The semiconductor industry is characterized by rapid technological change, intense competitive pressure and cyclical market patterns characterized by diminished product demand, limited visibility to demand for products further out than three to nine months, accelerated erosion of average selling prices and overcapacity. The Company's results of operations are affected by a wide variety of factors, including general economic conditions, conditions relating to technology companies, conditions specific to the semiconductor industry, decreases in average selling prices over the life of any particular product, the timing of new product introductions (by the Company, its competitors and others), the ability to manufacture sufficient quantities of a given product in a timely manner, the timely implementation of new manufacturing technologies, the ability to safeguard patents and intellectual property from competitors, and the impact of new technologies resulting in rapid escalation of demand for some products in the face of equally steep decline in demand for others. Market demand for the Company's products, particularly for those most recently introduced, can be difficult to predict, especially in light of customers' demands to shorten product lead times and minimize inventory levels. Unpredictable market demand could lead to revenue volatility if the Company were unable to provide sufficient quantities of specified products in a given quarter. In,addition, any difficulty in achieving targeted wafer production yields could adversely impact the Company's financial condition and results of operations. The Company attempts to identify changes in market conditions as soon as possible; however, the dynamics of the market make prediction of and timely reaction to such events difficult. Due to the foregoing and other factors, past results, including those described in this report, are much less reliable predictors of the future than is the case in many older, more stable and less dynamic industries. Based on the factors noted herein, the Company may experience substantial period-to-period fluctuations in future operating results.

The Company's future success depends in large part on the continued service of its key technical, sales, marketing and management personnel and on its ability to continue to attract and retain qualified employees. Particularly important are those highly skilled design, process, software 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 the Company's financial condition and results of operations.

Sales and operations outside of the United States subject the Company to risks associated with conducting business in foreign economic and regulatory environments. The Company's financial condition and results of operations could be adversely impacted by unfavorable economic conditions in countries in which it does significant business and by changes in foreign currency exchange rates affecting those countries. Specifically, the Company has sales and operations in the Asian markets. The recent instability in the Asian financial markets has adversely impacted sales and may continue to adversely impact sales in those markets in several ways, including reduced access to sources of capital needed by customers to make purchases and increased exchange rate differentials that may adversely effect the customer's ability to purchase or the Company's ability to sell at competitive prices. In addition, the instability may increase credit risks as the recent weakening of certain Asian currencies may impair customers' ability to repay existing obligations. Depending on the situation in Asia in coming quarters, any or all of these factors could adversely impact the Company's financial condition and results of operations in the near future.

Additionally, risks include government regulation of exports, tariffs and other potential trade barriers, reduced protection for intellectual property rights in some countries, and generally longer receivable collection periods. The Company's business is also subject to the risks associated with the imposition of legislation and regulations relating specifically to the import or export of semiconductor products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions will be imposed by the United States or other countries upon the importation or exportation of the Company's products in the future or what, if any, effect such actions would have on the Company's financial condition and results of operations.

In order to expand international sales and service, the Company will need to maintain and expand existing foreign operations or establish new foreign operations. This entails hiring additional personnel and maintaining or expanding existing relationships with international distributors and sales representatives. This will require significant management attention and financial resources and could adversely affect the Company's financial condition and results of operations. There can be no assurance that the Company will be successful in its maintenance or expansion of existing foreign operations, in its establishment of new foreign operations or in its efforts to maintain or expand its relationships with international distributors or sales representatives.

Many of the Company's operations are centered in an area of California that has been seismically active. Should there be a major earthquake in this area, the Company's operations may be disrupted resulting in the inability of the Company to manufacture or ship products in a timely manner, thereby materially adversely affecting the Company's financial condition and results of operations.

In addition, the securities of many high technology companies have historically been subject to extreme price and volume fluctuations, which may adversely affect the market price of the Company's common stock.

DEPENDENCE UPON INDEPENDENT MANUFACTURERS AND SUBCONTRACTORS. The Company does not manufacture the wafers used for its products. During the past two years, most of the Company's wafers have been manufactured by Seiko Epson Corporation (Seiko Epson) and UMC. The Company has depended upon these suppliers and others to produce wafers with competitive performance and cost attributes, including transitioning to advanced manufacturing process technologies, producing wafers at acceptable yields, and delivering them to the Company in a timely manner. While the timeliness, yield and quality of wafer deliveries have met the Company's requirements to date, there can be no assurance that the Company's wafer suppliers will not experience future manufacturing problems, including delays in the realization of advanced manufacturing process technologies. Additionally, disruption of operations at these foundries for any reason, including natural disasters such as fires or earthquakes as well as disrupted access to adequate supplies of electricity, natural gas or water would cause delays in shipments of the Company's products, and could have a material adverse effect on the Company's results of operations. The Company is also dependent on subcontractors to provide semiconductor assembly services. Any prolonged inability to obtain wafers or assembly services with competitive performance and cost attributes, adequate yields or timely deliveries from these manufacturers and subcontractors, or any other circumstance that would require the Company to seek alternative sources of supply, could delay shipments, and have a material adverse effect on the Company's financial condition and results of operations.

The Company's growth will depend in large part on the Company's ability to obtain increased wafer fabrication capacity and assembly services from suppliers which are cost effective. In order to secure additional wafer capacity, the Company from time to time considers alternatives, including, without limitation, equity investments in, or loans, deposits, or other financial commitments to, independent wafer manufacturers to secure production capacity, or the use of contracts which commit the Company to purchase specified quantities of wafers over extended periods. Although the Company is currently able to obtain wafers from existing suppliers in a timely manner, the Company has at times been unable, and may in the future be unable, to fully satisfy customer demand because of production constraints, including the ability of suppliers and subcontractors to provide materials and services in satisfaction of customer delivery dates, as well as the ability of the Company to process products for shipment. In addition, a significant increase in general industry demand or any interruption of supply could reduce the Company's supply of wafers or increase the Company's cost of such wafers. Such events could have a material adverse affect on the Company's financial condition and results of operations.

LITIGATION. The Company is currently engaged in patent litigation with Altera Corporation (Altera). See Note 11 of Notes to Consolidated Financial Statements. The ultimate outcome of these matters cannot be determined at this time. Management believes that it has meritorious defenses to the claims asserted against it and is defending them vigorously. The foregoing is a forward looking statement subject to risks and uncertainties, and the future outcome could differ materially due to the uncertain nature of the litigation with Altera and because the lawsuits are still in the pre-trial stage.

DEPENDENCE ON NEW PRODUCTS. The Company's future success depends in large part on its ability to develop and introduce on a timely basis new products which address customer requirements and compete effectively on the basis of price, functionality and performance. The success of new product introductions is dependent upon several factors, including timely completion of new product designs, the ability to utilize advanced manufacturing process technologies, achievement of acceptable yields, availability of supporting software design tools, utilization of predefined cores of logic and market acceptance. No assurance can be given that the Company's product development efforts will be successful or that its new products will achieve market acceptance. Revenues relating to some of the Company's mature products are expected to continue to decline in the future as a percentage of total revenues. As a result, the Company will be increasingly dependent on revenues derived from newer products. In addition, the average selling price for any particular product tends to decrease rapidly over the product's life. To offset such decreases, the Company relies primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products which incorporate advanced features and other price/performance factors such that higher average selling prices and higher margins are achievable relative to mature product lines. To the extent that such cost reductions and new product introductions do not occur in a timely manner, or the Company's products do not achieve market acceptance at prices with higher margins, the Company's financial condition and results of operations could be materially adversely affected.

COMPETITION. The Company's field programmable gate arrays (FPGAs) and complex programmable logic devices (CPLDs) compete in the programmable logic marketplace, with a substantial majority of the Company's revenues derived from its FPGA product families. The industries in which the Company competes are intensely competitive and are characterized by rapid technological change, rapid product obsolescence and continuous price erosion. The Company expects significantly increased competition both from existing competitors and from a number of companies that may enter its market.

Xilinx believes that important competitive factors in the programmable logic market include price, product performance and reliability, adaptability of products to specific applications, ease of use and functionality of software design tools, functionality of predefined cores of logic and the ability to provide timely customer service and support. The Company's strategy for expansion in the programmable logic market includes continued introduction of new product architectures which address high volume, low cost applications as well as high performance, leading edge density applications and continued price reductions proportionate with the ability to lower the cost of manufacture for established products. However, there can be no assurance that the Company will be successful in achieving these strategies.

The Company's major sources of competition are comprised of several elements: the manufacturers of custom CMOS gate arrays, providers of high density programmable logic products characterized by FPGA-type architectures, providers of high speed, low density CPLDs devices and other providers of new or emerging programmable logic products. The Company competes with custom gate array manufacturers on the basis of lower design costs, shorter development schedules and reduced inventory risks. The primary attributes of custom gate arrays are high density, high speed and low production costs in high volumes. The Company continues to develop lower cost architectures intended to narrow the gap between current custom gate array production costs (in high volumes) and PLD production costs. The Company competes with high density programmable logic suppliers on the basis of performance, the ability to deliver complete solutions to customers, voltage and customer support, taking advantage of the primary characteristics of flexible, high speed implementation and quick time-to-market capabilities of the Company's PLD product offerings. Competition among CPLD suppliers is based primarily on price, performance, design, software utility and the ability to deliver complete solutions to customers. In addition, the Company competes with manufacturers of new or emerging programmable logic products on the basis of price, performance, customer support, software utility and the ability to deliver complete solutions to customers. Some of the Company's current or potential competitors have substantially greater financial, manufacturing, marketing and technical resources than Xilinx. To the extent that such efforts to compete are not successful, the Company's financial condition and results of operations could be materially adversely affected.

INTELLECTUAL PROPERTY. The Company relies upon patent, trademark, trade secret and copyright law to protect its intellectual property. There can be no assurance that such intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. From time to time, third parties, including competitors of the Company, have asserted patent, copyright and other intellectual property rights to technologies that are important to the Company. There can be no assurance that third parties will not assert infringement claims against the Company in the future, that assertions by third parties will not result in costly litigation or that the Company would prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources of the Company. Any infringement claim or other litigation against or by the Company could materially adversely affect the Company's financial condition and results of operations.

YEAR 2000 COMPLIANCE. As is the case with most other companies using computers in their operations, the Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems, as well as the vendor and customer date-sensitive computerized information electronically transferred to the Company. The year 2000 issue is the result of computer programs being written using two digits, rather than four, to define the applicable year. Any of the Company's systems that have time-sensitive software may recognize the year "00" as 1900 rather than the year 2000, which could result in miscalculations, classification errors or system failures. Based on preliminary information, costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues on a timely basis, the Company's financial condition and results of operations could be adversely affected. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner.

MARKET RATE RISKS. INTEREST RATE RISK. The Company's exposure to interest rate risk relates primarily to the Company's investment portfolio and long-term debt obligations. See Note 5 of Notes to Consolidated Financial Statements. The Company's primary aim with its investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. The portfolio includes tax-advantaged municipal bonds, tax-advantaged auction rate preferred municipal bonds, corporate bonds, and US Treasury securities. In accordance with the Company's investment policy, the Company places investments with high credit quality issuers and limits the amount of credit exposure to any one issuer. These securities are subject to interest rate risk and will decrease in value if market interest rates increase. All securities have remaining maturities less than one year as of the balance sheet date, and the Company believes it has the ability to hold its investments until maturity. Therefore, the Company does not expect to recognize an adverse impact on income or cash flows, although there can be no assurance of this.

The Company is also subject to interest rate risk related to outstanding long-term debt. If long-term market interest rates decrease, the effective cost of the debt will increase. In order to mitigate the interest rate risks, the long-term debt fixed interest rate liability has been matched against the Company's short-term variable interest rate assets through a liability interest rate swap agreement. The liability swap exchanges one half of the underlying debt amount based on a fixed interest rate for the same amount based on variable interest rates. If interest rates rise by 10%, the cash flow impact of the swap would continue to be immaterial and would be offset by the increase in short-term investment interest rates. This contract was entered into for a two and a half-year period and will end in November 1998. As the long-term debt may be outstanding until November 2002, the Company will continue to evaluate its strategy related to the fixed rate debt.

The table below summarizes the Company's investment, debt and interest rate swap notional amounts as of March 31, 1998 as well as weighted average interest rates by year of maturity for the next five years and thereafter. The fair value as of March 31, 1998 is also shown.

Fair Value
March 31,
(In thousands) 1999 2000 2001 2002 Total 1998

Available-for-sale securities $340,415 --- --- --- $340,415 $340,585
   Average pre-tax interest rate 3.87%
Held-to-maturity securities $  36,271 --- --- --- $  36,271 $  36,266
   Average interest rate 5.09%
Convertible long-term debt --- --- --- $250,000 $250,000 $255,000
   Average interest rate 5.25% 5.25% 5.25% 5.25%
Interest rate swap
   Pay variable/receive fixed $125,000 --- --- --- $125,000 $       170
   Average pay rate   USD 3 month Libor   
   Average receive rate 5.94%

FOREIGN CURRENCY RISK. Through fiscal year 1998, the Company's purchases of processed silicon wafers from Japanese foundries have been denominated in yen. To help offset the Company's exposure for yen denominated liabilities, the Company's sales to Japanese customers through fiscal 1998 have also been denominated in yen. The Company has periodically hedged its net exposure to fluctuations in the yen-to-US dollar exchange rates through the use of forward exchange or option contracts. However, beginning in fiscal 1999, most wafers purchased from Japanese suppliers will be denominated in US dollars. The Company also intends to begin invoicing Japanese customers in US dollars during the second half of fiscal 1999. For a period of time, wafers will be purchased in US dollars and invoicing to Japanese customers will continue to be in yen, resulting in a yen exposure. However, after invoicing begins in US dollars, the Company believes that its net yen exposure relating to fluctuations in the yen-to-US dollar exchange rate should decline, although there can be no assurance that this will be the case. As a result, the Company plans to adjust its future hedging strategy. In addition, the Company entered into foreign exchange forward contracts in fiscal 1997 to minimize the impact of future exchange fluctuations relating to its fiscal 1998 investment in the USIC joint venture, which was denominated in New Taiwan dollars. No currency forward or option contracts were outstanding as of March 31, 1998.

The Company has several subsidiaries and an equity investment in the USIC joint venture whose financial statements are recorded in currencies other than the US dollar. As these foreign currency financial statements are translated at each month end during consolidation, fluctuations of exchange rates between the foreign currency and the US dollar increase or decrease the value of those investments. If permanent changes occur in exchange rates after an investment is made, the investment's value will increase or decrease accordingly. These fluctuations are recorded as a separate component of stockholders' equity as cumulative translation adjustments. To date, the USIC joint venture has recorded approximately $17 million as cumulative translation adjustments, as the New Taiwan dollar has decreased in value against the US dollar. Also, as the Company's subsidiaries and the USIC joint venture maintain investments denominated in other than local currencies, exchange rate fluctuations will occur. USIC's net income to date has resulted largely from favorable foreign currency exchange gains on its US dollar denominated investments.

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