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

FORM 10-Q

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 23, 2003

or

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

Commission File Number: 1-6453

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

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

2900 Semiconductor Drive, P.O. Box 58090
Santa Clara, California 95052-8090
----------------------------------
(Address of principal executive offices)

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Title of Each Class Outstanding at November 23, 2003.
------------------- ---------------------------------

Common stock, par value $0.50 per share 178,045,016




NATIONAL SEMICONDUCTOR CORPORATION

INDEX



Page No.
--------

Part I. Financial Information

Item 1. Financial Statements

Condensed Consolidated Statements of Operations (Unaudited) for
the Three Months and Six Months Ended November 23, 2003 and
November 24, 2002 3

Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) for the Three Months and Six Months Ended
November 23, 2003 and November 24, 2002 4

Condensed Consolidated Balance Sheets (Unaudited) as of
November 23, 2003 and May 25, 2003 5

Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended November 23, 2003 and November 24, 2002 6

Notes to Condensed Consolidated Financial Statements (Unaudited) 7-15

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-24

Item 3. Quantitative and Qualitative Disclosures About Market Risk 24

Item 4. Controls and Procedures 24

Part II. Other Information

Item 1. Legal Proceedings 25

Item 4. Submission of Matters to a Vote of Security Holders 25-26

Item 6. Exhibits and Reports on Form 8-K 26-27

Signature 28




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in Millions, except per share amounts)

Three Months Ended Six Months Ended
-------------------------- -------------------------
Nov. 23, Nov. 24, Nov. 23, Nov. 24,
2003 2002 2003 2002
------------ ------------- ------------ ------------


Net sales $ 473.5 $ 422.3 $ 898.3 $ 842.9
Operating costs and expenses:
Cost of sales 236.5 241.2 460.9 479.5
Research and development 83.2 107.1 175.3 217.8
Selling, general and administrative 72.8 68.3 141.2 138.2
Special items 6.0 0.7 18.6 0.7
------------ ------------- ------------ ------------

Total operating costs and expenses 398.5 417.3 796.0 836.2
------------ ------------- ------------ ------------

Operating income 75.0 5.0 102.3 6.7
Interest income, net 2.5 3.6 5.6 7.7
Other income (expense), net (2.7) (0.4) 2.8 (1.9)
------------ ------------- ------------ ------------

Income before taxes and cumulative effect
of a change in accounting principle 74.8 8.2 110.7 12.5
Income tax expense 9.0 2.0 13.3 5.0
------------ ------------- ------------ ------------

Income before cumulative effect of a
change in accounting principle 65.8 6.2 97.4 7.5
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million - - (1.9) -
------------ ------------- ------------ ------------

Net income $ 65.8 $ 6.2 $ 95.5 $ 7.5
============ ============= ============ ============

Earnings per share:
Income before cumulative effect of a change
in accounting principle:
Basic $ 0.37 $ 0.03 $ 0.53 $ 0.04
Diluted $ 0.34 $ 0.03 $ 0.50 $ 0.04

Cumulative effect of a change in accounting
principle including tax effect of $0.2 million:
Basic $ - $ - $ 0.01 $ -
Diluted $ - $ - $ 0.01 $ -

Net income:
Basic $ 0.37 $ 0.03 $ 0.52 $ 0.04
Diluted $ 0.34 $ 0.03 $ 0.49 $ 0.04

Weighted-average shares used to calculate earning per share:
Basic 180.1 181.3 182.3 181.0
Diluted 195.5 182.0 193.7 184.5


See accompanying Notes to Condensed Consolidated Financial Statements


NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in Millions)




Three Months Ended Six Months Ended
--------------------------- ------------------------------
Nov. 23, Nov. 24, Nov. 23, Nov. 24,
2003 2002 2003 2002
------------- ------------- --------------- --------------


Net income $ 65.8 $ 6.2 $ 95.5 $ 7.5

Other comprehensive income (loss), net of tax:
Reclassification adjustment for net realized
(gain) on available-for-sale securities
included in net income - (2.9) - (3.6)
Unrealized gain (loss) on
available-for-sale securities 0.8 4.1 (2.3) (24.0)
Derivative instruments:
Unrealized gain on cash flow hedges 0.1 0.1 0.2 0.5
------------- ------------- --------------- --------------

Comprehensive income (loss) $ 66.7 $ 7.5 $ 93.4 $ (19.6)
============= ============= =============== ==============





See accompanying Notes to Condensed Consolidated Financial Statements



NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in Millions)


Nov. 23, May 25,
2003 2003
------------------------ -----------------------


ASSETS
Current assets:
Cash and cash equivalents $ 513.5 $ 802.2
Short-term marketable investments 184.8 113.2
Receivables, less allowances of $35.3 in fiscal 2004
and $38.2 in fiscal 2003 166.1 137.1
Inventories 167.3 142.2
Deferred tax assets 66.0 66.0
Other current assets 26.6 20.5
------------------------ -----------------------

Total current assets 1,124.3 1,281.2

Property, plant and equipment, net 679.5 680.7
Goodwill 173.3 173.3
Other assets 99.6 109.4
------------------------ -----------------------

Total assets $2,076.7 $2,244.6
======================== =======================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 22.4 $ 2.3
Accounts payable 108.2 107.0
Accrued expenses 188.0 192.3
Income taxes payable 54.6 49.6
------------------------ -----------------------

Total current liabilities 373.2 351.2

Long-term debt - 19.9
Other noncurrent liabilities 180.9 167.5
------------------------ -----------------------

Total liabilities 554.1 538.6
------------------------ -----------------------

Commitments and contingencies

Shareholders' equity:
Common stock 89.0 91.8
Additional paid-in capital 1,177.3 1,451.3
Retained earnings 372.7 277.2
Accumulated other comprehensive loss (116.4) (114.3)
------------------------ -----------------------

Total shareholders' equity 1,522.6 1,706.0
------------------------ -----------------------

Total liabilities and shareholders' equity $2,076.7 $2,244.6
======================== =======================


See accompanying Notes to Condensed Consolidated Financial Statements




NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in Millions)

Six Months Ended
-----------------------------------------------
Nov. 23, Nov. 24,
2003 2002
----------------------- -----------------------


Cash flows from operating activities:
Net income $ 95.5 $ 7.5
Adjustments to reconcile net income with net cash
provided by operating activities:
Cumulative effect of a change in accounting principle 1.9 -
Depreciation and amortization 107.3 113.8
Gain on investments (3.0) (0.5)
Share in net losses of equity-method investments 7.7 6.1
Loss on disposal of equipment 2.2 1.6
Noncash special items 4.5 0.7
Other, net 2.4 0.3
Changes in certain assets and liabilities, net:
Receivables (21.4) (12.6)
Inventories (29.7) (8.0)
Other current assets (6.3) (9.8)
Accounts payable and accrued expenses (14.6) (15.8)
Income taxes payable 5.0 8.6
Other noncurrent liabilities 11.1 7.3
----------------------- -----------------------

Net cash provided by operating activities 162.6 99.2
----------------------- -----------------------

Cash flows from investing activities:
Purchase of property, plant and equipment (99.0) (98.3)
Sale and maturity of available-for-sale securities 314.0 300.1
Purchase of available-for-sale securities (386.7) (290.2)
Sale of investments 7.2 8.7
Sale of equipment - 2.3
Business acquisition, net of cash acquired - (11.0)
Investment in nonpublicly traded companies (1.7) (16.7)
Funding of benefit plan (4.5) (3.6)
Other, net 1.1 (1.3)
----------------------- -----------------------

Net cash used by investing activities (169.6) (110.0)
----------------------- -----------------------

Cash flows from financing activities:
Repayment of debt (1.8) (3.5)
Issuance of common stock under employee
stock-based awards 120.1 19.4
Purchase and retirement of treasury stock (400.0) -
----------------------- -----------------------

Net cash (used by) provided by financing activities (281.7) 15.9
----------------------- -----------------------

Net change in cash and cash equivalents (288.7) 5.1
Cash and cash equivalents at beginning of period 802.2 681.3
----------------------- -----------------------

Cash and cash equivalents at end of period $ 513.5 $ 686.4
======================= =======================


See accompanying Notes to Condensed Consolidated Financial Statements



Note 1. Summary of Significant Accounting Policies

Interim Financial Statements:

In the opinion of our management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position and results of operations of National
Semiconductor Corporation and our majority-owned subsidiaries. You should not
expect interim results of operations to necessarily be indicative of the results
to be expected for the full fiscal year. This report should be read in
conjunction with the consolidated financial statements and the accompanying
notes included in our annual report on Form 10-K for the fiscal year ended May
25, 2003.

Earnings Per Share:

A reconciliation of the shares used in the computation of basic and diluted
earnings per share follows:



Three Months Ended Six Months Ended
------------------------ -----------------------
Nov. 23, Nov. 24, Nov. 23, Nov. 24,
(In Millions) 2003 2002 2003 2002
------------ ----------- ----------- -----------


Numerator:
Income before cumulative effect of a change in
accounting principle $ 65.8 $ 6.2 $ 97.4 $ 7.5
============ =========== =========== ===========

Net income $ 65.8 $ 6.2 $ 95.5 $ 7.5
============ =========== =========== ===========

Denominator:
Weighted-average common shares outstanding
used for basic earnings per share 180.1 181.3 182.3 181.0

Effect of dilutive securities:
Stock options 15.4 0.7 11.4 3.5
------------ ----------- ----------- -----------

Weighted-average common and potential
common shares outstanding used for
diluted earnings per share 195.5 182.0 193.7 184.5
============ =========== =========== ===========



For the second quarter of fiscal 2004, we did not include options outstanding to
purchase 6.8 million shares of common stock with a weighted-average exercise
price of $58.32 in diluted earnings per share since their effect was
antidilutive because their exercise price exceeded the average market price
during the quarter. These shares could, however, potentially dilute basic
earnings per share in the future. For the first six months of fiscal 2004, we
did not include options outstanding to purchase 15.2 million shares of common
stock with a weighted-average exercise price of $44.97 in diluted earnings per
share since their effect was also antidilutive because their exercise price
exceeded the average market price during the same period. For the second quarter
of fiscal 2003, we did not include options outstanding to purchase 35.0 million
shares of common stock with a weighted-average exercise price of $32.20 in
diluted earnings per share since their effect was antidilutive because their
exercise price exceeded the average market price during the quarter. For the
first six months of fiscal 2003, we did not include options outstanding to
purchase 27.5 million shares of common stock with a weighted-average exercise
price of $37.00 in diluted earnings per share since their effect was
antidilutive because their exercise price exceeded the average market price
during the same period.



Employee Stock Plans

We account for our employee stock option and stock purchase plans in accordance
with the intrinsic method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." For more complete information on our
stock-based compensation plans, see Note 10 to the Consolidated Financial
Statements included in our annual report on Form 10-K for the year ended May 25,
2003.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, "Accounting for Stock-Based Compensation," as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." This information illustrates the effect on net income and earnings
per share as if we had accounted for stock-based awards to employees under the
fair value method specified by SFAS No. 123. The weighted-average fair value of
stock options granted during the second quarter and first six months of fiscal
2004 was $22.51 and $15.16 per share, respectively. The weighted-average fair
value of stock options granted during the second quarter and first six months of
fiscal 2003 was $8.30 and $9.61 per share, respectively. The weighted-average
fair value of rights granted under the stock purchase plans was $4.74 and $4.48
per share for the second quarter and first six months of fiscal 2004,
respectively. The weighted-average fair value of rights granted under the stock
purchase plans was $7.42 and $7.74 per share for the second quarter and first
six months of fiscal 2003, respectively. We estimated the fair value of these
employee stock-based awards using a Black-Scholes option pricing model that
assumes no expected dividends and uses the following weighted-average
assumptions:


Three Months Ended Six Months Ended
----------------------------- -----------------------------
Nov. 23, Nov. 24, Nov. 23, Nov. 24,
2003 2002 2003 2002
-------------- -------------- ------------- ---------------


Stock Option Plans
Expected life (in years) 5.4 5.0 5.1 5.0
Expected volatility 75% 77% 76% 77%
Risk-free interest rate 3.3% 2.7% 3.3% 2.7%

Stock Purchase Plans
Expected life (in years) 0.3 0.3 0.3 0.3
Expected volatility 48% 54% 50% 54%
Risk-free interest rate 0.9% 1.1% 0.9% 1.1%


For pro forma purposes, the estimated fair value of employee stock-based awards
is amortized on a straight-line basis over the options' vesting period for
options and the three-month purchase period for stock purchases under the stock
purchase plans. The pro forma information follows:


Three Months Ended Six Months Ended
-------------- -------------- ------------- ---------------
Nov. 23, Nov. 24, Nov. 23, Nov. 24,
(In Millions, Except Per Share Amounts) 2003 2002 2003 2002
-------------- -------------- ------------- ---------------


Net income - as reported $ 65.8 $ 6.2 $ 95.5 $ 7.5
Add back: Stock compensation charge included
in net income determined under the intrinsic
value method, net of tax 0.6 0.7 1.2 0.7
Deduct: Total stock-based employee compensation
expense determined under the fair value
method, net of tax (38.0) (49.7) (83.2) (95.5)
-------------- -------------- ------------- ---------------
Net income (loss) - pro forma $ 28.4 $ (42.8) $ 13.5 $ (87.3)
============== ============== ============= ===============

Basic earnings per share - as reported $ 0.37 $ 0.03 $ 0.52 $ 0.04
Basic earnings (loss) per share - pro forma $ 0.16 $ (0.24) $ 0.07 $ (0.48)
Diluted earnings per share - as reported $ 0.34 $ 0.03 $ 0.49 $ 0.04
Diluted earnings (loss) per share - pro forma $ 0.15 $ (0.24) $ 0.07 $ (0.48)



New Accounting Pronouncements:

At the beginning of fiscal 2004, we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The impact from the adoption
of this statement is discussed in Note 5 to the condensed consolidated financial
statements.

Reclassifications:

Certain amounts reported in fiscal 2003 have been reclassified to conform to the
fiscal 2004 presentation. Net operating results have not been affected by the
reclassification.

Note 2. Consolidated Financial Statement Details

Balance sheets (in Millions):

Nov. 23, May 25,
2003 2003
-------------------- -------------------


Inventories:
Raw materials $ 7.6 $ 8.1
Work in process 110.7 89.2
Finished goods 49.0 44.9
-------------------- -------------------

Total inventories $167.3 $142.2
==================== ===================



Statements of operations (in Millions):

Three Months Ended Six Months Ended
--------------------------- --------------------------
Nov. 23, Nov. 24, Nov. 23, Nov. 24,
2003 2002 2003 2002
-------------- ------------ ------------ -------------


Special items:
Cost reduction charges (See Note 4) $ 6.0 $ - $ 18.6 $ -
In-process research and development charges - 0.7 - 0.7
-------------- ------------ ------------ -------------
Total special items $ 6.0 $ 0.7 $ 18.6 $ 0.7
============== ============ ============ =============

Interest income, net:
Interest income $ 2.7 $ 4.1 $ 5.9 $ 8.6
Interest expense (0.2) (0.5) (0.3) (0.9)
-------------- ------------ ------------ -------------
Interest income, net $ 2.5 $ 3.6 $ 5.6 $ 7.7
============== ============ ============ =============

Other income (expense), net:
Net intellectual property income $ - $ 2.5 $ 8.0 $ 4.1
Net gain (loss) on investments 0.7 (0.2) 3.0 0.5
Share in net losses of equity-method investments (2.9) (2.5) (7.7) (6.1)
Other (0.5) (0.2) (0.5) (0.4)
-------------- ------------ ------------ -------------
Total other income (expense), net $ (2.7) $ (0.4) $ 2.8 $ (1.9)
============== ============ ============ =============




Note 3. Consolidated Statement of Cash Flows Information (in Millions)

Six Months Ended
-----------------------------------------
Nov. 23, Nov. 24,
2003 2002
--------------------- -------------------
Supplemental Disclosure of Cash Flows Information:


Cash paid for:
Interest $ 0.3 $ 1.0
Income taxes $ 10.0 $ 10.2

Supplemental Schedule of Non-cash Investing
and Financing Activities:

Issuance of stock for employee benefit plans $ 0.9 $ 0.8
Issuance of common stock to directors $ 0.4 $ 0.3
Unearned compensation relating to restricted stock issuance $ 1.9 $ 0.2
Restricted stock cancellation $ 0.8 $ 0.9
Change in unrealized gain on cash flow hedges $ 0.2 $ 0.5
Change in unrealized gain on available-for-sale securities $ (2.3) $ (27.6)
Acquisition of software license under long-term contracts $ 11.0 $ 13.9


Note 4. Restructuring of Operations and Cost Reduction Programs

During the second quarter of fiscal 2004, we continued to take steps consistent
with the objectives of our strategic profit-improvement actions that were
initially launched in February 2003. We recorded a $6.0 million charge for
supplemental actions, primarily for workforce reductions in various
manufacturing, product development and support areas. The charge includes
severance costs, as well as asset write-offs and lease obligations we incurred
upon vacating certain manufacturing and design center facilities within the
quarter upon the closure of those operations. In late August 2003, we also
completed the exit and sale of our information appliance business. This action
included the sale to Advanced Micro Devices, Inc. of certain intellectual
property and assets of the information appliance business. As part of the
transaction, AMD hired 125 former National employees who were mostly located in
Longmont, Colorado. However, certain information appliance assets were not
included in the sale transaction and certain employees that were directly
supporting the information appliance business were not hired by AMD. The
corresponding severance and asset impairments that were incurred resulted in net
charges of $4.0 million for the exit and sale of the information appliance
business, which were recorded in the first quarter of fiscal 2004. Included in
this net amount are proceeds of $10.1 million from the sale of assets that had a
carrying value of $7.5 million less transaction costs of $1.3 million. To date a
total of 192 employees have been terminated in fiscal 2004 as a combined result
of the exit from the information appliance business and the other supplemental
actions. Total charges related to cost reduction actions, including the exit of
the information appliance business, are presented in the following tables:


Enterprise Enhanced
Analog Networking Solutions
(In Millions) Segment Segment Segment All Others Total
-------------- ---------------- ---------------- -------------- --------------


Three months ended November 23, 2003:
Severance $ 2.0 $ - $ - $ 1.8 $ 3.8
Exit related costs 0.9 - - 1.1 2.0
Asset write-off 0.2 - - - 0.2
-------------- ---------------- ---------------- -------------- --------------
$ 3.1 $ - $ - $ 2.9 $ 6.0
============== ================ ================ ============== ==============





Enterprise Enhanced
Analog Networking Solutions
(In Millions) Segment Segment Segment All Others Total
-------------- ---------------- ---------------- -------------- --------------



Six months ended November 23, 2003:
Severance $ 3.7 $ - $ - $ 6.5 $ 10.2
Exit related costs 3.1 - - 1.2 4.3
Asset write-off 1.3 - - 4.1 5.4
-------------- ---------------- ---------------- -------------- --------------
$ 8.1 $ - $ - $ 11.8 $ 19.9
============== ================ ================ ============== ==============


Noncash charges included in the tables above relate to the write-off of assets,
primarily equipment and a technology license that were dedicated to the
information appliance and cellular baseband businesses. The cellular baseband
business was closed at the end of fiscal 2003 as part of the profit-improvement
plan. In connection with the sale transaction to AMD discussed above, we also
entered into a separate supply agreement where we will manufacture product for
AMD at prices specified by the terms of the agreement, which we believe
approximate market prices. This agreement is effective for three years unless
terminated earlier as permitted under the terms of the agreement.
The following table provides a summary of the activities related to our
cost reduction and restructuring actions included in accrued liabilities for the
six months ended November 23, 2003:


Other Exit
(In Millions) Severance Costs Total
-------------- -------------- --------------

Balance at beginning of fiscal year $ 17.5 $ 7.8 $ 25.3
Cash payments (15.8) (3.0) (18.8)
Fiscal 2004 cost reduction charges 10.2 4.3 14.5
-------------- -------------- --------------
Ending balance $ 11.9 $ 9.1 $ 21.0
============== ============== ==============

Payments for the remaining severance are expected to be completed by the
end of fiscal 2004. The remaining other exit costs, primarily lease obligations,
are expected to be paid through lease expiration dates that range from August
2004 through January 2009.
During the first six months of fiscal 2004 we paid severance to 305
employees in connection with workforce reductions announced in fiscal 2003 and
the first six months of fiscal 2004. Amounts paid for other exit-related costs
during the first six months of fiscal 2004 were primarily for payments under
lease obligations associated with previous restructuring and cost reduction
actions.

Note 5. Accounting for Asset Retirement Obligations

We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," at the
beginning of fiscal 2004. This statement requires that the fair value of a legal
liability for an asset retirement obligation be recorded in the period in which
it is incurred if a reasonable estimate of fair value can be made. Upon
recognition of a liability, the asset retirement cost is recorded as an increase
in the carrying value of the related long-lived asset and then depreciated over
the life of the asset. Our asset retirement obligations arise primarily from
contractual commitments to decontaminate machinery and equipment used at our
manufacturing facilities at the time we dispose of or replace them. We also have
some leased facilities where we have asset retirement obligations from
contractual commitments to remove leasehold improvements and return the property
to a specified condition when the lease terminates. As a result, we recorded a
$2.1 million noncurrent liability for asset retirement obligations and a $0.4
million increase in the carrying value of the related assets, net of $1.0
million of accumulated depreciation. The cumulative effect recorded in the first
quarter of fiscal 2004 upon the adoption of this accounting standard was a
charge of $1.9 million, including a tax effect of $0.2 million.
We were unable to recognize any asset retirement obligations associated
with the closure or abandonment of the manufacturing facilities we own. We
currently intend to operate these facilities indefinitely and are therefore
unable to reasonably estimate the fair value of any legal obligations we may
have because of the indeterminate closure dates.



The following table presents the activity for the asset retirement
obligations for the six months ended November 23, 2003:

(In Millions)
Balance at beginning of fiscal 2004 $ 2.1
Liability incurred 0.1
Accretion expense 0.1
-----------------------
Ending balance $ 2.3
=======================

The following table presents net income and earnings per share for the
second quarter and first six months of fiscal 2004 and 2003, as if the
provisions of SFAS No. 143 had been applicable in fiscal 2003:


Three Months Ended Six Months Ended
--------------------------- ------------------------------
Nov. 23, Nov. 24, Nov. 23, Nov. 24,
(In Millions, Except Per Share Amounts) 2003 2002 2003 2002
--------------------------- ------------------------------


Net income, as reported $ 65.8 $ 6.2 $ 95.5 $ 7.5
Add back:
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million - - 1.9 -
Deduct:
Accretion and depreciation in fiscal 2003, net of tax - - - 0.1
------------- ------------- --------------- --------------
Net income, as adjusted $ 65.8 $ 6.2 $ 97.4 $ 7.4
============= ============= =============== ==============

Net income per share, as adjusted:
Basic $ 0.37 $ 0.03 $ 0.53 $ 0.04
Diluted $ 0.34 $ 0.03 $ 0.50 $ 0.04


Note 6. Stock Repurchase

During the second quarter of fiscal 2004, we repurchased 12.7 million shares of
our common stock for $400.0 million in connection with a stock repurchase
program we announced in July 2003. A portion (7.5 million shares) of the total
was purchased through a privately negotiated transaction with a major financial
institution and the remainder was purchased in the open market.




Note 7. Segment Information

The following tables present information related to our reportable segments:


Enterprise Enhanced
Analog Networking Solutions
(In Millions) Segment Segment Segment All Others Eliminations Total
------------- -------------- ------------- ------------ ------------- ------------


Three months ended November 23, 2003:
Sales to unaffiliated customers $ 387.2 $ 5.1 $ 17.5 $ 63.7 $ 473.5
============= ============== ============= ============ ============= ============

Segment income (loss) before income taxes and
cumulative effect of a change in accounting
principle: $ 86.8 $ (6.1) $ 6.0 $ (11.9) - $ 74.8
============= ============== ============= ============ ============= ============

Three months ended November 24, 2002:
Sales to unaffiliated customers $ 323.1 $ 4.3 $ 13.4 $ 81.5 $ 422.3
============= ============== ============= ============ ============= ============

Segment income (loss) before income taxes: $ 15.3 $ (9.8) $ 6.1 $ (3.4) - $ 8.2
============= ============== ============= ============ ============= ============


Six months ended November 23, 2003:
Sales to unaffiliated customers $ 721.3 $ 10.4 $ 28.5 $ 138.1 $ 898.3
============= ============== ============= ============ ============= ============

Segment income (loss) before income taxes and
cumulative effect of a change in accounting
principle: $ 141.1 $ (10.0) $ 10.6 $ (31.0) - $ 110.7
============= ============== ============= ============ ============= ============

Six months ended November 24, 2002:
Sales to unaffiliated customers $ 650.2 $ 9.8 $ 24.8 $ 158.1 $ 842.9
============= ============== ============= ============ ============= ============

Segment income (loss) before income taxes: $ 29.2 $ (20.2) $ 9.0 $ (5.5) - $ 12.5
============= ============== ============= ============ ============= ============


The GeodeTM family of integrated processor products was the primary component of
the Information Appliance segment, which was formerly a reportable segment. It
was sold to Advanced Micro Devices, Inc. in late August 2003 as part of our
disposition of the information appliance business (See Note 4). Beginning in the
second quarter of fiscal 2004, the other aggregated operating segments that were
in our Information Appliance reportable segment no longer meet the requirements
of a reportable segment and are included in "All Other." Prior period amounts
have been reclassified to conform with the current year presentation.



Note 8. Contingencies - Legal Proceedings

o Environmental Matters

We have been named to the National Priorities List for our Santa Clara,
California, site and have completed a remedial investigation/feasibility study
with the Regional Water Quality Control Board (RWQCB), acting as an agent for
the Federal Environmental Protection Agency. We have agreed with the RWQCB to a
site remediation plan. In addition to the Santa Clara site, from time to time we
have been designated as a potentially responsible party (PRP) by federal and
state agencies for certain environmental sites with which we may have had direct
or indirect involvement. These designations are made regardless of the extent of
our involvement. These claims are in various stages of administrative or
judicial proceedings and include demands for recovery of past governmental costs
and for future investigations and remedial actions. In many cases, the dollar
amounts of the claims have not been specified, and in the case of the PRP cases,
claims have been asserted against a number of other entities for the same cost
recovery or other relief as is sought from us. We accrue costs associated with
environmental matters when they become probable and can be reasonably estimated.
The amount of all environmental charges to earnings, including charges for the
Santa Clara site remediation (excluding potential reimbursements from insurance
coverage), were not material during the fiscal periods covered in these
consolidated financial statements.
As part of the disposition in fiscal 1996 of the Dynacraft assets and
business, we retained responsibility for environmental claims connected with
Dynacraft's Santa Clara, California, operations and for other environmental
claims arising from our conduct of the Dynacraft business prior to the
disposition. As part of the Fairchild disposition in fiscal 1997, we also agreed
to retain liability for remediation projects and environmental matters arising
from our prior operation of Fairchild's plants in South Portland, Maine; West
Jordan, Utah; Cebu, Philippines; and Penang, Malaysia; and Fairchild agreed to
arrange for and perform the remediation and cleanup. We prepaid to Fairchild the
estimated costs of the remediation and cleanup and remain responsible for costs
and expenses incurred by Fairchild in excess of the prepaid amounts. To date,
the costs associated with the liabilities we have retained in these dispositions
have not been material and there have been no legal proceedings relating to
them.

o Tax Matters

Our tax returns for certain years are under examination in the U.S. by the
IRS and in other countries by local authorities. The IRS has completed examining
our tax returns for fiscal years 1997 through 2000 and on July 29, 2003 issued a
notice of proposed adjustment seeking additional taxes of approximately $19
million (exclusive of interest) for those years. The issues giving rise to most
of the proposed adjustments relate to R&D credits, inventory and depreciation
deductions. We are contesting the adjustments administratively. We believe we
have made adequate tax payments and/or accrued adequate amounts in our
consolidated financial statements to cover the amounts sought by the IRS, as
well as any other deficiencies that other governmental agencies may find in
their audits.

o Other Matters

In January 1999, a class action suit was filed against us and our chemical
suppliers by former and present employees claiming damages for personal
injuries. The complaint alleges that cancer and reproductive harm were caused to
employees exposed to chemicals in the workplace. In November 2003, the court
denied the plaintiffs' motion for certification of a medical monitoring class.
Discovery in the case is proceeding.
In November 2000, a derivative action was brought against us and other
defendants by a shareholder of Fairchild Semiconductor International, Inc.
Plaintiff seeks recovery of alleged "short-swing" profits under section 16(b) of
the Securities Exchange Act of 1934 from the sale by the defendants in January
2000 of Fairchild common stock. The complaint alleges that Fairchild's
conversion of preferred stock held by the defendants at the time of Fairchild's
initial public offering in August 1999 constitutes a "purchase" that must be
matched with the January 2000 sale for purposes of computing the "short-swing"
profits. Plaintiff seeks from National alleged recoverable profits of $14.1
million. In February 2002, the judge in the case granted the motion to dismiss
filed by us and our co-defendants and dismissed the case, ruling that the
conversion was done pursuant to a reclassification which is exempt from the
scope of Section 16(b). Plaintiff appealed the dismissal of the case and upon
appeal, the appeals court reversed the lower court's dismissal. Our petition to
the U.S. Supreme Court for a writ of certiorari was denied in October 2003. The
case is now in discovery in the trial court, where we intend to contest it
through available means.


In addition to the foregoing, we are a party to other suits and claims that
arise in the normal course of business. Based on current information, we do not
believe that it is probable that losses associated with the proceedings
discussed above that exceed amounts already recognized in our consolidated
financial statements will be incurred in amounts that would be material to our
consolidated financial position or results of operations.

Contingencies - Other:

In connection with our past divestitures, we have routinely provided
indemnities to cover the indemnified party for matters such as environmental,
tax, product and employee liabilities. We also routinely include intellectual
property indemnification provisions in our terms of sale, development agreements
and technology licenses with third parties. Since maximum obligations are not
explicitly stated in these indemnification provisions, the potential amount of
future maximum payments cannot be reasonably estimated. To date we have incurred
minimal losses associated with these indemnification obligations and as a
result, we have not recorded any liability in our consolidated financial
statements.



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to, among other things,
sales, gross margins, operating expenses, capital expenditures, R&D efforts and
acquisitions and investments in other companies and are indicated by words or
phrases such as "anticipate," "expect," "outlook," "foresee," "we believe," "we
intend," and similar words or phrases. These statements are based on our current
plans and expectations and involve risks and uncertainties that could cause
actual results to differ materially from expectations. These forward-looking
statements should not be relied upon as predictions of future events as we
cannot assure you that the events or circumstances reflected in these statements
will be achieved or will occur. The following are among the principal factors
that could cause actual results to differ materially from the forward-looking
statements: general business and economic conditions in the semiconductor
industry and in various markets such as wireless, PC, displays and networks;
pricing pressures and competitive factors; delays in the introduction of new
products or lack of market acceptance for new products; our success in
integrating acquisitions and achieving operating improvements with acquisitions;
risks of international operations; legislative and regulatory changes; the
outcome of legal, administrative and other proceedings that we are involved in;
the results of our programs to control or reduce costs; and the general
worldwide geopolitical situation. For a discussion of some of the factors that
could cause actual results to differ materially from our forward-looking
statements, see the discussion on Risk Factors that appears below and other
risks and uncertainties detailed in this and our other reports and filings with
the Securities and Exchange Commission. We undertake no obligation to update
forward-looking statements to reflect developments or information obtained after
the date hereof and disclaim any obligation to do so.
This discussion should be read in conjunction with the consolidated
financial statements and the accompanying notes included in this Form 10-Q and
in our annual report on Form 10-K for the fiscal year ended May 25, 2003.

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

1. Revenue Recognition

We recognize revenue from the sale of semiconductor products upon
shipment, provided title and risk of loss have passed to the customer,
the amount is fixed or determinable and collection of the revenue is
reasonably assured. Service revenues are recognized as the services
are provided or as milestones are achieved, depending on the terms of
the arrangement. We record a provision for estimated future returns at
the time of shipment. Approximately 50 percent of our semiconductor
product sales are currently made through distributors. We have
agreements with our distributors that cover various programs,
including pricing adjustments based on resales, scrap allowances and
volume incentives. The revenue we record for these distribution sales
is net of estimated provisions for these programs. When determining
this net distribution revenue, we must make significant judgments and
estimates. Our estimates are based upon historical experience rates,
inventory levels in the distribution channel, current economic trends,
and other related factors. To date, the actual distributor activity
has been materially consistent with the provisions we have made based
on our estimates. However, because of the inherent nature of
estimates, there is always a risk that there could be significant
differences between actual amounts and our estimates. Our financial
condition and operating results are dependent on our ability to make
reliable estimates and we believe that our estimates are reasonable.
However, different judgments or estimates could result in variances
that might be significant to reported operating results.
Intellectual property income is not classified as revenue. This
income is classified as non-operating income and is recognized when
the license is delivered, the fee is fixed or determinable, collection
of the fee is reasonably assured and no further obligations to the
other party exist.

2. Inventories

Inventories are stated at the lower of standard cost, which
approximates actual cost on a first-in, first-out basis, or market. We
reduce the carrying value of inventory for estimated obsolescence or
unmarketable inventory by an amount that is the difference between its
cost and the estimated market value based upon assumptions about
future demand and market conditions. Our products are classified as
either custom, which are those products manufactured with
customer-specified features or characteristics, or non-custom, which
are those products that do not have customer-specified features or
characteristics. We evaluate obsolescence by analyzing the inventory
aging, order backlog and future customer demand on an individual
product basis. If actual demand were to be substantially lower than
what we have estimated, we may be required to write down inventory
below the current carrying value. While our estimates require us to
make significant judgments and assumptions about future events, we
believe our relationships with our customers, combined with our
understanding of the end-markets we serve, provide us with the ability
to make reliable estimates. To date the actual amount of obsolete or
unmarketable inventory has been materially consistent with previously
estimated write-downs we have recorded. We also evaluate the carrying
value of inventory for lower-of-cost-or-market on an individual
product basis, and these evaluations are intended to identify any
difference between net realizable value and standard cost. Net
realizable value is determined as the selling price of the product
less the estimated cost of disposal. When necessary, we reduce the
carrying value of inventory to net realizable value. If actual market
conditions and resulting product sales were to be less favorable than
what we have projected, additional inventory write-downs may be
required.

3. Impairment of Goodwill, Intangible Assets and Other Long-lived Assets

We assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that their carrying value may not be
recoverable from the estimated future cash flows expected to result
from their use and eventual disposition. Our long-lived assets subject
to this evaluation include property, plant and equipment and
amortizable intangible assets. We assess the impairment of goodwill
annually in our fourth fiscal quarter and whenever events or changes
in circumstances indicate that it is more likely than not that an
impairment loss has been incurred. Intangible assets other than
goodwill are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value may not be fully
recoverable. Other intangible assets subject to this evaluation
include developed technology we have acquired, patents and technology
licenses. We are required to make judgments and assumptions in
identifying those events or changes in circumstances that may trigger
impairment. Some of the factors we consider include:

o Significant decrease in the market value of an asset
o Significant changes in the extent or manner for which the asset
is being used or in its physical condition
o A significant change, delay or departure in our business strategy
related to the asset
o Significant negative changes in the business climate, industry or
economic conditions
o Current period operating losses or negative cash flow combined
with a history of similar losses or a forecast that indicates
continuing losses associated with the use of an asset

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

Our impairment evaluation of goodwill is based on comparing the
fair value to the carrying value of the reporting units with goodwill.
The fair value of a reporting unit is measured at the business unit
level using a discounted cash flow approach that incorporates our
estimates of future revenues and costs for those business units.
Reporting units with goodwill include our wireless, displays, power
management and data conversion business units, which are operating
segments within our Analog reportable segment, our Enterprise
Networking business unit, which is a separate reportable segment and
our device connectivity business unit, which is an operating segment
included in "All Others." Our estimates are consistent with the plans
and estimates that we are using to manage the underlying businesses.
If we fail to deliver new products for these business units, or if the
products fail to gain expected market acceptance, or market conditions
for these businesses fail to sustain improvement, our revenue and cost
forecasts may not be achieved and we may incur charges for goodwill
impairment, which could be significant and could have a material
adverse effect on our net equity and results of operations.

4. Deferred Income Taxes

We determine deferred tax liabilities and assets based on the future
tax consequences that can be attributed to net operating loss and
credit carryovers and differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases, using the tax rate expected to be in effect when
the taxes are actually paid or recovered. The recognition of deferred
tax assets is reduced by a valuation allowance if it is more likely
than not that the tax benefits will not be realized. The ultimate
realization of deferred tax assets depends upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. We consider past performance, expected
future taxable income and prudent and feasible tax planning strategies
in assessing the amount of the valuation allowance. Our forecast of
expected future taxable income is based over those future periods that
we believe can be reasonably estimated. Changes in market conditions
that differ materially from our current expectations and changes in
future tax laws in the U.S. and international jurisdictions may cause
us to change our judgments of future taxable income. These changes, if
any, may require us to adjust our existing tax valuation allowance
higher or lower than the amount we have recorded.

o OVERVIEW
During the first half of fiscal 2004, we continued to take steps consistent with
the objectives of the strategic profit-improvement actions that were first
announced in February 2003. In late August 2003, we completed the exit and sale
of our information appliance business, consisting primarily of the GeodeTM
family of integrated processor products (See Note 4). In the second quarter of
fiscal 2004, we completed some cost reduction activities associated with other
supplemental actions that were also aimed at improving profitability. We are
concentrating our R&D investments on analog capabilities and focusing on growing
our analog sales and increasing our return on invested capital.
Net sales were $473.5 million for the second quarter of fiscal 2004 and
$898.3 million for the first six months of fiscal 2004. This represented
increases of 12 percent from sales of $422.3 million for the second quarter of
fiscal 2003 and 7 percent from sales of $842.9 million for the first six months
of fiscal 2003. The increases come from higher demand, particularly for power
management products, as business conditions for the semiconductor industry have
improved from a year ago.
We earned net income of $65.8 million in the second quarter of fiscal 2004
and $95.5 million in the first six months of fiscal 2004. This compares to net
income of $6.2 million in the second quarter of fiscal 2003 and $7.5 million in
the first six months of fiscal 2003. This improvement in net results was driven
by higher gross margin on increased sales and reduced operating expenses
achieved from the implementation of the strategic profit-improvement actions
launched in February 2003.

Net income included special items of $6.0 million in the second quarter of
fiscal 2004 and $18.6 million in the first six months of fiscal 2004. The
special items for the second quarter include charges for certain cost reduction
actions completed during the quarter (See Note 4). Special items in the first
six months of fiscal 2004 included charges of $12.6 million for cost reduction
actions and the exit and sale of the information appliance business, which were
recorded in the first fiscal quarter (See Note 4). Net income in the first six
months of fiscal 2004 also included a $1.9 million charge (including a tax
effect of $0.2 million) for the cumulative effect of a change in accounting
principle as a result of the adoption of SFAS No. 143, "Accounting for Asset
Retirement Obligations" (See Note 5). In comparison, net income for the second
quarter and first six months of fiscal 2003 included a special item of $0.7
million for an in-process R&D charge related to the acquisition in the second
quarter of fiscal 2003 of DigitalQuake.

O SALES
The following discussion is based on our operating segments described in Note 13
to the consolidated financial statements included in our Annual Report on Form
10-K for the year ended May 25, 2003.
The Analog segment, which represents 80 percent of our total sales,
recorded increases in sales of 20 percent for the second quarter of fiscal 2004
and 11 percent for the first six months of fiscal 2004 compared to the
corresponding periods of fiscal 2003. The increases in Analog segment sales were
largely attributable to increasing content of analog semiconductors in a variety
of electronic products, including consumer products such as cellular phones,
PDA's and other portable devices. The increases were driven by higher volume as
unit shipments increased 27 percent for the second quarter of fiscal 2004 and 16
percent for the first six months of fiscal 2004 over the corresponding periods
of fiscal 2003. At the same time, average selling prices declined 6 percent in
the second quarter of fiscal 2004 and 4 percent in the first six months of
fiscal 2004 from the corresponding periods of fiscal 2003. The decline in
average selling prices came from a shift in unit mix toward lower priced, higher
margin products, as well as some modest price declines. These lower priced,
higher margin products include a variety of high performance analog products
offered in very small form factors, made possible by our advanced chip-packaging
technologies. Notwithstanding the shift in average selling prices, our gross
margin percentage improved in fiscal 2004 compared fiscal 2003. Within the
Analog segment, sales of power management products led the growth in sales with
increases of 58 percent for the second quarter of fiscal 2004 and 48 percent for
the first six months of fiscal 2004 over sales for the corresponding periods of
fiscal 2003. Applications for wireless handsets largely drove the sales growth
in power management products. In addition, sales of audio and
application-specific wireless products (including radio frequency building
blocks) increased by 39 percent and 35 percent, respectively, over sales in the
second quarter of fiscal 2003. Sales of these products for the first six months
of fiscal 2004 increased 23 percent and 17 percent, respectively, over sales for
the first six months of fiscal 2003.
The GeodeTM family of integrated processor products, the primary component
of the Information Appliance segment, was sold to Advanced Micro Devices, Inc.
in late August 2003 as part of our disposition of the information appliance
business (See Note 4). As a result, the remaining aggregated operating segments
that were in our Information Appliance reportable segment no longer meet the
requirements of a reportable segment and beginning in the second quarter of
fiscal 2004 are included in "All Other."
In connection with the sale transaction to AMD (See Note 4), we also
entered into a separate supply agreement where we will manufacture product for
AMD at prices specified under the terms of the agreement, which we believe
approximate market prices. Sales of these products to AMD are included as a part
of our foundry business unit and is a separate operating segment included in
"All Other."

O GROSS MARGIN
Gross margin as a percentage of sales was 50 percent for the second quarter of
fiscal 2004 and 49 percent for the first six months of fiscal 2004. This
compares to 43 percent for each of the comparable periods of fiscal 2003. The
increase comes primarily from higher factory utilization, as well as a net
improvement in product mix. Wafer fabrication capacity utilization during the
first six months of fiscal 2004 was 90 percent, based on wafer starts, compared
to 68 percent for the first six months of fiscal 2003 when production activity
was lower under weaker business conditions.


o RESEARCH AND DEVELOPMENT
Our research and development expenses were $83.2 million, or 18 percent of
sales, for the second quarter of fiscal 2004 and $175.3 million, or 20 percent
of sales, for the first six months of fiscal 2004. This represents decreases of
22 percent from the second quarter of fiscal 2003 and 20 percent from the first
six months of fiscal 2003. R&D expenses were $107.1 million, or 25 percent of
sales, for the second quarter of fiscal 2003 and $217.8 million, or 26 percent
of sales, for the first six months of fiscal 2003. Lower R&D expenses reflect
the impact of actions we initially launched in February 2003 to reduce our R&D
as a percent of sales. These actions included exits of businesses, headcount
reductions and restructuring of a licensing agreement with TSMC. Ongoing R&D
spending is now heavily focused on our analog products and our underlying analog
capabilities. Total company spending through the first six months of fiscal 2004
for new product development was down 14 percent, and for process and support
technology was down 39 percent, from the first six months of fiscal 2003
primarily due to reduced spending in the business areas we have exited. Although
R&D spending is down as a whole and as a percent of sales, we continue to invest
in the development of new analog and mixed-signal technology-based products for
applications such as wireless handsets, displays, notebook PCs, other portable
devices and other applications requiring analog technology.

O SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses were $72.8 million, or 15
percent of sales, for the second quarter of fiscal 2004 and $141.2 million, or
16 percent of sales, for the first six months of fiscal 2004. This represents
increases of 7 percent from the second quarter of fiscal 2003 and 2 percent from
the first six months of fiscal 2003. SG&A expenses were $68.3 million, or 16
percent of sales, for the second quarter of fiscal 2003 and $138.2 million, or
16 percent of sales, for the first six months of fiscal 2003. The increase in
SG&A expenses was mainly due to higher costs in the second quarter of fiscal
2004 related to employee compensation and benefits, as well as some incremental
costs for outside services. Although SG&A expenses were up in the second
quarter, we are continuing to focus on controlling headcount and discretionary
spending consistent with our profit improvement objectives.

O INTEREST INCOME AND INTEREST EXPENSE
For the second quarter and first six months of fiscal 2004, we earned net
interest income of $2.5 million and $5.6 million, compared to $3.6 million and
$7.7 million for the corresponding periods of fiscal 2003. This decrease was due
to lower average interest rates on lower average cash balances. Our cash
balances were lower as a result of the repurchase of 12.7 million shares of our
common stock for $400.0 million. Offsetting interest expense was lower during
fiscal 2004 compared to fiscal 2003 as we continued to reduce our outstanding
debt balances.

o OTHER INCOME (EXPENSE), NET
The components of our other income (expense), net are primarily derived from our
investments and intellectual property licensing activities. We recorded other
expense, net, of $2.7 million for the second quarter of fiscal 2004 and other
income, net, of $2.8 million for the first six months of fiscal 2004. This
compared to other expense, net, of $0.4 million and $1.9 million for the second
quarter and first six months of fiscal 2003. The components of other expense,
net, for the second quarter of fiscal 2004 include a $0.7 million gain from sale
of investments, offset by a $2.9 million charge for our share in net losses of
equity-method investments and $0.5 million of other miscellaneous losses. Net
intellectual property income for the second quarter of fiscal 2004 was
immaterial. The components of other expense, net, for the second quarter of
fiscal 2003 included $2.5 million of net intellectual property income, offset by
a $0.2 million net loss from the write down of investments, a $2.5 million
charge for our share in net losses of equity-method investments and $0.2 million
of other miscellaneous losses. For the first six months of fiscal 2004, other
income, net, included $8.0 million of net intellectual property income and a
$3.0 million gain from the sale of an investment, partially offset by a $7.7
million charge for our share in net losses of equity-method investments and $0.5
million of other miscellaneous losses. For the first six months of fiscal 2003,
other expense, net, included $4.1 million of net intellectual property income
and a $0.5 million net gain from sale of investments, offset by a $6.1 million
charge for our share in net losses of equity-method investments and $0.4 million
of other miscellaneous losses.

o INCOME TAX EXPENSE
We recorded income tax expense of $9.0 million for the second quarter of fiscal
2004 and $13.3 million for the first six months of fiscal 2004 on income before
taxes and cumulative effect of a change in accounting principle. This compares
to income tax expense of $2.0 million and $5.0 million for the corresponding
periods of fiscal 2003, when our income was much lower. The fiscal 2004
estimated annual effective tax rate is 12 percent. Fiscal 2004 tax expense
consists primarily of U.S. alternative minimum tax and non-U.S. income taxes.
The fiscal 2003 tax expense represents non-U.S. income taxes on international
income. We did not incur U.S. income taxes in fiscal 2003.

o LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal 2004, cash and cash equivalents decreased
$288.7 million compared to an increase of $5.1 million in the first six months
of fiscal 2003. The primary factors contributing to these changes are described
below:

We generated cash from operating activities of $162.6 million for the first
six months of fiscal 2004 compared to $99.2 million for the first six months of
fiscal 2003. Cash was generated from operating activities because net income,
after adjusting for noncash items (primarily depreciation and amortization), was
greater than the negative impact that came from changes in working capital
components. The negative changes in working capital components for fiscal 2004
come primarily from increases in receivables and inventories combined with
decreases in accounts payable and accrued expenses. Cash from operating
activities for the first six months of fiscal 2003 was also generated because
net income for that period, after adjusting for noncash items (primarily
depreciation and amortization), was greater than the negative impact from
changes in working capital components.
Our investing activities used cash of $169.6 million in the first six
months of fiscal 2004, compared to $110.0 million used in the first six months
of fiscal 2003. Major uses of cash in fiscal 2004 included investment in
property, plant and equipment of $99.0 million, primarily for machinery and
equipment, and net purchases of available-for-sale securities of $72.7 million.
Major uses of cash in the first six months of fiscal 2003 included investment in
property, plant and equipment of $98.3 million, primarily for machinery and
equipment, and the acquisition of DigitalQuake for $11.0 million, net of cash
acquired.
Our financing activities used cash of $281.7 million in the first six
months of fiscal 2004 while generating cash of $15.9 million in the first six
months of fiscal 2003. The primary use of cash in the first six months of fiscal
2004 came from our repurchase of 12.7 million shares of our common stock for
$400.0 million. A portion (7.5 million shares) of the repurchase was transacted
directly with a major financial institution and the remainder in the open
market. This was partially offset by proceeds of $120.1 million from the
issuance of common stock under employee benefit plans. The primary source of
cash for the first six months of fiscal 2003 was from the issuance of common
stock under employee benefit plans of $19.4 million, which was slightly offset
by a $3.5 million repayment of our outstanding debt balances.
We foresee continuing cash outlays for plant and equipment in fiscal 2004,
with our primary focus on extending capacity and capabilities at our existing
sites. We are continuing with the construction of an assembly and test facility
in China that was begun in fiscal 2003 as part of our effort to increase
assembly and test capacity, as well as expand our business presence in Asian
markets. We currently expect our fiscal 2004 capital expenditure amount to be
greater than the fiscal 2003 amount. However, we continue to manage capital
expenditures in light of business conditions. We expect existing cash and
investment balances, together with existing lines of credit, to be sufficient to
finance planned capital investments in fiscal 2004 and the following twelve
months.
Our cash and investment balances are dependent on continued collection of
customer receivables and the ability to sell inventories. Although we have not
experienced major problems with our customer receivables, significant declines
in overall economic conditions could lead to deterioration in the quality of
customer receivables. In addition, major declines in financial markets would
likely cause reductions in our cash equivalents and marketable investments.
The following table provides a summary of the effect on liquidity and cash
flows from our contractual obligations and commercial commitments as of November
23, 2003:


Fiscal Year: 2009 and
(In Millions) 2004 2005 2006 2007 2008 thereafter Total
--------------- ---------- --------- --------- -------- ------------- --------------


Contractual obligations:
Debt obligations $ 0.5 $21.9 $ - $ - $ - $ - $ 22.4
Noncancellable
operating leases 10.5 16.9 13.3 11.4 8.9 8.3 69.3
Purchase obligations under:
CAD software licensing
Agreements 2.8 20.1 9.0 7.7 - - 39.6
Fairchild manufacturing
Agreement 4.1 - - - - - 4.1
Other 0.7 1.5 0.8 - - - 3.0
--------------- ---------- --------- --------- -------- ------------- --------------
Total $ 18.6 $60.4 $23.1 $19.1 $ 8.9 $ 8.3 $138.4
=============== ========== ========= ========= ======== ============= ==============
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $ 8.6 - - - - - $ 8.6
=============== ========== ========= ========= ======== ============= ==============


In addition, as of November 23, 2003, capital purchase commitments were
$46.8 million.


O OUTLOOK
Although overall economic conditions continue to be somewhat difficult to
predict, demand levels for the first half of fiscal 2004 strengthened as we have
seen market conditions in the semiconductor industry improve from a year ago.
New orders for our fiscal 2004 second quarter grew substantially over the
preceding quarter. The improvement was driven by higher seasonal demand for
notebook PCs and wireless handsets, as well as strong order activity from our
distribution channel. We saw improvement throughout the quarter in the weekly
run rate of total orders, including turns orders, which are orders received with
delivery requested in the same quarter. Our opening 13-week backlog entering the
third quarter of fiscal 2004 is higher than it was entering the second quarter
of fiscal 2004. However, we anticipate turns orders in the third quarter to be
seasonally lower than the level achieved in the second quarter due to lower
build activity that typically occurs in the post-holiday timeframe. In addition,
since our fiscal year ends on the last Sunday of May, fiscal 2004 is a 53-week
year. Our third fiscal quarter includes 14 weeks instead of the normal 13 weeks.
Considering all factors, including those discussed above, we expect sales for
the third quarter of fiscal 2004 to be 3 to 5 percent above the fiscal 2004
second quarter. However, if the anticipated level of turns orders is not
achieved or the rate of new orders declines, we may not be able to achieve this
increase. We also anticipate gross margin percentage in the third quarter of
fiscal 2004 to be higher by 0.5 to 1 percentage point from gross margin achieved
in the fiscal 2004 second quarter. Because wafer fabrication utilization should
continue running at high levels during the third quarter, we anticipate that we
will improve the mix and the overall pricing of the products we sell. However,
the mix of available product may not exactly match the mix of product requested
on a short-term basis.
In late August 2003, we completed the exit and sale of our information
appliance business, representing a key step in a series of profit-improvement
actions initially launched in February 2003 designed to improve our return on
investment and streamline our cost structure. In the second quarter, we
completed some cost reduction activities associated with other supplemental
actions that were consistent with the objectives of our overall
profit-improvement action plans. Our operating expenses, consisting of R&D and
SG&A, have benefited from these actions. This will be partially offset by
incremental programs, as well as certain external factors such as foreign
currency exchange rate fluctuations. For the third quarter of fiscal 2004, we
anticipate that operating expenses will range from $155-$160 million which is
relatively consistent with the amounts recorded in the recent second quarter. We
expect our investment in property, plant and equipment in total for fiscal 2004
to be greater than fiscal 2003. See "Liquidity and Capital Resources."

o RISK FACTORS
Conditions inherent in the semiconductor industry cause periodic fluctuations in
our operating results. Rapid technological change and frequent introduction of
new technology leading to more complex and integrated products characterize the
semiconductor industry. The result is a cyclical environment with short product
life cycles, price erosion and high sensitivity to the overall business cycle.
Substantial capital and R&D investment are also required to support products and
manufacturing processes. We have experienced in the past and expect to
experience in the future periodic fluctuations in our operating results. Shifts
in product mix toward, or away from, higher margin products can also have a
significant impact on our operating results. As a result of these and other
factors, our financial results can fluctuate significantly from period to
period.

OUR BUSINESS WILL BE HARMED IF WE ARE UNABLE TO COMPETE SUCCESSFULLY IN OUR
MARKETS. Competition in the semiconductor industry is intense. Our major
competitors include Texas Instruments, ST Microelectronics, Maxim, Analog
Devices and Linear Technology that sell competing products into some of the same
markets that we target. Competition is based on design and quality of products,
product performance, price and service, with the relative importance of these
factors varying among products and markets.
We cannot assure you that we will be able to compete successfully in the
future against existing or new competitors or that our operating results will
not be adversely affected by increased price competition. We may also compete
with some of our customers in certain markets, such as displays and wireless
handsets.
The wireless handset market continues to be important to our future growth
plans. New products are being developed to address new features and
functionality in handsets, such as color displays, advanced audio, lighting
features and image capture. Due to high levels of competition, as well as
complex technological requirements, there is no assurance that we will continue
to be successful in this targeted market. Although the worldwide handset market
is large, near-term growth trends are uncertain and difficult to predict with
accuracy. Delayed introduction of next-generation wireless base stations also
negatively impacts potential growth in the wireless handset market.

IF DEVELOPMENT OF NEW PRODUCTS IS DELAYED OR MARKET ACCEPTANCE IS BELOW
EXPECTATIONS, FUTURE OPERATING RESULTS MAY BE UNFAVORABLY AFFECTED. We believe
that continued focused investment in research and development, especially the
timely development and market acceptance of new analog products, is a key factor
to our successful growth and our ability to achieve strong financial
performance. Successful development and introduction of new products are
critical to our ability to maintain a competitive position in the marketplace.
We will continue to invest resources to develop more highly integrated solutions
and building block products, both primarily based on our analog capabilities.
These products will continue to be targeted towards applications such as
wireless handsets, displays, notebook PCs, other portable devices and other
applications that require analog.

INVESTMENTS AND ACQUISITIONS. We have made and will continue to consider making
strategic business investments and alliances and acquisitions we consider
necessary to gain access to key technologies that we believe augment our
existing technical capability or enable us to achieve faster time to market.
Acquisitions and investments involve risks and uncertainties that may
unfavorably impact our future financial performance. We may not be able to
integrate and develop the technologies we acquire as expected. If the technology
is not developed in a timely manner, we may be unsuccessful in penetrating
target markets. In addition, with any acquisition there are risks that future
operating results may be unfavorably affected by acquisition related costs,
including in-process R&D charges and incremental R&D spending.

EXPANSION OF OUR BUSINESS IN THE ASIAN MARKETS. As noted in our discussion of
planned capital expenditures, as part of our efforts to expand our business
presence in the Asian markets, we began construction of an assembly and test
facility in China's Suzhou Industrial Park in the Jiangsu Province of China
during the second quarter of fiscal 2003. We expect the facility to provide
analog products quickly and cost effectively to our customers in Asia, as well
as other regions as necessary. The facility will also increase our overall
assembly and test capacity to support increasing product volume. Product volume
increases are dependent upon customer demand. If our product volume does not
increase, lower factory utilization, which results in higher manufacturing cost
per unit, will unfavorably impact operating results. In addition, unexpected
start-up expenses, inefficiencies and delays in the start of production in the
facility may reduce expected future gross margin.

WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS. We conduct a substantial
portion of our operations outside the United States, and our business is subject
to risks associated with many factors beyond our control. These factors include:

- - fluctuations in foreign currency rates;
- - instability of foreign economies;
- - emerging infrastructures in foreign markets;
- - support required abroad for demanding manufacturing requirements;
- - foreign government instability and changes; and
- - U.S. and foreign laws and policies affecting trade and investment.

Although we did not experience any materially adverse effects from our
foreign operations as a result of these factors in the last year, one or more of
these factors has had an adverse effect on us in the past and they could
adversely affect us in the future. In addition, although we try to hedge our
exposure to currency exchange rate fluctuations, our competitive position
relative to non-U.S. suppliers can be affected by the exchange rate of the U.S.
dollar against other currencies, particularly the Japanese yen and euro.

TAXES. From time to time, we have received notices of tax assessments from
certain governments of countries in which we operate. These governments or other
government entities may serve future notices of assessments on us and the
amounts of these assessments or our failure to favorably resolve such
assessments may have a material adverse effect on our financial condition or
results of operations.


CURRENT WORLD EVENTS. Recent unrest in the many parts of the world including the
continuing hostilities in Iraq and terrorist activities worldwide have resulted
in additional uncertainty on the overall state of the world economy. There is no
assurance that the consequences from these events will not disrupt our
operations either in the U.S. or other regions of the world where we have
operations. Although the SARS illness appears to have been contained, if it or
other pandemic illness emerges in Asia, our business there could be adversely
affected. The spread of such illnesses beyond Asia could also negatively impact
other aspects of our operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, in our Annual Report on Form 10-K for the year ended May 25, 2003 and to
the subheading "Financial Market Risks" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 26 of our Annual Report on Form 10-K for the year ended May 25, 2003 and in
Note 1, "Summary of Significant Accounting Policies," and Note 2, "Financial
Instruments," in the Notes to the Consolidated Financial Statements included in
Item 8 of our 2003 Form 10-K. There have been no material changes from the
information reported in these sections.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

We maintain disclosure controls and procedures that are intended to ensure
that the information required to be disclosed in our Exchange Act filings
is properly and timely recorded, processed, summarized and reported. In
designing and evaluating our disclosure controls and procedures, our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and that management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Since we have investments in certain
unconsolidated entities which we do not control or manage, our disclosure
controls and procedures with respect to such entities are necessarily
substantially more limited than those we maintain for our consolidated
subsidiaries.

We have a disclosure controls committee comprised of key individuals from a
variety of disciplines in the company that are involved in the disclosure
and reporting process. The committee meets regularly to ensure the
timeliness, accuracy and completeness of the information required to be
disclosed in our filings. The committee reviewed this Form 10-Q and also
met with the Chief Executive Officer and the Chief Financial Officer to
review this Form 10-Q and the required disclosures and the effectiveness of
the design and operation of our disclosure controls and procedures. As
required by SEC Rule 13a-15(b), the committee performed an evaluation,
under the supervision and with the participation of management, including
our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the quarter covered by this report. Based on
that evaluation and their supervision of and participation in the process,
our Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures were effective at the reasonable
assurance level.

(b) Changes in internal controls.

There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over
financial reporting.



PART II. OTHER INFORMATION

Item 1. Legal Proceedings
- --------------------------
In November 2000, a derivative action was filed in the U.S. District Court in
Delaware against us, Fairchild Semiconductor International, Inc. and Sterling
Holding Company, LLC, by Mark Levy, a Fairchild stockholder. The action was
brought under Section 16(b) of the Securities Exchange Act of 1934 and the rules
issued under that Act by the Securities and Exchange Commission. The plaintiff
seeks disgorgement of alleged short-swing insider trading profits. We had
originally acquired Fairchild common and preferred stock in March 1997 at the
time we disposed of the Fairchild business. Prior to its initial public offering
in August 1999, Fairchild had amended its certificate of incorporation to
provide that all Fairchild preferred stock would convert automatically to common
stock upon completion of the initial public offering. As a result, our shares of
preferred stock converted to common stock in August 1999. Plaintiff has alleged
that the acquisition of common stock through the conversion constituted an
acquisition that should be "matched" against our sale in January 2000 of
Fairchild common stock for purposes of computing short-swing trading profits.
The action seeks to recover from us on behalf of Fairchild alleged recoverable
profits of approximately $14.1 million. In February 2002, the judge in the case
granted the motion to dismiss filed by us and our co-defendants and dismissed
the case, ruling that the conversion was done pursuant to a reclassification
which is exempt from the scope of Section 16(b). Plaintiff appealed the
dismissal of the case and upon appeal, the U.S. Court of Appeals for the third
circuit reversed the District Court's dismissal. Our petition for a writ of
certiorari to the U.S. Supreme Court was denied in October 2003 and the case is
now in discovery in the District Court. We intend to continue to contest the
case through all available means.

In January 1999, a class action suit was filed against us and a number of our
suppliers in California Superior Court by James Harris and other former and
present employees claiming damages for personal injury. The complaint alleges
that cancer and/or reproductive harm were caused to employees as a result of
alleged exposure to toxic chemicals while working at our company. Plaintiffs
claim to have worked at sites in Santa Clara and/or in Greenock, Scotland. In
addition, one plaintiff claims to represent a class of children of company
employees who allegedly sustained developmental harm as a result of alleged in
utero exposure to toxic chemicals while their mothers worked at the company.
Although no specific amount of monetary damages is claimed, plaintiffs seek
damages on behalf of the classes for personal injuries, nervous shock, physical
and mental pain, fear of future illness, medical expenses and loss of earnings
and earnings capacity. At the present time, the court has required the Scottish
employees to seek their remedies in Scottish courts. In November 2003, the court
denied the plaintiffs' motion for certification of a medical monitoring class.
Discovery in the case is proceeding and we intend to defend this action
vigorously.

You should also refer to the Legal Proceedings section in our Form 10-K for the
fiscal year ended May 25, 2003 and in our Form 10-Q for the fiscal quarter ended
August 24, 2003 for a description of our other existing material legal
proceedings.

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

(a) National Semiconductor Corporation's Annual Meeting was held on September
26, 2003.

(b) The following directors were elected at the meeting:

DIRECTOR FOR AUTHORITY WITHHELD
- -------- --- ------------------

Brian L. Halla 160,596,318 5,721,278
Steven R. Appleton 158,426,073 7,891,523
Gary P. Arnold 128,260,591 38,057,005
Richard J. Danzig 157,778,606 8,538,990
Robert J. Frankenberg 157,725,312 8,592,284
E. Floyd Kvamme 162,995,966 3,321,630
Modesto A. Maidique 158,394,518 7,923,078
Edward R. McCracken 158,362,597 7,954,999


(c) The following matters were also voted on at the meeting:

(i) Proposal to approve KPMG as auditors of the Company:

FOR: 163,109,076 Against: 2,377,750 Abstain: 830,770

(ii) Proposal to approve the adoption of the 2003 Employees Stock Purchase
Plan:

FOR: 161,398,815 Against: 3,952,606 Abstain: 966,175

Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------

(a) Exhibits

3.1 Second Restated Certificate of Incorporation of the Company as amended
(incorporated by reference from the Exhibits to our Registration Statement
on Form S-3 Registration No. 33-52775, which became effective March 22,
1994); Certificate of Amendment of Certificate of Incorporation dated
September 30, 1994 (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-09957, which became
effective August 12, 1996); Certificate of Amendment of Certificate of
Incorporation dated September 22, 2000 (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-48424, which became effective October 23, 2000).

3.2 By Laws of the Company, as amended effective October 30, 2001.
(incorporated by reference from the Exhibits to our Form 10-K for the year
ended May 26, 2002 filed August 16, 2002).

4.1 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to our Registration Statement on Form S-3 Registration No.
33-48935, which became effective October 5, 1992).

4.2 Rights Agreement (incorporated by reference from the Exhibits to our
Registration Statement on Form 8-A filed August 10, 1988); First Amendment
to the Rights Agreement dated as of October 31, 1995 (incorporated by
reference from the Exhibits to our Amendment No. 1 to the Registration
Statement on Form 8-A filed December 11, 1995); Second Amendment to the
Rights Agreement dated as of December 17, 1996 (incorporated by reference
from the Exhibits to our Amendment No. 2 to the Registration Statement on
Form 8-A filed January 17, 1997).

31. Rule 13a - 14(a)/15d - 14(a) Certifications

32. Section 1350 Certifications

(b) Reports on Form 8-K

During the quarter ended November 23, 2003, we filed the following reports
on Form 8-K:

1. A report on Form 8-K was filed on September 4, 2003 furnishing to the
Securities and Exchange Commission as part of Regulation FD disclosure
our press release issued on September 4, 2003 announcing our earnings
for the quarter ended August 24, 2003. The news release contained
Financial Statements consisting of Condensed Consolidated Statements
of Operations, Balance Sheets and Statements of Cash Flows prepared in
accordance with GAAP. Certain operating results information which was
not prepared in accordance with GAAP was also included in the press
release.

2. A report on Form 8-K was filed on September 10, 2003 reporting as
Regulation FD disclosure that we had purchased approximately 7.5
million shares of our stock pursuant to the buy-back program we had
previously announced. The press release announcing the purchase was
included in the Form 8-K. No financial statements were included in the
Form 8-K.

3. A report on Form 8-K was filed on November 6, 2003 reporting as
Regulation FD disclosure that we had made an upward revision of our
revenue outlook for the second quarter of fiscal 2004. The press
release announcing the revision was included in the Form 8-K. No
financial statements were included in the Form 8-K.



SIGNATURE


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.

NATIONAL SEMICONDUCTOR CORPORATION


Date: January 5, 2004

\s\ Robert E. DeBarr
--------------------
Robert E. DeBarr
Controller
Signing on behalf of the registrant and as
principal accounting officer