To our shareholders

We performed well in 2012, despite strong headwinds from a weak and uncertain economy. It was also the year we completed our strategic journey to make Texas Instruments an Analog and Embedded Processing company.

In 2012, 70 percent of our revenue came from Analog and Embedded Processing; just five years ago, less than half our revenue originated here. With no major impediments diverting our resources and energies, this trajectory should continue in the years ahead, and with it, the benefits that accrue to TI and its shareholders.

Analog and Embedded Processing share some characteristics that make our business model one that generates sustainably high cash flows against a backdrop of growth and stability. Both are large markets with lots of players, none of which is dominant. This translates into ample opportunity to grow and gain share. Both serve a broad customer base that numbers in the tens of thousands with target-rich opportunities across a range of applications. This means we can participate in the most exciting opportunities without becoming overly dependent on any single one. Both have product life cycles typically measured in years, if not decades, which boost returns on investment and enable a stable base of revenue. And, both have low capital requirements because their manufacturing equipment and process technologies are long lived.

Manufacturing is a big part of what allows Analog and Embedded Processing to generate high financial returns. The associated manufacturing process technologies allow our designers to create innovative chips that are highly differentiated, but the factories themselves last for decades. That dramatically increases our flexibility around when we buy these assets and when we put them into production. For example, during the past few years, we have had the opportunity to significantly expand our manufacturing footprint by acquiring capacity for pennies on the dollar. As a result, we can now support more than $5 billion of additional revenue with the

capacity we have on hand without making additional large capital outlays. Today, these investments are benefiting the company, its cash flow, its returns – and TI’s shareholders – and will continue to benefit us for many years to come.

So where are we now?

In Analog, we are the market leader with about 18 percent share. We have gained share in four of the past five years, even without the contribution that resulted from our acquisition of National Semiconductor, which broadened our product lines and gave us a stronger presence in the important industrial markets. In Embedded Processing, we hold the No. 2 position with about 12 percent share. For the past few years, we have focused on new product development to ensure a broad portfolio that can serve many customer needs, ranging from the industry’s lowest power-consuming microcontroller to multi-core DSPs for the next wave of the communications infrastructure build-out.

2012 showed what our Analog and Embedded Processing business model can deliver, even in a weak economy. We generated almost $3 billion in free cash flow and returned 90 percent of it to shareholders through dividends and share repurchases. We raised our quarterly dividend 24 percent, our tenth increase in the last nine years. And, we repurchased $1.8 billion worth of shares, further contributing to a 36 percent reduction in shares outstanding since the beginning of 2005.

Now that we’ve completed our strategic transition, we’re further honing our execution so we can deliver on the promise of TI: revenue growth and market share gains in Analog and Embedded Processing, cash flows at historic levels, and strong returns to our shareholders. Analog and Embedded Processing are where we are investing our resources. This is where we are committed to succeed.

Note: Free cash flow (non-GAAP) = Cash flow from operations minus capital expenditures. See page 48 for details.