Other product offerings that are not analog or mixed-signal include microcontrollers and embedded Bluetooth^TM 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:

•

high-efficiency switching voltage regulators and controllers

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•

high-performance low drop-out voltage regulators



•

accurate LED drivers



•

precision voltage references



•

battery management integrated circuits



•

photovoltaic power optimizer solutions

            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:

•

high-speed and precision operational amplifiers



•

high-fidelity, low-power audio amplifiers



•

high-speed and power efficient analog-to-digital converters and digital-to-analog converters



•

precision timing products



•

high-speed communication interface and signal-conditioning products



•

thermal management products

            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:

            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:

•

Allowances involving pricing and volume.  We refer to this as the "contract sales debit" program.

•

Allowances for inventory scrap.  We refer to this as the "scrap allowance" program.

            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:

            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:

•

Wafer Fabrication.  Product designs are compiled and digitized by state of the art design equipment and then transferred to silicon wafers in a series of complex precision processes that include oxidation, lithography, chemical etching, diffusion, deposition, implantation and metallization.

•

Wafer Sort.  The silicon wafers are tested and separated into individual circuit devices.

•

Product Assembly.  Tiny wires are used to connect the electronic circuits on the device to the stronger metal leads of the package in which the device is encapsulated for protection.

•

Final Test.  The devices are subjected to a series of rigorous tests using computerized circuit testers and, for certain applications, environmental testers such as burn-in ovens, centrifuges, temperature cycle or moisture resistance testers, salt atmosphere testers and thermal shock testers.

•

Coating.  Certain devices in the analog portfolio are designed to be used without traditional packaging. In this case, the integrated circuit is coated with a protective material to allow mounting directly onto a circuit board.

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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:

•

various conditions to the closing of the merger may not be satisfied or waived;

•

the merger may not be consummated, which among other things would cause our stock price to decline significantly, because the current stock price assumes the merger will be completed;

•

required regulatory approvals from governmental entities may delay the merger or result in the imposition of conditions that could cause TI to abandon the merger; we are still awaiting a regulatory decision in China;

•

the Merger Agreement may be terminated in circumstances that would require us to pay TI a termination fee of $200,000,000;

•

disruptions from the merger, whether completed or not, may harm our relationships with our employees, customers, suppliers or other business partners, and may result in a loss of or a substantial decrease in purchases by our major customers; and

•

pending the closing of the merger, the Merger Agreement restricts us from engaging in certain actions without TI's approval, which could prevent us from pursuing business opportunities that arise prior to the closing of the merger.

            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:

•

the patents owned by us or numerous other patents which third parties license to us will not be invalidated, circumvented, challenged or licensed to other companies; or

•

any of our pending or future patent applications will be issued within the scope of the claims sought by us, if at all; or

•

our products will not be held to infringe patents of others.

            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:

•

we will have additional cash requirements in order to support the payment of principal and interest on our outstanding indebtedness;

•

increases in our outstanding indebtedness and leverage may increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure;

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•

our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes may be limited; and

•

our flexibility in planning for, or reacting to, changes in our business and our industry may be limited.

            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:

•

seek additional financing in the debt or equity markets;

•

refinance, retire or restructure all or a portion of our indebtedness;

•

sell selected assets;

•

reduce or delay planned capital expenditures; or

•

reduce or delay planned operating expenditures.

            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:

•

we currently are remediating past contamination at some of our sites;

•

we have been identified as a potentially responsible party at a number of Superfund sites where we (or our predecessors) disposed of wastes in the past; and

•

significant regulatory and public attention on the impact of semiconductor operations on the environment may result in more stringent regulations, further increasing our costs.

            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:

            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

*    Assumes $100 invested on 5/28/06 in stock or index, including reinvestment of dividends.

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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:

⁽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.

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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:

•

growing our core revenues by marketing our extensive portfolio of general purpose analog products to a broad base of customers utilizing our established distribution channels and industry leading design tools;

•

identifying and understanding the complex application specific system problems addressable by analog innovation;

•

providing energy efficient, analog-intensive solutions that enable customers to differentiate their products while reducing the power consumption of their systems;

•

targeting our analog solutions towards emerging areas or applications that can provide further growth on top of our core business (current examples would include LED lighting, automotive, personal mobile devices, renewable energy, communications infrastructure and portable medical);

•

consistently delivering competitive products with superior quality and supply chain execution to our customers, and

•

consistently delivering superior returns on invested capital to our shareholders.

            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:

a)

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 business practices. This compares to approximately 64 percent in fiscal 2010 and approximately 53 percent in fiscal 2009, which included sales made through dairitens in Japan of approximately 9 percent in fiscal 2010 and 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. The revenue we record for these distribution sales is net of estimated provisions for these programs. When determining this net distribution revenue, we must make significant judgments and estimates. 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 allowance 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. However, because of the inherent nature of estimates, there is always a risk that there could be significant differences between actual amounts and our estimates. Our financial condition and operating results are dependent on our ability to make reliable estimates, and we believe that our

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estimates are reasonable. However, different judgments or estimates could result in variances that might be significant to our operating results.

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

b)

Valuation of 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. Reductions in carrying value are deemed to establish a new cost basis. Inventory is not written up if estimates of market value subsequently improve. We evaluate obsolescence by analyzing the inventory aging, order backlog and future customer demand on an individual product basis. If actual demand were to be substantially lower than what we have estimated, we may be required to write inventory down below the current carrying value. While our estimates require us to make significant judgments and assumptions about future events, we believe our relationships with our customers, combined with our understanding of the end-markets we serve, provide us with the ability to make reasonable estimates. The actual amount of obsolete or unmarketable inventory has been materially consistent with previously estimated write-downs we have recorded. We also evaluate the carrying value of inventory for lower-of-cost-or-market on an individual product basis, and these evaluations are intended to identify any difference between net realizable value and standard cost. Net realizable value is used as a measure of market for purposes of evaluating lower-of-cost-or-market and is determined as the selling price of the product less the estimated cost of disposal. When necessary, we reduce the carrying value of inventory to net realizable value. If actual market conditions and resulting product sales were to be less favorable than what we have projected, additional inventory write-downs may be required.

c)

Impairment of Goodwill, Intangible Assets and Other 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

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licenses. We assess the impairment of goodwill annually in our fourth fiscal quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the factors we consider include:

•

significant decrease in the market value of an asset;

•

significant changes in the extent or manner for which the asset is being used or in its physical condition;

•

significant change, delay or departure in our business strategy related to the asset;

•

significant negative changes in the business climate, industry or economic conditions; and

•

current period operating losses or negative cash flow combined with a history of similar losses or a forecast that indicates continuing losses associated with the use of an asset.

        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. We determine fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in our current business model. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. If, as a result of our analysis, we determine that our amortizable intangible assets or other long-lived assets have been impaired, we will recognize an impairment loss in the period in which the impairment is determined. Any such impairment charge could be significant and could have a material adverse effect on our financial position and results of operations.

        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 in other current assets 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.

        Our impairment evaluation of goodwill is based on comparing the fair value to the carrying value of our reporting units containing goodwill. Our reporting units are based on our operating segments as defined under ASC Topic 280, "Segment Reporting." 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. As of May 29, 2011 our reporting units containing goodwill include

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our high-speed products, mobile devices power, power products and precision signal path business units, all of which are operating segments within our Analog reportable segment, and our custom solutions business unit which is included in the category "All Others." Based upon our annual impairment assessment of goodwill completed in the fourth quarter of fiscal 2011, we concluded that the fair value of each reporting unit substantially exceeded its carrying value. The estimates we use in evaluating goodwill are consistent with the plans and estimates that we use to manage the underlying businesses. If we fail to deliver new products for these business units, if the products fail to gain expected market acceptance, or if market conditions for these business units fail to materialize as anticipated, our revenue and cost forecasts may not be achieved and we may incur charges for goodwill impairment, which could be significant and could have a material adverse effect on our results of operations.

d)

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 rate 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. In determining a valuation allowance, we consider past performance, expected future taxable income and prudent and feasible tax planning strategies. We currently have a valuation allowance that has been established primarily against the reinvestment and investment tax credits related to our operation in Malaysia, as we have concluded that the deferred tax assets will not be realized in the foreseeable future due to a tax holiday granted by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010 and the uncertainty of sufficient taxable income in Malaysia beyond fiscal 2019.

        Our forecast of expected future taxable income is based on historical taxable income and projections of future taxable income over the periods that the deferred tax assets are deductible. Changes in market conditions that differ materially from our current expectations and changes in future tax laws in the United States and international jurisdictions or changes in our tax structure may cause us to change our judgments of future taxable income. These changes, if any, may require us to adjust the existing tax valuation allowance higher or lower than the amount we currently have recorded and such an adjustment could have a material impact on the tax expense for the fiscal year.

        The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Although ASC Topic 740, "Income Taxes," provides further clarification on the accounting for uncertainty in income taxes recognized in the financial statements, the threshold and measurement attribute prescribed by the FASB guidance will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have currently estimated, this could have a material impact on income tax expense.

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e)

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. 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 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. The fair value of these cash awards was measured each reporting period and was calculated using the Monte Carlo valuation method.

        In determining fair value using the Black-Scholes option pricing model and the Monte Carlo valuation method, management is required to make certain estimates of the key assumptions such as expected life, expected volatility, dividend yields and risk free interest rates. The estimates of these key assumptions involve judgment regarding subjective future expectations of market price and trends. The assumptions used in determining expected life and expected volatility have the most significant effect on calculating the fair value of share-based awards. 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 the SEC's Staff Accounting Bulletin No. 107 to determine the expected life of stock options. 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. If we were to determine that another method to estimate these assumptions was more reasonable than our current methods, or if another method for calculating these assumptions were to be prescribed by authoritative guidance, the fair value for our share-based awards could change significantly. If the expected volatility and/or expected life were increased under our assumptions, then the Black-Scholes and Monte Carlo computations of fair value would also increase, thereby resulting in higher compensation costs being recorded.

        Under GAAP, we are required to estimate forfeitures at the date of grant. Our estimate of forfeitures is based on our historical activity, which we believe is indicative of expected forfeitures. In subsequent periods if the actual rate of forfeitures differs from our estimate, the forfeiture rates may be revised, as necessary. Changes in the estimated forfeiture rates can have a significant effect on share-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.

        We have also granted performance share units to executive officers that require us to estimate expected achievement of performance targets over the performance period. This estimate involves judgment regarding future expectations of various financial performance measures such as those described in the overview section below. If there are changes in our estimate of the level of financial performance measures expected to be achieved, the related share-based compensation expense may be significantly increased or reduced in the period that our estimate changes.

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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:

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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

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

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

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

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

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

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

Other Non-Operating Income (Expense), Net

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

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

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:

            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

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NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Consolidated Financial Statements

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NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME