National Semiconductor Annual Report 2009 LETTER TO SHAREHOLDERS DEAR SHAREHOLDERS In May, with great hoopla, the semiconductor industry celebrated the 50th anniversary of the invention of the integrated circuit (IC). This incredible technical breakthrough changed the face of electronics and enabled much of the lifestyle that we take for granted today. Founded on May 27, 1959 in Danbury, Connecticut, National Semiconductor also celebrated its 50th anniversary this year. We were there when it all started, and this event provided an opportunity for celebration as well as introspection about where we’ve been and where we are going as an industry and a company. OUR FOUNDATION In our five decades in business, National has built a deep base of analog expertise and a culture that embodies operational excellence. Early CEO Charlie Sporck established National’s reputation for manufacturing prowess, planning and logistics. To this day, customers value National’s ability to develop and deliver products, on-time, anywhere on the planet. National’s analog credentials were established by analog engineering giants like Bob Widlar (inventor of the first op amp, first bandgap reference and first voltage regulator), Bob Dobkin (who went on to co-found Linear Technologies Corp.), Jim Solomon (founder of Cadence Design Systems, Inc.) and a host of others too numerous to name. National brought the industry such innovations as low-voltage differential signaling (LVDS), white LED drivers, high speed analog-to-digital converters (ADCs) as well as audio and power subsystems for handheld devices. Analog product innovation continues today with our industry-leading PowerWise® energy-efficient products and our award-winning SolarMagic™ power optimizer. With unique analog process technology and packaging capabilities, National has developed a portfolio of more than 10,000 analog products. This tremendous portfolio is complemented by our best-in-class WEBENCH online design tools and strong relationships with our distribution partners serving thousands of unique customers around the world. So, as National grew as a company, the analog industry grew up with it and around it. Over the decades, National and a handful of highly profitable companies have created a $36 billion analog industry. This is a great story so far, and I invite you to visit our web site (national.com) to learn more. But, frankly we’re just getting warmed up. The challenges faced by the electronics industry, and in fact the world, have created a unique opportunity for analog companies to evolve and create a phase of growth while solving some of the most pressing problems in history. NEW CHALLENGES In a macroeconomic sense, this year has been a particularly difficult time for the industry and for our customers. The downturn has forced an accelera- tion of the changes that were already taking place in the industry. Customers across the board are doing more with less. They have fewer resources and less time to design their systems. Customers are relying more on their suppliers to help them innovate and create uniquely differentiated systems as well as perform the fundamentals of completing their designs on schedule and getting them into production. As this is happening, more and more of our customers’ system-product value comes from the semiconductor content within their systems, and increasingly, it is analog technology that makes the difference. This is not just traditional general-purpose analog, but applica- tion-specific analog solutions that uniquely solve real, system-level problems. These real-world problems tend to be specific to each application, but there is an underly- ing theme. The biggest challenge our customers face today is energy efficiency, and many of the answers lie in analog technology, particularly power management technology. The progression of Moore’s Law has packed millions of circuits into dense digital cores. These cores consume much more power and have created new system design challenges in the areas of battery life, thermal management, reliability and the cost of ownership to downstream customers. The irresistible force of increased performance has run smack into the immovable object of power constraints, and our customers are working through the consequences. In the world of mobile devices, the enrichment and abundance of features, coupled with the reduction in the size of phones, has created an issue with battery life. In infrastructure, wireless communications and data center applications, issues of power density, thermal management, and the sheer operational cost of energy have created demand for new system architectures. In automotive, electronic power budgets equate to fuel efficiency. In industrial applications, inefficiency and heat lead to reliability and up-time considerations. The list goes on across industries and applications...but we can help. NATIONAL’S STRATEGY It may be tough to predict how the economy will fare in the coming months or the coming year, but we are sowing the seeds of our own recovery. National is leveraging the strengths we have built in our 50 years of business and adding new capabilities to enable future growth. To address existing customer challenges around lack of resources, necessary expertise or time constraints, National is leveraging the strength of our large analog portfolio and our industry-leading online design tools through an effort we call, “Design Made Easy.” Through this effort, we will focus on making our customers’ designers much more efficient when using National products and position National as the analog supplier of choice for small to mid-sized customers based on the ease with which customers can select, design in and purchase analog components. This effort will include the introduction of new analog subsystem products, such as our SIMPLE SWITCHER® power modules, which are much easier for customers to implement and which increase the value of what we sell. Internally, we are enhancing our ability to innovate and finding emerging markets where analog innovation will yield large benefits. We have explored new markets and engaged customers at a deeper level than we have ever done before. In high-growth-potential markets such as renewable energy, medical electronics, mobile devices, communications infrastructure and LED lighting, National is creating higher value, application-specific subsystems, which combine multiple analog functions on a single chip, in a multi-chip package or as part of a subsystem module. This approach enables National to solve complex customer problems using analog semiconductor technology and to create solutions that are uniquely positioned in the marketplace. THE NEXT FIFTY YEARS The world wants to be green, and the environment wants to be clean. Energy efficiency is paramount in nearly all of our customers’ product definitions and desires. More and more, our customers tell us they need our help to solve energy issues as they strive to create products that consume less power and generate less heat. The underlying feature of our energy focus is our legacy in power management. This is not new to National. In fact, half of our revenue today comes from power management products. We are leveraging this expertise to address new applications such as: Reducing energy consumption – e.g. our PowerWise® family of energy-efficient circuits Several of our key customers in the medical diagnostics market (such as MRI and x-ray machine manufacturers) are planning to make their equipment portable, operating primarily off of battery power. National PowerWise analog front ends (AFE) will make this possible. As of this writing, nations and municipalities have initiatives to replace high power- consuming, high-pressure sodium street lamps with more efficient LED lighting. Eventually, all lighting will be done with LEDs, replacing the incandescent and compact fluorescent lighting we all use today in our homes and workplaces. National LED solutions are playing a role in this transformation. In any application, where the customer’s ASIC or FPGA consumes an unacceptable amount of power, National’s PowerWise Adaptive Voltage Scaling (AVS) technology will enable a 20 percent to 60 percent reduction in power consumption based upon the specific silicon characteristics and operating environment of that system. Renewable energy generation – e.g. our SolarMagicTM power optimization products. The cost of solar energy is so close to grid parity (where the cost of solar generated electricity equals the cost of fuel and other sources of generated electrical energy) that our industry can “reach out and touch it.” The solar industry had previously been focused on process innovation to improve the efficiency of solar panels, leaving the power management architecture in a relatively immature state. Based on a suite of National power management technologies, we introduced the SolarMagic power optimizer and immediately won the prestigious 2009 Intersolar Award for photovoltaic product innovation. The untapped potential of this innovation is tremendous as our chips migrate inside of new solar panel designs. Energy management – e.g. electric vehicle battery management, battery charging and emerging smart grid opportunities Our dependence on foreign oil resources combined with the volatility of supply has created a new impetus for change in our transportation infrastructure. A day is coming when electric vehicles will be commonplace with much more efficient charging capability, longer driving range and greatly enhanced battery life. National’s