to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. The Company's effective tax rate for fiscal 1998 was only 6.1% due primarily to the reversal of a portion of the previously established valuation allowance and certain undistributed foreign earnings for which no U.S. taxes were provided. 

The Internal Revenue Service (IRS) has proposed federal income tax deficiencies for the years 1984 through 1991, and the Company has made certain prepayments thereon. The Company contested the proposed deficiencies by filing petitions with the United States Tax Court, and most of the issues in dispute have now been resolved. On June 30, 1997, the IRS proposed income tax adjustments for the years 1992 through 1994. Although a substantial number of issues for these years have been resolved, certain issues still remain in dispute and are being contested by the Company. Management believes that adequate provision has been made for any adjustments that may result from tax examinations. 

The Company anticipates its effective tax rate for fiscal 1999 will be between 10% and 15%. The foregoing statements are forward looking. The Company's actual results could differ because of several factors, including those set forth below in the subsection entitled "Factors That May Affect Future Results and Financial Condition." Additionally, the actual future tax rate will be significantly impacted by the amount of and jurisdiction in which the Company's foreign profits are earned. 

LIQUIDITY AND CAPITAL RESOURCES 

As of September 25, 1998, the Company had $2.3 billion in cash, cash equivalents, and short-term investments, an increase of $841 million or 58% over the same balances at the end of fiscal 1997. During fiscal 1998, the Company's primary source of cash was $775 million in cash flows from operating activities. Cash generated by operations was primarily from net income, declines in inventory and accounts receivable resulting from improved asset management, and by a decline in other assets. These were partially offset by cash expenditures of $107 million associated with the Company's restructuring program and a decrease in other current liabilities of $85 million. The Company's cash and cash equivalent balances as of September 25, 1998, and September 26, 1997, include $56 million and $165 million, respectively, pledged as collateral to support letters of credit. 

In addition to the net purchase of short-term investments of $590 million, net cash used by investing activities included $46 million for the purchase of property, plant, and equipment and $10 million paid for the acquisition of technology offset by proceeds of $89 million from the sale of fixed assets and proceeds of $24 million from the sale of ARM stock. The Company expects that the level of capital expenditures in 1999 will be comparable to 1998. 

Over the last three years, the Company's debt ratings have been downgraded to non-investment grade. As of March 27, 1998, the Company's senior and subordinated long-term debt ratings were B- and CCC, respectively, by Standard and Poor's (S&P) Rating Agency, and B3 and Caa2,