Here are a few highlights of TI’s financial performance in 1997. These amounts are for continuing operations and exclude special items. Operating margins rose to 12.4 percent of revenues, up 8.7 percentage points from a year ago. Net revenues were $9750 million in 1997, compared to $9940 million in 1996. Financial results include revenues from businesses that have since been sold. Excluding the sold businesses, TI orders were up 19 percent and revenues up 10 percent.

Profit from operations (PFO) was $1213 million, up from $374 million in 1996. Diluted earnings per share (EPS) grew to $2.03 from $0.74 in 1996. (EPS figures have been adjusted to reflect the 2-for-1 stock split that occurred in the fourth quarter.)

As reported throughout the year, TI divested a number of businesses during 1997 so that we could concentrate on products and technologies where we have a strong and sustainable leadership position. At the same time, we were active in adding technologies important to future growth, including the announcement in the fourth quarter of the acquisition of Amati Communications, a world leader in Digital Subscriber Line (xDSL) technology which will revolutionize access to the Internet. We expect the xDSL market to grow rapidly during the next decade to more than $6 billion.

As the result of our strategic moves, TI emerged from 1997 a much different, and we believe, a much stronger company than we were even a year ago. To reflect the company’s new structure, we are reporting financial results for the three principal business segments, whose financial highlights are summarized below and are detailed elsewhere in this report.

SEMICONDUCTOR
Revenues were up 10 percent, growing faster than the market as a whole. Semiconductor operating margins were up six percentage points from 1996 to 1997, and semiconductor orders also grew significantly for the year. This was true despite continued weakness in the overall DRAM (dynamic random-access memory) market. TI closed the year in an environment of near-term caution due to the slowing in Asian economies and increased volatility in the DRAM market.

MATERIALS AND CONTROLS
Revenues grew 7 percent in 1997 versus 1996, while profit from operations improved 37 percent, as the business continued to reduce manufacturing costs.

EDUCATION TECHNOLOGY
Revenues, made up largely of calculators, grew by 6 percent in 1997. Profit from operations increased by about 5 percent for the year.

TI’s emerging digital imaging business, which is included in Corporate Activities, continued to make progress. During the fourth quarter, the business substantially increased shipments as it went into volume production of digital light processing systems for ultra-portable projectors.

Why is “the new TI” focusing on DSPS? The answer has a lot to do with our commitment to value, growth and financial stability. To become one of the industry’s premier companies, TI must grow shareholder value faster than revenues. Toward that end, we have set a target of consistently generating 20 percent annual growth in revenues and achieving a 20 percent return on invested capital. All of our businesses are working to improve operating profit margins, one of TI’s top priorities.

We believe that DSPS is the best way to reach those strategic goals. Let’s take a closer look at the reasons why.

First, there are the dynamics of the semiconductor market. Although the recent slowing in Asian economies is expected to have an impact, the outlook remains positive for longer term growth in semiconductors. We expect the worldwide semiconductor market to grow about 10 percent in 1998, up from 4 percent growth in 1997. Non-memory portions of the semiconductor market should grow even faster, led by digital signal processors and mixed-signal/ analog products, the two key technologies in our DSPS portfolio.

This attractive growth will be driven by the increasing semiconductor content in electronic equipment. Most of us have seen the trend toward digitization at work in our lives whether in the form of cell phones, personal computers, bar code scanners, CD players or hundreds of other products that make it easier to do the things we do every day. From this point forward, the trend will only accelerate, as these various electronic devices get more and more connected and find new ways to share their common digital language.

The second key factor is TI’s solid position in the semiconductor market. Our product portfolio is moving towards a higher mix of value-added products. In fact, during the fourth quarter of 1997, more than 45 percent of TI’s semiconductor revenues came from digital signal processing plus mixed-signal/ analog products, while memory was less than 20 percent.

TI is the world leader in DSPS — a portion of the semiconductor market that’s expected to grow two to three times faster than the industry as a whole. Why all the growth? Because digital signal processors and mixed-signal/analog products are the key enabling technologies for applications that go beyond the desktop and bring the benefits of digitization into the real world.

TI has #1 positions in both digital signal processing and mixed-signal/analog. No one has more of the chip technologies, process skills, software capabilities or design methodologies needed to create cutting-edge solutions for equipment makers. And we believe TI has what it takes to maintain and strengthen our position in the DSPS market.

We aren’t relying on superior technology alone to make it happen. We are linking TI’s industry-best digital signal processing and mixed-signal/analog technology with a deep understanding of today’s — and tomorrow’s — fastest growing markets.

This focus strengthens our ability to deliver high-quality, value-added solutions to our customers. We work to understand their needs, and then we develop solutions to match. In some cases, customers count on TI for high-performance chip architectures to enable specific applications. In other cases, it’s our software and systems expertise that makes the difference. But in every case, our market focus ensures that TI is providing solutions that fit, that add value and that are tough for competitors to match.

We’ve done a lot of work during the past 12 months, and we’re not finished yet. We believe the rapid pace of change will continue.

One of the challenges for our industry in 1998 is the financial turmoil in Asia. TI remains cautious in the near term as continuing volatility in DRAMs and slowing in Asian economies are expected to put pressure on the first quarter 1998 revenues and margins. But long term, we believe that by moving aggressively to strengthen our DSPS strategy, we can turn today’s challenging conditions into attractive opportunities for the new TI and our stockholders.

In this report we are going to provide more detail about DSPS, so that you’ll understand why we think this portion of the semiconductor market is so attractive. We’ll tell you more about how DSPS technology works. We’ll describe the markets we’re working to develop. We’ll show you how our strategy is already paying off with key wins in the marketplace. We’ll explain why TI Digital Signal Processing Solutions are uniquely positioned to drive profitable growth.

Without question, people are essential to TI’s continued progress. Changes to our compensation and benefits plans, including our profit-sharing program, ensure that TI is more competitive. TI people now experience a more direct connection to the company’s success. Rewards are tied to higher operating margins, aligning employee interests with those of our stockholders.

When you see how the pieces of the new TI fit together, we hope you will reach the same conclusion we have: TI is a company poised to win, to become one of the electronics industry’s premier performers. We will continue to track our progress toward that goal using the measures that are most important to our stockholders: value, growth and financial stability.

James R. Adams
Chairman of the Board

Thomas J. Engibous
President and Chief Executive Officer

William P. Weber
Vice Chairman