orders, impeding the manufacture or shipment of products, preventing the processing of transactions and reporting of financial results. They could also result in the unintentional disclosure of confidential information

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about the company or with respect to our customers and employees. While management has taken steps to address these concerns by implementing sophisticated network security and internal control measures, there can be no assurance that a system failure or data security breach will not have a material adverse effect on our financial condition and operating results.

We may experience delays in implementing a new enterprise resource planning system.

 We began a significant initiative to transform National's mainframe application landscape with a large scale enterprise resource planning (ERP) implementation intended to reduce the risk associated with our existing mainframe systems, simplify our complex information technology landscape to reduce cost of ownership and increase flexibility for evolving business needs. This program will introduce risks to our business operations. For example, implementation of a new ERP system will require significant investment, re-engineering of many processes used to run our business, and the attention of many employees who would otherwise be focused on other aspects of our business. The design and implementation of the new ERP system could also take longer than anticipated, which could result in delays in our ability to realize any anticipated benefits of the new ERP system, as well as additional costs and disruption to our business, and could have a material adverse effect on our cash flows, results of operations and financial condition.

We may not be able to attract or retain employees with skills necessary to remain competitive in our industry.

 Our continued success depends in part on the recruitment and retention of skilled personnel, including technical, marketing, management and staff personnel. Experienced personnel in the semiconductor industry, particularly in our targeted analog areas, are in high demand and competition for their skills is intense. We cannot assure you that we will be able to successfully recruit and retain the key personnel we require. Our ability to retain and attract employees may be adversely affected by the pending merger.

RISK FACTORS RELATING TO R&D, INTELLECTUAL PROPERTY AND LITIGATION

We may experience delays in introducing new products or market acceptance of new products may be below our expectations.

 Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the industries in which our primary customers operate. As our customers evolve and introduce new products, our success depends on our ability to anticipate and adapt to these changes in a timely and cost-effective manner by developing and introducing into the market new products that meet the needs of our customers. We are also directing efforts to develop new and different types of products to serve emerging mega trends such as energy efficiency. We believe that continued focused investment in research and development, especially the timely development, introduction and market acceptance of new products, is a key factor to successful growth and the ability to achieve strong financial performance. Successful development and introduction of these new products are critical to our ability to maintain a competitive position in the marketplace. We cannot assure you, however, that we will be successful in timely developing and introducing successful new products demanded by the market, or in achieving anticipated revenues from new products, and a failure to bring new products to market or achieve market success with them may harm our operating results. We also cannot assure you that products that may be developed in the future by our competitors will not render our products obsolete or non-competitive.

Our products are dependent on the use of intellectual property that we need to protect.

 We rely on patents, trade secrets, trademarks, mask works and copyrights to protect our products and technologies, and have a program to file applications for and obtain patents, trademarks, mask works and copyrights in the United States and in selected foreign countries where we believe filing

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for such protection is appropriate. Effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for by us in some countries. Some of our products and technologies are not covered by any patent or patent application. In addition, we cannot assure you that:

            We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors' rights agreements with our collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that our collaborators will not assert rights to intellectual property arising out of our research collaborations. In addition, we may not be able to enforce these agreements globally. Some of our technologies have been licensed on a non-exclusive basis from other companies, which may license such technologies to others, including our competitors. If necessary or desirable, we may seek licenses under patents or intellectual property rights claimed by others. However, we cannot assure you that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for technologies we use could cause us to incur substantial liabilities and to suspend the manufacture or shipment of products or our use of processes requiring the technologies.

            The protection of our intellectual property is essential in preventing unauthorized third parties from copying or otherwise obtaining and using our technologies. Despite our efforts, we cannot assure you that we will be able to adequately prevent misappropriation or improper use of our protected technologies.

We are subject to litigation risks.

 All industries, including the semiconductor industry, are subject to legal claims. We are involved in a variety of routine legal matters that arise in the normal course of business. Further discussion of certain specific material legal proceedings in which we are involved is contained in Note 15 to the Consolidated Financial Statements. We believe it is unlikely that the final outcome of these legal claims will have a material adverse effect on our consolidated financial position or results of operations. However, litigation is inherently uncertain and unpredictable. An unfavorable resolution of any particular legal claim or proceeding could have a material adverse effect on our consolidated financial position or results of operations.

RISK FACTORS RELATED TO OUR DEBT

Increased leverage may harm our financial condition and results of operations.

 Our total long term debt at May 29, 2011 was $1.0 billion and it will have important effects on our future operations, including, without limitation:

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            Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our consolidated operations, many of which are beyond our control. In addition, under our multicurrency credit agreement with a bank, we are required to comply with certain restrictive covenants, conditions, and default provisions that require the maintenance of certain financial ratios. If we are unable to generate sufficient cash flow from operations in the future to service our debt or maintain compliance with the financial covenants of our multicurrency credit agreement due to current economic conditions or otherwise, we may take certain actions which require us to, among other things:

            Such measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms, if at all, particularly if our credit rating is not strong.

Difficulties in the credit markets may limit our ability to refinance our debt as it becomes due.

 We cannot assure you that we will be able to refinance our debt as it becomes due. The cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued turbulence in the U.S. and international markets and economies may adversely affect the liquidity and financial conditions of issuers.

RISK FACTORS RELATING TO TAX AND ENVIRONMENTAL REGULATIONS

We may be affected by higher than expected tax rates or exposure to additional income tax liabilities.

 As a global company, our effective tax rate is dependent upon the geographic composition of worldwide earnings and tax regulations governing each region. We are subject to income taxes in both the United States and various foreign jurisdictions, and complex analyses and significant judgment are required to determine worldwide tax liabilities. Moreover, future tax liabilities may change as a result of unpredictable changes to the tax laws in relevant jurisdictions. From time to time, we have received notices of tax assessments in various jurisdictions where we operate. We may receive future notices of assessments and the amounts of these assessments or our failure to favorably resolve such assessments may have a material adverse effect on our financial condition or results of operations.

            We have significant amounts of deferred tax assets. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits associated with the deferred tax benefits will not be realized. If we are unable to generate sufficient future taxable income in certain jurisdictions, or if there is a significant change in the enacted tax rates or the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowances against our deferred tax assets, which would cause an

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increase in our effective tax rate. Proposals and discussions in Congress and the Executive branch for new U.S. tax legislation, as well as in California and other states for new state tax legislation, could, if adopted, adversely affect our effective tax rate. A significant increase in our effective tax rate could have a material adverse effect on our financial condition or results of operations.

            We were granted a tax holiday by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010. Such tax holiday is contingent upon meeting certain minimum requirements either on an annual basis or over specified periods of time ranging from 5 to 7 years. These requirements relate to capital expenditures levels, statutory revenue realization and the maintenance of a skilled workforce in Malaysia. If we are unable to meet these requirements, our income in Malaysia would be subject to taxation by the Malaysian government and this would result in increasing our effective tax rate.

We are subject to many environmental laws and regulations.

 Increasingly stringent environmental regulations restrict the amount and types of materials that can be released from our operations into the environment. While the cost of compliance with environmental laws has not had a material adverse effect on our results of operations historically, compliance with these and any future regulations could require significant capital investments in pollution control equipment or changes in the way we make our products. In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of liabilities and claims, regardless of fault, resulting from accidental releases, including personal injury claims and civil and criminal fines. The following should also be considered:

            For more information on environmental matters, see Note 15 to the Consolidated Financial Statements.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2.    PROPERTIES

 We conduct manufacturing, as well as certain research and development activities, at our wafer fabrication facilities located in South Portland, Maine and Greenock, Scotland. Wafer fabrication capacity utilization (based on wafer starts) was 64 percent for fiscal 2011 compared to 51 percent for fiscal 2010. Our assembly and test functions are performed primarily in our manufacturing facility located in Melaka, Malaysia.

            Our principal administrative and research facilities are located in Santa Clara, California. Our regional headquarters for Worldwide Marketing and Sales are located in Santa Clara, California; Munich, Germany; Tokyo, Japan; and Kowloon, Hong Kong. We maintain local sales offices and sales service centers in various locations and countries throughout our four business regions. We also operate small design facilities in various locations in the U.S., including:

• Federal Way, Washington   • Norcross, Georgia
• Fort Collins, Colorado   • Phoenix, Arizona
• Grass Valley, California   • South Portland, Maine
• Longmont, Colorado   • Tucson, Arizona

            Design facilities are also operated at overseas locations including China, Estonia, Finland, Germany, India, Italy, Japan, Malaysia, the Netherlands, Taiwan and the United Kingdom. We own our manufacturing facilities and our corporate headquarters. In general, we lease most of our research facilities and our sales and administrative offices. As described in the business section under Item 1 of this Form 10-K, our manufacturing operations are centralized and shared among our product line business units, and no individual facility is dedicated to a specific operating segment.

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ITEM 3.    LEGAL PROCEEDINGS

 We currently are a party to various legal proceedings, including those noted below. While we believe that the ultimate outcome of these various proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or results of operations, litigation is always subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include money damages or an injunction prohibiting us from selling one or more products. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the net income of the period in which the ruling occurs, and future periods.

Tax Matters

 The Internal Revenue Service is currently examining our federal tax returns for fiscal 2007 through 2009, as well as our amended federal tax returns for fiscal 2005 and 2006. Several U.S. state taxing jurisdictions are examining our state tax returns for fiscal 2001 through 2005. During fiscal 2010, the state of California closed its audits of fiscal years up through fiscal 2000, which resulted in an immaterial adjustment. Internationally, tax authorities from several foreign jurisdictions are also examining our foreign tax returns. We believe we have made adequate tax payments and/or accrued adequate amounts such that the outcome of these audits will have no material adverse effect on our financial statements.

Environmental Matters

 We have been named to the National Priorities List (Superfund) for our Santa Clara, California site and we have completed a remedial investigation/feasibility study with the Regional Water Quality Control Board (RWQCB), which is acting as agent for the EPA. We have agreed in principle with the RWQCB on a site remediation plan, and we are conducting remediation and cleanup efforts at the site. In addition to the Santa Clara site, we have been designated from time to time as a potentially responsible party by international, federal and state agencies for certain environmental sites with which we may have had direct or indirect involvement. These designations are made regardless of the extent of our involvement. These claims are in various stages of administrative or judicial proceedings and include demands for recovery of past governmental costs and for future investigations and remedial actions. In many cases, the dollar amounts of the claims have not been specified and the claims have been asserted against a number of other entities for the same cost recovery or other relief as is sought from us. We have also retained responsibility for environmental matters connected with businesses we sold in fiscal 1996 and 1997, but we are not currently involved in any legal proceedings relating to those liabilities.

Other

 In May 2008, eTool Development, Inc. and eTool Patent Holdings Corporation (collectively eTool) brought suit in the U.S. District Court for the Eastern District of Texas alleging that our WEBENCH® online design tools infringe an eTool patent and seeking an injunction and unspecified amounts of monetary damages (trebled because of the alleged willful infringement), attorneys' fees and costs. In December 2008, eTool amended the complaint and counterclaims to include our SOLUTIONS online tool in its allegations of infringement of the eTool patent. We filed an answer to the amended complaint and counterclaims for declaratory judgment of non-infringement and invalidity of the patent. On February 27, 2009, the Court held a scheduling conference setting a claim construction hearing for August 2011 and a jury trial for January 2012. eTool served its infringement contentions in March 2009 and we served our invalidity contentions in May 2009. Both parties exchanged initial disclosures on May 29, 2009. The discovery phase of the case is now open and ongoing. In February 2010, we filed our inter partes reexamination petition with the United States Patent and Trademark Office (PTO), seeking a determination that the '919 patent is invalid. On March 15, 2010, the PTO issued a communication granting our inter partes reexamination petition. The inter partes

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proceeding is ongoing. On June 8, 2010, eTool filed its second amended complaint removing the infringement allegations against our SOLUTIONS online tool. We answered eTool's second amended complaint on June 25, 2010. On February 7, 2011, we filed an amended answer, defenses and counterclaims that asserted an inequitable conduct defense and counterclaim. We intend to contest the case through all available means.

ITEM 4.    [REMOVED AND RESERVED]

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

See information appearing in Note 13, Shareholders' Equity; and Note 17, Financial Information by Quarter (Unaudited) in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Our common stock is traded on the New York Stock Exchange. During fiscal 2011, we paid total cash dividends of $91.6 million on our common stock, consisting of dividends of $0.08 per share of common stock paid in the first quarter of the fiscal year and dividends of $0.10 per share of common stock paid in the second, third and fourth quarters of the fiscal year. During fiscal 2010, we paid total cash dividends of $75.7 million on our common stock, consisting of dividends of $0.08 per share of common stock paid in each of the quarters of the fiscal year. During fiscal 2009, we paid total cash dividends of $64.4 million on our common stock, consisting of dividends of $0.06 per share of common stock paid in each of the first two quarters of the fiscal year and dividends of $0.08 per share of common stock in each of the remaining two quarters of the fiscal year. Subject to certain exceptions, the Merger Agreement provides that we may not declare or pay any dividends on our common stock without TI's prior written consent until the merger is completed or the Merger Agreement is terminated. Market price range data is based on the New York Stock Exchange Composite Tape. Market price per share at the close of business on July 15, 2011 was $24.82. At July 15, 2011, the number of record holders of our common stock was 4,566. For information on our equity compensation plans, see Item 12 of this Form 10-K.

            During the past three fiscal years, we did not make any unregistered sales of our securities.

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            The following graph compares a $100 investment in National stock over the five year period from the beginning of fiscal 2006 through the end of fiscal 2011, with a similar investment in the Standard & Poor's 500 Stock Index and Standard & Poor's 500 Semiconductor Industry Index. It shows the cumulative total returns over this five year period, assuming reinvestment of dividends.


Comparison of Five Year Cumulative Total Return* Among National,
S&P 500 Index and S&P 500 Semiconductor Industry Index

Comparison of Cumulative Five Year Total Return

CHART

 
  May 28,
2006

  May 27,
2007

  May 25,
2008

  May 31,
2009

  May 30,
2010

  May 29,
2011

 
 
     

National Semiconductor Corp.

  $ 100.00   $ 102.42   $ 81.32   $ 56.14   $ 58.10   $ 104.53  

S&P 500 Index

    100.00     120.64     111.68     76.65     92.74     115.58  

S&P 500 Semiconductor Industry Index

    100.00     109.14     106.26     72.95     99.56     120.40  

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Issuer Purchases of Equity Securities

The following table summarizes purchases we made of our common stock during the fourth quarter of fiscal 2011:

Period
  Total Number
Shares
Purchased(1)

  Average
Price Paid
per Share

  Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs

  Approximate
Dollar Value of
Shares that
May Yet Be
Purchased Under
the Plans or
Programs(2)

 
   

Month # 1

                         

February 28, 2011 - March 27, 2011

    122   $ 14.15     -   $ 127 million  

Month # 2

                         

March 28, 2011 - April 27, 2011

    4,805   $ 21.31     -   $ 127 million  

Month # 3

                         

April 28, 2011 - May 29, 2011

    1,504   $ 24.14     -   $ 127 million  
                       

Total

    6,431           -        
                       
(1)
Includes 3,231 shares that were acquired through the withholding of shares to pay employee tax obligations upon the vesting of restricted stock and 3,200 shares purchased by the rabbi trust utilized by our Deferred Compensation Plan, which permits participants to direct investment of their accounts in National stock in accordance with their instructions.

(2)
During the fourth fiscal quarter, no purchases were made under the $500 million stock repurchase program announced in June 2007, and any such repurchases are prohibited by the Merger Agreement. As of May 29, 2011, $127 million of the $500 million stock repurchase program announced in June 2007 remains available for future stock repurchases. We do not have any plans to terminate the program prior to its completion, and there is no expiration date for this repurchase program.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information has been derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of results of our future operations and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Form 10-K and the consolidated financial statements and related notes thereto in Item 8 of this Form 10-K.

FIVE-YEAR SELECTED FINANCIAL DATA
Years Ended (In Millions, Except Per Share Amounts and Employee Figures)

  May 29, 2011
  May 30, 2010
  May 31, 2009
  May 25, 2008
  May 27, 2007
 
 
     

OPERATING RESULTS

                               

Net sales

  $ 1,520.4   $ 1,419.4   $ 1,460.4   $ 1,885.9   $ 1,929.9  

Cost of sales

    482.0     484.2     544.1     671.5     757.7  
       

Gross margin

    1,038.4     935.2     916.3     1,214.4     1,172.2  

Operating expenses

    586.8     609.4     733.1     705.3     682.5  
       

Operating income

    451.6     325.8     183.2     509.1     489.7  

Interest (expense) income, net

    (52.5 )   (58.5 )   (62.3 )   (51.7 )   38.9  

Other non-operating (expense) income, net

    3.9     1.3     (7.3 )   (6.2 )   2.0  
       

Income before income taxes

    403.0     268.6     113.6     451.2     530.6  

Income tax expense

    104.2     59.4     40.3     118.9     155.3  
       

Net income

  $ 298.8   $ 209.2   $ 73.3   $ 332.3   $ 375.3  
       

EARNINGS PER SHARE

                               

Net income:

                               
 

Basic

  $ 1.24   $ 0.88   $ 0.32   $ 1.31   $ 1.17  
 

Diluted

  $ 1.20   $ 0.87   $ 0.31   $ 1.26   $ 1.12  

Weighted-average common and potential common shares outstanding:

                               
 

Basic

    241.8     236.4     229.1     252.8     319.5  
 

Diluted

    248.2     241.3     235.1     264.3     334.2  
   

FINANCIAL POSITION AT YEAR-END

                               

Working capital

  $ 1,403.1   $ 922.5   $ 811.6   $ 863.0   $ 991.5  

Total assets

  $ 2,395.3   $ 2,274.8   $ 1,963.3   $ 2,149.1   $ 2,246.8  

Long-term debt

  $ 1,042.8   $ 1,001.0   $ 1,227.4   $ 1,414.8   $ 20.6  

Total debt

  $ 1,042.8   $ 1,277.5   $ 1,289.9   $ 1,477.3   $ 20.6  

Shareholders' equity

  $ 850.5   $ 425.9   $ 177.0   $ 196.9   $ 1,768.5  
   

OTHER DATA

                               

Research and development

  $ 278.6   $ 272.7   $ 306.0   $ 363.0   $ 363.7  

Capital additions

  $ 100.0   $ 43.3   $ 83.7   $ 111.3   $ 106.6  

Cash dividends declared and paid

  $ 91.6   $ 75.7   $ 64.4   $ 50.6   $ 45.1  

Number of employees (in thousands)

    5.7     5.8     5.8     7.3     7.6  
   

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This MD&A contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Part I of Form 10-K "Item 1A. Risk Factors." These statements relate to, among other things, the pending merger with TI, sales, gross margins, operating expenses, capital expenditures, economic and market conditions, research and development efforts, asset dispositions, and acquisitions of and investments in other companies, and are indicated by words or phrases such as "anticipate," "expect," "outlook," "foresee," "believe," "could," "should," "intend," "will," and similar words or phrases. These statements involve risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. For a discussion of some of the factors that could cause actual results to differ materially from our forward-looking statements, see the discussion on risk factors that appears in Part I, Item 1A. of this Form 10-K and other risks and uncertainties detailed in this and our other reports and filings with the SEC. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so.

            This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Annual Report on Form 10-K for the year ended May 29, 2011.

Strategy and Business

We design, develop, manufacture and market a wide range of semiconductor products, most of which are analog and mixed-signal integrated circuits. Our goal is to be the premier provider of high-performance, energy-efficient analog and mixed-signal solutions. Many of these solutions are marketed under our PowerWise® brand. We are focused on the following:

            Approximately 93 percent of our net sales in fiscal 2011 came from Analog segment products. Beyond the general purpose analog categories defined by the World Semiconductor Trade Statistics (WSTS), we also sell analog subsystems specifically targeted at certain particular markets and applications. Energy efficiency is our overarching theme, and our PowerWise® products enable

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systems that consume less power, extend battery life and generate less heat. Our leading-edge products include power management circuits and sub-systems, audio and operational amplifiers, communication interface products and data conversion solutions. For more information on our business, see Part I, "Item 1. Business," in this Annual Report on Form 10-K for the fiscal year ended May 29, 2011.

            On April 4, 2011, we entered into the Merger Agreement with TI and Merger Sub, under which Merger Sub will, subject to the satisfaction or waiver of the conditions in the Merger Agreement, merge with and into National, and National will be the surviving corporation in the merger and a wholly owned subsidiary of TI. Pursuant to the terms and subject to the conditions of the Merger Agreement, at the Effective Time, each share of National common stock issued and outstanding immediately prior to the Effective Time (other than shares (i) held in treasury of National, (ii) owned by TI or Merger Sub or (iii) owned by shareholders who have perfected and not withdrawn a demand for appraisal rights under Delaware law) will be converted into the right to receive $25.00 in cash, without interest. Our Board of Directors unanimously approved the Merger Agreement and the merger on April 4, 2011, and on June 21, 2011, the Merger Agreement was adopted by our shareholders at a special meeting. The completion of the merger is subject to various closing conditions, including receiving certain foreign antitrust approvals. The transaction is expected to close before the end of the calendar year.

Critical Accounting Policies and Estimates

We believe the following critical accounting policies are those policies that have a significant effect on the determination of our financial position and results of operations. These policies also require us to make our most difficult and subjective judgments:

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Overview

We focus on providing leading-edge analog solutions with a large portion of our sales classified within the general purpose analog categories as defined by WSTS. In fiscal 2011, approximately 93 percent of our total sales came from our Analog segment. We believe that the success we have achieved in these markets has been driven by our knowledge of the analog markets, our circuit design capabilities and our understanding of electronic systems, especially as they pertain to energy efficiency that is enabled by our products. Our success has also been due to our innovative packaging and proprietary analog process technology, as well as our comprehensive manufacturing and supply chain competence.

            Net sales were higher in fiscal 2011 compared to net sales in fiscal 2010 due to higher overall demand from customers as the global economy continued to slowly recover. We also achieved a higher gross margin percentage in fiscal 2011 compared to fiscal 2010 as factory utilization increased to 64 percent in fiscal 2011 compared to 51 percent in fiscal 2010. Our performance in gross margin percentage is primarily attributable to continued improvement in manufacturing efficiencies from higher capacity utilization and benefits from factory consolidation activities that were completed by the end of fiscal 2010. We continue to direct our research and development investments on high-value growth areas in analog markets and applications, with particular focus on power management and energy efficiency where our PowerWise® products enable systems that consume less power, extend battery life and generate less heat.

            In reviewing our performance, we consider several key financial measures. When reviewing our net sales performance, we look at sales growth rates (both absolute and relative to competitors), new order rates (including turns orders, which are orders received with delivery requested in the same quarter), blended-average selling prices, sales of new products and market share. We gauge our operating income performance based on gross margin trends, product mix, blended-average selling prices, factory utilization rates and operating expenses relative to sales. Our profitability and earnings per share increased in fiscal 2011 compared to fiscal 2010. We remain focused on growing our revenue and earnings per share over time while generating a consistently high return on invested capital by concentrating on operating income, working capital management, capital expenditures and cash management. We determine return on invested capital based on net operating income after tax divided by invested capital, which generally consists of total assets reduced by goodwill and non-interest bearing liabilities.

            The following table and discussion provide an overview of our operating results for fiscal 2011, 2010 and 2009:

Years Ended:
(In Millions)

  May 29,
2011

  % Change
  May 30,
2010

  % Change
  May 31,
2009

 
 
     

Net sales

  $ 1,520.4     7.1 % $ 1,419.4     (2.8 %) $ 1,460.4  

Gross margin

 
$

1,038.4
       
$

935.2
       
$

916.3
 

As a % of net sales

    68.3 %         65.9 %         62.7 %

Operating income

 
$

451.6
       
$

325.8
       
$

183.2
 

As a % of net sales

    29.7 %         23.0 %         12.5 %

Net income

 
$

298.8
       
$

209.2
       
$

73.3
 

As a % of net sales

    19.7 %         14.7 %         5.0 %

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            Net income for fiscal 2011 also includes a net charge of $25.6 million for severance and restructuring expenses, of which $22.6 million relates to activities associated with the closures of our manufacturing facilities in Texas and China announced in March 2009 and $3.0 million relates to exit activities associated with the realignment of certain product line business units announced in May 2010 (See Note 6 to the Consolidated Financial Statements). Net income also includes $0.3 million of other operating expense (See Note 4 to the Consolidated Financial Statements). In addition, our fiscal 2011 net income includes approximately $14 million of expenses related to the merger transaction with TI that was announced on April 4, 2011. The vast majority of these expenses are not tax-deductible and are mostly embedded within selling, general and administrative expenses. These charges and credits described above are all pre-tax amounts.

            Net income for fiscal 2010 included a net charge of $20.1 million for severance and restructuring expenses, of which $1.7 million related to exit activities associated with the realignment of certain product line business units and $21.5 million related to the planned closures of our manufacturing facilities in Texas and China announced in March 2009. These severance and restructuring expenses were partially offset by a $3.1 million reduction of accrued expenses related to prior actions (See Note 6 to the Consolidated Financial Statements). Net income also included $0.4 million of other operating income (See Note 4 to the Consolidated Financial Statements). These charges and credits are all pre-tax amounts.

            Net income for fiscal 2009 included $143.9 million for severance and restructuring expenses related to the actions taken to reduce overall expenses in response to weak economic conditions and related business levels. Those actions included workforce reductions (in November 2008 and March 2009) and the planned closures of our manufacturing facilities in Texas and China announced in March 2009 (See Note 6 to the Consolidated Financial Statements). Net income also included a $2.9 million in-process R&D charge related to the acquisition of ActSolar, Inc. (See Note 7 to the Consolidated Financial Statements) and $2.7 million of other operating income (See Note 4 to the Consolidated Financial Statements). These charges and credits are all pre-tax amounts. Income tax expense for fiscal 2009 included incremental tax expense of $16.7 million related to the write down of foreign deferred tax assets that resulted from a tax holiday granted by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010. The effect of the write down of foreign deferred tax assets was partially offset by $15.0 million of tax benefits associated with R&D tax credits, net of the portion of the tax benefit that did not meet the more-likely-than-not recognition threshold.

Share-based Compensation Expense

Our operating results include the recognition of share-based compensation expense, which totaled $55.0 million in fiscal 2011, $73.8 million in fiscal 2010 and $70.9 million in fiscal 2009. Our share-based compensation expense in fiscal 2011 was lower compared to fiscal 2010 since we granted fewer stock options and more restricted stock units as part of our annual equity award grant in fiscal 2011. Stock options are subject to accelerated expense associated with employees who are eligible for retirement or expected to be eligible for retirement during the nominal vesting period. In contrast, we do not incur accelerated expense for restricted stock units since retirement-eligible employees do not receive accelerated vesting privileges. In addition, share-based compensation expense in fiscal 2010 contained an incremental $1.7 million charge related to the stock option exchange that occurred in November 2009. No such expense is included in fiscal 2011. The overall increase in our share-based compensation expense in fiscal 2010 compared to fiscal 2009 was primarily due to higher expense related to the share-based awards for our executive officers, as the company underwent a transition of its Chief Executive Officer during fiscal 2010. For further information and a description of

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our share-based compensation plans, see Note 1 and Note 14 to the Consolidated Financial Statements.

Net Sales

Years Ended:
(In Millions)

  May 29,
2011

  % Change
  May 30,
2010

  % Change
  May 31,
2009

 
       

Analog segment

  $ 1,418.9     7.7 % $ 1,316.9     (0.4 %) $ 1,322.8  

As a % of net sales

    93.3 %         92.8 %         90.6 %

All others

   
101.5
   
(1.0

%)
 
102.5
   
(25.5

%)
 
137.6
 

As a % of net sales

    6.7 %         7.2 %         9.4 %
       

Total net sales

  $ 1,520.4         $ 1,419.4         $ 1,460.4  
       

    100.0 %         100.0 %         100.0 %

The chart above and the following discussion are based on our reportable segments described in Note 16 to the Consolidated Financial Statements. The information for fiscal 2010 and 2009 has been reclassified to present segment information based on the structure of our operating segments in fiscal 2011.

            Beginning in fiscal 2011, we combined the activities of the former key market segments group together with certain emerging product lines that were previously a part of two separate power business units to form a new business unit called the strategic growth markets business unit. This business unit concentrates its efforts on selected high-growth emerging markets that represent promising opportunities to the company. The remaining product lines that were previously a part of the former performance power products business unit were combined with the remaining product lines within the infrastructure power business unit and renamed the power products business unit. As a result, the Analog segment now comprises five operating segments which include the high-speed products, mobile devices power, power products, precision signal path and strategic growth markets business units.

            Analog segment sales were higher in fiscal 2011 compared to fiscal 2010 due to higher overall demand from customers as the global economy continued to slowly recover. Sales of products for the industrial and the communications and networking markets were major contributors to year-over-year growth in sales. Unit shipments in our Analog segment were higher by 7 percent in fiscal 2011 compared to the volume shipped in fiscal 2010. Blended-average selling prices were essentially flat in fiscal 2011 compared to fiscal 2010.

            For purposes of this discussion, we have combined as one group the business units whose products fundamentally entail power management technology (mobile devices power, power products and strategic growth markets). Net sales from this group increased by 8 percent in fiscal 2011 compared to fiscal 2010. Net sales from our high-speed products and precision signal path business units in fiscal 2011 compared to fiscal 2010 increased by 13 percent and 2 percent, respectively.

            For other operating business units included in "All Others," sales were slightly lower in fiscal 2011 compared to fiscal 2010 as shipping volume and blended-average selling prices from non-analog business units that are no longer a part of our core focus have been declining. The sales from these non-analog business units also include sales generated from foundry and contract service arrangements.

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            For fiscal 2011, net sales in our geographic regions increased by 21 percent in Europe, 12 percent in Japan and 5 percent in the Americas while it remained flat in the Asia Pacific region compared to fiscal 2010. With respect to the profile of our various regions relative to the whole company, Europe increased to 25 percent of total sales, Japan remained flat at 9 percent of total sales, the Asia Pacific region decreased to 43 percent of total sales and the Americas declined to 23 percent of total sales. Although the euro strengthened against the dollar during fiscal 2011, the reported amount of net sales in U.S. dollars related to foreign currency-denominated sales in fiscal 2011 was unfavorably affected by foreign currency exchange rate fluctuations since the weighted-average exchange rate for the euro was weaker overall in fiscal 2011 than it was in fiscal 2010. This was partially offset by the favorable effect from the Japanese yen which strengthened over the fiscal year against the dollar. The overall effect of currency exchange rate fluctuations on net sales reported in U.S. dollars was minimal since only 17 percent of our total net sales were denominated in foreign currency and we have hedging programs intended to minimize the effect of currency exchange rate fluctuations.

            Analog segment sales were slightly lower in fiscal 2010 compared to fiscal 2009 due to lower overall demand from customers, particularly from customers in the wireless handset market, who were negatively affected by the downturn in the overall global economy throughout calendar 2009. Despite the effect of the economic downturn in fiscal 2010, analog sales were higher in the second half of fiscal 2010 over sales in the second half of fiscal 2009. As a result, unit shipments in our Analog segment were down by less than 1 percent in fiscal 2010 compared to the volume shipped in fiscal 2009 due to higher unit shipments in the second half of fiscal 2010. Blended-average selling prices were essentially flat in fiscal 2010 compared to fiscal 2009.

            For purposes of this discussion, we have combined as one group the business units whose products fundamentally entail power management technology (mobile devices power, power products and strategic growth markets). Net sales from this group decreased by 3 percent in fiscal 2010 compared to fiscal 2009. Net sales from our high-speed products and precision signal path business units in fiscal 2010 compared to fiscal 2009 increased by 5 percent and 1 percent, respectively.

            For other operating business units included in "All Others," sales were lower in fiscal 2010 compared to fiscal 2009 due to a lower volume of demand from non-analog business units that are no longer a part of our core focus. The sales from these non-analog business units also include sales generated from foundry and contract service arrangements.

            For fiscal 2010, net sales in our geographic regions increased by 7 percent in Japan and 2 percent in Europe while it decreased by 2 percent in the Americas and 7 percent in the Asia Pacific region compared to fiscal 2009. Sales in each region as a percentage of total net sales in fiscal 2010 compared to fiscal 2009 increased to 24 percent in the Americas, 22 percent in Europe and 9 percent in Japan while it declined in the Asia Pacific region to 45 percent. The reported amount of net sales in U.S. dollars related to foreign currency-denominated sales in fiscal 2010 was favorably affected by foreign currency exchange rate fluctuations as the Japanese yen strengthened over the fiscal year against the dollar. Although the euro weakened over the fiscal year against the dollar, it did not have a material effect on foreign currency-denominated sales in fiscal 2010. The overall effect of currency exchange rate fluctuations on net sales reported in U.S. dollars was minimal since only 16 percent of our total net sales were denominated in foreign currency and we have hedging programs intended to minimize the effect of currency exchange rate fluctuations.

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Gross Margin

Years Ended:
(In Millions)

  May 29,
2011

  % Change
  May 30,
2010

  % Change
  May 31,
2009

 
       

Net sales

  $ 1,520.4     7.1 % $ 1,419.4     (2.8 %) $ 1,460.4  

Cost of sales

    482.0     (0.5 %)   484.2     (11.0 %)   544.1  
       

Gross margin

  $ 1,038.4         $ 935.2         $ 916.3  
       

As a % of net sales

    68.3 %         65.9 %         62.7 %

Our gross margin percentage was higher in fiscal 2011 compared to fiscal 2010 mainly due to higher factory utilization, higher sales and the favorable effect of cost savings from the closures of our manufacturing facilities in Texas and China. Wafer fabrication capacity utilization (based on wafer starts) was 64 percent in fiscal 2011 compared to 51 percent in fiscal 2010. Although our blended-average selling prices in our Analog segment were flat in fiscal 2011 compared to fiscal 2010, product mix within our portfolio of analog products had a positive influence on our performance in gross margin percentage. Gross margin includes share-based compensation expense of $7.6 million in fiscal 2011 compared to $10.3 million in fiscal 2010.

            Our gross margin percentage was higher in fiscal 2010 compared to fiscal 2009, primarily due to the favorable effects of cost control measures, including cost savings from the closures of our manufacturing facilities in Texas and China. Although our blended-average analog selling prices were essentially flat compared to fiscal 2009, product mix within our portfolio of analog products continues to have a positive influence on our performance in gross margin percentage. Lower inventory obsolescence and scrap rates also affected our gross margin percentages favorably in fiscal 2010 compared to fiscal 2009. Wafer fabrication capacity utilization (based on wafer starts) was 51 percent in fiscal 2010 compared to 53 percent in fiscal 2009. Share-based compensation expense included in gross margin was $16.0 million in fiscal 2009.

Research and Development

Years Ended:
(In Millions)

  May 29,
2011

  % Change
  May 30,
2010

  % Change
  May 31,
2009

 
       

Research and development

  $ 278.6     2.2 % $ 272.7     (10.9 %) $ 306.0  

As a % of net sales

    18.3 %         19.2 %         21.0 %

The increase in research and development expenses in fiscal 2011 compared to fiscal 2010 primarily reflects higher annual payroll expenses. Share-based compensation expense included in R&D expense was $15.8 million in fiscal 2011 compared to $17.8 million in fiscal 2010. We are continuing to concentrate our research and development spending on analog products and underlying analog capabilities with particular emphasis on circuits that enable greater energy efficiency. We continue to invest in the development of new analog products that can serve applications in a wide variety of end markets such as portable electronics, industrial and automotive, LED lighting, communications infrastructure, renewable energy products and medical applications. Because of our focus on markets and applications that require or involve greater energy efficiency, a significant portion of our research and development is directed at power management technology.

            The decrease in research and development expenses in fiscal 2010 compared to fiscal 2009 primarily reflected cost savings associated with the cost reduction actions announced in fiscal 2009, including lower payroll and employee benefit expenses. Share-based compensation expense included in R&D expense was $24.3 million in fiscal 2009. R&D expenses for fiscal 2009 excluded an

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in-process R&D charge of $2.9 million related to the acquisition of ActSolar, Inc. (See Note 7 to the Consolidated Financial Statements), which was included as a separate component of operating expenses in the consolidated statement of income for fiscal 2009.

Selling, General and Administrative

Years Ended:
(In Millions)

  May 29, 2011
  % Change
  May 30, 2010
  % Change
  May 31, 2009
 
       

Selling, general and administrative

  $ 282.3     (10.9 %) $ 317.0     12.0 % $ 283.0  

As a % of net sales

    18.6 %         22.3 %         19.4 %

We record a charge or credit in selling, general and administrative expenses for the change in the liability associated with the employee deferred compensation plan due to an increase or decrease in the market value of the employees' corresponding investment assets for the plan. See the discussion of the corresponding gain and loss on the employees' investment assets described in the paragraph, "Other Non-Operating Income (Expense), Net." SG&A expenses include charges of $6.4 million in fiscal 2011 and $5.3 million in fiscal 2010 due to increases in the liability related to market fluctuation in the plan's investment assets. Excluding these amounts, SG&A expenses for fiscal 2011 decreased compared to fiscal 2010 by $35.8 million, or 12 percent. We believe that excluding these charges relating to changes in the liability associated with the employee deferred compensation plan liability provides a better understanding of the changes in our SG&A expenses that are related to our core operating performance during the relevant fiscal periods. The decrease in SG&A expenses reflect lower payroll and employee compensation expenses and lower share-based compensation expense. Share-based compensation expense included in SG&A expenses was $31.6 million in fiscal 2011 compared to fiscal 2010, which was $45.7 million. SG&A expenses in fiscal 2011 also include merger related expenses.

            Excluding the effect from the change in the liability associated with the employee deferred compensation plan, which included a credit of $7.7 million in fiscal 2009, SG&A expenses for fiscal 2010 compared to fiscal 2009 increased by $21.0 million, or 7.2 percent. The increase included higher employee benefit expenses and higher share-based compensation expenses related to executive officers, which are offset by cost savings associated with the cost reduction actions announced in fiscal 2009. Share-based compensation expense for fiscal 2010 included in SG&A expenses was $45.7 million compared to fiscal 2009, which was $30.6 million.

Severance and Restructuring Expenses Related to Cost Reduction Programs

Our fiscal 2011 results include a net charge of $25.6 million for severance and restructuring expenses, of which $22.6 million relates to activities associated with the closures of our manufacturing facilities in Texas and China announced in March 2009 and $3.0 million relates to exit activities associated with the realignment of certain product line business units announced in May 2010. For a more complete discussion of these actions and related charges, see Note 6 to the Consolidated Financial Statements.

            Our fiscal 2010 results included a net charge of $20.1 million for severance and restructuring expenses, of which $1.7 million related to exit activity associated with the realignment of certain product line business units and $21.5 million related to the planned closures of our manufacturing facilities in Texas and China announced in March 2009. These severance and restructuring expenses were partially offset by a $3.1 million reduction of accrued expenses related to prior actions. For a more complete discussion of these actions and related charges, see Note 6 to the Consolidated Financial Statements.

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            Our fiscal 2009 results included a net charge of $143.9 million for severance and restructuring expenses, of which $117.3 million related to the actions announced in March 2009 when we eliminated approximately 850 positions worldwide and announced the planned closures of our manufacturing facilities in Texas and China. It also included severance and restructuring expenses of $26.4 million related to a global workforce reduction announced in November 2008 and $0.2 million of residual charges related to other prior actions. For a more complete discussion of these actions and related charges, see Note 6 to the Consolidated Financial Statements.

Charge for Acquired In-Process Research and Development

In connection with the acquisition of ActSolar, Inc. in fiscal 2009, we allocated $2.9 million of the total purchase price to the value of in-process R&D (IPR&D). This amount was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed for the technology. There were no charges for acquired IPR&D in either fiscal 2011 or 2010 due to the change in accounting for business combinations beginning in fiscal 2010. See Note 7 to the Consolidated Financial Statements for a more complete discussion of our acquisitions.

Interest Income

Years Ended:
(In Millions)

  May 29,
2011

  May 30,
2010

  May 31,
2009

 
       

Interest income

  $ 2.6   $ 1.8   $ 10.4  

The increase in interest income in fiscal 2011 compared to fiscal 2010 is due to higher average cash balances and higher interest rates. The decrease in interest income in fiscal 2010 compared to fiscal 2009 is due to lower interest rates.

Interest Expense

Years Ended:
(In Millions)

  May 29,
2011

  May 30,
2010

  May 31,
2009

 
       

Interest expense

  $ 55.1   $ 60.3   $ 72.7  

The decrease in interest expense in fiscal 2011 and 2010 is due to lower overall debt balances.

Other Non-Operating Income (Expense), Net

Years Ended:
(In Millions)

  May 29,
2011

  May 30,
2010

  May 31,
2009

 
       

Gain (loss) on investments

  $ 6.7   $ 5.6   $ (7.3 )

Loss on extinguishment of debt

        (2.1 )    

Net loss on derivative instruments in fair value hedge

    (2.1 )   (2.2 )    

Loss on liquidation of interest rate swap

    (0.7 )        
       

Total other non-operating income (expense), net

  $ 3.9   $ 1.3   $ (7.3 )
       

A primary component of other non-operating income (expense), net is derived from activities or market value fluctuations related to investment assets. The gain on investments in fiscal 2011 and 2010 reflects an increase in the market value of the investment assets held in a trust for the employee deferred compensation plan while the loss on investments in fiscal 2009 reflected a decline in its market value. As described in the paragraph, "Selling, General and Administrative," SG&A expenses

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for the same period include the related charge or credit pertaining to the corresponding liability. The gain on investments also includes gains of $0.3 million in both fiscal 2011 and fiscal 2010 from the liquidation of a non-marketable investment we previously held. The loss on investments in fiscal 2009 included a gain of $0.4 million from non-marketable investments that were not associated with the deferred compensation plan. The loss on derivative instruments is a result of our interest rate swap agreement against the April 2010 $250 million debt issuance, which was liquidated in September 2010 (See Note 3 to the Condensed Consolidated Financial Statements).

Income Tax Expense

Years Ended:
(In Millions)

  May 29,
2011

  May 30,
2010

  May 31,
2009

 
       

Income tax expense

  $ 104.2   $ 59.4   $ 40.3  

Effective tax rate

    25.9 %   22.1 %   35.5 %

The effective tax rate was higher in fiscal 2011 compared to fiscal 2010 primarily because of higher U.S. income in fiscal 2011. Our fiscal 2011 effective tax rate was also higher because we incurred certain expenses associated with the Merger Agreement with TI that are not tax-deductible.

            The effective tax rate was lower in fiscal 2010 compared to fiscal 2009 due to a tax benefit of $7.4 million primarily arising from the repatriation of previously unremitted Japanese earnings. In addition, a portion of our earnings comes from our Malaysian subsidiary and is not taxable because of a tax holiday granted by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010.

            Our ability to realize the net deferred tax assets ($273.2 million at May 29, 2011) is primarily dependent on our ability to generate future U.S. taxable income. We believe it is more likely than not that we will generate sufficient taxable income to utilize these tax assets. Our ability to utilize these tax assets is dependent on future results and it is therefore possible that we will be unable to ultimately realize some portion or all of the benefits of these recognized deferred tax assets. This could result in additions to the deferred tax asset valuation allowance and an increase to tax expense.

Foreign Operations

Our foreign operations include manufacturing facilities in the Asia Pacific region and Europe and sales offices throughout the Asia Pacific region, Europe and Japan. A portion of the transactions at these facilities is denominated in local currency, which exposes us to risk from exchange rate fluctuations. Our exposure from expenses at foreign manufacturing facilities during fiscal 2011 was concentrated primarily in U.K. pound sterling and Malaysian ringgit. Where practical, we hedge net non-U.S. dollar denominated asset and liability positions using forward exchange and purchased option contracts. Our exposure from foreign currency denominated revenue is limited to the Japanese yen and the euro. We hedge up to 100 percent of the notional value of outstanding customer orders denominated in foreign currency using forward exchange contracts and over-the-counter foreign currency options. A portion of anticipated foreign sales commitments is at times hedged using purchased option contracts that have an original maturity of one year or less.

Financial Market Risks

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, we use derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes.

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            The credit quality of our investment portfolio (classified as cash and cash equivalents) remains very high. Our investment portfolio is mainly comprised of debt instruments that are with A/A2 or better rated issuers, of which the majority is rated AA-/Aa2 or better. We limit our exposure to any one counterparty by diversifying our investments and continually evaluating each counterparty's relative credit standing. As of May 29, 2011, the total credit exposure from most single counterparties typically does not exceed $40 million with the exception of AAA rated government-backed bonds and deposits. Our debt instruments also have very short average maturities that are generally less than 60 days, and we have not encountered any delays or disruption in their redemptions or maturities nor have we experienced any losses in connection with our cash investments. Our short-term investments include bank time deposits with financial institutions that have a combined capital and surplus of not less than $100 million and have maturities of less than a year.

            Due to the short-term nature of our investment portfolio, changes in interest rates would have a corresponding effect on our interest income. Our interest expense would not necessarily be affected by changes in interest rates since our long-term debt totaling approximately $1 billion has fixed interest rates.

            A substantial majority of our revenue and capital spending is transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the Japanese yen, pound sterling, euro and various other Asian currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we have established programs to hedge our exposure to these changes in foreign currency exchange rates. Our hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. An adverse change (defined as 15 percent in all currencies) in exchange rates would result in a decline in income before taxes of less than $10 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, these changes typically affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency selling prices. All of these potential changes are based on sensitivity analyses performed as of May 29, 2011.

Liquidity and Capital Resources

Years Ended:
(In Millions)

  May 29,
2011

  May 30,
2010

  May 31,
2009

 
       

Net cash provided by operating activities

  $ 373.5   $ 402.9   $ 360.8  

Net cash used in investing activities

    (134.1 )   (41.7 )   (81.7 )

Net cash used in financing activities

    (172.9 )   (34.5 )   (315.6 )
       

Net change in cash and cash equivalents

  $ 66.5   $ 326.7   $ (36.5 )
       

The primary factors contributing to the changes in cash and cash equivalents in fiscal 2011, 2010 and 2009 are described below:

            In fiscal 2011, cash provided by operating activities was generated by net income adjusted for non-cash items (primarily depreciation and amortization, and share-based compensation expense), which was partially offset by the negative effect from changes in working capital components. The negative effect in changes in working capital components was primarily caused by a decrease in accounts payable and accrued liabilities combined with an increase in other current assets. In fiscal 2010, cash from operating activities was positively affected by net income, adjusted for non-cash

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items (primarily depreciation and amortization, and share-based compensation expense), combined with a positive effect from changes in working capital components. The positive changes in working capital were from a decrease in inventory plus increases in accounts payable and accrued expenses, as well as other non-current liabilities. These positive changes were partially offset by the negative change in working capital from an increase in receivables and other current assets. In fiscal 2009, cash from operating activities was generated by net income, adjusted for non-cash items (primarily depreciation and amortization, and share-based compensation expense), combined with a positive effect from changes in working capital components. The positive changes in working capital were mainly attributable to decreases in receivables and inventories. These positive changes were partially offset by the negative change from decreases in accounts payable and accrued expenses, as well as the decrease in other non-current liabilities.

            The primary use of cash for investing activities in fiscal 2011 was the purchase of property, plant and equipment of $100.0 million, mainly representing the purchase of machinery and equipment, and the purchase of short-term investments of $80.0 million. This was partially offset by proceeds of $40 million from the maturity of short-term investments. The primary use of cash for investing activities in fiscal 2010 was the purchase of property, plant and equipment of $43.3 million, mainly representing the purchase of machinery and equipment. The primary use of cash for investing activities in fiscal 2009 was the purchase of property, plant and equipment of $83.7 million, mainly representing the purchase of machinery and equipment.

            The primary use of cash for financing activities in fiscal 2011 was for the repayment of our $250 million senior notes due June 2010. We also used cash to make payments of $91.6 million for cash dividends and $6.6 million for software license obligations in fiscal 2011. These amounts were partially offset by proceeds of $154.8 million from the issuance of common stock under employee benefit plans and $13.0 million from the liquidation of the interest rate swap agreement related to our $250 million senior unsecured notes due April 2015. The primary use of cash for financing activities in fiscal 2010 was for payments of $265.6 million of principal payments on the bank term loan, $75.7 million for cash dividends, and $6.3 million for software license obligations. This amount was partially offset by cash proceeds of $244.9 million (net of issuance costs and discount on principal) from our issuance of $250 million principal amount of senior unsecured notes in a public offering in April 2010 and $71.2 million from the issuance of common stock under employee benefit plans. The primary use of cash for financing activities in fiscal 2009 was for the repurchase of 6.2 million shares of our common stock in the open market for $128.4 million and payments of $187.6 million for principal payments on the unsecured bank term loan and $64.4 million for cash dividends. These amounts were partially offset by cash proceeds of $60.2 million from the issuance of common stock under employee benefit plans.

            We will continue to manage the level of capital expenditures relative to sales levels, capacity utilization and industry business conditions. At May 29, 2011, our total long term debt was $1.0 billion. We expect that existing cash and investment balances, together with existing lines of credit and cash generated by operations, will be sufficient to finance the capital investments currently planned for fiscal 2012, as well as our debt service payments. We also believe that such available cash and investment balances would also be sufficient to finance any termination fee that may be payable to TI pursuant to the Merger Agreement and our costs incurred in connection with the pending merger. However, we cannot assure that if economic conditions were to substantially further deteriorate within the next year, we would have the appropriate financial resources to meet our business requirements.

            Our cash and investment balances are dependent in part on continued collection of customer receivables and the ability to sell inventories. Although we have not experienced major problems

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with our customer receivables, continual declines in overall economic conditions could lead to deterioration in the quality of customer receivables in the future. Since we no longer hold marketable investments with maturities greater than 90 days, we did not experience any major declines in our cash equivalents or marketable investments as a result of the downturn in the financial markets. However, major declines in financial markets could cause reductions in our cash equivalents and marketable investments in the future.

            As of May 29, 2011, the amount of cash and short-term investments held by foreign subsidiaries was $316.2 million. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

            The following table provides a summary of the effect on liquidity and cash flows from our contractual obligations as of May 29, 2011:

 
  Payments due by period:  
(In Millions)
  Total
  Less than
1 Year

  1 – 3
Years

  3 – 5
Years

  More than
5 Years

 
 
     

Contractual obligations:

                               
 

Long-term debt

  $ 1,029.7   $ -   $ 404.7   $ 250.0   $ 375.0  

Operating lease obligations:

                               
 

Non-cancelable operating leases

    31.0     12.6     13.3     4.6     0.5  

Purchase obligations:

                               
 

Other software licensing agreements

    1.8     1.8     -     -     -  
 

Industrial gas contracts

    5.7     0.5     1.0     1.0     3.2  
 

Other purchase obligations

    17.5     8.1     6.8     2.6     -  
       

Total

  $ 1,085.7   $ 23.0   $ 425.8   $ 258.2   $ 378.7  
       

Commercial commitments: Standby letters of credit under bank multicurrency agreement

 
$

2.2
 
$

2.2
 
$

-
 
$

-
 
$

-
 
       

            In addition to amounts included in the table above, we have agreed to pay Qatalyst a fee of $28.0 million, $5.0 million of which was paid upon delivery of Qatalyst's opinion and the remainder of which will be paid upon, and subject to, the consummation of the merger with TI. The above table also excludes $195.8 million of long-term income taxes payable since we are unable to reliably estimate the timing of future payments related to uncertain tax positions. As of May 29, 2011, capital purchase commitments were $10.3 million.

            We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might be established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in trading activities involving non-exchange traded contracts. As a result, we do not believe we are materially exposed to financing, liquidity, market or credit risks that could arise if we had engaged in these relationships.

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Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2011-05, "Comprehensive Income (Topic 220) – Presentation of Comprehensive Income." This ASU increases the prominence of items reported in other comprehensive income and facilitates convergence of U.S. GAAP and IFRS by eliminating the option to present components of comprehensive income as part of the statement of changes in stockholders' equity. It requires those components to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU is effective and should be applied retrospectively beginning in our fiscal 2013. We do not expect the adoption of this ASU to have a significant effect on our consolidated financial statements.

            In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This ASU achieves the objectives of the FASB to develop common requirements for defining fair value and for the measurement of and disclosure about fair value between U.S. GAAP and IFRS. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. This ASU is effective on a prospective basis beginning in our fiscal 2013 and we do not expect the adoption of this ASU to have a significant effect on our consolidated financial statements.

            In December 2010, the FASB issued ASU No. 2010-29, "Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations – a consensus of the FASB Emerging Issues Task Force." This ASU clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures in Topic 805 when comparative financial statements are presented. It also improves the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. This ASU is effective for us beginning in fiscal 2012. The adoption of this ASU may expand the existing disclosure requirements, but we do not expect the adoption to have a significant effect on our consolidated financial statements.

            In December 2010, the FASB issued ASU No. 2010-28, "Intangibles – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts – a consensus of the FASB Emerging Issues Task Force." This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts and it provides guidance on when Step 2 of the goodwill impairment test is required for those reporting units. This ASU is effective for us beginning in fiscal 2012. We do not expect the adoption of this ASU to have a significant effect on our consolidated financial statements.

Outlook

Although we experienced a declining trend in new orders during the first three quarters of fiscal 2011, new orders grew in the fourth quarter of fiscal 2011 over the preceding third quarter by 21 percent. All of the improvement in new orders came from the distribution channel as new orders were down from our OEM customers. A portion of the improvement in new orders was attributable to better-than-expected turns orders, which represent orders received with delivery requested in the same quarter. These short-term orders also came primarily from our distributors who saw resales of our products increase by approximately 16 percent in the fourth quarter over the previous third quarter.

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            In light of the pending merger with TI, we are not providing guidance for net sales in the first quarter of fiscal 2012. We incurred approximately $14 million of expenses during the fourth quarter of fiscal 2011 that were attributable to the pending merger with TI. Most of these amounts are embedded within SG&A expenses. We anticipate that we will continue to incur merger-related expenses in the first quarter of fiscal 2012.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See information/discussion appearing under the subcaption "Financial Market Risks" of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K and the information appearing in Note 1, "Summary of Significant Accounting Policies," and Note 3, "Financial Instruments," in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
  Page

Financial Statements of National Semiconductor Corporation and Subsidiaries:

   

Consolidated Balance Sheets at May 29, 2011 and May 30, 2010

 
49

Consolidated Statements of Income for each of the years in the three-year period ended May 29, 2011

 
50

Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended May 29, 2011

 
51

Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended May 29, 2011

 
52

Consolidated Statements of Cash Flows for each of the years in the three-year period ended May 29, 2011

 
53

Notes to Consolidated Financial Statements

 
54

Reports of Independent Registered Public Accounting Firm

 
101

Financial Statement Schedule:

   

Schedule II – Valuation and Qualifying Accounts for each of the years in the three-year period ended May 29, 2011

 
148

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NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS

(In Millions, Except Share Amounts)
  May 29,
2011

  May 30,
2010

 
 
     

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 1,093.5   $ 1,027.0  
 

Short-term investments

    40.0     -  
 

Receivables, less allowances of $36.7 in 2011 and $30.0 in 2010

    81.5     98.2  
 

Inventories

    132.0     118.6  
 

Deferred tax assets

    64.1     70.3  
 

Other current assets

    187.5     156.8  
       

Total current assets

    1,598.6     1,470.9  

Property, plant and equipment, net

    421.1     390.1  

Goodwill

    68.3     66.1  

Deferred tax assets, net

    209.1     245.5  

Other assets

    98.2     102.2  
       

Total assets

  $ 2,395.3   $ 2,274.8  
       

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Current liabilities:

             
 

Current portion of long-term debt

  $ -   $ 276.5  
 

Accounts payable

    49.2     49.8  
 

Accrued liabilities

    142.1     204.5  
 

Income taxes payable

    4.2     17.6  
       

Total current liabilities

    195.5     548.4  

Long-term debt

    1,042.8     1,001.0  

Long-term income taxes payable

    195.8     175.3  

Other non-current liabilities

    110.7     124.2  
       

Total liabilities

    1,544.8     1,848.9  
       

Commitments and contingencies

             

Shareholders' equity:

             
 

Preferred stock of $0.50 par value. Authorized 1,000,000 shares.

    -     -  
 

Common stock of $0.50 par value. Authorized 850,000,000 shares.

             
   

Issued and outstanding 251,738,675 shares in 2011 and 239,071,512 shares in 2010

    125.9     119.5  
 

Additional paid-in-capital

    391.5     188.3  
 

Retained earnings

    457.5     250.3  
 

Accumulated other comprehensive loss

    (124.4 )   (132.2 )
       

Total shareholders' equity

    850.5     425.9  
       

Total liabilities and shareholders' equity

  $ 2,395.3   $ 2,274.8  
       

See accompanying Notes to Consolidated Financial Statements

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NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

Years Ended
(In Millions, Except Per Share Amounts)

  May 29,
2011

  May 30,
2010

  May 31,
2009

 
 
     

Net sales

  $ 1,520.4   $ 1,419.4   $ 1,460.4  

Cost of sales

    482.0     484.2     544.1  
       

Gross margin

    1,038.4     935.2     916.3  
       

Research and development

    278.6     272.7     306.0  

Selling, general and administrative

    282.3     317.0     283.0  

Severance and restructuring expenses

    25.6     20.1     143.9  

In-process research and development charge

    -     -     2.9  

Other operating expense (income), net

    0.3     (0.4 )   (2.7 )
       

Operating expenses

    586.8     609.4     733.1  
       

Operating income

    451.6     325.8     183.2  

Interest income

    2.6     1.8     10.4  

Interest expense

    (55.1 )   (60.3 )   (72.7 )

Other non-operating income (expense), net

    3.9     1.3     (7.3 )
       

Income before income taxes

    403.0     268.6     113.6  

Income tax expense

    104.2     59.4     40.3  
       

Net income

  $ 298.8   $ 209.2   $ 73.3  
       

Earnings per share:

                   
 

Basic

  $ 1.24   $ 0.88   $ 0.32  
 

Diluted

  $ 1.20   $ 0.87   $ 0.31  

Weighted-average common and potential common shares outstanding:

                   
 

Basic

    241.8     236.4     229.1  
 

Diluted

    248.2     241.3     235.1  

See accompanying Notes to Consolidated Financial Statements

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NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended
(In Millions)

  May 29,
2011

  May 30,
2010

  May 31,
2009

 
 
     

Net income

  $ 298.8   $ 209.2   $ 73.3  

Other comprehensive income (loss), net of tax:

                   
 

Defined benefit pension plans:

                   
   

Reclassification adjustment for the amortization of transition asset included in net periodic pension cost

    (0.1 )   (0.1 )   (0.2 )
   

Recognition of actuarial gain (loss) arising during the period

    7.5     (8.3 )   (36.5 )
 

Retirement health plan:

                   
   

Recognition of prior service costs upon implementation of new plan

    -     -     (0.2 )
   

Recognition of actuarial gain (loss) arising during the period

    0.4     (0.1 )   -  
       

Other comprehensive income (loss)

    7.8     (8.5 )   (36.9 )
       

Comprehensive income

  $ 306.6   $ 200.7   $ 36.4  
       

See accompanying Notes to Consolidated Financial Statements

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NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

 
  Common Stock    
   
   
 
(In Millions, Except Per Share Amount)
  Shares
  Par Value
  Additional
Paid-In
Capital

  Retained
Earnings

  Accumulated
Other
Comprehensive
Loss

  Total
 
   

Balance at May 25, 2008

    232.6   $ 116.3   $ -   $ 167.4   $ (86.8 ) $ 196.9  
 

Effect upon the adoption of new accounting standards for change in

                                     
 

defined benefit plan measurement date, net of tax

    -     -     -     (0.6 )   -     (0.6 )
 

Net income

    -     -     -     73.3     -     73.3  
 

Cash dividend declared and paid ($0.28 per share)

    -     -     -     (64.4 )   -     (64.4 )
 

Issuance of common stock under equity compensation plans

    6.2     3.1     59.1     -     -     62.2  
 

Cancellation of restricted stock

    -     -     (0.4 )   -     -     (0.4 )
 

Share-based compensation cost

    -     -     67.2     -     -     67.2  
 

Tax benefit associated with stock options

    -     -     8.1     -     -     8.1  
 

Purchase and retirement of treasury stock

    (6.2 )   (3.1 )   (66.4 )   (58.9 )   -     (128.4 )
 

Other comprehensive loss

    -     -     -     -     (36.9 )   (36.9 )
   

Balance at May 31, 2009

    232.6     116.3     67.6     116.8     (123.7 )   177.0  
 

Net income

    -     -     -     209.2     -     209.2  
 

Cash dividend declared and paid ($0.32 per share)

    -     -     -     (75.7 )   -     (75.7 )
 

Issuance of common stock under equity compensation plans

    6.3     3.2     65.9     -     -     69.1  
 

Issuance of stock under Executive Officer Equity Plan

    0.3     0.1     (0.1 )   -     -     -  
 

Cancellation of restricted stock

    (0.1 )   (0.1 )   (1.9 )   -     -     (2.0 )
 

Share-based compensation cost

    -     -     64.9     -     -     64.9  
 

Tax deficiency associated with stock options

    -     -     (6.8 )   -     -     (6.8 )
 

Stock option exchange program

    -     -     (1.3 )   -     -     (1.3 )
 

Other comprehensive loss

    -     -     -     -     (8.5 )   (8.5 )
   

Balance at May 30, 2010

    239.1     119.5     188.3     250.3     (132.2 )   425.9  
 

Net income

    -     -     -     298.8     -     298.8  
 

Cash dividend declared and paid ($0.38 per share)

    -     -     -     (91.6 )   -     (91.6 )
 

Issuance of common stock under equity compensation plans

    12.8     6.5     148.6     -     -     155.1  
 

Cancellation of restricted stock

    (0.2 )   (0.1 )   (3.5 )   -     -     (3.6 )
 

Share-based compensation cost

    -     -     51.9     -     -     51.9  
 

Tax benefit associated with stock options

    -     -     6.2     -     -     6.2  
 

Other comprehensive income

    -     -     -     -     7.8     7.8  
   

Balance at May 29, 2011

    251.7   $ 125.9   $ 391.5   $ 457.5   $ (124.4 ) $ 850.5  
   

See accompanying Notes to Consolidated Financial Statements

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NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended
(In Millions)

  May 29,
2011

  May 30,
2010

  May 31,
2009

 
       

CASH FLOWS FROM OPERATING ACTIVITIES:

                   

Net income

  $ 298.8   $ 209.2   $ 73.3  

Adjustments to reconcile net income with net cash provided by operating activities:

                   
 

Depreciation and amortization

    80.3     91.8     117.4  
 

Share-based compensation expense

    52.2     65.4     67.7  
 

Excess tax benefit from share-based payment arrangements

    (11.0 )   (0.3 )   (5.0 )
 

Tax benefit (deficiency) associated with stock options

    36.3     (6.8 )   8.1  
 

Deferred tax provision

    39.6     12.9     21.2  
 

(Gain) loss on investments

    (6.7 )   (5.6 )   7.3  
 

(Gain) loss on disposal of equipment

    (0.5 )   0.9     (0.1 )
 

Impairment (recovery) of equipment and other assets

    10.0     (1.2 )   55.1  
 

Non-cash restructuring recovery

    (1.0 )   (8.3 )   (1.5 )
 

In-process research and development charge

    -     -     2.9  
 

Loss on extinguishment of debt

    -     2.1     -  
 

Other, net

    5.6     7.4     3.1  
 

Changes in certain assets and liabilities, net:

                   
   

Receivables

    17.0     (28.2 )   65.2  
   

Inventories

    (13.5 )   15.7     13.5  
   

Other current assets

    (45.8 )   (23.1 )   2.9  
   

Accounts payable and accrued liabilities

    (67.3 )   59.9     (35.7 )
   

Current and deferred income taxes

    (23.1 )   1.7     (8.5 )
   

Other non-current liabilities

    2.6     9.4     (26.1 )
       

Net cash provided by operating activities

    373.5     402.9     360.8  
       

CASH FLOWS FROM INVESTING ACTIVITIES:

                   

Purchase of property, plant and equipment

    (100.0 )   (43.3 )   (83.7 )

Sale of equipment

    4.7     3.1     1.1  

Purchase of short-term investments

    (80.0 )   -     -  

Proceeds from maturity of short-term investments

    40.0     -     -  

Business acquisition, net of cash acquired

    (4.1 )   (4.8 )   (4.5 )

Funding of benefit plan

    (3.7 )   (1.6 )   (6.4 )

Redemption of benefit plan

    8.6     7.5     11.6  

Other, net

    0.4     (2.6 )   0.2  
       

Net cash used in investing activities

    (134.1 )   (41.7 )   (81.7 )
       

CASH FLOWS FROM FINANCING ACTIVITIES:

                   

Proceeds from unsecured senior notes, net of issuance costs of $2.4

    -     244.9     -  

Proceeds from liquidation of interest rate swap

    13.0     -     -  

Repayment of debt

    (250.0 )   (265.6 )   (187.6 )

Payment on software license obligations

    (6.6 )   (6.3 )   -  

Excess tax benefit from share-based payment arrangements

    11.0     0.3     5.0  

Issuance of common stock

    154.8     71.2     60.2  

Payroll taxes paid on behalf of employees

    (3.5 )   (2.0 )   (0.4 )

Purchase and retirement of treasury stock

    -     -     (128.4 )

Cash payments in connection with stock option exchange program

    -     (1.3 )   -  

Cash dividends declared and paid

    (91.6 )   (75.7 )   (64.4 )
       

Net cash used in financing activities

    (172.9 )   (34.5 )   (315.6 )
       

Net change in cash and cash equivalents

    66.5     326.7     (36.5 )

Cash and cash equivalents at beginning of year

    1,027.0     700.3     736.8  
       

Cash and cash equivalents at end of year

  $ 1,093.5   $ 1,027.0   $ 700.3  
       

See accompanying Notes to Consolidated Financial Statements

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NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Operations

We design, develop, manufacture and market a wide range of semiconductor products, most of which are analog and mixed-signal integrated circuits. Our goal is to be the premier provider of high-performance energy-efficient analog and mixed-signal solutions. These solutions are marketed under our PowerWise® brand. Energy-efficiency is our overarching theme, and our PowerWise® products enable systems that consume less power, extend battery life and generate less heat. Our leading-edge products include power management circuits and sub-systems, audio and operational amplifiers, communication interface products and data conversion solutions.

            On April 4, 2011, we entered into the Merger Agreement with TI and Merger Sub, under which Merger Sub will, subject to the satisfaction or waiver of the conditions in the Merger Agreement, merge with and into National, and National will be the surviving corporation in the merger and a wholly owned subsidiary of TI. Pursuant to the terms and subject to the conditions of the Merger Agreement, at the Effective Time, each share of National common stock issued and outstanding immediately prior to the Effective Time (other than shares (i) held in treasury of National, (ii) owned by TI or Merger Sub or (iii) owned by shareholders who have perfected and not withdrawn a demand for appraisal rights under Delaware law) will be converted into the right to receive $25.00 in cash, without interest. Our Board of Directors unanimously approved the Merger Agreement and the merger on April 4, 2011, and on June 21, 2011, the Merger Agreement was adopted by our shareholders at a special meeting. The completion of the merger is subject to various closing conditions, including receiving certain foreign antitrust approvals. The transaction is expected to close before the end of the calendar year.

Basis of Presentation

The consolidated financial statements include National Semiconductor Corporation and our majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. These financial statements have been prepared on the basis that our operations continue as planned prior to entering into the Merger Agreement with TI and therefore, do not include any effect of the expected consummation of the merger with TI, except for costs incurred to date in connection with the merger.

            Our fiscal year ends on the last Sunday of May. For each of our fiscal years ended May 29, 2011, and May 30, 2010, we had a 52-week year. For our fiscal year ended May 31, 2009, we had a 53-week year. Operating results for the additional week in fiscal 2009 were considered immaterial to our consolidated results of operations for fiscal 2009.

Revenue Recognition

We recognize revenue from the sale of semiconductor products upon shipment, provided we have persuasive evidence of an arrangement typically in the form of a purchase order, title and risk of loss have passed to the customer, the amount is fixed or determinable and collection of the revenue is reasonably assured. We record a provision for estimated future returns at the time of shipment. Approximately 71 percent of our semiconductor product sales were made to distributors in fiscal 2011, which includes approximately 9 percent of sales made through dairitens in Japan under local

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business practices. This compares to approximately 64 percent in fiscal 2010 and approximately 53 percent in fiscal 2009, which includes sales made through dairitens in Japan of approximately 9 percent in fiscal 2010 and approximately 8 percent in fiscal 2009. We have agreements with our distributors that cover various programs, including pricing adjustments based on resale pricing and volume, price protection for inventory and scrap allowances.

            In line with industry practices, we generally credit distributors for the effect of price reductions on their inventory of our products and, under specific conditions, we repurchase products that we have discontinued. In general, distributors do not have the right to return product, except under customary warranty provisions. The programs we offer to our distributors could include one or both of the following:

            Under the contract sales debit program, products are sold to distributors at standard published prices that are contained in price books that are broadly provided to our various distributors. Distributors are required to pay for this product within our standard commercial terms. After the initial purchase of the product, the distributor has the opportunity to request a price allowance for a particular part number depending on the current market conditions for that specific part as well as volume considerations. This request is made prior to the distributor reselling the part. Once we have approved an allowance to the distributor, the distributor proceeds with the resale of the product and credits are issued to the distributor in accordance with the specific allowance that we approved. Periodically, we issue new distributor price books. For those parts for which the standard prices have been reduced, we provide an immediate credit to distributors for inventory quantities they have on hand.

            Under the scrap allowance program, certain distributors are given a contractually defined allowance to cover the cost of any scrap they might incur. The amount of the allowance is specifically agreed upon with each distributor.

            The revenue we record for these distribution sales is net of estimated provisions for these programs. Our estimates are based upon historical experience rates by geography and product family, inventory levels in the distribution channel, current economic trends and other related factors. We regularly monitor the claimed allowances against the rates assumed in our estimates of the allowances. Actual distributor claims activity has been materially consistent with the provisions we have made based on our estimates.

            Service revenues are recognized as the services are provided or as milestones are achieved, depending on the terms of the arrangement. These revenues are included in net sales and totaled $18.4 million in fiscal 2011, $19.6 million in fiscal 2010 and $17.4 million in fiscal 2009.

            Certain intellectual property income is classified as revenue if it meets specified criteria established by company policy that defines whether it is considered a source of income from our primary operations. These revenues are included in net sales and totaled $0.3 million in fiscal 2011, $1.3 million in fiscal 2010 and $2.6 million in fiscal 2009. All other intellectual property income that does not meet the specified criteria is not considered a source of income from primary operations and is therefore classified as a component of other operating income, net, in the consolidated statement of income. Intellectual property income is recognized when the license is delivered, the fee

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is fixed or determinable, collection of the fee is reasonably assured and remaining obligations are perfunctory or inconsequential to the other party.

Inventories

Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. The total carrying value of our inventory is reduced for any difference between cost and estimated market value of inventory that is determined to be obsolete or unmarketable, based upon assumptions about future demand and market conditions.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. We use the straight-line method to depreciate machinery and equipment over their estimated useful life (3-9 years). Buildings and improvements are depreciated using both straight-line and declining-balance methods over the assets' remaining estimated useful life (3-50 years), or, in the case of leasehold improvements, over the lesser of the estimated useful life or lease term.

            We capitalize eligible costs to acquire software used internally. We use the straight-line method to amortize software used internally over its estimated useful life (generally 3-5 years). Internal-use software is included in the property, plant and equipment balance.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination. Goodwill is assigned to reporting units and as of May 29, 2011, we have five reporting units that contain goodwill.

            We evaluate goodwill for impairment on an annual basis and whenever events or changes in circumstance indicate that it is more likely than not that an impairment loss has been incurred. We assess the impairment of goodwill annually in our fourth fiscal quarter, which has been selected as the period for our recurring evaluation for all reporting units. Our impairment evaluation of goodwill is based on comparing the fair value to the carrying value of our reporting units containing goodwill. The fair value of a reporting unit is measured at the business unit level using a discounted cash flow approach that incorporates our estimates of future revenues and costs for those business units.

Impairment of Long-lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property, plant and equipment and amortizable intangible assets. Amortizable intangible assets subject to this evaluation include developed technology we have acquired, patents and technology licenses. Our impairment evaluation of long-lived assets includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If our estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. If assets are determined to be recoverable, but the useful lives are shorter than we originally estimated, we depreciate or amortize the net book value of the asset over the newly determined remaining useful lives.

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            We classify long-lived assets as assets held for sale when the criteria have been met, in accordance with ASC Topic 360, "Property, Plant, and Equipment." Upon classification of an asset as held for sale, we cease depreciation of the asset and classify the asset as a current asset at the lower of its carrying value or fair value (less cost to sell). If an asset is held for sale as a result of a restructuring of operations, any write down to fair value (less cost to sell) is included as a restructuring expense in the consolidated statement of income. When we commit to a plan to abandon a long-lived asset before the end of its previously estimated useful life, we revise depreciation estimates to reflect the use of the asset over its shortened useful life. We review depreciation estimates periodically, including both estimated useful lives and estimated salvage values. These reviews may result in changes to historical depreciation rates, which are considered to be changes in accounting estimates and are accounted for on a prospective basis.

Income Taxes

We determine deferred tax assets and liabilities based on the future tax consequences that can be attributed to net operating loss and credit carryovers and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the enacted tax rates expected to be applied when the taxes are actually paid or recovered. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which the net operating loss and credit carryovers and differences between financial statement carrying amounts and their respective tax bases become deductible.

Earnings per Share

We compute basic earnings per share using the weighted-average number of common shares outstanding. Diluted earnings per share are computed using the weighted-average common shares outstanding after giving effect to potential common shares from share-based awards using the treasury stock method.

            For all years presented, the reported net income was used as the numerator in our computation of basic and diluted earnings per share. A reconciliation of the shares used in the computation follows:

(In Millions, Except Exercise Prices)
  2011
  2010
  2009
 
 
     

Weighted-average common shares outstanding used for basic earnings per share

    241.8     236.4     229.1  

Effect of dilutive securities:

                   
 

Share-based awards

    6.4     4.9     6.0  
       

Weighted-average common and potential common shares outstanding used for diluted earnings per share

   
248.2
   
241.3
   
235.1
 
       

Anti-dilutive potential common shares:

                   
 

Stock options:

                   
   

Number of shares

    11.7     34.1     41.9  
       
   

Weighted-average exercise price

  $ 19.97   $ 21.68   $ 23.25  
       

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            Anti-dilutive potential common shares are not included in the calculation of diluted earnings per share. For fiscal 2011, 2010 and 2009, the effect of these shares was anti-dilutive because the exercise price of the related stock options exceeded the average market price during each of those years. Shares related to outstanding stock options at May 29, 2011 that were anti-dilutive could potentially dilute basic earnings per share in the future.

Currencies

The functional currency for all operations worldwide is the U.S. dollar. We include gains and losses arising from remeasurement of foreign currency financial statement balances into U.S. dollars and gains and losses resulting from foreign currency transactions in selling, general and administrative expenses. Included in net income were net foreign currency losses of $2.6 million in fiscal 2011, $3.9 million in fiscal 2010 and $3.4 million in fiscal 2009.

Financial Instruments

Cash and Cash Equivalents. Cash equivalents are highly liquid instruments with an original maturity of three months or less. We maintain cash equivalents in various currencies and in a variety of financial instruments.

Deferred Compensation Plan Assets. Employee contributions under the deferred compensation plan (See Note 12 to the Consolidated Financial Statements) are maintained in a rabbi trust and are not readily available to us. Participants can direct the investment of their deferred compensation plan accounts in the same investments funds offered by the 401(k) plan. Although participants direct the investment of these funds, they are classified as trading securities and are included in other assets because they remain assets of the company until they are actually paid out to the participants. We had deferred compensation plan assets of $41.8 million at May 29, 2011 and $40.3 million at May 30, 2010, which are included in other assets. In connection with these trading securities, we recorded net gains of $6.4 million in fiscal 2011 and $5.3 million in fiscal 2010 and a net loss of $7.7 million in fiscal 2009. There is an offset for the same amounts included in SG&A expenses in fiscal 2011, 2010 and 2009, respectively, that represents the corresponding change in the liability associated with the employee deferred compensation plan due to the change in market value of these trading securities.

Derivative Financial Instruments. As part of our risk management strategy we use derivative financial instruments, including forwards, swaps and purchased options, to hedge certain foreign currency and interest rate exposures. Our intent is to offset gains and losses that occur from our underlying exposure with gains and losses on the derivative contracts used to hedge them. As a matter of company policy, we do not enter into speculative positions with derivative instruments. The criteria we use for designating an instrument as a hedge include the instrument's effectiveness in risk reduction and direct matching of the financial instrument to the underlying transaction.

            We record all derivative instruments on the balance sheet at fair value. Gains or losses resulting from changes in the values of these derivatives are accounted for based on the use of the derivative and whether it qualifies for hedge accounting. See Note 3 to the Consolidated Financial Statements for a full description of our hedging activities and related accounting policies.

Share-based Compensation

We measure and record compensation expense for all share-based payment awards based on estimated fair values in accordance with ASC Topic 718, "Compensation-Stock Compensation." We provide share-based awards to our employees, executive officers and directors through various equity compensation plans including our employee equity, stock option, stock purchase and restricted stock plans.

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            The fair value of stock option and stock purchase equity awards is measured at the date of grant using a Black-Scholes option pricing model and the fair value of restricted stock awards is based on the market price of our common stock on the date of grant. The fair value of these awards is recognized on a straight-line basis over the vesting period. The cash awards that were paid on November 29, 2010 in connection with retention arrangements with each of our executive officers (approved by the Compensation Committee of our Board of Directors in November 2008) were considered a share-based payment award and measured at fair value since the award was indexed to the price of our common stock (See Note 14 to the Consolidated Financial Statements). The fair value of these cash awards was measured each reporting period and was calculated using the Monte Carlo valuation method.

            The compensation expense for share-based awards is based on awards that are expected to vest and is reduced for estimated forfeitures. We apply an annual forfeiture rate that is determined based on historical forfeiture activity. Our estimated forfeiture rate is evaluated each reporting period and, taking into consideration all available evidence both before and after the reporting date, we make appropriate adjustments. This forfeiture rate represents the awards expected to be forfeited each year and results in the recognition of share-based compensation expense over the vesting period for those awards that vest. For fiscal 2011, 2010 and 2009, forfeiture rates of 7.3 percent, 6.5 percent and 7.7 percent, respectively, were applied for share-based compensation expense related to employee stock options (excluding officers).

            Share-based compensation expense included in operating results for fiscal 2011, 2010 and 2009 is presented in the following table:

(In Millions, Except Per Share Amounts)
  2011
  2010
  2009
 
 
     

Cost of sales:

                   
 

Gross compensation

  $ 7.3   $ 9.8   $ 15.5  
 

Capitalized in inventory during the period

    (6.5 )   (7.8 )   (13.0 )
 

Realized from inventory during the period

    6.8     8.3     13.5  
       

    7.6     10.3     16.0  

Research and development

    15.8     17.8     24.3  

Selling, general and administrative

    31.6     45.7     30.6  
       

Total share-based compensation included in income before taxes

    55.0     73.8     70.9  

Income tax benefit

    (18.4 )   (23.5 )   (21.0 )
       

Total share-based compensation, net of tax, included in net income

  $ 36.6   $ 50.3   $ 49.9  
       

Share-based compensation effects on earnings per share:

                   
 

Basic

  $ 0.15   $ 0.21   $ 0.22  
 

Diluted

  $ 0.15   $ 0.21   $ 0.21  

Share-based compensation capitalized in inventory

 
$

0.7
 
$

1.0
 
$

1.5
 
       

Total gross share-based compensation

  $ 54.7   $ 73.3   $ 70.4  
       

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            The fair value of share-based awards to employees in connection with equity compensation plans was estimated using a Black-Scholes option pricing model that used the following weighted-average assumptions:

 
  2011
  2010
  2009
 
 
     

Stock Option Plan:

                   

Expected life (in years)

    3.8     3.8     3.7  

Expected volatility

    41 %   45 %   45 %

Risk-free interest rate

    1.4 %   1.9 %   2.4 %

Dividend yield

    2.2 %   2.3 %   1.4 %

Stock Purchase Plan:

                   

Expected life (in years)

    0.8     0.8     0.7  

Expected volatility

    35 %   42 %   39 %

Risk-free interest rate

    0.2 %   0.3 %   1.8 %

Dividend yield

    2.3 %   2.3 %   1.4 %

            The weighted-average fair value of stock options granted during both fiscal 2011 and 2010 was $4.01 per share, and during fiscal 2009 was $5.83 per share. The weighted-average fair value of rights granted under the stock purchase plan was $3.41, $4.06 and $5.05 per share for fiscal 2011, 2010 and 2009 respectively.

            The fair value of cash awards that were paid on November 29, 2010 in connection with the executive officer retention arrangements was estimated using the Monte Carlo valuation method. At May 30, 2010 the following closing stock price and weighted-average assumptions used were:

 
  2010
 
 
     

Executive Officer Retention Awards:

       

Closing stock price

  $ 14.05  

Remaining term (in years)

    0.5  

Expected volatility

    32 %

Risk-free interest rate

    0.2 %

Dividend yield

    2.3 %

            For all options granted after December 31, 2007, we determine expected life based on historical stock option exercise experience for the last four years, adjusted for our expectation of future exercise activity. For options granted prior to January 1, 2008, we use the simplified method specified by SEC's Staff Accounting Bulletin (SAB) No. 107 to determine the expected life of stock options. The expected volatility is based on implied volatility, as management has determined that implied volatility better reflects the market's expectation of future volatility than historical volatility, and is determined based on our traded options, which are actively traded on several exchanges. We derive the implied volatility using the closing prices of traded options during a period that closely matches the timing of the option grant for the stock option and stock purchase plans, and on the last day of the quarter for the cash awards under the executive officer retention arrangements. The traded options selected for our measurement for the stock option and stock purchase plans are near-the-money and close to the exercise price of the option grants and have terms ranging from one to two years. The traded options selected for our measurement of the cash awards under the executive officer retention arrangements were near-the-money and at the closing price of our common stock on the last day of the quarter and had similar remaining terms (in years). The risk-free interest rate is based upon interest rates that match the expected life of the outstanding options under our employee stock option plans, the expected life of the purchase rights under our employee

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stock purchase plan and the retention period under the executive officer retention arrangements, as applicable. The dividend yield is based on recent history and our expectation of dividend payouts.

            Under our equity compensation plans, employees who retire from the company and meet certain conditions set forth in the plans and related stock option grant agreements continue to vest in their stock options after retirement. During that post-retirement period of continued vesting, no service is required of the employee. Prior to fiscal 2007, we historically recognized compensation costs of these options using the nominal vesting period approach for pro forma reporting purposes. The FASB guidance specifies that a stock option award is considered to be vested when the employee's retention of the option is no longer contingent on the obligation to provide continuous service (the "non-substantive vesting period approach"). Under the non-substantive vesting period approach, the compensation cost should be recognized immediately for options granted to employees who are eligible for retirement at the time the option is granted. If an employee is not currently eligible for retirement, but is expected to become eligible during the nominal vesting period, then the compensation expense for the option should be recognized over the period from the grant date to the date retirement eligibility occurs. Beginning in fiscal 2007, we changed the method for recognizing the compensation cost for these options to the non-substantive vesting period approach for those options that were granted beginning in fiscal 2007. If we had used the non-substantive vesting period approach in calculating the amounts for unvested option grants prior to fiscal 2007, the pre-tax share-based compensation expense would have been lower by $1.3 million in fiscal 2010 and $6.8 million in fiscal 2009. Pre-tax share-based compensation expense in fiscal 2011 was not affected.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2009-13, "Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force." In the absence of vendor-specific objective evidence (VSOE) or other third party evidence (TPE) of the selling price for the deliverables in a multiple-element arrangement, this ASU requires companies to use an estimated selling price (ESP) for the individual deliverables. Companies are to apply the relative-selling price model for allocating an arrangement's total consideration to its individual elements. Under this model, the ESP is used for both the delivered and undelivered elements that do not have VSOE or TPE of the selling price. The FASB also issued ASU No. 2009-14, "Software (Topic 985) – Certain Revenue Arrangements That Include Software Elements," which excludes the software from the scope of software revenue guidance if the software contained in the tangible product is essential to the tangible product's functionality. Both ASUs are effective for us beginning in our fiscal 2012, with earlier application permitted. We elected to early adopt the accounting requirements in these ASUs during the second quarter of fiscal 2011. Their adoption did not have a material effect on our consolidated financial statements.

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Reclassifications

Certain amounts in the consolidated financial statements and notes to consolidated financial statements for prior years have been reclassified to conform to the fiscal 2011 presentation. Net operating results have not been affected by these reclassifications.

Note 2. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which the transaction to sell the asset or transfer the liability would occur and the assumptions that market participants would use in pricing the asset or liability. We measure fair value to record our available-for-sale securities, derivative financial instruments and the deferred compensation plan assets. The measurement of fair value for our long-term debt is used to provide disclosure under Accounting Standards Codification (ASC) Topic 825, "Financial Instruments." We do not measure fair value to record the carrying value of our long-term debt, except for the debt associated with our interest rate swap that was subject to hedge accounting (See Note 3 to the Condensed Consolidated Financial Statements). Our non-financial assets subject to fair value measurements include goodwill and amortizable intangible assets, which are measured and recorded at fair value in the period they are acquired or determined to be impaired, and property, plant and equipment, which is measured and recorded at fair value in the period it is determined to be impaired or classified as held for sale.

            The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1.  Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

            Level 1 assets include our investments in institutional money-market funds that are classified as cash equivalents and the investment funds of the deferred compensation plan assets where the respective financial instruments are traded in an active market with sufficient volume and frequency of activity.

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

            Level 2 assets and liabilities include our investments in commercial paper that are classified as cash equivalents and our senior notes that represent long-term debt instruments that are less actively traded in the market, but where quoted market prices exist for similar instruments that are actively traded, and derivative financial instruments which are based on observable inputs or can be corroborated by observable data for substantially the full term of the derivative financial instrument.

Level 3.  Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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            Level 3 assets include goodwill, amortizable intangible assets, and property, plant and equipment where we determine fair value based on unobservable inputs using the best information available in the circumstances and take into consideration assumptions that market participants would use in pricing the asset.

            Assets and liabilities measured at fair value on a recurring basis include the following:

(In Millions)
  Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1)

  Significant
Other
Observable
Inputs
(Level 2)

  Total
 
 
     

Balances at May 29, 2011:

                   

Cash and cash equivalents:

                   
 

Institutional money-market funds

  $ 231.1   $ -   $ 231.1  
 

Commercial paper

    -     369.9     369.9  
       

    231.1     369.9     601.0  

Other assets:

                   
 

Investment funds – Deferred compensation plan assets:

                   
   

Institutional money-market funds

    7.3     -     7.3  
   

Mutual funds

    33.5     -     33.5  
   

Marketable equity securities

    1.0     -     1.0  
       

    41.8     -     41.8  
       

Total assets measured at fair value

  $ 272.9   $ 369.9   $ 642.8  
       
 

Accrued liabilities:

                   
   

Derivative liabilities – Forward contracts

  $ -   $ 0.1   $ 0.1  
       

Total liabilities measured at fair value

  $ -   $ 0.1   $ 0.1  
       

Balances at May 30, 2010:

                   

Cash and cash equivalents:

                   
 

Institutional money-market funds

  $ 216.6   $ -   $ 216.6  
 

Commercial paper

    -     79.9     79.9  
       

    216.6     79.9     296.5  

Other current assets:

                   
 

Derivative assets – Forward contracts

    -     0.6     0.6  

Other assets:

                   
 

Investment funds – Deferred compensation plan assets:

                   
   

Institutional money-market funds

    6.9     -     6.9  
   

Mutual funds

    32.6     -     32.6  
   

Marketable equity securities

    0.8     -     0.8  
       

    40.3     -     40.3  
 

Derivative assets – Interest rate swap

    -     1.6     1.6  
       

Total assets measured at fair value

  $ 256.9   $ 82.1   $ 339.0  
       

            There were no transfers between level 1 and level 2 financial assets and liabilities in fiscal 2011 and 2010.

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            The institutional money-market funds and the various investment funds within our deferred compensation plan assets are traded in an active market and the net asset value of each fund on the last day of the quarter is used to determine its fair value. We determine fair value of our commercial paper by obtaining non-binding market prices from our broker on the last day of each quarter. We then corroborate these market prices by comparison to quoted market prices for similar instruments. The fair value of foreign currency forward contracts represents the present value difference between the stated forward contract rate and the current market forward rate at settlement. The fair value of foreign currency option contracts represents the probable weighted net amount we would expect to receive at maturity. The fair value of the interest rate swap was determined using a valuation model that includes significant observable inputs, such as interest rate yield curves and discount rates commensurate with the six-month LIBOR interest rates, as well as the creditworthiness of the counterparties and our own nonperformance risk.

            Non-financial assets measured at fair value on a recurring basis include the following:

(In Millions)
  Significant
Other
Observable
Inputs
(Level 2)

 
 
     

Balance at May 29, 2011:

       

Other assets:

       
 

Property, plant and equipment held for sale

  $ 17.6  
       

            In fiscal 2011, a portion of our assets held for sale was written down to its fair value of $17.6 million less cost to sell of $0.7 million. As a result we recorded an impairment charge of $6.0 million, which is further discussed in Note 6 to the Consolidated Financial Statements. The fair value of those assets held for sale is based on market prices of similar assets using a market approach that includes observable inputs.

            The fair value of our long-term debt (including the current portion) at May 29, 2011 was $1,141.3 million and at May 30, 2010 was $1,339.2 million. The fair value measurements for our long-term debt instruments take into consideration credit rating changes, equity price movements, interest rate changes and other economic variables.

Note 3. Financial Instruments

Cash Equivalents

Our policy is to diversify our investment portfolio to minimize the exposure of our principal to credit, geographic and investment sector risk. At May 29, 2011, investments were placed with a variety of different financial institutions and other issuers. Investments with maturity of one year or less have a rating of A1/P1 or better.

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            Our cash equivalents consisted of the following as of May 29, 2011 and May 30, 2010:

(In Millions)
  2011
  2010
 
 
     

CASH EQUIVALENTS

             

Available-for-sale securities:

             
 

Institutional money market funds

  $ 231.1   $ 216.6  
 

Commercial paper

    369.9     79.9  
       

    601.0     296.5  

Held-to-maturity securities:

             
 

Bank time deposits

    345.4     530.0  
       

Total cash equivalents

  $ 946.4   $ 826.5  
       

Short-Term Investments

(In Millions)
  2011
  2010
 
 
     

Bank time deposit maturing September 2011

  $ 40.0   $ -  
       

Total short-term investments

  $ 40.0   $ -  
       

Derivative Financial Instruments

The objective of our foreign exchange risk management policy is to preserve the U.S. dollar value of after-tax cash inflow in relation to non-U.S. dollar currency movements. We are exposed to foreign currency exchange rate risk that is inherent in orders, sales, cost of sales, expenses, and assets and liabilities denominated in currencies other than the U.S. dollar. We enter into foreign exchange contracts, primarily forwards and purchased options, to hedge against exposure to changes in foreign currency exchange rates. These contracts are matched at inception to the related foreign currency exposures that are being hedged. Exposures which are hedged include sales by subsidiaries, and assets and liabilities denominated in currencies other than the U.S. dollar. Our foreign currency hedges typically mature within six months.

            Derivative instruments used to hedge exposures to variability in expected future foreign denominated cash flows are not designated as cash flow hedges. Gains or losses on these derivative instruments are immediately recorded in earnings.

            We had an interest rate swap agreement that managed our exposure to interest rate changes from our $250 million senior unsecured notes due April 2015 (see below). The agreement effectively converted the fixed interest rate of the $250 million principal amount of senior unsecured notes to a floating interest rate. We designated this swap agreement as a fair value hedge and recognized the changes in the fair value of both the swap and the related debt, which we recorded as gains or losses on derivative instrument in fair value hedge included in other non-operating income, net.

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            The following table provides information about gains (losses) associated with our derivative financial instruments:

 
   
  Amount of Gains
(Losses) Recognized
in Income on
Derivative
   
  Amount of Losses
Recognized in
Income on
Hedged Item
 
 
  Location of
Gains (Losses)
Recognized
in Income on
Derivative

  Location of
Losses
Recognized
in Income on
Hedged Item

 
(In Millions)
  2011
  2010
  2009
  2011
  2010
  2009
 
 
     
Fair value hedge:                                              
  Interest rate swap   Other non-operating income (expense), net   $ 12.0   $ 1.6   $ -   Other non-operating income (expense), net   $ (14.1 ) $ (3.8 ) $ -  
                   
Instruments without hedge accounting designation:                                              
  Forward contracts   Selling, general and administrative   $ (2.8 ) $ 0.1   $ 2.4                        
  Purchased options   Selling, general and administrative     (0.6 )   (0.1 )   (0.2 )                      
                                 
        $ (3.4 ) $ -   $ 2.2                        
                                 

            In September 2010, we liquidated our interest rate swap for which we received proceeds of $16.1 million including accrued interest through the liquidation date. Upon the date of liquidation, we measured the fair value of both the swap and the related debt, which resulted in a net gain on derivative instrument in fair value hedge of $0.3 million. We also incurred a loss of $0.7 million due to the derecognition of the fair value hedge in connection with the liquidation of the interest rate swap. These amounts are included in other non-operating income, net for fiscal 2011. The accumulated fair value adjustment to the carrying value of the senior unsecured notes will be amortized over the remaining term of the debt on an effective yield basis and will be recorded as a reduction of interest expense. No further fair value adjustments will be made to the carrying value of the senior unsecured notes.

Fair Value and Notional Principal of Derivative Financial Instruments

The notional principal amounts for derivative financial instruments provide one measure of the transaction volume outstanding as of fiscal year-end and do not represent the amount of the exposure to credit or market loss. The estimates of fair value are based on applicable and commonly

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used pricing models using prevailing financial market information at May 29, 2011. The table below shows the fair value and notional principal of derivative financial instruments:

 
  Liability Derivatives  
(In Millions)
  Balance Sheet Location
  Notional
Principal

  Fair Value
 
 
     

Balances at May 29, 2011:

                   

Instruments without hedge accounting designation:

                   
 

Forward contracts

    Accrued liabilities   $ 28.7   $ 0.1  
             

 

 
  Asset Derivatives  
(In Millions)
  Balance Sheet Location
  Notional
Principal

  Fair Value
 
 
     

Balances at May 30, 2010:

                   

Fair value hedge:

                   
 

Interest rate swap

    Other assets   $ 250.0   $ 1.6  

Instruments without hedge accounting designation:

                   
 

Forward contracts

    Other current assets     20.0     0.6  
             

Total

        $ 270.0   $ 2.2  
             

Concentrations of Credit Risk

Financial instruments that may subject us to concentrations of credit risk are primarily investments and trade receivables. Our investment policy requires cash investments to be placed with high-credit quality counterparties and limits the amount of investments with any one financial institution or direct issuer. We sell our products to distributors and manufacturers involved in a variety of industries including computers and peripherals, wireless communications and automotive. We perform continuing credit evaluations of our customers whenever necessary and we generally do not require collateral. Our top ten customers combined represented approximately 61 percent of total accounts receivable at May 29, 2011 and approximately 58 percent of total accounts receivable at May 30, 2010.

            Net sales to major customers as a percentage of total net sales were as follows:

 
  2011
  2010
  2009
 
       

Distributor:

                   
 

Avnet

    20 %   17 %   15 %
 

Arrow

    16 %   15 %   13 %

            Sales to the distributors included above are mostly for our Analog segment products, but also include some sales for our other operating segment products. Historically, we have not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

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Note 4. Consolidated Financial Statement Details

Consolidated Balance Sheets
(In Millions)

  2011
  2010
 
 
     

RECEIVABLE ALLOWANCES

             

Doubtful accounts

  $ 0.3   $ 0.4  

Returns and allowances

    36.4     29.6  
       

Total receivable allowances

  $ 36.7   $ 30.0  
       

INVENTORIES

             

Raw materials

  $ 11.6   $ 9.5  

Work in process

    86.3     67.8  

Finished goods

    34.1     41.3  
       

Total inventories

  $ 132.0   $ 118.6  
       

OTHER CURRENT ASSETS

             

Prepaid income taxes

  $ 133.9   $ 90.0  

Prepaid expenses

    13.2     19.8  

Assets held for sale

    33.9     45.8  

Other

    6.5     1.2  
       

Total current assets

  $ 187.5   $ 156.8  
       

PROPERTY, PLANT AND EQUIPMENT

             

Land

  $ 21.1   $ 21.1  

Buildings and improvements

    399.8     398.3  

Machinery and equipment

    1,643.0     1,679.4  

Internal-use software

    69.0     81.5  

Construction in progress

    44.1     18.7  
       

Total property, plant and equipment

    2,177.0     2,199.0  

Less accumulated depreciation and amortization

    (1,755.9 )   (1,808.9 )
       

Total property, plant and equipment, net

  $ 421.1   $ 390.1  
       

OTHER ASSETS

             

Debt issuance costs

  $ 4.5   $ 5.8  

Income tax receivable

    41.7     41.7  

Deferred compensation plan assets

    41.8     40.3  

Other

    10.2     14.4  
       

Total other assets

  $ 98.2   $ 102.2  
       

ACCRUED LIABILITIES

             

Payroll and employee related

  $ 71.7   $ 127.3  

Accrued interest payable

    22.9     24.6  

Deferred gain on sale of assets

    13.3     -  

Severance and restructuring expenses

    1.2     15.4  

Other

    33.0     37.2  
       

Total accrued liabilities

  $ 142.1   $ 204.5  
       

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Consolidated Balance Sheets
(In Millions)

  2011
  2010
 
 
     

OTHER NON-CURRENT LIABILITIES

             

Accrued pension obligation

  $ 57.7   $ 67.3  

Deferred compensation plan liability

    41.8     40.3  

Other

    11.2     16.6  
       

Total other non-current liabilities

  $ 110.7   $ 124.2  
       

 

 
   
   
 

ACCUMULATED OTHER COMPREHENSIVE LOSS

             

Defined benefit pension plans

  $ (124.5 ) $ (131.9 )

Other

    0.1     (0.3 )
       

Total accumulated other comprehensive loss

  $ (124.4 ) $ (132.2 )
       

 

Consolidated Statements of Income
(In Millions)

  2011
  2010
  2009
 
       

OTHER OPERATING EXPENSE (INCOME), NET

                   

Net intellectual property income

  $ (0.2 ) $ (0.3 ) $ (2.7 )

Litigation settlement

    -     (0.3 )   -  

Other

    0.5     0.2     -  
       

Total other operating expense (income), net

  $ 0.3   $ (0.4 ) $ (2.7 )
       

OTHER NON-OPERATING INCOME (EXPENSE), NET

                   
 

Trading securities:

                   
   

Change in unrealized holding gains/losses, net

  $ 6.4   $ 5.3   $ (7.7 )
 

Non-marketable investments:

                   
   

Gain from sale

    -     -     0.4  
   

Gain from liquidation of investment

    0.3     0.3     -  
       

Total gain (loss) on investments, net

    6.7     5.6     (7.3 )

Loss on extinguishment of debt

    -     (2.1 )   -  

Net loss on derivative instrument in fair value hedge

    (2.1 )   (2.2 )   -  

Loss on liquidation of interest rate swap

    (0.7 )   -     -  
       

Total other non-operating income (expense), net

  $ 3.9   $ 1.3   $ (7.3 )
       

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Note 5. Supplemental Disclosure of Cash Flow Information and Non-Cash Investing and Financing Activities

(In Millions)
  2011
  2010
  2009
 
       

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                   

Cash paid for:

                   

Interest

  $ 56.2   $ 59.3   $ 70.8  

Income taxes

  $ 101.7   $ 83.3   $ 24.3  

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

                   

Cancellation of shares withheld for taxes on restricted stock and performance share unit awards

  $ 3.6   $ 2.0   $ 0.4  

Acquisition of software under license obligations, net

  $ 0.4   $ -   $ 3.3  

Deposit applied to purchase equipment

  $ 4.7   $ 15.0   $ -  

Note 6. Cost Reduction Programs and Restructuring of Operations

Fiscal 2011

We recorded a net charge of $25.6 million for severance and restructuring expenses in fiscal 2011. The following table provides additional detail related to these expenses:

(In Millions)
  Analog
Segment

  All
Others

  Total
 
       

May 2010 business realignment:

                   
 

Severance

  $ 0.7   $ 0.8   $ 1.5  
 

Other exit-related costs

    0.3     0.1     0.4  
 

Impairment of equipment and other assets

    1.2     -     1.2  
 

Release of reserves:

                   
   

Severance

    (0.1 )   -     (0.1 )
       

    2.1     0.9     3.0  

March 2009 workforce reduction and plant closures:

                   
 

Other exit-related costs

    -     15.1     15.1  
 

Severance

    -     0.4     0.4  
 

Gain on sale of equipment

    -     (0.8 )   (0.8 )
 

Impairment of property, plant and equipment

    -     8.8     8.8  
 

Release of reserves:

                   
   

Severance

    -     (0.9 )   (0.9 )
       

    -     22.6     22.6  
       

Total severance and restructuring expenses, net

  $ 2.1   $ 23.5   $ 25.6  
       

            In connection with exit activities related to the realignment of certain product line business units originally announced in May 2010, we recorded a total net charge of $3.0 million in fiscal 2011. This amount includes $1.5 million for severance expenses and $0.4 million for other exit-related costs in connection with two leased facilities. In the first quarter of fiscal 2011, we also decided to discontinue the development of a product which was originally acquired with the purchase of ActSolar, Inc. in fiscal 2009. As a result, we recorded a $1.2 million charge to write off the intangible asset and certain equipment related to the development project that is no longer used. These charges were partially offset by a recovery of $0.1 million to reduce accrued severance expenses upon

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finalizing severance packages with certain terminated employees in foreign locations. All activities related to the product line business realignment were substantially completed by the end of fiscal 2011.

            In connection with the workforce reduction and plant closures announced in March 2009, we recorded a total net charge of $22.6 million in fiscal 2011. This amount includes other exit-related costs of $15.1 million associated with the closure and transfer activities that occurred at our manufacturing sites in Texas and China during fiscal 2011, and $0.4 million for severance expenses. We also recorded a $6.0 million impairment charge to reduce the carrying value of one of the manufacturing sites that is held for sale since the industrial real estate market in its location has declined. In addition, we recorded a $0.8 million charge to write off certain Texas building improvements that were removed in the second quarter of fiscal 2011 and a $2.0 million charge to write off certain Texas equipment previously classified as held for sale that remained unsold after completing a final public sale of the equipment in the first quarter of fiscal 2011. As a result, total charges for the impairment of property, plant and equipment were $8.8 million in fiscal 2011. Partially offsetting the charges discussed above was a $0.9 million recovery to reduce accrued severance expenses upon redeploying certain employees from Texas and China to other locations, and a $0.8 million gain on the sale of certain Texas equipment. Since these net charges relate to actions announced in fiscal 2009, total cumulative net charges since March 2009 through the end of fiscal 2011 for these actions are presented in the following table:

(In Millions)
  Analog
Segment

  All
Others

  Total
 
       

March 2009 workforce reduction and plant closures:

                   
 

Severance

  $ 14.0   $ 46.6   $ 60.6  
 

Other exit-related costs

    -     47.1     47.1  
 

Impairment of property, plant and equipment

    -     63.1     63.1  
 

Gain on sale of equipment

    -     (2.1 )   (2.1 )
 

Other equipment gain, net

    -     (1.2 )   (1.2 )
 

Release of reserves:

                   
   

Severance

    (0.4 )   (5.7 )   (6.1 )
       

Total cumulative severance and restructuring expenses for the March 2009 workforce reduction and plant closures

  $ 13.6   $ 147.8   $ 161.4  
       

            We ceased production activity in both China and Texas in fiscal 2010 and the remaining activities associated with the closures of those manufacturing facilities were substantially completed in fiscal 2011. Since then, we have been actively engaged in locating buyers to purchase each of these manufacturing facilities. As a result, all of the China and Texas plant assets have been classified as held for sale. As of May 29, 2011, the total carrying value of assets held for sale was $33.9 million and is reported in other current assets in the consolidated balance sheet. We have ceased depreciation on these assets and now measure the carrying value at the lower of historical net book value or fair value (less cost to sell). Activity related to assets held for sale during fiscal 2011 includes the $6.0 million impairment charge to reduce the carrying value of one of the facilities to its fair value less cost to sell, the sale of certain Texas equipment with a carrying value of $2.6 million and the write off of certain Texas building improvements and equipment with a carrying value of $2.8 million. In addition, certain Texas equipment with a carrying value of $0.5 million (approximating fair value) was transferred to our manufacturing facility in Maine and reclassified as held and used.

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            After the end of fiscal 2011, we completed the sale of our China manufacturing facility to an unrelated third party in June 2011. The facility and its existing machinery and equipment, which had a carrying value of $17.0 million, were sold for $26.6 million. As a result, we expect to record a gain in the first quarter of fiscal 2012 of approximately $6 million after determining the final costs of the transaction. A portion of the proceeds in the amount of $13.3 million was received prior to the end of fiscal 2011 and is included in deferred gain on sale of assets on the consolidated balance sheet.

            In June 2011, we also completed the sale of our ERI business to an unrelated third party for $0.8 million. The ERI business was a part of the strategic growth market business unit within our Analog reportable segment. Under the terms of the agreement, we sold certain assets and liabilities, primarily intellectual property and customer contracts, which had a carrying value of $0.4 million. As a result, we expect to record a gain in the first quarter of fiscal 2012 after determining the final costs of the transaction.

Fiscal 2010

We recorded a net charge of $20.1 million for severance and restructuring expenses in fiscal 2010. The following table provides additional detail related to these expenses:

(In Millions)
  Analog
Segment

  All
Others

  Total
 
       

May 2010 business realignment:

                   
 

Severance

  $ 1.1   $ 0.6   $ 1.7  

March 2009 workforce reduction and plant closures:

                   
 

Other exit-related costs

    -     28.7   $ 28.7  
 

Severance

    -     0.5     0.5  
 

Gain on sale of equipment

    -     (1.3 )   (1.3 )
 

Other equipment gain, net

    -     (1.2 )   (1.2 )
 

Release of reserves:

                   
   

Severance

    (0.4 )   (4.8 )   (5.2 )
       

    (0.4 )   21.9     21.5  

November 2008 workforce reduction:

                   
 

Release of reserves:

                   
   

Severance

    (0.2 )   (2.8 )   (3.0 )

Fiscal 2008 workforce reduction and manufacturing restructure:

                   
 

Release of reserves:

                   
   

Other exit-related costs

    -     (0.1 )   (0.1 )
       

Total severance and restructuring expenses, net

  $ 0.5   $ 19.6   $ 20.1  
       

            We recorded a charge of $1.7 million in fiscal 2010 for severance payments to employees who were terminated in connection with exit activities as part of the realignment of certain product line business units announced in May 2010.

            In connection with the workforce reduction and plant closures announced in March 2009, we recorded a net charge of $21.5 million in fiscal 2010 for additional severance and restructuring expenses that were partially offset by the equipment gains described below. The restructuring expenses included $28.7 million of other exit-related costs associated with closure and transfer activities that occurred at our manufacturing sites in Texas and China during fiscal 2010, and $0.5 million for severance expenses.

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            By the second half of fiscal 2010, the global economy began to slowly recover as revenue prospects improved significantly. An increasing portion of our revenues were coming from a portfolio of products that are primarily manufactured in our wafer fabrication facility in Greenock, Scotland. Management believed there was a larger market with a longer life for these products than was previously assumed and decided to increase its manufacturing capacity in Scotland. Certain equipment previously classified as held for sale, primarily the Texas equipment, is now being used in our manufacturing facility in Scotland. The carrying value of this equipment was adjusted based on the lower of its carrying value before being classified as held for sale (adjusted for any depreciation that would have been recognized had it been continuously classified as held and used), or its fair value at the time management decided the equipment would no longer be sold. Since the date we first classified this equipment as held for sale to the date we reclassified it as held and used, the fair value of this equipment had increased. As a result, we recorded a gain of $1.2 million to restore the carrying value of the equipment to fair value which was lower than what its carrying value would have been had it been continuously classified as held and used. The weighted average remaining life of this equipment at the time we classified it as held for sale was 7.8 years and when it was reclassified as held and used in fiscal 2010, its weighted-average remaining life was 7.3 years. We also recorded a gain of $1.3 million upon completing the sale of some of the equipment in China and Texas during fiscal 2010. In addition to these equipment gains, we recorded a recovery of $5.2 million due to adjustments to reduce accrued severance expenses for manufacturing employees who voluntarily terminated prior to their scheduled departure dates and for severance packages that were finalized with certain employees in foreign locations.

Fiscal 2009

We recorded a net charge of $143.9 million for severance and restructuring expenses in fiscal 2009. The following table provides additional detail related to these expenses:

(In Millions)
  Analog
Segment

  All
Others

  Total
 
       

March 2009 workforce reduction and plant closures:

                   
 

Severance

  $ 14.0   $ 45.7   $ 59.7  
 

Impairment of equipment and other assets

    -     54.3     54.3  
 

Other exit-related costs

    -     3.3     3.3  
       

    14.0     103.3     117.3  

November 2008 workforce reduction:

                   
 

Severance

    9.8     15.7     25.5  
 

Impairment of equipment

    0.7     0.1     0.8  
 

Other exit-related costs

    0.1     -     0.1  
       

    10.6     15.8     26.4  

Fiscal 2008 workforce reduction and manufacturing restructure:

                   
 

Other exit-related costs

    -     2.2     2.2  
 

Gain on sale of equipment

    -     (0.5 )   (0.5 )
 

Release of reserves:

                   
   

Severance

    (1.1 )   (0.3 )   (1.4 )
       

    (1.1 )   1.4     0.3  

Release of reserves related to other prior actions:

                   
 

Other exit-related costs

    -     (0.1 )   (0.1 )
       

Total severance and restructuring expenses

  $ 23.5   $ 120.4   $ 143.9  
       

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            In March 2009, we announced that we would take actions to reduce overall expenses in response to weak economic conditions and related business levels. As part of the plan, we eliminated approximately 850 positions worldwide in our product lines, sales and marketing, manufacturing and support functions. The majority of the affected employees departed by the end of fiscal 2009. We also planned to further reduce headcount by approximately 875 through the eventual closure of our wafer fabrication facility in Arlington, Texas and our assembly and test plant in Suzhou, China. The departure of these additional employees was to coincide with the phased timing of the plant closures. As a result of these actions, we recorded $117.3 million in fiscal 2009, which included severance costs of $59.7 million, asset impairment charges of $54.3 million and other exit-related costs of $3.3 million associated with closure and transfer activities incurred in fiscal 2009. Included in the asset impairment charges was $9.8 million related to the modification of a CAD software license that reduced the volume of licenses available for use by the company.

            In November 2008, we announced a global workforce reduction that eliminated approximately 330 positions in response to the uncertain business climate at that time. These positions were primarily in non-manufacturing functions in our product line, marketing and sales, and general administrative operations. In addition to the workforce reduction, we closed two design centers located in the United States. As a result of this action, we recorded severance and restructuring expenses of $26.4 million in fiscal 2009, which represented the total amount expected to be incurred. This amount included severance costs of $25.5 million, other exit-related costs of $0.1 million and $0.8 million for the impairment of abandoned equipment.

            In addition to the actions described above, we recorded a net charge of $0.3 million related to the workforce reduction and manufacturing restructure announced in fiscal 2008. This amount included a $2.2 million charge for other exit-related costs primarily incurred in connection with dismantling and removing equipment. This charge was partially offset by a recovery of $1.9 million, which included $1.4 million primarily due to an adjustment to reduce accrued severance expenses upon finalizing severance packages with certain terminated employees in foreign locations and a gain of $0.5 million from the subsequent sale of some of the equipment that had been previously written down.

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Summary of Activities

The following table provides a summary of the activities related to our severance and restructuring costs included in accrued expenses during fiscal 2011, 2010 and 2009:

 
  Fiscal 2010
Business Unit Realignment
  Fiscal 2009
Workforce Reduction and Plant Closures
  Cost Reduction and
Restructuring Actions In Prior Years
   
 
(In Millions)
  Severance
  Other Exit-Related Costs
  Severance
  Other Exit-Related Costs
  Severance
  Other Exit-Related Costs
  Total
 
       

Balances at May 25, 2008

                          $ 14.5   $ 0.8   $ 15.3  
 

Cost reduction charges

              $ 85.2   $ 3.4     -     2.2     90.8  
 

Cash payments

                (42.3 )   (2.2 )   (13.0 )   (2.7 )   (60.2 )
 

Release of residual reserves

                -     -     (1.4 )   (0.1 )   (1.5 )
                   

Balances at May 31, 2009

                42.9     1.2     0.1     0.2     44.4  
 

Cost reduction charges

  $ 1.7   $ -     0.5     28.7     -     -     30.9  
 

Cash payments

                (22.7 )   (29.3 )   (0.2 )   (0.1 )   (52.3 )
 

Exchange rate adjustment

                0.6     -     0.1     -     0.7  
 

Release of residual reserves

                (8.2 )   -     -     (0.1 )   (8.3 )
       

Balance at May 30, 2010

    1.7     -     13.1     0.6     -     -     15.4  
 

Cost reduction charges

    1.5     0.4     0.4     15.1     -     -     17.4  
 

Cash payments

    (2.6 )   (0.4 )   (11.8 )   (15.6 )   -     -     (30.4 )
 

Exchange rate adjustment

    (0.1 )   -     (0.1 )   -     -     -     (0.2 )
 

Release of residual reserves

    (0.1 )   -     (0.9 )   -     -     -     (1.0 )
       

Balance at May 29, 2011

  $ 0.4   $ -   $ 0.7   $ 0.1   $ -   $ -   $ 1.2  
       

            During fiscal 2011 we paid severance to 211 employees in connection with exit activities as part of the business unit realignment announced in May 2010 and the plant closures. Payments for other exit-related costs were primarily for expenses associated with closure and transfer activities incurred in connection with the closures of our manufacturing facilities in Texas and China. The balances at May 29, 2011, which are expected to be paid in early fiscal 2012, primarily represent remaining estimated costs for activities that have occurred, but have yet to be paid, as a result of the business realignment and the manufacturing plant closures.

Note 7. Acquisition

Fiscal 2011

In June 2010, we acquired substantially all of the assets of GTronix Inc. (GTronix), a fabless semiconductor company based in Fremont, California. GTronix's proprietary analog technology provides very low-power solutions for noise cancellation in mobile applications such as wireless handsets and audio accessories. The acquisition of GTronix's assets is intended to expand our existing audio portfolio. In addition, GTronix technology has potential for other broader applications in which low-power analog signal processing is important.

            The acquisition was accounted for using the acquisition method of accounting with a purchase price of $4.5 million for the GTronix's assets. The acquired assets constitute a business and included

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primarily amortizable intangible assets, inventory and equipment. No liabilities were assumed in the transaction. The purchase price was allocated as follows:

(In Millions)
  Total  

Tangible assets

  $ 0.2  

Acquired developed technology

    1.7  

Other intangible assets

    0.4  

Goodwill

    2.2  
       

Total

  $ 4.5  
       

            Goodwill from this acquisition is included in our Analog segment and it primarily represents the expected value of future technologies that have yet to be determined. Goodwill is expected to be deductible for tax purposes.

            Revenue and earnings of GTronix since the acquisition date included in our operating results for fiscal 2011 were immaterial.

Fiscal 2010

In October 2009, we acquired Energy Recommerce Inc. (ERI), a privately held solar energy company that provided web-based monitoring of commercial photovoltaic systems performance. The acquisition of ERI expanded our portfolio of power management technologies.

            Beginning in fiscal 2010, we adopted ASC Topic 805, "Business Combinations," which changed the accounting for business combinations. The acquisition of ERI was accounted for using the acquisition method of accounting with a purchase price of $6.1 million for all of the outstanding shares of the company's common stock. The purchase price was allocated as follows:

(In Millions)
  Total  

Net assets

  $ 0.2  

Acquired developed technology

    0.8  

Other intangible assets

    1.1  

Goodwill