Two thousand and two was a challenging year for most companies in the high technology industry, including Xilinx. Global economies were weak and companies in the communications sector struggled with greatly diminished end customer demand. Semiconductor industry sales plunged a record 33 percent in calendar 2001 as end customers worked through excess inventory levels. To put this in perspective, consider the following: It took over 30 years for the semiconductor industry to reach $70 billion in sales. In 2001 alone, industry sales decreased by over $70 billion to approximately $155 billion, according to Gartner Dataquest. Sales for the Programmable Logic Device (PLD) segment of the semiconductor industry declined 36 percent – the worst annual decline in PLD history and the first time that performance for this segment lagged the overall semiconductor industry. Xilinx fared better than the PLD segment as a whole, but proved no exception to this downturn with revenues decreasing 26 percent to approximately $1.0 billion. Additionally, high internal inventory levels prevented the manufacture of new wafers at lower costs and ultimately resulted in Xilinx taking a sizeable inventory write-down. Finally, Xilinx’s older products, which typically enjoy higher gross margins, declined rapidly. This resulted in product mix issues that unfavorably impacted Xilinx’s overall gross margin, driving it below the historical 60% level.

In spite of a difficult macroeconomic climate, Xilinx decided to avoid laying off employees. Rather, the Company aggressively reduced pay and other discretionary costs while continuing to invest in research and development. This resulted in a record number of new product introductions and a 44% share of the PLD segment. According to Gartner Dataquest, Xilinx gained six percentage points of PLD segment share in calendar 2001 {A}. Xilinx also achieved a #6 ranking on Fortune Magazine’s annual list of “The Best 100 Companies to Work For.”

Just as Xilinx was one of the first semiconductor companies to enter the industry downturn, it is expected to be among the first semiconductor companies to recover. Revenues reached a bottom in the September 2001 quarter and the December 2001 quarter showed slight growth. In the March 2002 quarter, the Company reported a 20 percent sequential increase in sales driven primarily by the success of its new products.

During the year, Xilinx achieved several product-related milestones. Cumulative revenues from the flagship Virtex™ product family recently surpassed $1.0 billion, making it the fastest ramping Field Programmable Gate Array (FPGA) family in history. Only four full quarters after its introduction, the Virtex-II™ series of FPGAs now represents over 10 percent of Company revenues. This family is the leading choice for designers in a wide range of applications such as image processing, gigabit ethernet switching, virtual private networking and fabric-attached storage. In March 2002, Xilinx introduced the Virtex-II Pro™ series of FPGAs {B}, enabling a new era of programmable systems. This revolutionary product is the first in the industry to embed high performance IBM PowerPC™ processors with multi-gigabit serial transceivers. These technologies enable Xilinx’s customers to support emerging serial communications standards such as PCI Express, InfiniBand, XAUI and RapidIO. On April 17, 2002, Xilinx and other leading industry partners sponsored “Programmable World 2002”, which was simulcast to over 6,000 design engineers and system architects across North America and Europe, to expose customers to the new capabilities of the Virtex-II Pro solution. Additionally, Xilinx recently introduced the Virtex-II Easypath™ family. These devices provide Virtex-II customers with a unique, risk free, high-volume alternative to Application Specific Integrated Circuits (ASICs) with significantly lower price points than high-density FPGAs. Ultimately, this enables Xilinx to participate longer in the customer’s product life cycle.

During the fiscal year, Xilinx introduced two key products aimed at providing greater end market diversification: Spartan™-IIE FPGAs and CoolRunner™-II Complex Programmable Logic Devices (CPLDs){B}. Spartan-IIE devices target high-volume, digital consumer applications by providing an affordable, programmable alternative to ASICs. Combined revenues for the entire Spartan-II family increased nearly 30 percent sequentially in the most recent quarter. Xilinx’s CoolRunner-II devices are the industry’s first fully digital CPLDs. This results in scalable solutions that provide low power consumption, high performance and low cost at the same time. Xilinx estimates its share of the CPLD market segment was approximately 16 percent at the end of calendar year 2001, up from 12 percent in the prior year. Both the Spartan and CoolRunner families are finding rapid success in non-traditional PLD applications such as home networking, broadband access and digital video technology.

During fiscal 2002, Xilinx’s software solutions continued to provide a key competitive advantage for the Company. Xilinx ended fiscal year 2002 with over 142,000 installed software seats, up nearly 40 percent from the end of fiscal 2001. In addition, the number of intellectual property cores sold increased by nearly 50 percent in fiscal 2002. Both of these data points indicate overall design activity remains robust for Xilinx products.

In February 2002, Xilinx introduced the latest version of the ISE™ (Integrated Software Environment) family of design software. With over 12 million lines of code, ISE is one of the most sophisticated software packages on the market. ISE supports the entire range of Xilinx FPGA and CPLD devices and leads the industry in important metrics like performance and compile times. In fact, the coupling of ISE with Xilinx’s state-of-the-art silicon architecture yields the greatest competitive performance advantage in Xilinx’s history.

The fiscal year ahead promises exciting developments in many areas for Xilinx. With the help of our leading foundry partner, United Microelectronics Corporation (UMC), we expect to aggressively ramp production on 300mm wafers {C.}. The switch to 300mm wafers is expected to reduce the cost of a silicon die by more than 30 percent over time. At the same time, fixed costs and minimum order quantities associated with manufacturing ASICs are expected to rise considerably. This causes a fundamental shift in the PLD versus ASIC paradigm. While time to market and flexibility have always favored PLDs, now economics will increasingly favor PLDs and enable a greater expansion into the $16 billion ASIC market.

In closing, I’d like to stress that all industry downturns end and the companies that keep investing through the downturns emerge even stronger during the recovery. Xilinx financials at year-end are already showing signs of improvement. Gross margin was 58 percent, up from 51 percent from the first quarter of fiscal 2002. Inventory days were 63 days, down from 158 days in the prior year. Operating expenses decreased by 17 percent, enabling us to exit the fiscal year with the PLD industry’s highest operating margin at 15 percent. Additionally, Xilinx has taken a leadership role in this “post-Enron” era. To increase the transparency of financial results to shareholders, Xilinx will discontinue its use of pro-forma reporting starting in fiscal 2003. Also, Xilinx began incorporating an abbreviated cash flow statement with the earnings release in the fourth quarter of fiscal 2002.

Our new product momentum continues unabated and has allowed Xilinx to make significant inroads into the ASIC market. According to Gartner Dataquest, Xilinx is now the single largest ASIC supplier in Europe and the second largest, after IBM, in the Americas {D.}. While I remain cautious about end market demand, our new product growth coupled with new market opportunities, position Xilinx solidly to continue to gain market share in fiscal 2003 and beyond. I look forward to reporting more success to you next year.