ITEM 1. BUSINESS

Maxim Integrated Products, Inc. (“Maxim” or the “Company”) designs, develops, manufactures, and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The Company also provides a range of high-frequency design processes and capabilities that can be used in custom designs. The analog market is fragmented and characterized by many diverse applications, a great number of product variations, and, as to many circuit types, relatively long product life cycles. Maxim’s objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. The Company’s product offerings include those of its wholly owned subsidiary, Dallas Semiconductor, a company acquired by Maxim in fiscal year 2001.

The Company is a Delaware corporation that was originally incorporated in California in 1983. It is headquartered in Sunnyvale, California. The mailing address for the Company’s headquarters is 120 San Gabriel Drive, Sunnyvale, California 94086, and the Company’s telephone number is (408) 737-7600. Additional information about the Company is available on the Company’s website at www.maxim-ic.com.

The Company makes available through its website free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. The Company assumes no obligation to update or revise any forward-looking statements in this annual report on Form 10-K, whether as a result of new information, future events or otherwise, unless it is required to do so by law. A copy of this annual report on Form 10-K is available without charge upon written request to: Investor Relations, Maxim Integrated Products, Inc., 120 San Gabriel Drive, Sunnyvale, California 94086.

The Mixed Signal Analog Integrated Circuit Market

All electronic signals fall into one of two categories, linear or digital. Linear (or analog) signals represent real world phenomena, such as temperature, pressure, sound, or speed, and are continuously variable over a wide range of values. Digital signals represent the “ones” and “zeros” of binary arithmetic and are either on or off.

Three general classes of semiconductor products arise from this partitioning of signals into linear or digital. There are those, such as memories and microprocessors, that operate only in the digital domain. There are linear devices such as amplifiers, references, analog multiplexers, and switches that operate primarily in the analog domain. Finally, there are mixed-signal devices that combine linear and digital functions on the same integrated circuit and interface between the analog and digital worlds. Maxim’s strategy has been to target both the linear and mixed-signal markets, often collectively referred to as the analog market. In addition, Maxim products include some Dallas Semiconductor products that are exclusively or principally digital. Although the acquisition of Dallas Semiconductor did not substantially affect Maxim’s strong focus on the linear and mixed signal market, it has supplemented Maxim’s capabilities in the digital area in ways that enable development of new products, mixed signal and other, with very sophisticated digital characteristics. Risks associated with fulfilling this strategy are discussed in “Item 1., Business – Trends, Risks and Uncertainties.”

The Company believes that, compared to the digital integrated circuit market, the mixed signal analog market has generally been characterized by a wider range of products used in smaller quantities by a larger number of customers, and in some cases, by longer product life cycles and lower capital requirements as a result of generally using less dense manufacturing technologies. The Company believes that the widespread application of low-cost microprocessor-based systems and of digital communication technologies has affected the market for analog integrated circuits by increasing the need for signal conditioning interfaces between the digital and analog world. In addition, due to increased integration capability, analog companies have been capturing digital logic within their mixed signal circuits, which was previously captured by digital logic companies.

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The analog market is a diverse group of markets, serving numerous and widely differing applications for the instrumentation, industrial control, data processing, communications, automotive, consumer and medical industries. For each application, different users may have unique requirements for circuits with specific resolution, accuracy, linearity, speed, power, and signal amplitude capabilities, which results in a high degree of market complexity. Maxim’s products can be used in a variety of applications, but serve only certain portions of the total mixed signal analog market.

Products and Applications

The Company believes that it addresses the requirements of the market by providing competitively priced products that add value to electronic equipment with superior quality and reliability.

The Company’s research and development programs emphasize development of technically innovative processes and products. In addition, the Company develops second-source products. The Company’s products are available with numerous packaging alternatives, including packages for surface mount technology.

The following table illustrates the major industries served and planned to be served by the Company and typical applications for which the Company’s products can be used:

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While Maxim’s proprietary products have received substantial market acceptance, some of Maxim’s competitors have developed second source products or functionally equivalent products for some of Maxim’s successful innovative proprietary products. Typically in the semiconductor industry, when a proprietary product becomes second sourced, the credibility of the original design is enhanced, however, gross margins may be adversely affected due to increased price competition.

Product Quality

The Company emphasizes quality and reliability from initial product design through manufacturing, assembling and testing. In the product design phase, the Company applies a set of circuit design rules derived from modeling and characterization of the process and individual circuit elements. The completeness of this characterization and the limits of these models can affect the final quality of the product. There is a high risk that model characterization of the internally developed processes contains incomplete data; however, such models are refined as the processes mature. The performance of product designs is dependent on the process operating within the limits specified for critical parameters. Deviations from these limits can affect the quality of the end product. Critical process parameters must maintain a level of stability for subsequent long-term reliability tests to validate the integrity of the process and material produced using the process. The Company measures the stability of these process parameters using test routines and structures that simulate the actual devices used in product design. Simulations generally approximate actual device limits but are not always able to match all usage environments or conditions. The Company believes a comprehensive and thorough engineering approach is applied to the development and deployment of these test routines and structures. The data compiled from the measurement of these critical parameters are statistically analyzed and determine the acceptance of the wafers to be used in the manufacture of the Company’s product. The test routines and structures used by the Company do not provide complete assurance that all quality problems or issues will be detected.

Product quality is determined by conformance to predetermined parameters to the extent they are measured. Parameters are either tested during manufacturing or assured by design. Predetermined parameters assured by design are reliant on the stability of the semiconductor manufacturing processes, the amount of process margin

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and the completeness of product characterization. Reliability testing is done during wafer process development, process release, product release stages and limited ongoing reliability monitors and serves as a control of process consistency. Parameters tested during manufacturing are dependent on the integrity of the manufacturing test operation, which includes factors such as test software, stability and repeatability of test systems, test set up issues, and other factors and variables. The Company believes a significant amount of resources and diligence is applied to monitor and control the manufacturing test operation.

Quality problems experienced by suppliers may be impossible to reproduce or detect in a controlled environment, or may not be detected by the Company’s quality control procedures. Should this occur, such defects may become part of the Company’s finished product which would ultimately be sold to customers. If such defects cause quality control problems in the manufacture of customers’ end products or cause direct or indirect damages to either the Company’s customers or the ultimate end user, the Company may be liable for its customers’ increased production costs at its customers and both direct and indirect damages caused by the defective product. Such liability could have a material adverse impact on the Company’s results of operation and financial condition.

Long term thermal, mechanical and environmental testing is performed in an effort to detect and accelerate the presence of defects that may arise over the life of a product’s use. The Company also performs infant mortality studies on many of its products. Semiconductor manufacturing consists of complex and diverse processes. Although Maxim believes that the above testing regime is comprehensive and that it meets industry standards, a possibility exists that failure mechanisms could elude detection. This could expose the Company to liability, unforeseen customer returns, and loss of reputation.

Some of the Company’s products include purchased components, such as crystals, batteries, passive elements, PC boards, metalcans, which might have manufacturing defects that are not detectable by the Company’s test and monitoring procedures. Such reliability problems might adversely impact the reliability of the Company’s products and expose the Company to liability, unforeseen customer returns, and loss of reputation as well.

Manufacturing

Maxim uses its own wafer fabrication and, to a small extent, third-party silicon foundries to produce wafers. The majority of processed wafers are subjected to parametric and functional testing at the Company’s facilities. The broad range of products demanded by the mixed signal analog integrated circuit market requires multiple manufacturing process technologies. Many different process technologies are currently used for wafer fabrication of the Company’s products. Historically, wafer fabrication of analog integrated circuits has not required the state-of-the-art processing equipment necessary for the fabrication of advanced digital integrated circuits, although newer processes do utilize and require these state-of-the-art facilities and equipment. In addition, hybrid products are manufactured using a complex multichip technology featuring thin-film, thick-film, laser-trimmed resistors and other active or passive components. For the majority of these technologies, the Company relies on its fabrication facilities and, to a small extent, manufacturing subcontractors. The Company used six subcontract silicon foundries (five in fiscal year 2004) that represented approximately 4% (5% in fiscal year 2004) of wafer production in fiscal year 2005. None of these subcontractors is affiliated with the Company.

Most of the wafers produced in fiscal year 2005 were manufactured at one of the Company’s four wafer fabrication facilities noted in the table below:

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During fiscal year 2005, the Company continued its conversion to 8-inch wafers at its manufacturing facilities located at Dallas, Texas and San Jose, California. The conversion to 8-inch wafer manufacturing at the San Jose, California facility was completed at the end of fiscal year 2005 and the Company ceased production of 6-inch wafers at this facility. The conversion to 8-inch wafer manufacturing at the facility located in Dallas, Texas will continue throughout fiscal year 2006. The Company is converting a portion of its wafer manufacturing facility located at Beaverton, Oregon from six-inch to eight-inch production and will continue this conversion during fiscal year 2006.

In fiscal year 2004, the Company purchased from Philips Semiconductors a facility in San Antonio, Texas for $40 million in cash. The acquisition includes a 178.5-acre campus site with a submicron eight-inch wafer fabrication facility. The Company began wafer manufacturing operations at this facility during the fourth quarter of fiscal year 2004.

As is customary in the industry, the Company ships most of its processed wafers to foreign assembly subcontractors, located in the Philippines, Malaysia, Thailand, China, Taiwan, Singapore, and South Korea, where wafers are separated into individual integrated circuits and assembled into a variety of packages. After assembly has been completed, the majority of the assembled product is shipped to the Company’s test facilities located in Cavite, the Philippines, or Chonburi Province, Thailand. In fiscal year 2005, the Company performed approximately one-fourth of its wafer sort operations at its U.S. facilities, the remaining wafer sort operations were performed offshore at its facilities located in Cavite, the Philippines, and Chonburi Province, Thailand. These facilities have the capacity to electronically test and laser trim the majority of the Company’s wafers.

In the first quarter of fiscal year 2005, the Company relocated test operations from its leased site in Samutprakarn Province, Thailand to the new facility located in Chonburi Province, Thailand. The Company started wafer sort operations at this new facility in fiscal year 2005 and sorted approximately 15% of the Company’s wafers there in fiscal year 2005. The test operation in Chonburi Province, Thailand can be increased in size at the time the Company needs further test capacity as demand dictates. However, the increased capacity may not be timely or sufficient to meet the increased demand. Currently, the Company expects that the Company’s facilities located in Cavite, the Philippines and Chonburi Province, Thailand combined will have enough wafer sort, final test and shipping capacity to meet the Company’s fiscal year 2006 financial plan, subject to normal and also to unforeseen challenges in meeting product demand.

Once testing has been completed, finished product is currently shipped to the Company’s finished goods location at its test facility in Cavite, the Philippines. Finished product is either shipped directly from Cavite, the Philippines to customers worldwide or to other Company locations for sale to end customers or distributors.

The assembly of Dallas modules is currently being performed by one of the Company’s Philippine assembly subcontractors. The subcontractor utilizes the Company’s assembly equipment in its operation. The Company plans to purchase land and construct a module assembly facility in the Philippines in fiscal year 2006. Upon completion, the Company will begin assembling Dallas modules and will discontinue using the subcontractor. The Company has reached an agreement with its current module assembly subcontractor to continue assembling Dallas modules until construction has been completed and the new facility is ready to commence operations. All company owned equipment and materials will be transferred back to the Company as part of the transfer of Dallas module assembly from the subcontractor. In addition, the Company can at its discretion hire a majority of the existing workforce. Should the new facility, once operational, have unacceptable product yields, quality or reliability, the Company results of operations may be materially adversely affected.

In the past and as sometimes happens in the semiconductor industry, the Company has experienced disruptions in the supply of processed wafers due to quality problems or failure to achieve satisfactory electrical yields. If the foundries used by the Company were unwilling or the Company’s own internal wafer fabrication facilities were unable to produce adequate supplies of processed wafers conforming to the Company’s quality standards, the Company’s business and relationships with its customers could be adversely affected.

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Due to the relatively lengthy manufacturing cycle, the Company builds some of its inventory in advance of receiving orders from its customers. As a consequence of inaccuracies inherent in forecasting, inventory imbalances periodically occur that result in surplus amounts of some Company products and shortages of others. Such shortages can adversely affect customer relations and surpluses can result in larger-than-desired inventory levels, which can adversely affect the Company’s financial position. Excess inventory issues can also arise when customers cancel orders. Finished products and work in process for those orders may be unsaleable.

Sales and Marketing

In the United States and Canada, the Company sells its products through a direct sales and applications organization in eight regional sales offices, one sales representative organization and through its own and other unaffiliated distribution channels. As is customary in the industry, most domestic distributors are entitled to certain price rebates and product return privileges.

International sales are conducted by 23 Maxim sales offices, one sales representative organization and 28 distributors. The Company sells in both United States dollars and various foreign currencies. A majority of the Company’s international sales are billed and payable in United States dollars and are therefore not directly subject to currency exchange fluctuations. A portion of the Company’s sales from its United Kingdom, French, and German affiliates is denominated in the local currencies, primarily the Euro and British Pound. The majority of the sales to customers and distributors located in Japan are denominated in Yen. The Company enters into foreign currency forward contracts to protect the United States dollar value of its firm sales commitments and net monetary assets. Changes in the relative value of the dollar, however, may create pricing pressures for Maxim’s products. In addition, from time to time, various forms of protectionist trade legislation are proposed in the United States and certain foreign countries. A change in current tariff structures or other trade policies could adversely affect the Company’s foreign marketing strategies. In general, payment terms for foreign customers, distributors and others, which represent a majority of the Company’s accounts receivable at June 25, 2005, are longer than for U.S. customers. Certain major Japanese customers have payment terms that are generally well beyond payment terms extended to customers in other geographic locations. As is customary in the semiconductor industry, the Company’s domestic distributors may market products which compete with Maxim’s.

International sales accounted for approximately 74%, 74%, and 69% of net revenues in fiscal years 2005, 2004 and 2003, respectively. See Note 12 “Segment Information” of the Notes to Consolidated Financial Statements.

At June 25, 2005, the Company’s backlog was approximately $313 million, as compared to approximately $529 million at June 26, 2004. The Company includes in its backlog customer-released orders with firm schedules for shipment within the next 12 months. As is customary in the semiconductor industry, these orders may be canceled in most cases without penalty to the customers. In addition, the Company’s backlog includes orders from domestic distributors as to which revenues are not recognized until the products are sold by the distributors. Accordingly, the Company believes that its backlog at any time should not be used as a measure of future revenues. All of the backlog numbers have been adjusted for estimated future U.S. distribution ship and debit pricing adjustments.

The Company warrants its products to its customers generally for one year from the date of shipment, but in certain cases for longer periods. Warranty expense to date has been minimal. In certain cases, which have been more commonplace during fiscal year 2005, the Company warrants products to include significant liability beyond the cost of replacing the product.

Research and Development

The Company believes that research and development is critical to its future success. Objectives for the research and development function include definition, design, and layout of innovative proprietary products that meet customer needs consistent with their market timing; development of second-source products; design of parts for

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high yield and reliability; test development; and development of manufacturing processes and advanced packaging to support an expanding product line and customer requirements. It is difficult to predict a schedule for a new product. If a product is not developed on time or does not meet a customer’s specifications, the development can be a complete failure.

The research and development plans of the Company require qualified process development, test development Computer Aided Design (CAD) tools, Computer Aided Engineering (CAE) tools and design engineering talent. The Company does not always have CAD and CAE tools, the number of engineers, skill sets or experience required in these areas which may result in the Company not meeting its research and development goals.

Research and development expenses were approximately $328.2 million, $306.3 million, and $272.3 million in fiscal years 2005, 2004, and 2003, respectively.

Competition

The mixed signal analog integrated circuit industry is intensely competitive, and virtually all major semiconductor companies presently compete with, or conceivably could compete with, some segment of the Company’s business. Maxim’s competitors include, without limitation, Altera Corporation, Anadigics Inc., Analog Devices, Inc., Advanced Analogic Technologies, Inc., Applied Micro Circuits Corporation, Atmel Corp., Conexant Systems Inc., Exar Corp., Fairchild Semiconductor Corp., Freescale Semiconductor, Inc., Fujitsu Limited, Infineon Technologies AG, Intel Corporation and its subsidiaries, Intersil Corporation, Linear Technology Corporation, Lucent Technologies, Marvell Technology Group Ltd., Micrel Inc., Microchip Technology Inc., Mitsubishi Corporation, Mitsui & Co. Ltd., Monolithic Power Systems, Inc., Motorola Inc., National Semiconductor Corporation, O2Micro International Ltd., ON Semiconductor Corporation, Philips Electronics N.V., PMC-Sierra Inc., Qualcomm Inc., RF Micro Devices Inc., Renesas Technology Corp., Richtek Technology, Ricoh Company Ltd., Rohm Co. Ltd., Seiko Corporation, Semtech Corporation, STMicroelectronics N.V., Silicon Laboratories Inc., Siliconix Inc., Sipex Corporation, Skyworks Solutions, Inc., Texas Instruments Inc., Vitesse Semiconductor Corporation, Volterra Semiconductor Corporation, and others, including start-up companies. Some of Maxim’s competitors have substantially greater financial, manufacturing, and marketing resources than the Company, and some of Maxim’s competitors have greater technical resources. The Company believes it competes favorably with these corporations primarily on the basis of technical innovation, product definition, quality, price, and service. The Company may be excluded from equipment designs because it cannot provide a complete chip set as required by the customer. There can be no assurance that competitive factors will not adversely affect the Company’s future business.

Patents, Licenses, and Other Intellectual Property Rights

The Company relies upon both know-how and patents to develop and maintain its competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer the Company’s products or that the confidentiality agreements with employees, consultants, silicon foundries and other suppliers and vendors will be adequate to protect the Company’s interests. The Company’s products interface with other products, which may require licenses that the Company does not have.

The Company currently holds 410 U.S. patents and 56 foreign patents with expiration dates ranging from fiscal years 2006 to 2023. In addition, the Company has applied for 85 U.S. patents, some of which have corresponding patent applications in multiple foreign jurisdictions. It is the Company’s policy to seek patent protection for significant inventions that may be patented, though the Company may elect, in appropriate cases, not to seek patent protection even for significant inventions if other protection, such as maintaining the invention as a trade secret, is considered more advantageous. In addition, the Company has registered certain of its mask sets under the Semiconductor Chip Protection Act of 1984.

There can be no assurance that any patent will be issued on pending applications or that any patent issued will provide substantive protection for the technology or product covered by it. The Company believes that patent and mask work protection is of less significance in its business than experience, innovation, and management skill.

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Maxim has registered several of its trademarks with the U.S. Patent and Trademark Office and in foreign jurisdictions.

Due to the many technological developments and the technical complexity of the semiconductor industry, it is possible that certain of the Company’s designs or processes may involve infringement of patents or other intellectual property rights held by others. Often it is not possible to know if patents or pending patents exist when the Company designs circuits and that can create risk and liability later that jeopardize the Company’s revenues and profits. From time to time, the Company has received, and in the future may receive, notice of claims of infringement by its products on intellectual property rights of third parties. If any such infringements were to exist, the Company might be obligated to seek a license from the holder of the rights and might have liability for past infringement. In the past, it has been common in the semiconductor industry for patent holders to offer licenses on reasonable terms and rates. Although the practice of offering licenses appears to be generally continuing, in some situations, typically where the patent directly relates to a specific product or family of products, patent holders have refused to grant licenses. No assurance can be given that the Company will be able to obtain licenses as needed in all cases or that the terms of any license that may be offered will be acceptable to Maxim. In those circumstances where an acceptable license is not available, the Company would need either to change the process or product so that it no longer infringes or else stop manufacturing the product or products involved in the infringement.

Environmental Regulation

Various foreign and United States federal, state, and local government agencies impose a variety of environmental regulations on the storage, handling, use, discharge and disposal of certain chemicals, gases and other substances used or produced in the semiconductor manufacturing process. The Company’s facilities have been designed to comply with these regulations, and it believes that its activities are conducted in material compliance with such regulations. There can be no assurance, however, that interpretation and enforcement of current or future environmental regulations will not impose costly requirements upon the Company. Any failure of the Company to control adequately the storage, handling, use, discharge or disposal of regulated substances could result in fines, suspension of production, alteration of fabrication processes and legal liability, which may materially adversely impact the Company’s financial condition, results of operations or liquidity.

Increasing public attention has been focused on the environmental impact of electronic manufacturing operations and waste electronic equipment. While the Company to date has not experienced any materially adverse effects on its business from environmental regulations, there can be no assurance that changes in such regulations will not have a materially adverse effect on the Company’s financial condition or results of operations. Possible effects include, but are not limited to, making costly changes to manufacturing, waste discharge or disposal processes and purchasing higher cost equipment or materials.

In 2003, the European Union (EU) adopted mandatory restrictions on the use of certain hazardous substances including, but not limited to, cadmium, lead, and mercury. The deadline to comply with these restrictions is July 1, 2006. In addition, other countries have adopted voluntary programs or are considering legislation to restrict or prohibit the use of certain hazardous substances. We use lead and may use other hazardous substances in the manufacture of some of our products. In addition, in anticipation of current enacted or potential legislation, some of our customers are currently transitioning to purchasing products that do not contain these restricted hazardous materials. We are in the process of transitioning the manufacturing process of some of our products to eliminate the use of these hazardous substances. The transition has been completed for many of our products, and we intend to continue the transition to satisfy local regulatory requirements and the needs of our customers. If we do not meet the EU deadline or our customer’s deadline on the use of certain hazardous substances or the deadlines of other countries which may enact such legislation, it would preclude us from selling products containing these hazardous substances to customers in these affected locations, and our customers will find alternate suppliers. This could materially impact our results of operation and financial condition. Additionally, once the deadline for the mandatory restrictions on the use of certain hazardous materials has passed for the EU, or customers or other countries which enact such legislation, we may still have in our inventory products which

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contain these hazardous substances. Should we be unable to sell these products to locations or customers which do not have such restrictions, we would have to write such inventory off as obsolete. This could materially impact our results of operations.

Employees

The supply of skilled engineers required for Maxim’s business is limited, and competition for such personnel is intense. The Company’s growth also requires the hiring or training of additional middle-level managers. If the Company is unable to hire, retain, and motivate qualified technical and management personnel, its operations and financial results will be adversely affected.

None of the Company’s employees is subject to a collective bargaining agreement.

At June 25, 2005, the Company had 7,980 employees.

Trends, Risks and Uncertainties

An investment in the securities of Maxim involves certain risks. In evaluating the Company and its business, prospective investors should give careful consideration to the factors listed below, in addition to the information provided elsewhere in this Annual Report on Form 10-K, in the documents incorporated herein by reference and in other documents filed with or furnished to the Securities and Exchange Commission.

Factors Affecting Future Operating Results

The Company’s future operating results are difficult to predict and may be affected by a number of factors.

The semiconductor market has historically been cyclical and subject to significant economic downturns at various times. After a period of increasing demand that extended through fiscal year 2000, the semiconductor industry, including the portions in which the Company participates, experienced dramatically decreased demand. Although some of the causes of that decrease are known, including significant excess inventories in the hands of equipment manufacturers and other potential customers, it remains unclear what all the causes may have been. In fiscal year 2005, Maxim achieved increases in net revenues and net income of 16.2% and 28.8%, respectively over fiscal year 2004 levels. However, Maxim’s ability to achieve future revenue and net income growth depends on whether, and the extent to which, demand for its products increases and reflects real end-user demand and whether customer cancellations and delays of outstanding orders remain small.

Other key factors affecting the Company’s revenues and operating results that could cause actual results to differ materially from past or predicted results include the timing of new product announcements or introductions by the Company and its competitors, competitive pricing pressures, fluctuations in manufacturing yields and manufacturing efficiency, adequate availability of wafers and other materials and manufacturing capacity, changes in product mix, our ability to turn backlog into revenues and economic conditions in the United States and international markets. As a result of these and other factors, there can be no assurance that the Company will not experience material fluctuations in its future operating results on a quarterly or annual basis.

The Company’s ability to realize its quarterly revenue goals and projections is affected to a significant extent by its ability to match inventory and current production mix with the product mix required to fulfill orders on hand and orders received within a quarter for delivery in that quarter (referred to as “turns business”). This issue, which has been one of the distinguishing characteristics of the analog integrated circuit industry, results from the very large number of individual parts offered for sale and the very large number of customers, combined with limitations on Maxim’s and its customers’ ability to forecast orders accurately, and relatively lengthy manufacturing cycles. Because of this extreme complexity in the Company’s business, no assurance can be given that the Company will achieve a match of inventory on hand, production units, and shippable orders sufficient to realize quarterly or annual revenue and net income goals.

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In addition, in certain markets where end-user demand may be particularly volatile and difficult to predict, such as notebook computers, cellular handsets, and certain consumer products that require Maxim to manufacture product and have it available for shipment, even though the customer is unwilling to make a binding commitment to purchase all, or even any, of the product. At any given time, this situation could affect a portion of the Company’s backlog. As a result, in any quarterly fiscal period, the Company is subject to the risk of cancellation of orders leading to a sharp fall-off of sales and backlog. Further, those orders may be for products that meet the customer’s unique requirements so that those cancelled orders would, in addition, result in an inventory of unsaleable products, resulting in potential inventory write-offs. Because of lengthy manufacturing cycles for certain of the products subject to these uncertainties, the amount of unsaleable product could be substantial. The Company routinely estimates inventory reserves required for such product. Actual results may differ from these reserve estimates, and such differences may be material to Maxim’s financial condition, gross margins, and results of operations.

Dependence on New Products, Process Technologies and Market Penetration

The Company’s future success will continue to depend on its ability to introduce new products, enter new markets and to develop new process technologies. Semiconductor design and process technologies are subject to rapid technological change, requiring a high level of expenditures for research and development. Design and process development for the portions of the semiconductor market in which the Company participates are particularly challenging. The success of new product introductions is dependent on several factors, including proper new product selection, timely product introduction, achievement of acceptable production test times and yields, and market acceptance. From time to time, Maxim has not fully achieved its new product introduction and process development goals. There can be no assurance that the Company will successfully develop or implement new process technologies or that new products will be introduced on a timely basis or receive substantial market acceptance.

In addition, the Company’s growth is dependent on its continued ability to penetrate new markets where the Company has limited experience and competition is intense. There can be no assurance that the markets being served by the Company will grow (for example, older markets do saturate and decline); that the Company’s existing and new products will meet the requirements of such markets; that the Company’s products will achieve customer acceptance in such markets; that competitors will not force prices to an unacceptably low level or take market share from the Company; or that the Company can achieve or maintain profitability in these markets.

Manufacturing Risks

The fabrication of integrated circuits is a highly complex and precise process. Minute impurities, contaminants in the manufacturing environment, difficulties in the fabrication process, defects in the masks used in the wafer manufacturing process, manufacturing equipment failures, wafer breakage, or other factors can cause a substantial percentage of wafers to be rejected or numerous dice on each wafer to be nonfunctional. The Company has from time to time experienced reliability problems and lower-than-expected production yields, which have delayed product shipments and adversely affected gross margins. There can be no assurance that the Company will not experience a decrease in manufacturing yields or reliability or quality problems that could expose the Company to liability, product returns and product warranty claims.

The number of shippable dice per wafer for a given product is critical to the Company’s results of operations. To the extent the Company does not achieve acceptable manufacturing yields or experiences delays in its wafer fabrication, wafer sort, assembly or final test operations, its results of operations could be adversely affected. During periods of decreased demand, fixed wafer fabrication costs could have an adverse effect on the Company’s financial condition, gross margins, and results of operations.

The Company is continuing its ramp up of wafer manufacturing production at its wafer manufacturing facility located in San Antonio, Texas, which began in fiscal year 2005. The conversion to 8-inch wafer manufacturing at

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the facility located in Dallas, Texas will continue throughout fiscal year 2006. In addition, the Company is converting a portion of its wafer manufacturing facility located at Beaverton, Oregon to eight-inch wafer manufacturing and developing new processes, which are necessary for the successful entry into significantly large markets, in anticipation of increased customer demand for its products. Should the Company be unsuccessful in completing its planned production ramp up at the San Antonio, Texas, wafer manufacturing facility, or conversion to eight-inch wafer manufacturing at its wafer manufacturing facility located at Dallas, Texas and Beaverton, Oregon, or should customer demand fail to increase and the Company no longer needs the additional capacity, the Company’s financial position and results of operations could be adversely impacted.

The Company manufactures approximately 96% of its wafer production requirements internally. Given the nature of the Company’s products, it would be very difficult and costly to arrange for independent manufacturing facilities to supply such products. Any prolonged inability to utilize one of the Company’s manufacturing facilities as a result of fire, natural disaster, unavailability of electric power or otherwise, would have a material adverse effect on the Company’s results of operations and financial condition.

Competition

The Company experiences intense competition from a number of companies, some of which have significantly greater financial, manufacturing, and marketing resources than the Company and some of which have greater technical resources than the Company and have intellectual property rights to which the Company is not privy. To the extent that the Company’s proprietary products become more successful, competitors will offer second source products or functionally equivalent products for some of those products, which could erode the Company’s profit margins.

Dependence on Independent Distributors and Sales Representatives

A portion of the Company’s sales is realized through independent electronics distributors and a limited portion of the Company’s sales is realized through independent sales representatives that are not under the control of the Company. Dallas Semiconductor continues to derive a larger percentage of its sales through the distribution channel than the Maxim only business. These independent sales organizations generally represent product lines offered by several companies and thus could reduce their sales efforts applied to the Company’s products or terminate their representation of the Company. Payment terms for foreign distributors are substantially longer, either according to contract or by practice, than for U.S. customers. The Company generally requires foreign distributors to provide a letter of credit to the Company in an amount equal to the credit limit set for accounts receivable from such foreign distributors. The letter of credit provides for collection on accounts receivable from the foreign distributor should the foreign distributor default on their accounts receivable to the Company. The Company does not require letters of credit from any of its domestic distributors and is not protected against accounts receivable default or bankruptcy by these distributors. The inability to collect open accounts receivable could adversely affect the Company’s results of operations. Termination of a significant distributor, whether at the Company’s or the distributor’s initiative, could be disruptive to the Company’s current business. If the Company were unable to find suitable replacements, terminations by significant distributors or representatives could have a material adverse impact on the Company.

Dependence on Independent Foundries, Subcontractors, Thailand Test Facility and Philippines Test and Shipping Facility

Although the Company has an internal capability to fabricate most of its wafers, Maxim remains dependent on outside silicon foundries for a small portion of its wafer fabrication. None of the independent foundries currently used by Maxim is affiliated with the Company. As is typical in the semiconductor industry, from time to time, the Company has experienced disruptions in the supply of processed wafers from these foundries due to quality problems, failure to achieve satisfactory electrical yields, and capacity limitations. Procurement from foundries is done by purchase order and contracts. If these foundries are unable or unwilling to produce adequate supplies of

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processed wafers conforming to the Company’s quality standards or unable to provide timely delivery, the Company’s business and relationships with its customers for the limited quantities of products produced by these foundries would be adversely affected. Finding alternate sources of supply or initiating internal wafer processing for these products may not be economically feasible.

Maxim relies on assembly subcontractors located in the Philippines, Malaysia, Thailand, China, Singapore, Taiwan and South Korea to separate wafers into individual integrated circuits and to package them. None of the assembly subcontractors currently used by Maxim is affiliated with the Company. Reliability problems experienced by the Company’s assemblers could cause serious problems in delivery and quality resulting in potential product liability to the Company. In fiscal year 2005, the Company performed approximately one fourth of its wafer sort operations at its U.S. facilities, the remaining wafer sort operations were performed offshore at its facility located in Cavite, the Philippines, and Chonburi Province, Thailand. In the past, the Company’s assembly contractors in Malaysia, South Korea and the Philippines have been impacted by political disorders, labor disruptions, criminal activities and natural disasters. Although the Company has been affected by these problems in the past, none has materially affected the Company’s revenues or costs to date. However, similar problems in the future or more aggravated consequences of current problems, could affect deliveries to Maxim of assembled, tested product, possibly resulting in substantial delayed or lost sales and/or increased expense. The Company anticipates that its Thailand test facility will perform about one-fourth of the Company’s wafer sort and approximately 40% of the Company’s final testing for its products in fiscal year 2006, but would not provide sufficient capacity to make up for a significant disruption in the Philippines test facility.

The Company performs substantially all of its final testing at its facilities in the Philippines and Thailand. Given the nature of the Company’s test operations, it would be very difficult and costly to arrange for independent testing facilities to supply such test services. Any prolonged inability to utilize one of the Company’s testing facilities as a result of fire, natural disaster, political instability, unavailability of electric power or otherwise, would have a material adverse effect on the Company’s results of operations and financial condition.

As previously noted, once testing has been completed, finished product is currently shipped to the Company’s finished goods location at its test facility in Cavite, the Philippines. In fiscal year 2006, the Company plans to establish a shipping operation at its test facility in Chonburi Province, Thailand. Once established, finished product will be shipped directly from either Cavite, the Philippines or Chonburi Province, Thailand to customers worldwide or to other Company locations for sale to end customers or distributors. Should there be disruption for any reason to the shipping operations in Cavite, the Philippines or should the Company be unable to establish a shipping operation at its Thailand test facility, the Company might not be able to meet its revenue plan in the fiscal period impacted by the disruption. Failure to meet the revenue plan may materially adversely impact the Company’s results of operations.

Availability and Quality of Materials, Supplies, and Subcontract Services

The semiconductor industry has experienced a very large expansion of fabrication capacity and production worldwide over time. As a result of increasing demand from semiconductor and other manufacturers, availability of certain basic materials and supplies, such as chemicals, gases, polysilicon, silicon wafers, ultra-pure metals, lead frames and molding compounds, and of subcontract services, like epitaxial growth, ion implantation and assembly of integrated circuits into packages, have from time to time, over the past several years, been in short supply and could come into short supply again if overall industry demand continues to increase in the future. The Company purchases materials and supplies from many suppliers, some of which are sole-sourced. If these supplies are interrupted, the Company may not be able to find replacement supplies. In addition, from time to time natural disasters can lead to a shortage of some of the above materials due to disruption of the manufacturer’s production. Maxim devotes continuous efforts to maintain availability of all required materials, supplies, and subcontract services. However, Maxim does not have long-term agreements providing for all of these materials, supplies, and services, and shortages could occur as a result of capacity limitations or production constraints on suppliers that could have a materially adverse effect on Maxim’s ability to achieve its planned production.

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A number of Dallas Semiconductor products, including nonvolatile Static Random Access Memory products (SRAMs), real time clocks, and iB utton ^™ products use components such as static memory circuits, batteries, PC boards, and crystals that are purchased from third parties. The Company anticipates that from time to time supplies of these components may not be sufficient to meet all customer requested delivery dates for products containing the components. As a result of any such shortages, future sales and earnings from products using these components could be adversely affected. Additionally, significant fluctuations in the purchase price for these components could affect gross margins for the products involved. Suppliers could also discontinue the manufacture of such purchased products or could have quality problems that could affect the Company’s ability to meet customer commitments. Quality problems experienced by suppliers could be impossible to reproduce or detect in a controlled environment, or could not be detected by the Company’s quality control procedures. Should this occur, such defects may become part of the Company’s finished product which would ultimately be sold to customers. If such defects cause quality control problems in the manufacture of customers’ end products or cause direct or indirect damages to either the Company’s customers or the ultimate end user, the Company may be liable for increased production costs at its customers and both direct and indirect damages caused by the defective product. Such liability could have a material adverse impact on the Company’s results of operation and financial condition.

In addition, suppliers of semiconductor manufacturing equipment are sometimes unable to deliver test and/or fabrication equipment to a schedule or equipment performance specification that meets the Company’s requirements. Delays in delivery of equipment needed for growth could adversely affect the Company’s ability to achieve its manufacturing and revenue plans in the future.

Protection of Proprietary Information

The Company relies upon both know-how and patents to develop and maintain its competitive position. There can be no assurance that others will not develop or patent similar technology or reverse engineer the Company’s products or that the confidentiality agreements upon which the Company relies will be adequate to protect its interests. Moreover, the laws of foreign countries do not protect proprietary rights to the same extent as the United States, and we may encounter problems in protecting our proprietary rights in those foreign countries. Other companies have obtained patents covering a variety of semiconductor designs and processes, and the Company might be required to obtain licenses under some of these patents or be precluded from making and selling the infringing products, if such patents are found to be valid. There can be no assurance that Maxim would be able to obtain licenses, if required, upon commercially reasonable terms or at all.

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which the Company’s products are alleged to infringe third party intellectual property rights, including patents, registered trademarks, or copyrights. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification relating to intellectual property infringement claims. The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. To date, the Company has not paid or been required to defend any indemnification claims, and accordingly, the Company has not accrued any amounts for its indemnification obligations. However, there can be no assurances that the Company will not have any future financial exposure under those indemnification obligations.

Intellectual Property Litigation and Claims

The Company is subject to various legal proceedings and other similar claims that involve possible infringement of patent, other intellectual property rights of third parties or misappropriation of trade secrets. Maxim is currently a defendant in a lawsuit brought by Qualcomm, Inc. (Qualcomm) in which Qualcomm alleges that Maxim has willfully infringed Qualcomm patents as well as violated Qualcomm trade secrets. Qualcomm seeks unspecified actual and treble monetary damages and permanent injunctions against Maxim. While no assurance can be given in this regard, the Company does not believe that the ultimate outcome of the action will have a

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material adverse effect on the financial condition or liquidity of the Company. However, were Qualcomm to prevail in its claims against the Company, the Company’s operating results could be materially adversely affected. In the third quarter of fiscal year 2005, the Company and Linear Technology Corporation (LTC) settled their on-going patent litigation that was brought by LTC against Maxim and other unrelated parties concerning LTC’s United States Patent 5,481,178, which relates to control circuits and methods for maintaining high efficiencies over broad current ranges in a switching regulator circuit. The settlement agreement resolved all legal claims between the LTC and the Company and their respective subsidiaries, and it provided for the license of LTC’s United States Patent 5,481,178 to the Company for use in current and future products. Under the terms of the settlement agreement, the Company paid LTC $40 million in the fourth quarter of fiscal year 2005 and will pay LTC additional amounts in fiscal year 2006 through fiscal year 2013. In addition to the above, from time to time, the Company receives notices that its products or processes may be infringing the intellectual property rights of others.

If one or more of the Company’s products or processes were determined to infringe any such intellectual property rights of a third party, a court might enjoin the Company from further manufacture and/or sale of the affected products. The Company would then need to obtain a license from the holders of the rights and/or to reengineer the Company’s products or processes in such a way as to avoid the alleged infringement. In any of those cases, there can be no assurance that the Company would be able to obtain any necessary license on commercially reasonable terms acceptable to the Company or at all or that the Company would be able to reengineer its products or processes to avoid infringement. An adverse result in litigation arising from such a claim could involve an injunction to prevent the sales of a material portion of the Company’s products, a reduction or the elimination of the value of related inventories, and the assessment of a substantial monetary award for damages related to past sales which could have a material adverse effect on the Company’s result of operations and financial condition.

Insurance

The Company has insurance contracts with independent insurance companies that provide certain of its employees with health (medical and dental) benefits, worker’s compensation coverage, long term disability income coverage, life insurance coverage, and fiduciary insurance coverage for employee and Company funds invested under the Employee Retirement Income and Security Act. The Company is self-insured with respect to medical benefits for most of its domestic (United States) employees. The Company has insurance contracts with independent insurance companies that provide coverage related to certain property insurance, worker’s compensation insurance, and automobile insurance. In addition, the Company has insurance contracts that provide officer and director liability coverage for the Company’s officers and directors. Other than the specific areas mentioned above, the Company is self-insured as it relates to most of its risks and exposures. Based on management’s assessment and judgment, the Company has determined that it is more cost effective to self-insure these risks than to incur the insurance premium costs. The risks and exposures the Company self insures include, but are not limited to, fire, property and casualty, natural disaster, product defects, political risk, general liability, theft, counterfeits, patent infringement, and some employment practice matters. Should there be catastrophic loss from events such as fires, explosions, or earthquakes, among many other risks, or adverse court or similar decisions in any area in which the Company is self-insured, the Company’s financial condition, results of operations, and liquidity may be materially adversely affected.

Customer Supply Agreements

The Company enters into contracts with certain customers whereby the Company commits to supply quantities of specified parts at a predetermined scheduled delivery date. The number of such arrangements increased during fiscal year 2005 as this practice becomes more commonplace. Should the Company be unable to supply the customer with the specific part at the quantity and product quality desired at the scheduled delivery date, the customer may incur additional production costs. In addition, the customer may incur lost revenues due to a delay in receiving the parts necessary to have the end product ready for sale to its customers or due to product quality

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issues which may arise. Under the customer supply agreements, the Company may be liable for direct additional production costs or lost revenues. The Company tries to limit such liabilities. However, if products were not shipped on time or were quality deficient, the Company may be liable for resulting damages. Such liability, should it arise, may have a material adverse impact on the Company’s results of operation and financial condition.

Foreign Trade and Currency Exchange

Many of the materials and manufacturing steps in the Company’s products are supplied by foreign companies or by the Company’s operations abroad, such as its test operations in the Philippines and Thailand. Approximately 74% of the Company’s net revenues in fiscal year 2005 were from foreign customers. Accordingly, both manufacturing and sales of the Company’s products may be adversely affected by political or economic conditions abroad. In addition, various forms of protectionist trade legislation are routinely proposed in the United States and certain foreign countries. A change in current tariff structures or other trade policies could adversely affect the Company’s foreign manufacturing or marketing strategies. Currency exchange fluctuations could also increase the cost of components manufactured abroad and the cost of the Company’s products to foreign customers or decrease the costs of products from the Company’s foreign competitors.

The Company is subject to U.S. Customs and Export Regulations, including U.S. International Traffic and Arms Regulations and similar laws, which collectively control import, export, and sale of technologies by U.S. companies. Failure to comply with such regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against shipment of product, which could have a material adverse impact on the Company’s results of operations and financial condition.

Dependence on Key Personnel

The Company’s success depends to a significant extent upon the continued service of its President, John F. Gifford, its other executive officers, and key management and technical personnel, particularly its experienced engineers and business unit managers, and on its ability to continue to attract, retain, and motivate qualified personnel. The competition for such employees is intense. The loss of the services of Mr. Gifford or several of the Company’s executive officers could have a material adverse effect on the Company. In addition, there could be a material adverse effect on the Company should the turnover rates for engineers and other key personnel increase significantly or should the Company be unable to continue to attract qualified personnel.

The Company does not maintain any key person life insurance policies on any of its officers or employees.

Effect of New Accounting Pronouncements

The Company’s success depends to a significant extent upon the continued use of stock options as a compensation tool. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 123(R), “Share-Based Payment.” SFAS 123(R) replaces Statement of Financial Accounting Standards No. 123, “Accounting for Stock Issued to Employees,” and supersedes Accounting Principal Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires that compensation costs relating to share-based payment transactions be recognized in the consolidated financial statements. Compensation costs will be measured based on the fair value of the equity or liability instruments issued. The Company will be required to implement SFAS 123(R) in the first quarter of its fiscal year 2006. The Company has evaluated the impact of SFAS 123(R) on the Company’s financial condition and results of operations and believes the charge of SFAS 123(R) will reduce the Company’s quarterly earnings by $0.07 to $0.08 per share for the first quarter of fiscal year 2006.

The Company plans to seek stockholder approval for increases in the number of shares available for grant under its option plan as well as other amendments that may be adopted from time to time which require stockholder approval. If such proposals do not receive stockholder approval, the Company may not be able to grant stock

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options to employees at the same levels as in the past, which could have a material adverse effect on the Company’s ability to attract, retain and motivate qualified personnel and as a result, on the Company’s results of operation and financial condition. Additionally, if such proposals do not receive stockholder approval, the Company may need to increase cash compensation in order to attract, retain and motivate employees which could have a material adverse effect on the Company’s results of operations.

Long Range Plan

The Company has developed a long-range plan, which it has publicly announced. The Company strives to operate its business with the goal of achieving its long-range plan. However, it may not be possible for the Company to meet its long-range plan due to a variety of factors, including, but not limited to, economic and environment changes, the Company’s failure to perform or execute, and other risks identified in this Annual Report on Form 10-K and in other reports and documents that the Company files from time to time with the Securities and Exchange Commission. Therefore, the Company’s long-range plan should not be taken as a promise or a predictor of future results, but as a company goal or plan.