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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Analog Devices, Inc.

(781) 329-4700

Securities Registered Pursuant to Section 12(b) of The Act:

Securities Registered Pursuant to Section 12(g) of The Act:

None

     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 ü     NO      

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $15,985,689,956 based on the closing price of the Common Stock on the New York Stock Exchange Composite Tape reporting system on December 31, 2001.

      As of December 31, 2001 there were 364,407,391 shares of Common Stock, $0.16 2/3 par value per share, outstanding.

Documents Incorporated by Reference

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PART I

ITEM 1.     BUSINESS

Company Overview

      We are a world leader in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing (DSP) integrated circuits (ICs) used in signal processing applications.

      We produce a wide range of products that meet the technology needs of a broad base of customers and markets. Markets and applications for our products include communications, computers and computer peripherals, consumer electronics, industrial, instrumentation, military and space systems and automotive electronics.

      During fiscal 2001, approximately 38% of our revenues came from the communications market. Over the past few years, this market has been our fastest-growing served market. Communications applications include wireless handsets and base stations, as well as products used for high-speed access to the Internet, including ICs used in ADSL and cable modems and central office networking equipment.

      We serve the PC market with products that monitor and manage power usage, process signals used in flat panel displays and multimedia projectors and enable PCs to provide CD-quality audio. We also serve the high-end consumer market with ICs used in products such as digital cameras and camcorders, DVD players and surround sound audio systems. During fiscal 2001, approximately 22% of our revenues were derived from the computer and consumer markets.

      We serve the industrial market by providing products for data acquisition systems, automatic process control systems, robotics, environmental control systems and automatic test equipment. We also provide products to the instrumentation market for use in engineering, medical and scientific instruments. During fiscal 2001, approximately 40% of our revenue came from the industrial market.

      We sell our products worldwide through a direct sales force, third-party industrial distributors and independent sales representatives. We have direct sales offices in 19 countries, including the United States.

      We are headquartered near Boston, in Norwood, Massachusetts, and have manufacturing facilities in Massachusetts, California, North Carolina, Ireland, the United Kingdom, the Philippines and Taiwan. Founded in 1965, we employ approximately 9,000 people worldwide. Our stock is listed on the New York Stock Exchange under the symbol ADI and is included in the Standard & Poor’s 500 Index.

Industry Background

      Real-world phenomena, such as temperature, pressure, sound, images, speed and acceleration, are analog by nature, consisting of continuously varying information. This information can be detected and measured using analog sensors, which represent real-world phenomena by generating continuously varying voltages and currents. The signals from these sensors are initially processed using analog methods, such as amplification, filtering and shaping. They are then usually converted to digital form for storage, display or further manipulation. The further manipulation of the signals after conversion to digital form is called “digital signal processing,” or DSP. Digital signals are frequently converted back to analog form for functions such as analog display, audio output or control. These manipulations and transformations along this signal chain are collectively known as “real-world signal processing.”

      Significant advances in semiconductor technology in recent years have substantially increased the performance and functionality of ICs used in signal processing applications. These advances include the ability to combine analog and digital signal processing capability on a single chip, thereby making possible much more highly integrated solutions. The convergence of computing and communications requires end products that incorporate state-of-the-art signal processing capability onto as few chips as possible. Our products are used as components in equipment and systems to achieve higher performance, including greater speed, improved accuracy, more efficient signal processing, and minimized power consumption.

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Principal Products

      We are engaged in the design, manufacture and marketing of a broad line of high-performance ICs that incorporate analog, mixed-signal and digital signal processing technologies that address a wide range of real-world signal processing applications. We produce and market several thousand products. Our highest revenue product accounted for approximately 2% of our revenue for fiscal 2001. Many of our products are proprietary and equivalent products are available only from a limited number of other suppliers. We also design, manufacture and market a limited range of assembled products.

Markets and Applications

      The following describes some of the characteristics of, and products supplied to, each of our major markets:

      Communications — The development of broadband, wireless and Internet infrastructures around the world has created an important market for our communications products. Communications technology involves the acquisition of analog signals that are converted from analog to digital and digital to analog form as they are processed and transmitted. Our expertise in combining analog and digital functionality on a single chip or chip set has enabled us to develop products that fulfill the technological challenges of this complex and rapidly expanding market space. The need for ever higher speed and reduced power consumption, coupled with more reliable, more bandwidth-efficient communications, is creating increasing demand for our products, which are used in systems that include digital, analog and mixed-signal processing capability. Our products are used in the full spectrum of signal processing for audio, data, image or video communication. In broadband and wireless communication applications, our products are incorporated into data and digital subscriber line (DSL) modems, cellular telephones, base station equipment and remote access servers. We are also developing micromachined products for use in optical networks.

      Computers and Computer Peripherals — Increased interface between users and PCs through monitors, printers, scanners and audio devices and the increasing need for power and thermal management capability in PCs have provided many opportunities in the computer market. Our ability to integrate analog, DSP and mixed-signal functionality on ICs has enabled us to supply many high performance critical components required by PC manufacturers. The computer industry seeks to develop and market ever smaller and lighter personal computers. This need increases demand for high performance ICs to monitor power usage to enable manufacturers to use smaller batteries and extend battery life between charges. We currently supply a variety of ICs used in this market for functions such as graphic displays, interfaces between PCs and peripherals such as modems and printers, power and battery management, and enhanced audio input and output capability for business and entertainment applications.

      Consumer Electronics — Increased market demand for acquisition, display and digital processing of signals has allowed us to combine analog and digital design capability to provide solutions that meet the rigorous cost, size and reliability constraints of the consumer electronics market. The emergence of high-performance feature-rich consumer products, such as home sound systems, video projectors, DVD players and digital camcorders and cameras, has led to the need for high-performance system-level ICs with a high level of specific functionality.

      Industrial — Our industrial market includes data acquisition systems, automatic process control systems, robotics, environmental control systems and automatic test equipment. These products generally require ICs that offer performance greater than that available from commodity-level ICs, but generally do not have production volumes that warrant custom or application-specific ICs. Combinations of analog and mixed-signal ICs are usually employed to achieve the necessary functionality. Automatic test equipment applications have created opportunities for the design of system-level ICs that require a high level of electronic circuitry.

      Instrumentation — Our instrumentation market includes engineering, medical and scientific instruments. These products are usually designed using the highest performance analog and mixed-signal ICs available. Production volumes in this space generally do not warrant custom or application-specific ICs.

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      Military/ Aerospace — The military, commercial avionics and space markets all require high-performance ICs that meet rigorous environmental and reliability specifications. Nearly all of our analog ICs can be supplied in versions that meet appropriate military standards. In addition, many products can be supplied to meet the standards required for broadcast satellites and other commercial space applications. Most of our products sold in this market are derived from standard commercial grade ICs.

      Automotive — Although the automotive market has historically been served with low-cost, low-performance ICs, demand has emerged for higher performance devices for a wide range of applications. In response, we are developing products specifically for the automotive market. We supply a micromachined IC used as a crash sensor in airbag systems, which serves as an alternative to an electromechanical sensor. We believe that other micromachined devices derived from this product may be suitable for other automotive applications, such as roll-over sensing, global positioning satellite (GPS) automotive navigation systems, anti-lock brakes and “smart” suspension systems and non-automotive applications including earthquake detectors and high-end computer joysticks.

Research and Development

      Our markets are characterized by rapid technological changes and advances. Accordingly, we make substantial investments in the design and development of new products and processes, and for significant improvement of existing products and processes. We spent $465 million during fiscal 2001 related to the design, development and improvement of new and existing products and processes, compared to $390 million spent during fiscal 2000 and $253 million spent during fiscal 1999.

      In support of our research and development activities, we employ hundreds of engineers involved in product and process development at several design centers and manufacturing sites located throughout the world.

      As of November 3, 2001, we owned approximately 662 U.S. patents and had 318 patent applications on file with the United States patent office. We believe that while our patents may provide some advantage, our competitive position is largely determined by such factors as the system and application knowledge, ability and experience of our personnel, the range and number of new products being developed, our market brand recognition and ongoing marketing efforts, customer service and technical support.

IC Products

     Analog Products

      Our analog IC technology has been the foundation of our business for more than 25 years, and we believe we are one of the world’s largest suppliers of analog ICs. Our analog ICs are primarily high-performance, single-function devices. The majority of our analog IC product revenue is attributable to sales of data converters (analog-to-digital and digital-to-analog) and amplifiers. Other analog IC products we offer include analog signal processing devices (such as analog multipliers), voltage references and comparators. Over the past few years we have been expanding our analog IC product offerings along the entire analog signal chain and into product areas where our focus was previously limited, principally interface circuits and power management ICs. We are also expanding our analog IC product line to better meet the needs of customers designing portable battery-operated equipment.

      Our analog IC products tend to be general purpose in nature. This allows customers to incorporate them into a wide variety of equipment and systems. Our product portfolio includes several hundred analog ICs, any one of which can have as many as several hundred customers. Analog ICs typically have long product life cycles. Our analog IC customers include both original equipment manufacturers (OEMs) and customers who build equipment for their own use. Most of our analog ICs have been purchased by OEMs to serve the instrumentation, industrial and military/ aerospace markets, but during the past few years they have been increasingly used for applications in communications, computers, camcorders, scanners, automatic test equipment, imaging and other consumer applications requiring high-performance real-world signal processing. By using standard, high-performance, readily available, off-the-shelf components in their designs, our

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      Other analog ICs include circuits that are designed to serve the needs of particularly demanding applications, such as very high speed analog timing and pin driver circuits needed by OEMs in the automatic test equipment business. Manufacturers of portable instrumentation need analog ICs designed to address demanding battery life requirements, and need similar kinds of functions available in analog IC products integrated into a single, very low-power chip. Other principal requirements include higher accuracy, lower cost per function, smaller size, lower weight and fewer components for improved reliability. These application-specific products allow our customers to design smaller, lighter, higher performance, more power-efficient and lower-cost end products. We believe that these benefits have become more important to our OEM customers as they increase their focus on high-performance, small, lightweight products, many of which are battery-powered.

     General Purpose DSP Products

      Our DSP products are designed to efficiently execute specialized software programs (algorithms) associated with processing digitized real-time, real-world data. General-purpose DSP IC customers typically write their own algorithms using software tools that we provide and software tools they obtain from third-party suppliers. All of these devices share a common architecture that allows system designers to address cost, performance and time-to-market constraints. We support these products with specialized applications and easy-to-use, low-cost design tools, which reduce product development costs and time to market.

     Mixed-Signal Products

      Our products also include multi-function mixed-signal devices that incorporate combinations of analog and digital technology. The growing need to allow user interface with computers and consumer products as well as the development of communications systems has created new opportunities for these mixed-signal devices. Examples of these devices include chipsets for communication applications (GSM cellular phones, remote access servers, data and fax modems), audio input/output devices and power and thermal management devices for computer applications and electric motor control devices.

     Micromachined Products

      Our technology base includes a number of new products using an advanced IC technology known in the industry as surface micromachining. This technology enables extremely small mechanical structures to be built on the surface of a chip along with supporting circuitry. In addition to incorporating an electro-mechanical structure, these devices also have analog circuitry for conditioning signals obtained from the micromachined sensing element.

      Our micromachined products are accelerometers used in a wide variety of applications. The majority of current revenue from micromachined products is derived from accelerometers used by automotive manufacturers in airbag applications. Emerging applications include GPS automobile navigation systems, earthquake detectors and high-end computer joysticks. We are also engaged in the development of micromachined products for use in all-optical switching elements in optical networks.

     General Purpose and Custom Products

      Across the entire range of ICs that we design and manufacture are general purpose products as well as custom products designed for specific applications for specific customers. In many of the new emerging markets in communications, computer and consumer products, there is a tendency to work with selected major customers to design application-specific solutions which can combine elements of analog, digital, mixed-signal and micromachined functionality.

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Assembled Products

      Our assembled products include multi-chip modules (MCMs), hybrids and printed circuit board modules. An MCM is a device made up of several IC chips assembled in an automated fashion in a multilayer package that provides high interconnect density at low cost. A hybrid consists of several chips and discrete components mounted and wired together on a substrate, which is then enclosed in a package. A printed-board module consists of surface-mount components assembled on a small printed board that is then encapsulated in a small plastic case.

      Revenues from this product group have been declining for several years, primarily because hybrids are being replaced in many new designs with smaller, lower-cost monolithic ICs that offer higher levels of performance and integration. Sales of these products are approximately 3% of our total sales.

Sales Channels

      We sell our products in North America and internationally through a direct sales force, third-party distributors and independent sales representatives. Approximately 39% of our fiscal 2001 net sales were to customers in North America. As of December 1, 2001, we had 12 sales offices in the United States, and our third-party distribution channel consisted of six national and regional third-party distributors and several independent sales representatives in numerous locations throughout the U.S. and Canada.

      Approximately 24% of our fiscal 2001 net sales were to customers in Europe, 15% to customers in Japan, and 22% to customers in other international markets. As of December 1, 2001, we had direct sales offices in Australia, Austria, Brazil, Canada, China, Denmark, France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, the Netherlands, Singapore, Sweden, Taiwan and the United Kingdom. We also had sales representatives and/or distributors in approximately 46 countries outside North America, including countries where we also have direct sales offices. For further detail regarding geographic information, see Note 4 in the Notes to our Consolidated Financial Statements included as part of this report.

      A significant portion of our fiscal 2001 revenue was derived from sales made through distributors. These distributors typically maintain an inventory of our products. Some of them also sell products competitive with our products, including those for which we are an alternate source. Sales to certain distributors are made under agreements that provide protection to the distributors for their inventory of our products against price reductions and products that are slow-moving or that we have discontinued.

      Our worldwide technical direct field sales efforts are supported by an extensive promotional program that includes editorial coverage and paid advertising in trade publications, direct mail programs, promotional brochures, technical seminars and participation in trade shows. We publish and distribute full-length databooks, short-form catalogs, applications guides, technical handbooks and detailed data sheets for individual products. We also provide product and application information and sell products via our worldwide web site on the Internet. We maintain a staff of field application engineers who aid customers in incorporating our products into their products during their product development cycles.

      For fiscal 2001, our 20 largest customers accounted for approximately 30% of our net sales. The largest single customer represented approximately 3% of net sales.

Production and Raw Materials

      Monolithic integrated circuit components are manufactured in a sequence of semiconductor production steps that include wafer fabrication, wafer testing, cutting the wafer into individual “chips” (or dice), assembly of the dice into packages and electrical testing of the devices in final packaged form. The raw materials used to manufacture these devices include silicon wafers, processing chemicals (including liquefied gases), precious metals, ceramic packages and plastic used for packaging.

      We develop and employ a wide variety of proprietary processes that are specifically tailored for use in fabricating high-performance linear, mixed-signal and system-level ICs. We also use industry-standard bipolar and CMOS wafer fabrication processes.

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      Our IC products are fabricated both at our production facilities and by third-party wafer fabricators. We rely primarily on our own facilities for fabricating wafers that require linear and mixed-signal processes. We operate wafer fabrication facilities in Wilmington and Cambridge, Massachusetts; Santa Clara and Sunnyvale, California; Belfast, Northern Ireland and Limerick, Ireland. We also operate assembly and test facilities located in Ireland, the Philippines and Taiwan and also use third-party subcontractors. We have agreements with Taiwan Semiconductor Manufacturing Company, (TSMC), and Chartered Semiconductor Manufacturing Pte., Ltd., (CSM), for the production of digital and very large scale integration mixed-signal devices. To provide access to advanced process technology at competitive costs, we participated in the formation of a joint venture (WaferTech, LLC) with TSMC, Altera, Integrated Silicon Solutions and several individual investors that built a fabrication facility for eight-inch wafers in Camas, Washington. Originally we had an 18% equity ownership in WaferTech. In fiscal 1999, we sold 78% of our investment to other WaferTech partners in exchange for $105 million in cash, which was equal to 78% of the carrying value of the equity ownership at October 31, 1998. During the first quarter of fiscal 2001, we completed the sale of our remaining investment in WaferTech, LLC to TSMC for approximately $61 million in cash. We recorded a pretax realized gain on the sale of this investment of approximately $28 million.

      Hybrid products are manufactured by mounting and connecting together several integrated circuit chips in a single package. We manufacture some of the chips used in our hybrids, and purchase others from outside suppliers. The production process for modular components, subsystems and systems consists primarily of assembly, packaging and testing. Some of our assembled products are assembled and tested within our U.S. manufacturing facilities and at U.S. subcontractors, while others are assembled and tested at our facilities outside the United States or by subcontractors, principally in the Far East.

      To respond to production capacity requirements, we significantly expanded our manufacturing capacity over the past several years. Major wafer fabrication expansions were completed in Wilmington, Massachusetts, Sunnyvale, California, and Limerick, Ireland. In fiscal 2001, we completed construction of an additional assembly and test facility in Cavite, Philippines. We expect that our capital expenditures for fiscal 2002 will be approximately $70 million compared to $297 million in fiscal 2001.

Backlog

      Backlog at the end of fiscal 2001 was approximately $210 million, down from approximately $1,062 million at the end of fiscal 2000. We define backlog as firm orders with a customer requested delivery date within thirteen weeks. While backlog has declined primarily as a result of the lower demand for our products from the year earlier period, it has also been impacted by the tendency of customers to rely on shorter lead times available from suppliers, including us, in periods of depressed demand. In periods of increased demand, there is a tendency towards longer lead times that has the effect of increasing backlog and, in some instances, we may not have manufacturing capacity sufficient to fulfill all orders. As is customary in the semiconductor industry, we allow orders to be canceled or deliveries delayed by customers without penalty. Accordingly, we believe that our backlog at any time should not be used as an indication of future revenues.

Government Contracts

      We estimate that approximately 4% of our fiscal 2001 total worldwide revenue was attributable to sales to the U.S. government and government contractors and subcontractors. Our government contract business is predominantly in the form of negotiated, firm fixed-price subcontracts. All such contracts and subcontracts contain standard provisions relating to termination at the election of the United States government.

Competition

      We compete with a large number of semiconductor companies in markets that are highly competitive. We believe we are one of the largest suppliers of high-performance linear and mixed-signal signal-processing components. Competitors for our analog, mixed-signal and DSP products include Cirrus Logic Inc., Linear Technology Corp., Maxim Integrated Products, Inc., Motorola Semiconductor Products, National Semiconductor Corp., Phillips Semiconductor, ST Microelectronics and Texas Instruments, Inc. Sales of our

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      Many other companies offer products that compete with our products. Some also offer other electronic products, and some have financial resources substantially larger than ours. Also, some formerly independent competitors have been purchased by larger companies.

      We believe that competitive performance in the marketplace for real-world signal-processing components depends upon several factors, including product price, technical innovation, product quality and reliability, range of products, customer service and technical support. We believe our aggressive technical innovation emphasizing product performance and reliability, supported by our commitment to strong customer service and technical support, enables us to continue to compete successfully in our chosen markets against both foreign and domestic semiconductor manufacturers.

Environment

      Our manufacturing facilities are subject to numerous environmental laws and regulations, particularly with respect to industrial waste and emissions. Compliance with these laws and regulations has not had a material impact on our capital expenditures, earnings or competitive position.

Employees

      As of November 3, 2001, we employed approximately 9,000 persons. Our future success depends in large part on the continued service of our key technical and senior management personnel, and on our ability to continue to attract, retain and motivate qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on us. We believe that relations with our employees are good.

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ITEM 2.     PROPERTIES

      Our corporate headquarters is located in Norwood, Massachusetts. Manufacturing and other operations are conducted in several locations worldwide. The following tables provide certain information about our principal general offices and manufacturing facilities:

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      In addition to the principal leased properties listed in the previous table, we also lease sales offices and other premises at 26 locations in the United States and 40 locations overseas under operating lease agreements. These leases expire at various dates through the year 2035. We anticipate no difficulty in retaining occupancy of any of our manufacturing, office or sales facilities through lease renewals prior to expiration or through month-to-month occupancy, or in replacing them with equivalent facilities. For information concerning our obligations under all operating and capital leases see Note 9 in the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.

ITEM 3.     LEGAL PROCEEDINGS

      The information required by this item is set forth in Note 10 in the Notes to our Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were submitted to a vote of our security holders during the last quarter of the fiscal year ended November 3, 2001.

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EXECUTIVE OFFICERS OF THE COMPANY

      The following table sets forth (i) the name and age of each present executive officer; (ii) the position(s) presently held by each person named; and (iii) the principal occupations held by each person named for at least the past five years. There is no family relationship among the named officers.

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PART II

      Our Common Stock is listed on the New York Stock Exchange (“NYSE”) under the symbol ADI. The table below sets forth the NYSE high and low sale prices of our Common Stock during the two most recent fiscal years.

      We have never paid any cash dividends on our Common Stock and currently have no intentions to do so.

      The approximate number of holders of record of our Common Stock at December 31, 2001 was 5,052. This number does not include shareholders for whom shares are held in a “nominee” or “street” name.

      On February 6, 2001, we issued and delivered an aggregate of 27,136 shares of our common stock to three individuals in partial fulfillment of the payment by us of consideration to the three former stockholders of White Mountain DSP, Inc., which we acquired on February 5, 1999. We issued and delivered these shares in reliance upon an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

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Results of Operations

      Net sales were $2,277 million in fiscal 2001, a decrease of 12% from net sales of $2,578 million in fiscal 2000. The decrease in net sales was attributable to declining demand in several markets that we serve, particularly the communications market, as well as an overall decline in the general economy. Fiscal 2001 analog IC product sales decreased 3% from fiscal 2000. Our analog IC product sales were strong in the first half of the year and declined in line with a major downturn in the semiconductor industry that occurred during the last half of fiscal 2001. Our fiscal 2001 DSP IC product sales decreased 32% from the prior year due to order cancellations and adjustments, particularly from telecommunications customers and contract manufacturers. Sales of new products, which we define as sales of products introduced in the prior six quarters, were 19% of net sales in fiscal 2001 as compared with 25% in fiscal 2000. The year over year decrease in new products as a percentage of sales was primarily due to the sharp downturn in sales of our communications products.

      Net sales were $2,578 million in fiscal 2000, an increase of 78% over net sales of $1,450 million in fiscal 1999. This increase in net sales was attributable to continued growth in the markets we serve. Sales into all end markets increased in fiscal 2000 with the communications market representing the largest growth area.

      The percentage of sales by geographic region for the last three years is as follows:

      As set forth above, the fiscal 2001 decline in North American sales as a percentage of total sales was principally attributable to an overall decline in the communications market as well as a cyclical downturn in the semiconductor industry. Sales to international regions remained strong in the first half of fiscal 2001 but weakened in the latter half of the year due to the downturn in the semiconductor industry. In absolute dollar terms, sales to Europe increased by 10% in fiscal 2001. Sales in fiscal 2001 to Japan remained relatively flat to fiscal 2000 as both a percentage of sales and in absolute dollar terms. Fiscal 2001 sales to Southeast Asia remained flat as a percentage of sales as compared to fiscal 2000 while declining approximately 13% in absolute dollars. In fiscal 2000, sales to Europe declined as a percentage of total sales largely due to a weakening Euro/ U.S. dollar exchange rate over fiscal 1999. In absolute dollars, fiscal 2000 net sales increased over fiscal 1999 by 72% in North America, 61% in Europe, 75% in Japan and 114% in Southeast Asia. These large sales increases were due to high growth in end market demand that was not sustainable.

      Gross margin was $1,269 million, or 55.7% of net sales, in fiscal 2001 compared to $1,461 million, or 56.7% of net sales, in fiscal 2000. Gross margin declined by 100 basis points from the prior year due to reduced revenue levels, the impact of inventory reserves and low utilization of our internal fabs. The increase in gross margin in fiscal 2000 to 56.7% from the 49.3% achieved in fiscal 1999 was due primarily to the favorable effect of fixed costs being allocated across a higher sales base and improved manufacturing efficiencies as production increased at our wafer fabrication, assembly and test facilities. Gross margin declined to 52% in the fourth quarter of fiscal 2001 as a result of a 47% sales decline in the fourth quarter of fiscal 2001 as compared to the fourth quarter of fiscal 2000.

      Research and development (R&D) expense amounted to $465 million in fiscal 2001, an increase of $75 million over fiscal 2000. Additional expenses associated with increased engineering headcount were the main reason for the year over year increase. As a result of the decline in the year to year revenue, R&D spending as a percentage of sales increased to 20.4% from 15.1% in fiscal 2000. 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 research and development is essential in order to maintain product

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      Amortization of intangibles was $53 million for fiscal 2001 compared with $11 million for fiscal 2000. The increase in amortization expense was attributable to the amortization of goodwill associated with the acquisition of BCO Technologies plc in the third quarter of fiscal 2000, and the acquisition of Thomas Neuroth AG, Signal Processing Associates Pty. Ltd., Integrated Micro Instruments, Inc., ChipLogic, Inc. and Staccato Systems, Inc. completed in the first quarter of fiscal 2001.

      During the first quarter of fiscal 2001, we completed the following acquisitions: