To our shareholders

Five years ago, we began a journey to fundamentally remake Texas Instruments into a company focused on two of the industry’s most attractive semiconductor markets – Analog and Embedded Processing.

Despite its ups and downs, I believe 2011 became the most important year yet in that journey given the strategic progress made in our businesses. The year began with high expectations for sustained strength in world economies; but before the first quarter was over, one of the worst natural disasters of our lifetime – the earthquake and tsunami in Japan – began to impact the production of electronics, and by summer, political and economic uncertainty was unraveling the recovery. Even so, it was a year in which TI outpaced the market in Analog and Embedded Processing and again gained share.

Foremost among the things that made 2011 important was our acquisition of National Semiconductor. This strategically significant purchase gave us immediate access to a high-quality portfolio of more than 12,000 analog products and a large pool of highly talented analog engineers. Together, we offer customers a powerful and unparalleled suite of solutions.

In Embedded Processing, we continued to heavy up our investments in microcontrollers, where our ultra-low power capabilities enable an expanded range of applications. As a result, we’ve increased our portfolio fourfold in the last three years, and today offer products across the breadth of the microcontroller spectrum.

In our third major business, Wireless, two significant things occurred. First, we continued our planned exit from basebands; as we enter 2012, we expect revenue from this product line to become only a couple of percent of our revenue compared with almost 25 percent four years ago. More strategically, we strengthened our position in applications processors and connectivity products – both of which offer great growth potential. As cloud computing increasingly takes hold, the opportunity for these products in many smart, connected devices will increase.

Across all our businesses, there is a meaningful story developing in the diversity of our customer base. We now have more than 90,000 customers and, excluding our wireless baseband products, no single customer comprises more than 5 percent of our revenue. This breadth of customers alongside our breadth of portfolio sets TI apart from our competitors.

The transition at TI is evident in our numbers. Today, our core businesses constitute more than 70 percent of our revenue, and that number should continue to grow as almost 90 percent of our R&D investments are targeted there. Nowhere is the progress more obvious than in Analog, which now comprises half of our company’s total revenue, up from a third in 2006. During 2011, we again returned cash to stockholders through stock repurchases of $2 billion and an increase of 31 percent in the dividend rate. Even so, the balance sheet remained robust with year-end cash and short-term investments of almost $3 billion.

As we look to future growth, we continue to make strong investments in China, the geographic region we believe most critical to success. We have a large, determined sales and applications engineering team there with offices in 16 cities, four times more than we had six years ago. We’ve taken a similar approach in India, Eastern Europe and Russia – all emerging markets with growing middle-class populations that will shape future economies.

By the end of 2011, the challenges from earlier in the year were abating. The industry was recovering from Japan’s natural disasters, semiconductor demand was becoming better aligned with customer demand, and our revenue was starting to improve. We know that great technology companies deliver growth – lots of it. The chips we make are increasingly pervasive in our daily lives, so we believe the opportunity to achieve this goal is within reach. Our job now is to transform great potential into great results and to make consistent outperformance the hallmark of our company. And that is our sole priority for 2012.