ANALOG DEVICES INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended August 2, 2003
OR


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

For the Transition period from_______________ to ________________

Commission File No. 1-7819

Analog Devices, Inc.

(Exact name of registrant as specified in its charter)


Massachusetts		04-2348234
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Technology Way, Norwood, MA		02062-9106
(Address of principal executive offices)		(Zip Code)

(781) 329-4700
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES v NO

As of August 2, 2003 there were 367,308,907 shares of Common Stock, $0.16 2/3 par value per share, outstanding.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4. Controls and Procedures
PART II — OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands except per share amounts)


		Three Months Ended

		August 2, 2003			August 3, 2002

Net sales		$	520,445		$	445,448
Cost of sales			233,846			208,182

Gross margin			286,599			237,266
Operating expenses:
	Research and development		113,672			107,040
	Selling, marketing, general and administrative		72,178			67,138
	Special charges		341			12,839
	Amortization of intangibles		656			14,327

			186,847			201,344
Operating income			99,752			35,922
Nonoperating (income) expenses:
	Interest expense		7,763			10,847
	Interest income		(9,999	)		(14,566	)
	Other, net		762			(21	)

			(1,474	)		(3,740	)

Income before income taxes			101,226			39,662
Provision for income taxes			22,270			8,249

Net income		$	78,956		$	31,413

Shares used to compute earnings per share – basic			366,025			365,065

Shares used to compute earnings per share – diluted			384,166			380,770

Earnings per share – basic		$	0.22		$	0.09

Earnings per share – diluted		$	0.21		$	0.08

See accompanying notes.

ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(thousands except per share amounts)


		Nine Months Ended

		August 2, 2003			August 3, 2002

Net sales		$	1,489,751		$	1,251,790
Cost of sales			676,555			589,896

Gross margin			813,196			661,894
Operating expenses:
	Research and development		335,810			314,570
	Selling, marketing, general and administrative		213,002			187,850
	Special charges		341			40,089
	Amortization of intangibles		1,964			42,666

			551,117			585,175
Operating income			262,079			76,719
Nonoperating (income) expenses:
	Interest expense		24,561			34,172
	Interest income		(32,516	)		(50,283	)
	Other, net		477			(1,160	)

			(7,478	)		(17,271	)

Income before income taxes			269,557			93,990
Provision for income taxes			59,303			23,461

Net income		$	210,254		$	70,529

Shares used to compute earnings per share – basic			364,477			364,253

Shares used to compute earnings per share – diluted			380,509			382,565

Earnings per share – basic		$	0.58		$	0.19

Earnings per share – diluted		$	0.55		$	0.18

See accompanying notes.

ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands)


Assets		August 2, 2003		November 2, 2002		August 3, 2002

Cash and cash equivalents		$	1,312,725	$	1,613,753	$	1,186,015
Short-term investments			1,916,640		1,284,270		1,767,840
Accounts receivable, net			259,134		228,338		223,308
Inventories:
	Raw materials		10,050		14,598		15,279
	Work in process		222,757		225,680		200,934
	Finished goods		64,133		66,113		67,831

			296,940		306,391		284,044
Deferred tax assets			154,000		152,552		155,000
Prepaid expenses and other current assets			44,554		38,921		37,492

	Total current assets		3,983,993		3,624,225		3,653,699

Property, plant and equipment, at cost:
	Land and buildings		294,505		294,037		294,074
	Machinery and equipment		1,371,028		1,385,198		1,384,694
	Office equipment		94,232		95,120		95,357
	Leasehold improvements		127,227		131,113		130,280

			1,886,992		1,905,468		1,904,405
Less accumulated depreciation and amortization			1,189,151		1,124,564		1,090,071

	Net property, plant and equipment		697,841		780,904		814,334

Deferred compensation plan investments			294,742		277,595		271,395
Other investments			2,791		2,010		2,938
Goodwill, net			163,373		163,373		176,932
Other intangible assets, net			9,300		11,264		11,916
Other assets			96,028		120,820		92,492

	Total other assets		566,234		575,062		555,673

		$	5,248,068	$	4,980,191	$	5,023,706

See accompanying notes.

ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(thousands, except share amounts)


Liabilities and Stockholders' Equity			August 2, 2003		November 2, 2002			August 3, 2002

Short-term borrowings and current portion of obligations under capital leases			$	618	$	3,745		$	4,355
Accounts payable				106,054		91,269			113,602
Deferred income on shipments to distributors				112,607		110,271			112,433
Income taxes payable				151,275		126,471			113,816
Accrued liabilities				115,499		151,879			156,474

	Total current liabilities			486,053		483,635			500,680

Long-term debt and obligations under capital leases				1,263,457		1,274,487			1,231,954
Deferred income taxes				18,000		22,612			40,000
Deferred compensation plan liability				299,130		283,210			276,841
Other non-current liabilities				17,758		16,231			13,531

	Total non-current liabilities			1,598,345		1,596,540			1,562,326

Commitments and Contingencies
Stockholders’ equity:
Preferred stock, $1.00 par value, 471,934 shares authorized, none outstanding				—		—			—
Common stock, $0.16 2/3 par value, 600,000,000 shares authorized, 371,348,856 shares issued (367,680,211 on November 2, 2002 and 366,564,819 on August 3, 2002)				61,893		61,281			61,095
Capital in excess of par value				802,659		762,473			753,833
Retained earnings				2,389,873		2,179,619			2,144,849
Accumulated other comprehensive income (loss)				630		(1,908	)		3,775

				3,255,055		3,001,465			2,963,552
Less 4,039,949 shares in treasury, at cost (4,493,186 on November 2, 2002 and 72,778 on August 3, 2002)				91,385		101,449			2,852

		Total stockholders’ equity		3,163,670		2,900,016			2,960,700

			$	5,248,068	$	4,980,191		$	5,023,706

See accompanying notes.

ANALOG DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(thousands)


			Nine Months Ended

			August 2, 2003			August 3, 2002

Cash flows from operating activities:
	Net income		$	210,254		$	70,529
	Adjustments to reconcile net income to net cash provided by operations:
		Depreciation		126,339			132,593
		Amortization		1,964			42,666
		Deferred income taxes		(6,096	)		(27,005	)
		Non-cash portion of special charge		4,694			12,892
		Other non-cash expense		11,292			9,248
		Changes in operating assets and liabilities		(20,210	)		(59,658	)

	Total adjustments			117,983			110,736

Net cash provided by operating activities				328,237			181,265

Cash flows from investing activities:
	Purchase of short-term available-for-sale investments			(4,026,968	)		(2,742,102	)
	Maturities of short-term available-for-sale investments			3,394,598			2,402,540
	Payments for acquisitions, net of cash acquired			—			(5,245	)
	Additions to property, plant and equipment, net			(49,377	)		(41,482	)
	Proceeds from sale of fixed assets			1,500			—
	Decrease in other assets			14,145			277

Net cash used for investing activities				(666,102	)		(386,012	)

Cash flows from financing activities:
	Repurchase of common stock			(52	)		—
	Proceeds from employee stock plans			44,384			31,503
	Payments on capital lease obligations			(3,398	)		(6,310	)
	Net decrease in variable rate borrowings			(5,475	)		(437	)

Net cash provided by financing activities				35,459			24,756

Effect of exchange rate changes on cash				1,378			1,057

Net (decrease) increase in cash and cash equivalents				(301,028	)		(178,934	)
Cash and cash equivalents at beginning of period				1,613,753			1,364,949

Cash and cash equivalents at end of period			$	1,312,725		$	1,186,015

See accompanying notes.

ANALOG DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED AUGUST 2, 2003
(all tabular amounts in thousands except per share amounts and percentages)

Note 1 – Basis of Presentation

In the opinion of management, the information furnished in the accompanying condensed consolidated financial statements reflects all normal recurring adjustments that are necessary to fairly state the results for these interim periods and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended November 2, 2002 and related notes. The results of operations for the interim periods shown in this report are not necessarily indicative of the results that may be expected for the fiscal year ending November 1, 2003 or any future period.

The Company has a 52-53 week fiscal year that ends on the Saturday closest to the last day in October. Fiscal 2003 and fiscal 2002 are 52-week fiscal years.

Note 2 – Stock-Based Compensation

The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 148 (FAS 148), “Accounting for Stock-Based Compensation — Transition and Disclosure” effective November 3, 2002. FAS 148 amends Statement of Financial Accounting Standards No. 123 (FAS 123), “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and also amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by FAS 148 and FAS 123, the Company continues to apply the accounting provisions of Accounting Principle Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, with regard to the measurement of compensation cost for options granted under the Company’s equity compensation plans, consisting of the 2001 Broad-Based Stock Option Plan, the 1998 Stock Option Plan, the Restated 1994 Director Option Plan, the Restated 1988 Stock Option Plan, the 1992 Employee Stock Purchase Plan and the 1998 International Employee Stock Purchase Plan. No material employee compensation expense has been recorded as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had expense been recognized using the fair value method described in FAS 123, using the Black-Scholes option-pricing model, we would have reported the following results of operations:


		Three Months Ended

		August 2, 2003			August 3, 2002

Net income, as reported		$	78,956		$	31,413

Deduct: total stock-based compensation expense determined under the fair value method, net of tax			(54,813	)		(55,951	)

Pro forma net income (loss)		$	24,143		$	(24,538	)

Earnings (loss) per share:
	Basic – as reported	$	0.22		$	0.09

	Basic – pro forma	$	0.07		$	(0.07	)

	Diluted – as reported	$	0.21		$	0.08

	Diluted – pro forma	$	0.06		$	(0.07	)


		Nine Months Ended

		August 2, 2003			August 3, 2002

Net income, as reported		$	210,254		$	70,529

Deduct: total stock-based compensation expense determined under the fair value method, net of tax			(164,110	)		(171,683	)

Pro forma net income (loss)		$	46,144		$	(101,154	)

Earnings (loss) per share:
	Basic – as reported	$	0.58		$	0.19

	Basic – pro forma	$	0.13		$	(0.28	)

	Diluted – as reported	$	0.55		$	0.18

	Diluted – pro forma	$	0.12		$	(0.28	)

Note 3 – Comprehensive Income

Components of comprehensive income include net income and certain transactions that have generally been reported in the consolidated statement of stockholders’ equity and consisted of the following:


		Three Months Ended

		August 2, 2003			August 3, 2002

Net income		$	78,956		$	31,413
	Foreign currency translation		19			2,253
	Change in unrealized gains (losses) on available-for-sale securities, net of taxes of $247 and $229, respectively		458			(425	)
	Change in unrealized gains (losses) on derivative instruments designated as cash flow hedges		(2,121	)		224

Other comprehensive income (loss)			(1,644	)		2,052

Comprehensive income		$	77,312		$	33,465


		Nine Months Ended

		August 2, 2003			August 3, 2002

Net income		$	210,254		$	70,529
	Foreign currency translation		1,824			1,156
	Change in unrealized gains (losses) on available-for-sale securities, net of taxes of $1,300 and $285, respectively		2,414			(529	)
	Change in unrealized gains (losses) on derivative instruments designated as cash flow hedges		(1,700	)		3,352

Other comprehensive income (loss)			2,538			3,979

Comprehensive income		$	212,792		$	74,508

Note 4 – Short-term investments

Substantially all of the Company’s short-term investments have contractual maturities of twelve months or less at time of acquisition. Unrealized gains of $0.7 million ($0.4 million net of tax) and $3.0 million ($2.0 million net of tax) were recorded in other comprehensive income in the three and nine months ended August 2, 2003, respectively. Unrealized gains and losses were not material during the first nine months of fiscal 2002. Total unrealized losses as of the end of the third quarter of fiscal 2003 were $3.0 million ($2.0 million net of tax). Unrealized losses were not material as of the end of the third quarter of fiscal 2002. No realized gains or losses were recorded during the three or nine months ended August 2, 2003 or fiscal 2002.

Note 5 – Derivative Instruments and Hedging Agreements

Derivative financial instruments are accounted for in accordance with Statement of Financial Accounting Standards No. 133, (FAS 133), “Accounting for Derivative Instruments and Hedging Activities” as amended by FAS 138. The Company recognizes all derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose for or intent of holding the instrument. Changes in the fair value of the derivative financial instruments are either recognized periodically in earnings or in stockholders’ equity as a component of other comprehensive income (OCI) depending on the type of derivative and whether the derivative financial instrument qualifies for hedge accounting. Changes in fair values of derivatives not qualifying for hedge accounting are reported immediately in earnings.

The Company enters into forward foreign exchange contracts to offset certain operational and balance sheet exposures from the impact of changes in foreign currency exchange rates. Such exposures result from the portion of the Company’s operations, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Japanese Yen and the Euro. These foreign exchange contracts are entered into to support product sales, purchases and financing transactions made in the normal course of business, and accordingly, are not speculative in nature.

Foreign Exchange Exposure Management - The Company has significant international sales and purchase transactions in foreign currencies and has a policy of hedging forecasted and actual foreign currency risk with forward foreign exchange contracts. The Company’s forward foreign exchange contracts are denominated in Japanese Yen, British Pounds Sterling and the Euro and are for periods consistent with the terms of the underlying transactions, generally one year or less. Derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. In accordance with FAS 133, hedges related to anticipated transactions are designated and documented at the inception of the respective hedges as cash flow hedges and are evaluated for effectiveness monthly. As the terms of the contract and the underlying transaction are matched at inception, forward contract effectiveness is calculated by comparing the change in fair value of the contract to the change in the forward value of the anticipated transaction, with the effective portion of the gain or loss on the derivative instrument reported as a component of OCI in stockholders’ equity and reclassified into earnings in the same line item associated with the forecasted transaction in the same period during which the hedged transaction affects earnings. Any residual change in fair value of the instruments, or ineffectiveness, is recognized immediately in other expense. No ineffectiveness was recognized during the third quarter and first nine months of fiscal 2003 or fiscal 2002.

Additionally, the Company enters into foreign currency forward contracts that economically hedge the gains and losses generated by the remeasurement of certain recorded assets and liabilities in a non-functional currency. Changes in the fair value of these undesignated hedges are recognized in other expense immediately as an offset to the changes in the fair value of the asset or liability being hedged.

Interest Rate Exposure Management – In January 2002, the Company entered into an interest rate swap (the “Swap”) with an aggregate notional amount of $1,200 million. The swap is a derivative instrument as defined by FAS 133 and was designated as a fair value hedge at inception. The swap hedges the benchmark interest rate of the Company’s $1,200 million Convertible Subordinated Notes (the “Notes”) and has the effect of swapping the 4.75% fixed rate of the Notes into a LIBOR-based floating rate (1.14% as of August 6, 2003). The Swap, as well as the Notes, matures on October 1, 2005. As the critical terms of the Swap and the underlying interest component of the Company’s Notes were matched at inception, effectiveness is calculated by comparing the change in the fair value of the contract to the change in the fair value of the interest rate component, with the effective portion of the gain or loss on the derivative instrument reported in other expense. The Swap is designed to provide for the termination of the Swap in the event the Notes are either converted or redeemed early. The Company evaluates this fair value hedge for effectiveness quarterly, and restructured certain terms in October 2002 to provide for an even more highly effective hedge relationship with the Notes. The restructuring resulted in an interest rate swap with terms more favorable to the Company, offset by a promise to pay a fixed amount over time to the counterparty regardless of when the Swap is terminated.

The restructuring, which had no impact on earnings, increased the Swap asset by $27 million, with an offsetting debt liability of an equal amount. The restructuring increased the effectiveness of the hedge on a prospective basis. The fair value hedge was determined to be highly effective, and a minor amount of ineffectiveness ($0.1 million) was recorded in other expense, during the nine months ended August 2, 2003.

Derivative financial instruments involve, to a varying degree, elements of market and credit risk not recognized in the consolidated financial statements. The market risk associated with these instruments resulting from currency exchange rate or interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. The counterparties to the agreements relating to the Company’s foreign exchange and interest rate instruments consist of a number of major international financial institutions with high credit ratings. The Company does not believe that there is significant risk of nonperformance by these counterparties because the Company continually monitors the credit ratings of such counterparties, and limits the financial exposure with any one financial institution. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the obligations of the Company to the counterparties.

The following table summarizes activity in other comprehensive income related to derivatives classified as cash flow hedges held by the Company during the period from November 3, 2002 through August 2, 2003:


Accumulated (gain) loss included in other comprehensive income as of November 2, 2002	$	(3,321	)
Changes in fair value of derivatives – (gain) loss		(3,292	)
Less: Reclassifications into earnings from other comprehensive income		4,992

Accumulated (gain) loss included in other comprehensive income as of August 2, 2003	$	(1,621	)

All of the accumulated gain will be reclassified into earnings over the next twelve months.

Note 6 – Special Charges

A summary of the activity in accrued restructuring is as follows:


	Fiscal 2002									Fiscal 2001

	2nd Quarter			3rd Quarter			4th Quarter			Special
Accrued Restructuring	Special Charges			Special Charges			Special Charges			Charges			Total

Balance at November 2, 2002	$	25,017		$	4,254		$	3,146		$	7,607		$	40,024
Severance payments		(2,025	)		(1,111	)		(1,160	)		(2,261	)		(6,557	)
Other cash payments					(9	)					(420	)		(429	)
Effect of foreign currency translation on accrual					67									67

Balance at February 1, 2003	$	22,992		$	3,201		$	1,986		$	4,926		$	33,105

Severance payments		(1,531	)		(496	)		(156	)		(1,353	)		(3,536	)
Other cash payments		(800	)		(577	)		(217	)		(58	)		(1,652	)
Effect of foreign currency translation on accrual					17									17

Balance at May 3, 2003	$	20,661		$	2,145		$	1,613		$	3,515		$	27,934

Severance payments		(2,136	)		(244	)		(438	)		(277	)		(3,095	)
Other cash payments		(305	)		(19	)		(51	)		(39	)		(414	)
Change in estimate		(2,900	)								(1,453	)		(4,353	)
Effect of foreign currency translation on accrual					(1	)								(1	)

Balance at August 2, 2003	$	15,320		$	1,881		$	1,124		$	1,746		$	20,071

During the third quarter of fiscal 2003, the Company recorded a special charge of $0.3 million. The charge included $2.0 million of a write-down of equipment due to a decision to outsource the assembly of products in plastic packages, which

had been done internally at the Company’s facility in the Philippines. This amount was the net book value of the assets used in plastic assembly, net of proceeds received from the sale in the third quarter of certain of the assets. The Company also decided to abandon efforts to develop a particular expertise in optical communications that resulted in the write-down of $2.7 million of equipment. During the quarter ended August 2, 2003, the Company determined that the costs remaining to be paid for certain restructuring charges would be less than the amount originally reserved. Accordingly, the Company reversed accruals of $4.4 million related to prior restructuring charges as more fully described below.

During the second quarter of fiscal 2002, the Company recorded special charges of approximately $27.2 million (comprised of $28.7 million of second quarter charges offset by $1.5 million related to a change in estimate discussed below). The second quarter charge was comprised of $25.7 million related to the planned transfer of production from the Company’s three older four-inch wafer fabrication facilities to the Company’s three six-inch and one eight-inch wafer fabrication facilities, and $3 million primarily related to the impairment of an investment, which was partially offset by an adjustment of $1.5 million related to equipment cancellation fees recorded in fiscal year 2001. The investment impairment, which was related to an equity investment in a private company, was due to the Company’s decision to abandon the product strategy for which the investment was made. Included in the $25.7 million special charge were severance and fringe benefit costs of $15.3 million for 509 manufacturing employees in the United States and Ireland, $2.3 million related to the write-down of equipment to be abandoned and $8.1 million of other charges, primarily related to lease termination and cleanup costs. The write-down of equipment was principally due to a decision to discontinue various product development strategies. In the third quarter of fiscal 2003, the Company reversed $2.9 million of the accrual primarily due to lower than previously expected severance costs. The lower severance costs were the result of a reduction in the number of separated employees and, to a lesser extent, the average tenure of severed employees differing from estimates. The 509 employees projected to be terminated at the time of the original charge was adjusted down to 439 and as of August 2, 2003, 296 employees have been terminated. The reduction in the number of employees to be terminated was due to the transfer of employees, which primarily occurred in the third quarter of fiscal 2003, to positions in the Company’s six-inch wafer fabrication facilities where the Company experienced an increase in demand for its products. The process of transferring production from the four-inch to the six and eight-inch wafer fabrication facilities is ongoing. Various processes have to be transitioned and customer requirements have to be satisfied seamlessly throughout the transition period. The transfer involves moving production from three separate four-inch wafer fabrication facilities to three six-inch and one eight-inch facility. The transition of production has already been completed at two of the four-inch facilities. The related lease termination and clean up costs will be incurred as the disposition and clean up at each site is completed. Since severance costs are paid as income continuance at some locations, these costs will be incurred over time subsequent to the final termination of employment. The transition from the remaining four-inch facility is in progress and is planned to be complete during the next four to five months.

In addition, the remaining service lives of certain assets within the older four-inch wafer fabrication facilities were shortened. As a result, depreciation expense included in cost of sales for the fiscal year 2002 included additional depreciation of approximately $8.7 million associated with the shortened lives.

During the third quarter of fiscal 2002, the Company recorded special charges of approximately $12.8 million. The charges included severance and fringe benefit costs of $3.7 million related to cost reduction actions taken in several product groups and, to a lesser extent, in manufacturing, $3.8 million related to the impairment of an investment, $3.4 million related to the impairment of goodwill associated with the closing of an Austrian design center acquired in fiscal 2001 and $1.9 million primarily related to the abandonment of equipment and lease cancellation fees. The investment impairment, which was related to an equity investment in a private company, was due to the Company’s decision to abandon the product strategy for which the investment was made. The severance and fringe benefit costs were for approximately 70 engineering employees in the United States, Europe and Canada, and approximately 30 manufacturing employees in the United States. All of the manufacturing employees and substantially all of the engineering employees had been terminated as of August 2, 2003.

During the fourth quarter of fiscal 2002, the Company recorded special charges of approximately $8.4 million. The charges included severance and fringe benefit costs of $2.5 million related to cost reduction actions taken in the sales group, several product groups and the Company’s manufacturing test operations for approximately 65 employees in the United States and Europe, of which 56 had been terminated as of August 2, 2003. The Company expects to substantially complete this action by the end of the fourth quarter of fiscal 2003. The charges also included $2.1 million related to the impairment of investments, $1.8 million primarily related to the abandonment of equipment and lease cancellation fees and a change in estimate of $2.0 million of additional estimated clean-up costs originally recorded in the second quarter of fiscal 2002. The investment impairment charges were related to the decline in fair value of a publicly traded equity investment to less than its cost basis that was determined to be other-than-temporary, and to an equity investment in a private company. The private company equity investment was part of a product strategy that the Company decided to abandon.

During fiscal 2001, the Company recorded special charges of approximately $47 million related to cost reduction actions taken in response to the economic climate at that time. The actions consisted of workforce reductions in manufacturing and, to a lesser extent, in selling, marketing and administrative areas as well as a decision to consolidate worldwide manufacturing operations and rationalize production planning and quality activities. The cost reductions included severance and fringe benefit costs of $29.6 million for approximately 1,200 employees in the U.S., Europe, Asia and the Philippines, substantially all of which had been terminated as of August 2, 2003. The special charges also included $11.6 million related to the abandonment of equipment resulting from the consolidation of worldwide manufacturing operations and $5.8 million of other charges primarily related to equipment and lease cancellation fees. Based on the results of negotiations with vendors regarding purchase order cancellation fees, the amount paid was $1.5 million less than the amount recorded for such charges and, accordingly, the Company adjusted the provision for purchase order cancellation fees by $1.5 million in the second quarter of fiscal 2002 to reflect this change in estimate. In the third quarter of fiscal 2003, the Company determined that the severance costs remaining to be paid would be $1.3 million less than the amount originally recorded for these charges and also determined that $0.2 million originally reserved for the termination of two leases would not be required. Therefore, the Company adjusted the provision for these severance and other costs in the third quarter of fiscal 2003 to reflect this change in estimate.

Of the $47.0 million of special charges recorded in fiscal 2001, $1.8 million remained accrued as of August 2, 2003, and represents severance payments being paid as income continuance to certain of the 1,200 terminated employees, predominantly in the U.S.

Note 7 – Earnings Per Share

Basic earnings per share is computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to stock option programs and other potentially dilutive securities. In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the period. Shares related to convertible debt financing and certain of the Company’s outstanding stock options were excluded because they were anti-dilutive, however, these shares could be dilutive in the future. The following table sets forth the computation of basic and diluted earnings per share:


		Three Months Ended

		August 2, 2003		August 3, 2002

Basic:
	Net income	$	78,956	$	31,413

	Weighted shares outstanding		366,025		365,065

	Earnings per share	$	0.22	$	0.09

Diluted:
	Net income	$	78,956	$	31,413

	Weighted shares outstanding		366,025		365,065
	Assumed exercise of common stock equivalents		18,141		15,705

	Weighted average common and common equivalent shares		384,166		380,770

	Earnings per share	$	0.21	$	0.08

Anti-dilutive shares related to:
	Outstanding stock options		29,485		30,680
	Convertible debt		9,247		9,247


		Nine Months Ended

		August 2, 2003		August 3, 2002

Basic:
	Net income	$	210,254	$	70,529

	Weighted shares outstanding		364,477		364,253

	Earnings per share	$	0.58	$	0.19

Diluted:
	Net income	$	210,254	$	70,529

	Weighted shares outstanding		364,477		364,253
	Assumed exercise of common stock equivalents		16,032		18,312

	Weighted average common and common equivalent shares		380,509		382,565

	Earnings per share	$	0.55	$	0.18

Anti-dilutive shares related to:
	Outstanding stock options		38,695		19,745
	Convertible debt		9,247		9,247

Note 8 – Segment Information

The Company operates and tracks its results in one operating segment. The Company designs, develops, manufacturers and markets a broad range of integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by Statement of Financial Accounting Standard No. 131 (FAS 131), “Disclosures about Segments of an Enterprise and Related Information.”

Note 9 – New Accounting Standards

Business Combinations & Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 (FAS 141), “Business Combinations,” and No. 142 (FAS 142), “Goodwill and Other Intangible Assets.” FAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. FAS 142, which became effective for the Company in fiscal year 2003, prohibits the amortization of goodwill and intangible assets with indefinite useful lives. FAS 142 requires that these assets be reviewed for impairment at least annually, or more frequently if impairment indicators arise. Other intangible assets with finite lives will continue to be amortized over their estimated useful lives and assessed for impairment under FAS 144.

The Company will test goodwill for impairment using the two-step process prescribed by FAS 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. FAS 142 provides six months to complete step one of the transitional impairment review. In the first step, if the fair value of the reporting unit(s) exceed(s) the carrying value, no impairment loss is recognized. If the carrying value of the reporting unit(s) exceed(s) the fair value, goodwill is potentially impaired and the Company must complete step two in order to measure the impairment loss. Step two compares the implied fair value of the goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

The Company began applying FAS 142 in the first quarter of fiscal 2003. Application of the nonamortization provisions of FAS 142 is expected to result in an increase in annual net income of approximately $54 million in fiscal 2003.

The Company completed the required impairment tests of goodwill and indefinite-lived intangible assets as of November 3, 2002 in the second quarter of fiscal 2003. The results of the impairment review indicated that there was no impairment of goodwill. See further discussion under Note 10 “Goodwill and Other Intangible Assets.”

Asset Retirement Obligations

Effective November 3, 2002, the Company adopted Statement of Financial Accounting Standards No. 143 (FAS 143), “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of FAS 143 did not have a material effect on the Company’s financial position or results of operations.

Impairment or Disposal of Long-Lived Assets

Effective November 3, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 (FAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses the financial accounting and reporting for the impairment of long-lived assets. This statement supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions for the disposal of a segment of a business of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” The adoption of FAS 144 did not have a material effect on the Company’s financial position or results of operations.

Classification of Debt Extinguishment

Effective November 3, 2002, the Company adopted Statement of Financial Accounting Standards No. 145 (FAS 145), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Under FAS 145, gains and losses on extinguishments of debt are classified as income or loss from continuing operations rather than extraordinary items. The adoption of FAS 145 did not have a material impact on the Company’s financial position or results of operations.

Costs Associated with Exit or Disposal Activities

In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (FAS 146), “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by FAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, plant closing, or other exit or disposal activity. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. FAS 146 may affect the timing of recognizing future exit or disposal costs, if any, as well as the amounts recognized.

Accounting for Stock-Based Compensation

Effective November 3, 2002, the Company adopted Statement of Financial Accounting Standards No. 148 (FAS 148), “Accounting for Stock-Based Compensation – Transitions and Disclosure.” FAS 148 amends FAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to FAS 123’s fair value method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While FAS 148 does not amend FAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of FAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of FAS 123 or the intrinsic value method of Accounting Principles Board Opinion No. 25, (APB 25), “Accounting for Stock Issued to Employees,” and related interpretations. The Company has adopted the disclosure requirements of FAS 148 and will continue to account for stock-based compensation plans in accordance with APB 25. The Company has made interim disclosures in Note 2 – Stock-Based Compensation.

Accounting for Derivative Instruments and Hedging Activities

In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149 (FAS 149), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003. The Company does not believe that the adoption of FAS 149 will have a material effect on its financial position or results of operations.

Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. FAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of FAS 150 will have a material effect on its financial position or results of operations.

Guarantor’s Accounting and Disclosure Requirements for Guarantees

In November 2002, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement requirement of FIN 45 is effective for guarantees issued or modified after December 31, 2002. As of August 2, 2003, the fair value of the Company’s guarantees that were issued or modified after December 31, 2002 were not material. The disclosure requirements of FIN 45, which are effective for interim and annual periods ending after December 15, 2002, are included in the following paragraphs.

Under the terms of the lease agreement, which was entered into prior to January 1, 2003, related to the Company’s headquarters facility in Norwood, Massachusetts, the Company has agreed to assume the note related to the property in the event of default by the lessor. Assumption of the note, which was approximately $9 million at August 2, 2003, would entitle the Company to a first lien on the property. The lease expires in May 2007. The guarantee was made by the Company to allow the lessor to obtain a lower cost of borrowing.

The Company has provided certain indemnities pursuant to which it may be required to make payments to an indemnified party in connection with certain transactions and agreements. With respect to certain acquisitions and divestitures, the Company has provided routine indemnities for such matters as environmental, tax, product and employee liabilities. In addition, in connection with various other agreements, including subsidiary banking agreements, the Company may provide routine guarantees. Generally, a maximum obligation is not explicitly stated, thus the potential amount of future maximum payments cannot be reasonably estimated. The duration of the indemnities varies, and in many cases is indefinite. The Company has not recorded any liability for these indemnities in the consolidated financial statements, except as otherwise disclosed.

Consolidation of Variable Interest Entities

In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company has not yet determined what effect, if any, the adoption of FIN 46 will have on the Company’s financial position or results of operations.

Note 10 – Goodwill and Other Intangible Assets

Beginning in fiscal 2003, the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), “Goodwill and Other Intangible Assets.” As a result, the Company discontinued amortizing the remaining balances of goodwill beginning November 3, 2002. Instead the Company will annually evaluate goodwill for impairment. The Company will also evaluate goodwill whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from estimated future cash flows.

As required by FAS 142, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. As a result, a net balance of $1.6 million of acquired workforce intangibles was transferred to goodwill as of November 3, 2002.

Other intangible assets at August 2, 2003 and August 3, 2002, which will continue to be amortized, consisted of the following:


	August 2, 2003				August 3, 2002

	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization

Technology-based	$	16,923	$	8,399	$	16,923	$	6,029
Tradename		1,167		541		1,167		417
Other		6,147		5,997		6,147		5,875

Total	$	24,237	$	14,937	$	24,237	$	12,321

Amortization expense relating to goodwill and other intangibles was:


	Three Months Ended

	August 2, 2003		August 3, 2002

Goodwill	$	—	$	13,568
Other intangibles		656		759

Total	$	656	$	14,327


	Nine Months Ended

	August 2, 2003		August 3, 2002

Goodwill	$	—	$	40,407
Other intangibles		1,964		2,259

Total	$	1,964	$	42,666

The Company expects annual amortization expense for these intangible assets to be:


Fiscal	Amortization
Years	Expense

2003	$	2,618
2004		2,618
2005		2,287
2006		1,292
2007		1,292
2008+		1,156

The following table provides a reconciliation of reported net income for the three and nine months ended August 3, 2002 to adjusted net income had FAS 142 been applied as of the beginning of fiscal 2002:


		Three Months Ended

		August 2, 2003		August 3, 2002

Reported net income		$	78,956	$	31,413
Add back: Goodwill and workforce amortization (net of tax)			—		10,979

Adjusted net income		$	78,956	$	42,392

Basic earnings per share:
	Reported net income	$	0.22	$	0.09
	Goodwill and workforce amortization (net of tax)		—		0.03

	Adjusted net income	$	0.22	$	0.12

Diluted earnings per share:
	Reported net income	$	0.21	$	0.08
	Goodwill and workforce amortization (net of tax)		—		0.03

	Adjusted net income	$	0.21	$	0.11


		Nine Months Ended

		August 2, 2003		August 3, 2002

Reported net income		$	210,254	$	70,529
Add back: Goodwill and workforce amortization (net of tax)			—		32,687

Adjusted net income		$	210,254	$	103,216

Basic earnings per share:
	Reported net income	$	0.58	$	0.19
	Goodwill and workforce amortization (net of tax)		—		0.09

	Adjusted net income	$	0.58	$	0.28

Diluted earnings per share:
	Reported net income	$	0.55	$	0.18
	Goodwill and workforce amortization (net of tax)		—		0.09

	Adjusted net income	$	0.55	$	0.27

Note 11 – Common Stock Repurchase

In August 2002, the Company’s Board of Directors approved the repurchase of up to 15 million shares of common stock. As of August 2, 2003, the Company had repurchased 4,351,751 shares of its common stock at an average purchase price of $22.47 per share. The repurchased shares are held as treasury shares and are being used for the employee stock purchase plan and other benefit plans.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations

This information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended November 2, 2002.

This Quarterly Report on Form 10-Q, including the section entitled “Outlook”, contains or incorporates forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We have included important factors in the cautionary statements below under the heading “Factors That May Affect Future Results” that we believe could cause our actual results to differ materially from the forward-looking statements we make. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Results of Operations

Third Quarter 2003 Overview

We recorded quarterly sales of $520.4 million in the third quarter of fiscal 2003, which was a 17% increase in sales from the third quarter of fiscal 2002 and a 4% increase in sales from the second quarter of fiscal 2003. Our gross margins remained strong at 55.1% of net sales, which was a 180 basis point increase from the third quarter of fiscal 2002. Our cash flow continued to be strong, with cash, cash equivalents and short-term investments increasing by $128 million during the third quarter of fiscal 2003 to $3.2 billion as compared to the second quarter of fiscal 2003.

Sales

Net sales were $520.4 million in the third quarter of fiscal 2003, an increase of 17% from net sales of $445.4 million in the third quarter of fiscal 2002. Net sales for the first nine months of fiscal 2003 were $1,489.8 million, an increase of 19% from the $1,251.8 million reported for the comparable period of fiscal 2002. Approximately 78% of our net sales were from analog products and 22% of our net sales were from DSP products in both the three and nine month periods ended August 2, 2003. Our analog product revenue was 14% higher in the third quarter of fiscal 2003 than in the third quarter of fiscal 2002 primarily due to increased sales of products used in computer, consumer and communication applications. DSP product revenue was 28% higher in the third quarter of fiscal 2003 than in the third quarter of fiscal 2002 primarily as a result of increased sales of chipsets used in wireless handsets.

For the quarter ended August 2, 2003, sales increased in all regions compared to the same prior year quarter with the strongest revenue growth occurring in Japan and Southeast Asia. For the nine months ended August 2, 2003, sales increased in all regions compared to the same prior year period with the strongest revenue growth in Japan and Southeast Asia. During the three months ended August 2, 2003 and August 3, 2002, approximately 75% and 73%, respectively, of net sales were derived from international customers. A large portion of the Asian sales are products delivered to Asia but designed in the US and Europe.

Gross Margin

Gross margin was $286.6 million, or 55.1% of net sales, in the third quarter of fiscal 2003, an increase of 180 basis points from the third quarter of fiscal 2002 gross margin of $237.3 million, or 53.3% of net sales. Gross margin was $813.2 million, or 54.6% of net sales, for the nine months ended August 2, 2003, an increase of 170 basis points from the $661.9 million, or 52.9% of net sales, for the same period in the prior year. The increase in gross margin for both the three and nine month periods ended August 2, 2003 was largely due to the favorable effect of fixed costs allocated across a higher sales base and, to a lesser extent, the impact of manufacturing restructuring actions taken in fiscal 2002 and fiscal 2001.

Research and Development

Research and development, or R&D, expenses amounted to $113.7 million, or 21.8% of net sales, in the third quarter of fiscal 2003, an increase of $6.7 million from the $107 million, or 24.0% of net sales, recorded in the third quarter of fiscal 2002. For the nine months ended August 2, 2003, R&D expenses were $335.8 million, or 22.5% of net sales, an increase of $21.2 million from the $314.6 million, or 25.1% of net sales, recorded in the same period in the prior year. Included in the third quarter of fiscal 2003 and the third quarter of fiscal 2002 R&D expenses are approximately $2.0 million and $2.2 million, respectively, of acquisition-related expenses. The increase in R&D expenses in dollars was primarily due to restoration of salaries to our most highly compensated employees, modest raises and the selective hiring of engineers. Despite the significant decline in sales in fiscal 2002, in view of our long-term business strategy, we continued to invest in R&D at levels commensurate with significantly higher revenue levels than we were achieving in the short term. At any point in time, we have hundreds of R&D projects underway, and we believe that none of these projects is material on an individual basis. We expect to continue the development of innovative technologies and processes for new products and we believe that a continued commitment to R&D is essential in order to maintain product leadership with our existing products and to provide innovative new product offerings, and therefore, we expect to continue to make significant R&D investments in the future.

Selling, Marketing, General and Administrative

Selling, marketing, general and administrative, or SMG&A, expenses were $72.2 million and $213 million for the three and nine months ended August 2, 2003 as compared to $67.1 million and $187.9 million for the same periods in the prior year. As a percentage of sales, SMG&A was 13.9% of net sales in the third quarter of fiscal 2003 and 15.1% in the third quarter of fiscal 2002. For the nine months ended August 2, 2003, SMG&A expenses were $213.0 million, or 14.3% of net sales, an increase of $25.1 million from the $187.9 million, or 15% of net sales, recorded in the same period in the prior year. The increase in SMG&A expenses in dollars for both the third quarter and first nine months of fiscal 2003 over the same periods in the prior year was the result of the restoration of salaries for our most highly compensated employees, modest raises given to a large portion of our employees, as well as an increase in field applications engineers in order to help our customers design in our newest products.

Amortization of Intangibles

Amortization of intangibles was $0.7 million in the third quarter of fiscal 2003 compared with $14.3 million in the third quarter of fiscal 2002. Amortization of intangibles was $2.0 million for the first nine months of fiscal 2003 compared with $42.7 million for the first nine months of fiscal 2002. We implemented the provisions of Statement of Financial Accounting Standards No. 142, or FAS 142, as of the beginning of fiscal 2003, which resulted in this significant decrease in amortization expense in the first three and nine months of fiscal 2003 as compared to the same time periods of fiscal 2002. Under FAS 142, goodwill is no longer amortized. In fiscal 2003, we anticipate annual amortization expense to decrease to $2.6 million as a result of our adoption of FAS 142.

Special Charges

During fiscal 2003, 2002 and 2001, we recorded special charges totaling $0.3 million, $48.5 million and, $47.0 million, respectively.

During the third quarter of fiscal 2003, we recorded a special charge of $0.3 million. The charge included $2.0 million of a write-down of equipment due to a decision to outsource the assembly of products in plastic packages, which had been done at our facility in the Philippines. This amount was the net book value of the assets used in plastic assembly, net of proceeds received from the sale in the third quarter of certain of the assets. We also decided to abandon efforts to develop a particular expertise in optical communications, which resulted in the write-down of $2.7 million of equipment. During the quarter ended August 2, 2003, we determined that the costs remaining to be paid for certain restructuring charges would be less than the amount originally reserved. Accordingly, we reversed accruals of $4.4 million related to prior restructuring charges as more fully described below.

In the second quarter of fiscal 2002, we recorded special charges of approximately $27.2 million. The second quarter charge included $25.7 million related to the planned transfer of production from our three older four-inch wafer fabrication facilities to our three six-inch and one eight-inch wafer fabrication facilities, and $3 million primarily related to the impairment of an investment, which was partially offset by a $1.5 million adjustment to estimated equipment cancellation fees recorded in fiscal year 2001. The investment impairment, which was related to an equity investment in a private company, was due to our

decision to abandon the product strategy for which the investment was made. Included in the $25.7 million component of the special charge were severance and fringe benefit costs of $15.3 million for 509 manufacturing employees in the United States and Ireland, $2.3 million related to the write-down of equipment to be abandoned and $8.1 million of other charges primarily related to lease termination and cleanup costs. In addition, the remaining service lives of certain assets within the older four-inch wafer fabrication facilities have been shortened. Depreciation expense included in cost of sales in fiscal 2002 included additional depreciation of approximately $8.7 million associated with the shortened lives of these assets. The write-down of equipment was principally due to our decision to discontinue various product development strategies. In the third quarter of fiscal 2003, we reversed $2.9 million of the accrual primarily due to lower than previously expected severance costs. The lower severance costs were the result of a reduction in the number of separated employees and, to a lesser extent, the average tenure of separated employees differing from our estimates. The 509 employees projected to be terminated at the time of the original charge was adjusted down to 439 and as of August 2, 2003, 296 employees have been terminated. The reduction in the number of employees to be terminated was due to the transfer of employees, which primarily occurred in the third quarter of fiscal 2003, to positions in our six-inch wafer fabrication facilities where we experienced an increase in demand for our products. The process of transferring production from the four-inch to the six and eight-inch wafer fabrication facilities is ongoing. Various processes have to be transitioned and customer requirements have to be satisfied seamlessly throughout the transition period. The transfer involves moving production from three separate four-inch wafer fabrication facilities to three six-inch and one eight-inch facility. The transition of production has already been completed at two of the four-inch facilities. The related lease termination and clean up costs will be incurred as the transition at each site is completed. Since severance costs are paid as income continuance at some locations, these costs will be incurred over time subsequent to the final termination of employment. The transitions from the remaining four-inch facility is in progress and is planned to be complete during the next four to five months. As of August 2, 2003, there was $15.3 million related to these charges remaining to be paid. Once fully complete, we anticipate annual savings from the above actions of approximately $60 million, primarily in cost of sales, and the first full year’s impact will be realized in fiscal 2004.

During the third quarter of fiscal 2002, we recorded special charges of approximately $12.8 million. The charges included severance and fringe benefit costs of $3.7 million related to cost reduction actions taken in several product groups and, to a lesser extent, in manufacturing, $3.8 million related to the impairment of an investment, $3.4 million related to the impairment of goodwill associated with the closing of an Austrian design center we acquired in fiscal 2001 and $1.9 million primarily related to the abandonment of equipment and lease cancellation fees. The investment impairment, which was related to an equity investment in a private company, was due to our decision to abandon the product strategy for which the investment was made. The severance and fringe benefit costs were for approximately 70 engineering employees in the United States, Europe and Canada, and approximately 30 manufacturing employees in the United States. All of the manufacturing employees and substantially all of the engineering employees had been terminated as of August 2, 2003. As of August 2, 2003, there was $1.9 million related to these charges remaining to be paid, which primarily related to termination payments being paid as income continuance to terminated employees. Once fully complete, we anticipate the workforce reductions will result in annual savings of approximately $10 million, primarily in operating expenses, and the first full year’s impact will be realized in fiscal 2004.

During the fourth quarter of fiscal 2002, we recorded special charges of approximately $8.4 million. The charges included severance and fringe benefit costs of $2.5 million related to cost reduction actions taken in our sales group, several product groups and in manufacturing test operations for approximately 65 employees in the United States and Europe, of which 56 had been terminated as of August 2, 2003. The charges also included $2.1 million related to the impairment of investments, $1.8 million primarily related to the abandonment of equipment and lease cancellation fees and a change in estimate of $2 million of additional estimated cleanup costs originally recorded in the second quarter of fiscal 2002. The investment impairment charges were related to the decline in fair value of a publicly traded equity investment to less than its cost basis that was determined to be other-than-temporary, and to an equity investment in a private company. The private company equity investment was part of a product strategy that we decided to abandon. As of August 2, 2003, there was $1.1 million related to these charges remaining to be paid, which primarily related to termination payments being paid as income continuance to terminated employees. Once fully complete, we anticipate the workforce reductions will result in annual savings of approximately $4 million, primarily in operating expenses, and the first full year’s impact will be realized in fiscal 2004.

During fiscal 2001, we recorded special charges of approximately $47 million related to cost reduction actions taken in response to the economic climate at that time. The actions consisted of workforce reductions in manufacturing and, to a lesser extent, in selling, marketing and administrative areas. In addition, we made a decision to consolidate worldwide manufacturing operations and rationalize production planning and quality activities. The cost reductions included severance and fringe benefit costs of $29.6 million for approximately 1,200 employees in the United States, Europe, Asia and the Philippines, substantially all of which had been terminated as of August 2, 2003. The special charges also included $11.6 million related to the abandonment of equipment resulting from the consolidation of worldwide manufacturing operations and $5.8 million of other charges primarily related to equipment and lease cancellation fees. Based on the results of negotiations with vendors regarding

purchase order cancellation fees, the amount paid was approximately $1.5 million less than the amount recorded for such charges and, accordingly, in the second quarter of fiscal 2002, we adjusted the provision for purchase order cancellation fees by $1.5 million to reflect this change in estimate. In the third quarter of fiscal 2003 we determined that the severance costs remaining to be paid would be $1.3 million less than the amount originally recorded for these charges and also determined that $0.2 million originally reserved for the termination of two leases would not be required. Therefore, we adjusted the provision for these severance and other costs in the third quarter of fiscal 2003 to reflect this change in estimate. We believe that the workforce reductions will result in annual salary savings of approximately $40 million, consisting of a $27 million reduction in cost of sales and a $13 million reduction in operating expenses. The impact in fiscal 2002 of these cost savings was approximately $30 million, consisting of a $20 million reduction in cost of sales and a $10 million reduction in operating expenses, and the first full year’s impact will be realized in fiscal 2004.

Of the $47 million of special charges recorded in fiscal 2001, $1.8 million remained accrued as of August 2, 2003, and primarily represents severance payments being paid as income continuance to certain of the 1,200 terminated employees, predominantly in the U.S.

Operating Income

Operating income for the third quarter of fiscal 2003 was $99.7 million, an increase of $63.8 million from the $35.9 million reported for the third quarter of fiscal 2002. Operating income for the nine months ended August 2, 2003 was $262.1 million compared to $76.7 million in the same period of the prior year. Approximately $13 million and $40 million of the increase in the three and nine months ended August 2, 2003, respectively, is attributable to special charges recorded in fiscal 2002 primarily relating to the transfer of production from older four-inch wafer fabrication facilities to our modern six- and eight-inch wafer fabrication facilities. An additional $14 million and $41 million of the increase in the three and nine months ended August 2, 2003, respectively, relates to the cessation of goodwill amortization. The remainder of the increase in operating income was attributable to increased revenue levels and improved gross margins, partially offset by increased operating expenses.

Nonoperating Income and Expense

Interest expense was $8 million and $25 million in the three and nine months ended August 2, 2003 compared to $11 million and $34 million in the same periods from the prior year. The decrease in interest expense for the nine months ended August 2, 2003 compared to the same period in the prior year was the result of an interest rate swap agreement we entered into in January 2002.

Interest income was $10 million and $33 million in the three and nine months ended August 2, 2003 compared to $15 million and $50 million in the same periods from the prior year. The decrease in interest income for the three and nine month ended August 2, 2003 was primarily a result of the decline in interest rates during fiscal 2002 as a result of actions taken by the Federal Reserve Board and, to a lesser extent, our decision to increase our holdings of higher credit quality lower interest-bearing investments.

Provision for Income Taxes

Our effective income tax rate was 22% for the three and nine months ended August 2, 2003 compared to 21% and 25% in the three and nine months ended August 3, 2002. The decrease in the effective tax rate in the nine month period ended August 2, 2003 compared to the same period in the prior year was due to a shift in the mix of worldwide profits and the discontinuance of goodwill amortization in the first quarter of fiscal 2003 as a result of our adoption of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

Net Income

Net income for the third quarter of fiscal 2003 was $79 million, or 15.2% of net sales, and diluted earnings per share was $0.21 compared to net income of $31.4 million, or 7.0% of net sales, and diluted earnings per share of $0.08 for the same quarter in fiscal 2002. Net income for the first nine months of fiscal 2003 was $210.3 million, or 14.1% of net sales, and diluted earnings per share was $0.55 compared to net income of $70.5 million, or 5.6% of net sales, and diluted earnings per share of $0.18 for the same period in fiscal 2002.

Outlook

Our net sales for the third quarter of fiscal 2003 increased 4% from the second quarter of fiscal 2003 as a result of increased demand for our products. Based upon our expectation of continued improvement in our business and the semiconductor industry generally, our plan for our fourth quarter of fiscal 2003 anticipates an increase of approximately 3% to 5% in net sales from the third quarter of fiscal 2003. We are planning to continue constraining the growth of operating expenses to the range of 1% to 2%. In the event that net sales and operating expenses increase as planned, and assuming no unusual items, we would expect our fourth quarter of fiscal 2003 diluted earnings per share to be $0.22 to $0.23, as compared to $0.21 in the third quarter of fiscal 2003.

Liquidity and Capital Resources

At August 2, 2003, cash, cash equivalents and short-term investments totaled $3.2 billion, an increase of $331 million from the fourth quarter of fiscal 2002 and an increase of $276 million from the third quarter of fiscal 2002. The increase in cash, cash equivalents and short-term investments from the fourth quarter of fiscal 2002 was primarily due to operating cash inflows of $328 million, or 22% of net sales, in the first nine months of fiscal 2003.

Accounts receivable of $259 million at August 2, 2003 increased $31 million from $228 million at the end of the fourth quarter of fiscal 2002. Accounts receivable for the third quarter of fiscal 2003 increased $36 million from the third quarter of fiscal 2002. The increase in accounts receivable is primarily attributable to the increase in sales and slightly offset by an improvement in days sales outstanding. Days sales outstanding improved to 45 days as of August 2, 2003 from 46 days at August 3, 2002 and November 2, 2002.

Inventories decreased $9 million from $306 million at the end of the fourth quarter of fiscal 2002 to $297 million at the end of the third quarter of fiscal 2003. At August 2, 2003, days cost of sales in inventory decreased to 116 days from 135 days at November 2, 2002 and decreased from 126 days at August 3, 2002. The decrease in inventory in dollars was due to our continued tight control over manufacturing spending, close management of inventory levels and the impact of restructuring actions taken over the last several quarters.

Net additions to property, plant and equipment for the first nine months of fiscal 2003 were $49 million and were funded with a combination of cash on hand and cash generated from operations. We currently plan to make capital expenditures of approximately $70 million in fiscal 2003. Capital expenditures are expected to remain at current low levels, as we believe we currently have ample installed capacity to significantly increase internal production levels. Depreciation expense is expected to decrease slightly in fiscal 2003 from $181 million in fiscal 2002 to approximately $168 million in fiscal 2003.

In August 2002, our Board of Directors approved the repurchase of up to 15 million shares of our common stock. We may repurchase shares from time to time on the open market or in privately negotiated transactions. Our management will determine the timing and amount of shares to be repurchased. As of August 2, 2003, we had repurchased 4,351,751 shares of our common stock at an average purchase price of $22.47 per share. The repurchased shares are held as treasury shares and are being used for our employee stock purchase plan and other benefit plans.

During the three and nine months ended August 2, 2003, there were no material changes to our contractual cash obligations, other than routine debt and lease payments. During the three and nine months ended August 2, 2003, we made payments of approximately $2.2 million and $5.5 million, respectively, related to our long-term debt obligations and approximately $0.9 million and $3.4 million, respectively, related to capital lease obligations.

At August 2, 2003, our principal source of liquidity was $3.2 billion of cash, cash equivalents and short-term investments. We believe that our existing sources of liquidity and cash expected to be generated from future operations, together with current and anticipated available long-term financing, will be sufficient to fund operations, capital expenditures and research and development efforts for at least the next twelve months and thereafter for the foreseeable future.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the financial condition and results of operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported

amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements.

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or market. Because of the cyclical nature of the semiconductor industry, changes in inventory levels, obsolescence of technology, and product life cycles, we write down inventories to net realizable value. We employ a variety of consistent methodologies to determine the amount of inventory reserves necessary. While a portion of the reserve is determined via reference to the age of inventory and lower of cost or market calculations, an element of the reserve is subject to significant judgments by us about future demand for our inventory. Additionally, we have built inventory in preparation for the transfer of production from our four-inch wafer fabrication facilities to our six- and eight-inch wafer fabrication facilities for both lifetime supply and transition inventory. We have recorded certain levels of reserves related to these inventory builds. Although we believe that we have used our best efforts and available information to estimate future demand, due to the uncertain economic times and the difficulty inherent in predicting future results, it is possible that actual demand for our products will differ from our estimates. If actual demand for our products is less than our estimates, additional reserves for existing inventories may need to be recorded in future periods.

Long-Lived Assets

We review property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate over the remaining economic life. If such assets are considered to be impaired, the impairment to be recognized in earnings equals the amount by which the carrying value of the assets exceeds their fair market value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. Although we have recognized no material impairment adjustments related to our property, plant, and equipment during the past three fiscal years, except those made in conjunction with restructuring actions, deterioration in our business in the future could lead to such impairment adjustments in future periods. Evaluation of impairment of long-lived assets requires estimates of future operating results that are used in the preparation of the expected future undiscounted cash flows. Actual future operating results and the remaining economic lives of our long-lived assets could differ from the estimates used in assessing the recoverability of these assets. These differences could result in impairment charges, which could have a material adverse impact on our results of operations.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, or FAS 142, “Goodwill and Other Intangible Assets.” In the first quarter of fiscal 2003, we adopted the new rules of FAS 142 for measuring the impairment of goodwill. As required by FAS 142, all remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. The estimates and assumptions described above along with other factors such as discount rates will affect the amount of an impairment loss, if any, we recognize under FAS 142. We will be required to test goodwill for impairment, which may result in impairment losses that could have a material adverse impact on our results of operations.

Accounting for Income Taxes

We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, or FAS 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. FAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. We evaluate the realizability of our deferred tax assets quarterly by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. At August 2, 2003, we had deferred tax assets of $154 million primarily resulting from temporary differences between the book and tax bases of assets and liabilities. While these assets are not assured of realization, we have conducted an assessment of the likelihood of realization and concluded that no significant valuation allowance is required. In reaching our conclusion, we evaluated certain relevant criteria including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years that can be used to absorb net operating losses and taxable income in future years. Our judgments regarding future profitability may change

due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.

In addition, we have provided for potential liabilities due in various foreign jurisdictions. Judgment is required in determining our worldwide income tax expense provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which such determination is made.

Contingencies

From time to time, we receive notices that our products or manufacturing processes may be infringing the patent or intellectual property rights of others. We periodically assess each matter in order to determine if a contingent liability in accordance with Statement of Financial Accounting Standards No. 5, or FAS 5, “Accounting for Contingencies,” should be recorded. In making this determination, we may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated. Should a loss be probable and reasonably estimable, we record a contingent loss in accordance with FAS 5. In determining the amount of a contingent loss, we consider advice received from experts in the specific matter, current status of legal proceedings, settlement negotiations that may be ongoing, prior case history and other factors. Should the judgments and estimates made by us be incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations. See Note 11 to our Consolidated Financial Statements contained in Item 8 of our Annual Report on Form 10-K for the year ended November 2, 2002.

Stock Options

We have voluntarily provided the following disclosure in order to provide our stockholders with information about our stock option programs and activity. We believe that this disclosure, combined with the disclosure provided in Note 2 to our Consolidated Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q, provides detailed information about our stock option programs.

Option Program Description

Our stock option program is a broad-based, long-term employee retention program that is intended to attract, retain and motivate our employees, officers and directors and to align their interests with those of our stockholders. We have two plans under which we currently grant stock options:

1) The 1998 Stock Option Plan, as amended, under which officers, directors and employees of Analog are granted options to purchase shares of our common stock; and

2) The 2001 Broad-Based Stock Option Plan, as amended, under which options to purchase shares of our common stock may be granted to all employees, consultants and advisors of Analog, other than officers or directors.

Substantially all of our employees participate in these plans. Options generally vest over periods of five years, and all options have a term of ten years. Our option plans do not permit us to grant options at exercise prices that are below the fair market value of our common stock as of the date of grant. These plans are critical to our efforts to create and maintain a competitive advantage in the extremely competitive semiconductor industry.

Options are generally granted once per year between September and January as part of our annual performance review process. Occasionally, as in fiscal year 2002, two sets of option grants can fall within one fiscal year, as the process spans the end of one fiscal year and the beginning of the next fiscal year. Conversely, as in fiscal year 1999, there are fiscal years in which no annual merit options are granted. We have a goal to keep the dilution related to our option program to a long-term average of approximately 4% annually. The dilution percentage is calculated as the total number of shares of our common stock

underlying new option grants for the year, net of options forfeited by employees leaving the company, divided by total outstanding shares of our common stock.

All stock option grants to executive officers and directors can be made only from stockholder-approved plans and are made after a review by, and with the approval of, the compensation committee of our board of directors. All members of the compensation committee are independent directors, as that term is defined in the applicable rules for issuers traded on the New York Stock Exchange. See the “Report of the Compensation Committee” in our 2003 proxy statement for further information regarding the policies and procedures of Analog and the compensation committee regarding our grant of stock options.

In December 2002, our Board of Directors adopted an amendment to each of our 2001 Broad-Based Stock Option Plan and our 1998 Stock Option Plan to provide that the terms of outstanding options under these plans may not be amended to provide an option exercise price per share that is lower than the original exercise price per share.

Distribution and Dilutive Effect of Options

Employee and Executive Option Grants
As of August 2, 2003


	FY2003			5 Yr. Avg.			2002			2001
	As of 8/2/03

Net grants during the period as a percentage of outstanding shares		0.0	%**		4.4	%		7.1	%***		4.3	%
Grants to named executive officers* during the period as a percentage of total options granted		0.0	%		5.4	%		5.1	%		5.8	%
Grants to named executive officers* during the period as a percentage of outstanding shares		0.00	%		0.32	%		0.39	%		0.27	%
Cumulative options held by named executive officers* as a percentage of total options outstanding		7.1	%		9.6	%		6.9	%		7.9	%

* See “Aggregated Option Exercises and Remaining Option Values” below for our named executive officers. Named executive officers are defined by the SEC as our chief executive officer and our four other most highly compensated executive officers who were serving as executive officers on November 2, 2002.

** Net grants is equal to total grants less grant cancellations. See the “Summary of Option Activity” table for detail regarding our total grants and cancellations during the nine months ended August 2, 2003.

*** Options are generally granted once per year between September and January as part of our annual performance review process. Occasionally, as in fiscal year 2002, two sets of option grants can fall within one fiscal year, as the process spans the end of one fiscal year and the beginning of the next fiscal year. Conversely, as in fiscal year 1999, there are fiscal years in which no annual merit options are granted.

General Option Information

Summary of Option Activity
As of August 2, 2003


										Options Outstanding

					Number of								Weighted-
					Employees								Average
					Receiving		Shares Available			Number of			Exercise Price
	(shares in thousands)				Grants (#)		for Options (#)			Shares (#)			($)

Last Fiscal			November 3, 2001					22,184			63,737		$	22.28
Year								50,000
	Additional shares reserved-12/2001 Shares cancelled upon termination of expired stock plans							(2,196	)
	Grants
		FY02 Annual retention 1/22/02				4,341		(13,082	)		13,082			41.06
		FY03 Annual retention 9/24/02				4,530		(13,645	)		13,645			19.90

		Other						(1,400	)		1,400			36.45
				Total				(28,127	)		28,127			30.57
	Exercises							—			(3,869	)		6.51
	Cancellations							2,144			(2,144	)		34.24

			November 2, 2002					44,005			85,851		$	25.41
Fiscal	Grants							(1,334	)		1,334			32.63
Year-to-date	Exercises							—			(3,691	)		8.73
(as of 8/2/03)	Cancellations – expired plans							(83	)		—			6.42
	Cancellations							1,521			(1,521	)		36.33

			August 2, 2003					44,109			81,973			26.08

In-the-Money and Out-of-the-Money Option Information
As of August 2, 2003


	Exercisable						Unexercisable						Total

					Wtd. Avg.						Wtd. Avg.						Wtd. Avg.
					Exercise						Exercise						Exercise
(shares in thousands)	Shares (#)		%		Price ($)		Shares (#)		%		Price ($)		Shares (#)		%		Price ($)

In-the-Money Options		21,164		94		14.55		34,576		58		19.79		55,740		68		17.80
Out-of-the-Money Options (1)		1,418		6		48.86		24,815		42		43.39		26,233		32		43.68

Total Options Outstanding		22,582		100		16.70		59,391		100		29.65		81,973		100		26.08

(1)

Out-of-the-money options are those options with an exercise price per share equal to or greater than the closing price per share of our common stock ($39.51) on the last trading day of the third quarter of fiscal 2003 (on August 1, 2003).

Executive Options

Options Granted to Named Executive Officers
Year-to-Date, as of August 2, 2003

Individual Grants

Potential Realizable Value at

Number of

Percent of

Assumed Annual Rates of

Securities

Total

Stock Price Appreciation for

Underlying

Options

Exercise

Option Term ($) (2)

Options

Granted to

Price per

Grant

Name

Granted (#)

Employees

Share ($)

Date (1)

10%

Brian P. McAloon

669

0.05

37.38

6/2/03

15,727

39,855

Franklin Weigold

168

0.01

37.38

6/2/03

3,949

10,008

(1)		Options generally expire 10 years after the grant date.

(2)		Potential realizable value is based on an assumption that the market price of our common stock will appreciate at the stated rates (5% and 10%), compounded annually, from the date of grant until the end of the 10-year term. These values are calculated based on rules promulgated by the SEC and do not reflect our estimate or projection of future stock prices. Actual gains, if any, on stock option exercises will depend on the future performance of the price of our common stock and the timing of exercises.

Aggregated Option Exercises and Remaining Option Values
Year-to-Date, As of August 2, 2003

Number of

Securities

Underlying

Value of Unexercised

Unexercised

In-the-Money

Options as of

August 2, 2003 (#)

August 2, 2003 ($)

Shares Acquired

Value

Exercisable/

Name

on Exercise (#)

Realized ($)

Unexercisable

Jerald G. Fishman

148,000

3,751,106

603,964/3,370,000

14,983,434/57,324,900

Brian P. McAloon

26,000

673,530

203,255/ 413,671

5,713,123/ 4,623,955

Joseph E. McDonough

35,000

899,025

99,262/ 388,002

2,196,777/ 4,454,281

Samuel H. Fuller

46,666

1,302,346

66,097/ 230,002

1,250,140/ 2,868,351

Franklin Weigold

23,332

308,449

41,375/ 219,336

396,645/ 2,691,670

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of August 2, 2003 about the securities authorized for issuance under our equity compensation plans, consisting of our 2001 Broad-Based Stock Option Plan, our 1998 Stock Option Plan, our Restated 1994 Director Option Plan, our Restated 1988 Stock Option Plan, our 1992 Employee Stock Purchase Plan, and our 1998 International Employee Stock Purchase Plan.


	(a)			(b)		(c)

	Number of securities to			Weighted-average		Number of securities remaining
	be issued upon exercise of			exercise price of		available for future issuance under
	outstanding options,			outstanding options,		equity compensation plans (excluding
Plan Category	warrants and rights (#)(1)			warrants and rights ($)		securities reflected in column (a))

Equity compensation plans approved by stockholders		64,630,492			26.39		13,062,071	(2)
Equity compensation plans not approved by stockholders*		17,173,353	(3)		25.14		33,186,044	(4)
TOTAL		81,803,845			26.13		46,248,115	(5)

* Our officers and directors are ineligible to receive grants under our 2001 Broad-Based Stock Option plan.

(1) This table excludes an aggregate of 169,476 shares issuable upon exercise of outstanding options assumed by Analog in connection with various acquisition transactions. The weighted-average exercise price of the excluded options is $5.41.

(2) Includes 1,780,203 shares issuable under our 1992 Employee Stock Purchase Plan, of which up to 529,718 shares are issuable in connection with the current offering period which ends June 1, 2004.

(3) Issued pursuant to our 2001 Broad-Based Stock Option Plan, which does not require the approval of and has not been approved by our stockholders.

(4) Includes 359,397 shares issuable under our 1998 International Employee Stock Purchase Plan, of which up to 89,631 shares are issuable in connection with the current offering period which ends June 1, 2004.

(5) Includes 2,139,600 shares issuable under our employee stock purchase plans, of which up to 619,349 are issuable in connection with the current offering period which ends June 1, 2004.

Factors That May Affect Future Results

Our future operating results are difficult to predict and may materially fluctuate.

Our future operating results are difficult to predict and may be materially affected by a number of factors, including the timing of new product announcements or introductions by us or our competitors, competitive pricing pressures, fluctuations in manufacturing yields, adequate availability of wafers and manufacturing capacity, the risk that our backlog could decline significantly, our ability to hire, retain and motivate adequate numbers of engineers and other qualified employees to meet the demands of our largest customers, changes in product mix, and the effect of adverse changes in economic conditions in the United States and international markets. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns. After strong growth in 1999 and 2000, the semiconductor market declined significantly in 2001 and grew only slightly in 2002. Our business is subject to rapid technological changes and there can be no assurance, depending on the mix of future business, that products stocked in inventory will not be rendered obsolete before we ship them. As a result of these and other factors, there can be no assurance that we will not experience material fluctuations in future operating results on a quarterly or annual basis.

Long-term contracts are not typical for us and reductions, cancellations or delays in orders for our products could adversely affect our operating results.

In certain markets where end-user demand may be particularly volatile and difficult to predict, some customers place orders that require us to manufacture product and have it available for shipment, even though the customer is unwilling to make a binding commitment to purchase all, or even any, of the product. At any given time, this situation could affect a portion of our backlog. As a result, we are subject to the risk of cancellation of orders leading to a sharp fall-off of sales and backlog. Further, those orders may be for products that meet the customer’s unique requirements so that those cancelled orders would, in addition, result in an inventory of unsaleable products, resulting in potential inventory write-offs. As a result of lengthy manufacturing cycles for certain of the products subject to these uncertainties, the amount of unsaleable product could be substantial. Reductions, cancellations or delays in orders for our products could adversely affect our operating results.

Our future success depends upon our ability to develop and market new products and enter new markets.

Our success significantly depends on our continued ability to develop and market new products. There can be no assurance that we will be able to develop and introduce new products in a timely manner or that new products, if developed, will achieve market acceptance. In addition, our growth is dependent on our continued ability to penetrate new markets where we have limited experience and competition is intense. There can be no assurance that the markets we serve will grow in the future, that our existing and new products will meet the requirements of these markets, that our products will achieve customer acceptance in these markets, that competitors will not force prices to an unacceptably low level or take market share from us, or that we can achieve or maintain profits in these markets. Also, some of our customers in these markets are less established, which could subject us to increased credit risk.

We may not be able to compete successfully in the semiconductor industry in the future.

Many other companies offer products that compete with our products. Some also offer other electronic products, and some have greater financial, manufacturing, technical and marketing resources than we have. Additionally, some formerly independent competitors have been purchased by larger companies. Our competitors also include emerging companies selling specialized products to markets we serve. There can be no assurance 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 price competition.

We may not be able to satisfy increasing demand for our products, and increased production may lead to overcapacity and lower prices.

The cyclical nature of the semiconductor industry has resulted in sustained or short-term periods when demand for our products has increased or decreased rapidly. We, and the semiconductor industry generally, experienced a period of rapid decreases in demand in fiscal year 2001 and experienced a modest recovery in fiscal 2002 and the first nine months of fiscal 2003. As a result, we have overcapacity due to the expansion of our production facilities and increased access to third-party foundries. However, we cannot be sure that we will not encounter unanticipated production problems either at our own facilities or at third-party foundries, or that our capacity will be sufficient to satisfy future demand for our products. We believe that other semiconductor manufacturers have expanded their production capacity over the past several years. This expansion by us and our competitors has led to overcapacity in our target markets and could lead to price erosion that would adversely affect our operating results.

Our revenues may not increase enough to offset the expense of additional capacity.

Our capacity additions in fiscal year 2001 resulted in a significant increase in operating expenses. If revenue levels do not increase enough to offset these additional expense levels, our future operating results could be adversely affected. In addition, asset values could be impaired if the additional capacity is underutilized for an extended period of time. Should customer demand fail to increase and we no longer need the additional capacity, our financial position and results of operations could be adversely impacted.

We rely on third-party subcontractors and manufacturers for some industry-standard wafers and assembly/test services, and therefore cannot control their availability or conditions of supply.

We rely, and plan to continue to rely, on assembly and test subcontractors and on third-party wafer fabricators to supply most of our wafers that can be manufactured using industry-standard digital processes. This reliance involves several risks, including reduced control over delivery schedules, manufacturing yields and costs. Additionally, we utilize third-party wafer fabricators as sole-source suppliers, primarily Taiwan Semiconductor Manufacturing Company. These suppliers manufacture components in accordance with our proprietary designs and specifications. We have no written supply agreements with these sole-source suppliers and purchase our custom components through individual purchase orders. If these sole-source suppliers are unable or unwilling to manufacture and deliver sufficient quantities of components to us, on the time schedule and of the quality that we require, we may be forced to seek to engage additional or replacement suppliers, which could result in additional expenses and delays in product development or shipment of product to our customers.

Our transition of products to more modern facilities and related inventory builds may not progress as planned.

We are transitioning products from our older four-inch wafer fabrication facilities to our six-inch and eight-inch wafer fabrication facilities. We have built inventory in preparation for this transfer for both lifetime supply and transition inventory. We have recorded certain levels of reserves related to these inventory builds. Although we believe that we have used our best efforts and information to estimate future demand, due to the uncertain economic times and the difficulty inherent in predicting future results, it is possible that actual demand for our products will differ from our estimates. If we are unable to transition our products as planned or if actual demand for products included in our inventory builds is less than our estimates, our financial position and results of operations could be adversely impacted.

Our manufacturing processes are highly technical and may be interrupted.

We have both generic and proprietary manufacturing processes that utilize a substantial amount of technology as the fabrication of integrated circuits is a highly complex and precise process. Minute impurities, contaminants in the manufacturing environment, difficulties in the fabrication process, defects in the masks used in the wafer manufacturing process, manufacturing equipment failures, wafer breakage or other factors can cause a substantial percentage of wafers to be rejected or numerous dice on each wafer to be nonfunctional. While we have significant expertise in semiconductor manufacturing, it is possible that some processes could become unstable. This instability could result in manufacturing delays and product shortages, which could have a material adverse effect on our business.

We rely on manufacturing capacity located in geologically unstable areas, which could affect the availability of supplies and services.

We, and many companies in the semiconductor industry, rely on internal manufacturing capacity located in California as well as wafer fabrication foundries in Taiwan and other sub-contractors in geologically unstable locations around the world. This reliance involves risks associated with the impact of earthquakes on us and the semiconductor industry, including temporary loss of capacity, availability and cost of key raw materials and equipment and availability of key services including transport. In addition, California has experienced intermittent interruption in the availability of electricity. To date, the impact on us has been negligible. However, electricity is a critical resource for us, without which our products could not be manufactured at factories exposed to continued lengthy power interruptions. Any prolonged inability to utilize one of our manufacturing facilities as a result of fire, natural disaster, unavailability of electric power or otherwise, would have a material adverse effect on our results of operations and financial condition.

We are exposed to economic, political and other risks through our significant worldwide operations.

During the first nine months of fiscal year 2003, approximately 75% of our revenues were derived from customers in international markets. Although we engage in hedging transactions to reduce our exposure to currency exchange rate fluctuations, there can be no assurance that our competitive position will not be adversely affected by changes in the exchange rate of the United States dollar against other currencies. We have manufacturing facilities outside the United States in Ireland, the United Kingdom, the Philippines and Taiwan. In addition to being exposed to the ongoing economic cycles in the semiconductor industry, we are also subject to the economic and political risks inherent in international operations and their impact on the United States economy in general, including the risks associated with ongoing uncertainties and political and economic instability in many countries around the world as well as the economic disruption from acts of terrorism, particularly

in the aftermath of the terrorist attacks of September 11, 2001 and the response to them by the United States and its allies. These risks include air transportation disruptions, expropriation, currency controls and changes in currency exchange rates, tax and tariff rates, freight rates and social and political unrest.

We are involved in frequent litigation regarding intellectual property rights, which could be costly to defend and could require us to redesign products or pay significant royalties.

There can be no assurance that any patent will issue on pending applications or that any patent issued will provide substantive protection for the technology or product covered by it. We believe that patent and mask set protection is of less significance in our business than experience, innovation and management skill. There also can be no assurance that others will not develop or patent similar technology, or reverse engineer our products, or that our confidentiality agreements with employees, consultants, silicon foundries and other suppliers and vendors will be adequate to protect our interests.

The semiconductor industry is characterized by frequent claims and litigation involving patent and other intellectual property rights, including claims arising under our contractual indemnification of our customers. We have received from time to time, and may receive in the future, claims from third parties asserting that our products or processes infringe their patents or other intellectual property rights. In the event a third party makes a valid intellectual property claim against us and a license is not available to us on commercially reasonable terms, or at all, we could be forced either to redesign or to stop production of products incorporating that intellectual property, and our operating results could be materially and adversely affected. Litigation may be necessary to enforce our patents or other of our intellectual property rights or to defend us against claims of infringement, and this litigation could be costly and divert the attention of our key personnel. See Note 11 in the Notes to our Consolidated Financial Statements contained in Item 8 of our Annual Report on Form 10-K for the year ended November 2, 2002 and Item 1 of Part II of this Quarterly Report on Form 10-Q for information concerning pending litigation that involves us. An adverse outcome in this or other litigation could have a material adverse effect on our consolidated financial position or on our consolidated results of operations or cash flows in the period in which the litigation is resolved.

We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.

We rely primarily upon know-how, rather than on patents, to develop and maintain our competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer our products or that the confidentiality agreements upon which we rely will be adequate to protect our interests. Other companies have obtained patents covering a variety of semiconductor designs and processes, and we might be required to obtain licenses under some of these patents or be precluded from making and selling the infringing products, if such patents are found to be valid. There can be no assurance that we would be able to obtain licenses, if required, upon commercially reasonable terms, or at all. Moreover, the laws of foreign countries in which we design, manufacture and market our products may afford little or no effective protection of our proprietary technology.

If we do not retain our key personnel, our ability to execute our business strategy will be limited.

Our success depends to a significant extent upon the continued service of our executive officers and key management and technical personnel, particularly our experienced engineers, and on our ability to continue to attract, retain, and motivate qualified personnel. The competition for these employees is intense. The loss of the services of one or more of our key personnel could have a material adverse effect on our operating results. In addition, there could be a material adverse effect on us should the turnover rates for engineers and other key personnel increase significantly or if we are unable to continue to attract qualified personnel. We do not maintain any key person life insurance policy on any of our officers or employees.

Our future operating results are dependent on the performance of independent distributors and sales representatives.

A significant portion of our sales are through independent distributors that are not under our control. These independent distributors generally represent product lines offered by several companies and thus could reduce their sales efforts applied to our products or terminate their representation of us. We generally do not require letters of credit from our distributors and are not protected against accounts receivable default or bankruptcy by these distributors. Our inability to collect open accounts receivable could adversely affect our results of operations. Termination of a significant distributor, whether at our initiative or the distributor’s initiative, could disrupt our current business. If we are unable to find suitable replacements in the event of terminations by significant distributors or sales representatives, our operating results could be adversely affected.

Leverage and debt service obligations may adversely affect our cash flow.

During the fourth quarter of fiscal year 2000, we issued $1,200,000,000 of 4.75% convertible subordinated notes due 2005 (all of which are still outstanding) and, as a result, we have a substantial amount of outstanding indebtedness. We may be unable to generate cash sufficient to pay the principal of, interest on, and other amounts due in respect of, this indebtedness when due. Our substantial leverage could have significant negative consequences. This substantial leverage could increase our vulnerability to general adverse economic and industry conditions. It may require the dedication of a substantial portion of our expected cash flow from operations to service the indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures. It may also limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the information provided under ITEM 7A. “Qualitative and Quantitative Disclosures about Market Risk” set forth on page 32 of our Annual Report on Form 10-K for the year ended November 2, 2002.

ITEM 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of August 2, 2003. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that, as of August 2, 2003, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended August 2, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

As previously reported in our Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 2003, on March 4, 2003, Motorola, Inc. filed an action in the United States District Court for the Eastern District of Texas against us, alleging that we infringed five patents owned by Motorola relating to semiconductor processing and semiconductor chip design. On March 11, 2003, Motorola filed a First Amended Complaint asserting the same five patents. The First Amended Complaint seeks injunctive relief and unspecified damages. On April 17, 2003, we filed a motion under the Federal Rules of Civil Procedure for a more definite statement of Motorola’s allegations. Motorola opposed that motion, and, by order dated July 18, 2003, the Court denied our motion. On August 5, 2003, we filed an answer and also counterclaimed against Motorola. In the counterclaim, we asserted that Motorola infringes six of our patents relating to semiconductor technology. Motorola’s response to our counterclaims is due August 25, 2003. The case is proceeding through discovery.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report on Form 10-Q.

(b) Reports on Form 8-K

On May 14, 2003, we furnished a Current Report on Form 8-K under Item 9 (pursuant to Item 12) containing a press release announcing our financial results for the fiscal quarter ended May 3, 2003.

Items 2,3,4 and 5 of PART II are not applicable and have been omitted.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		ANALOG DEVICES, INC.



Date: August 20, 2003	By:		/s/ Jerald G. Fishman

			Jerald G. Fishman
			President and
			Chief Executive Officer
			(Principal Executive Officer)

Date: August 20, 2003	By:		/s/ Joseph E. McDonough

			Joseph E. McDonough
			Vice President-Finance
			and Chief Financial Officer
			(Principal Financial and
			Accounting Officer)

Exhibit Index


Exhibit
No.		Description

31.1		Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).

31.2		Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).

32.1		Certification Pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer).

32.2		Certification Pursuant to 18 U.S.C. Section 1350 (Chief Financial Officer).

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	1)		The 1998 Stock Option Plan, as amended, under which officers, directors and employees of Analog are granted options to purchase shares of our common stock; and

	2)		The 2001 Broad-Based Stock Option Plan, as amended, under which options to purchase shares of our common stock may be granted to all employees, consultants and advisors of Analog, other than officers or directors.

*		See “Aggregated Option Exercises and Remaining Option Values” below for our named executive officers. Named executive officers are defined by the SEC as our chief executive officer and our four other most highly compensated executive officers who were serving as executive officers on November 2, 2002.

**		Net grants is equal to total grants less grant cancellations. See the “Summary of Option Activity” table for detail regarding our total grants and cancellations during the nine months ended August 2, 2003.

***		Options are generally granted once per year between September and January as part of our annual performance review process. Occasionally, as in fiscal year 2002, two sets of option grants can fall within one fiscal year, as the process spans the end of one fiscal year and the beginning of the next fiscal year. Conversely, as in fiscal year 1999, there are fiscal years in which no annual merit options are granted.

(1)		This table excludes an aggregate of 169,476 shares issuable upon exercise of outstanding options assumed by Analog in connection with various acquisition transactions. The weighted-average exercise price of the excluded options is $5.41.

(2)		Includes 1,780,203 shares issuable under our 1992 Employee Stock Purchase Plan, of which up to 529,718 shares are issuable in connection with the current offering period which ends June 1, 2004.

(3)		Issued pursuant to our 2001 Broad-Based Stock Option Plan, which does not require the approval of and has not been approved by our stockholders.

(4)		Includes 359,397 shares issuable under our 1998 International Employee Stock Purchase Plan, of which up to 89,631 shares are issuable in connection with the current offering period which ends June 1, 2004.

(5)		Includes 2,139,600 shares issuable under our employee stock purchase plans, of which up to 619,349 are issuable in connection with the current offering period which ends June 1, 2004.

	(a)		Exhibits

			The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report on Form 10-Q.

	(b)		Reports on Form 8-K

			On May 14, 2003, we furnished a Current Report on Form 8-K under Item 9 (pursuant to Item 12) containing a press release announcing our financial results for the fiscal quarter ended May 3, 2003.