UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2006.

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission file number 000-06217

INTEL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		94-1672743
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2200 Mission College Boulevard, Santa Clara, California		95054-1549
(Address of principal executive offices)		(Zip Code)

(408) 765-8080
(Registrant’s telephone number, including area code)

 

N/A
(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

Shares outstanding of the Registrant’s common stock:

Class		Outstanding at October 27, 2006
Common stock, $0.001 par value		5,766 million

 

 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)

		Three Months Ended								Nine Months Ended
		Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,
(In Millions, Except Per Share Amounts)		2006				2005				2006				2005
Net revenue		$	8,739			$	9,960			$	25,688			$	28,625
Cost of sales			4,445				4,012				12,280				11,876
Gross margin			4,294				5,948				13,408				16,749
Research and development			1,389				1,341				4,447				3,783
Marketing, general and administrative			1,425				1,478				4,662				4,082
Restructuring			98				—				98				—
Amortization of acquisition-related intangibles and costs			8				29				37				103
Operating expenses			2,920				2,848				9,244				7,968
Operating income			1,374				3,100				4,164				8,781
Gains (losses) on equity securities, net			168				(2	)			207				(20	)
Interest and other, net			272				145				570				387
Income before taxes			1,814				3,243				4,941				9,148
Provision for taxes			513				1,248				1,398				2,937
Net income		$	1,301			$	1,995			$	3,543			$	6,211
Basic earnings per common share		$	0.23			$	0.33			$	0.61			$	1.01
Diluted earnings per common share		$	0.22			$	0.32			$	0.60			$	1.00
Cash dividends declared per common share		$	0.20			$	0.16			$	0.40			$	0.32
Weighted average common shares outstanding			5,769				6,062				5,808				6,139
Weighted average common shares outstanding, assuming dilution			5,832				6,144				5,885				6,211

See accompanying notes.

INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)

		Sept. 30,				Dec. 31,
(In Millions)		2006				2005
Assets
Current assets:
Cash and cash equivalents		$	4,469			$	7,324
Short-term investments			2,654				3,990
Trading assets			1,096				1,458
Accounts receivable, net			3,358				3,914
Inventories			4,477				3,126
Deferred tax assets			1,138				1,149
Other current assets			412				233
Total current assets			17,604				21,194
Property, plant and equipment, net of accumulated depreciation of $28,937 ($27,021 at December 31, 2005)			18,038				17,111
Marketable strategic equity securities			388				537
Other long-term investments			3,085				4,135
Goodwill			3,861				3,873
Other long-term assets			3,879				1,464
Total assets		$	46,855			$	48,314
Liabilities and stockholders’ equity
Current liabilities:
Short-term debt		$	196			$	313
Accounts payable			2,401				2,249
Accrued compensation and benefits			1,597				2,110
Accrued advertising			974				1,160
Deferred income on shipments to distributors			603				632
Other accrued liabilities			1,908				810
Income taxes payable			1,378				1,960
Total current liabilities			9,057				9,234
Long-term debt			2,060				2,106
Deferred tax liabilities			375				703
Other long-term liabilities			346				89
Contingencies
Stockholders’ equity:
Preferred stock			—				—
Common stock and capital in excess of par value, 5,758 shares issued and outstanding (5,919 at December 31, 2005)			7,348				6,245
Accumulated other comprehensive income			168				127
Retained earnings			27,501				29,810
Total stockholders’ equity			35,017				36,182
Total liabilities and stockholders’ equity		$	46,855			$	48,314

See accompanying notes.

INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

		Nine Months Ended
		Sept. 30,				Oct. 1,
(In Millions)		2006,				2005
Cash and cash equivalents, beginning of period		$	7,324			$	8,407
Cash flows provided by (used for) operating activities:
Net income			3,543				6,211
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			3,488				3,295
Share-based compensation			1,041				—
Restructuring			98				—
Excess tax benefit from share-based payment arrangements			(114	)			—
Amortization of intangibles and other acquisition-related costs			197				192
(Gains) losses on equity securities, net			(207	)			20
(Gains) on divestitures			(129	)			—
Net loss on retirements and impairments of property, plant and equipment			59				57
Deferred taxes			(343	)			(170	)
Tax benefit from employee equity incentive plans			—				284
Changes in assets and liabilities:
Trading assets			362				1,129
Accounts receivable			568				(748	)
Inventories			(1,263	)			(193	)
Accounts payable			152				131
Income taxes payable			(463	)			738
Other assets and liabilities			(571	)			148
Total adjustments			2,875				4,883
Net cash provided by operating activities			6,418				11,094
Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment			(4,663	)			(4,459	)
Acquisition, net of cash acquired			—				(103	)
Purchases of available-for-sale investments			(3,443	)			(5,426	)
Maturities and sales of available-for-sale investments			6,092				7,439
Purchases/investments in non-marketable equity securities			(1,377	)			(115	)
Net proceeds from divestitures			152				—
Other investing activities			(35	)			(126	)
Net cash used for investing activities			(3,274	)			(2,790	)
Cash flows provided by (used for) financing activities:
Increase (decrease) in short-term debt, net			(112	)			64
Excess tax benefit from share-based payment arrangements			114				—
Repayment of notes payable			(581	)			—
Proceeds from sales of shares through employee equity incentive plans			767				1,058
Repurchase and retirement of common stock			(4,443	)			(7,500	)
Payment of dividends to stockholders			(1,744	)			(1,476	)
Net cash used for financing activities			(5,999	)			(7,854	)
Net increase (decrease) in cash and cash equivalents			(2,855	)			450
Cash and cash equivalents, end of period		$	4,469			$	8,857
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest paid of $26 in 2006		$	7			$	6
Income taxes, net of refunds		$	2,213			$	2,084

See accompanying notes.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited

Note 1: Basis of Presentation

Intel Corporation has a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2006 is a 52-week fiscal year in which the first, second, and third quarters of 2006 were 13-week quarters. Fiscal year 2005 was a 53-week fiscal year in which the first quarter was a 14-week quarter and the second and third quarters were 13-week quarters.

The accompanying interim consolidated condensed financial statements of Intel have been prepared in conformity with United States (U.S.) generally accepted accounting principles, consistent in all material respects with those applied in the company’s Annual Report on Form 10-K for the year ended December 31, 2005, except for the adoption of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123(R)) as noted in “Note 3: Employee Equity Incentive Plans.” The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most significant, difficult, and subjective judgments include the valuation of non-marketable equity securities; the recognition and measurement of current and deferred income tax assets and liabilities; the assessment of recoverability of long-lived assets; the valuation of inventory; and the valuation and recognition of share-based compensation. The actual results experienced by the company may differ from management’s estimates.

The interim financial information is unaudited, but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. The interim consolidated condensed financial statements should be read in connection with the consolidated financial statements in the company’s Annual Report on Form 10-K for the year ended December 31, 2005. Certain amounts reported in previous periods have been reclassified to conform to the current presentation.

Note 2: Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—An Amendment of FASB Statements No. 87, 88, 106, and 132R” (SFAS No. 158). SFAS No. 158 requires that the funded status of defined benefit postretirement plans be recognized on the company’s balance sheet, and changes in the funded status be reflected in comprehensive income, effective fiscal years ending after December 15, 2006. SFAS No. 158 also requires the measurement date of the plan’s funded status to be the same as the company’s fiscal year-end. Although this requirement is not required until fiscal 2008, the company is planning to early adopt this provision for fiscal 2006. If the company had applied the provisions of SFAS No. 158 to the consolidated balance sheet for fiscal 2005, approximately $100 million of net liabilities would have been recognized. The company will be adopting all requirements of SFAS No. 158 for the 2006 fiscal year, ending December 30, 2006.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value measurements. The measurement and disclosure requirements are effective for the company beginning in the first quarter of fiscal 2008. The company is currently evaluating whether SFAS No. 157 will result in a change to its fair value measurements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The provisions are effective for the company beginning in the first quarter of fiscal 2007. The company is currently evaluating the impact this statement will have on its consolidated financial statements.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43” (EITF 06-2). EITF 06-2 requires companies to accrue the cost of such compensated absences over the requisite service period. The company currently accrues the cost of compensated absences for sabbatical programs when the eligible employee completes the requisite service period, which is seven years of service. The company is required to apply the provisions of EITF 06-2 at the beginning of fiscal 2007. EITF 06-2 allows for adoption through retrospective application to all prior periods or through a cumulative effect adjustment to retained earnings. The company is currently evaluating the financial impact of this guidance and the method of adoption which will be used.

Note 3: Employee Equity Incentive Plans

In May 2006, stockholder approval was obtained for the 2006 Equity Incentive Plan (the 2006 Plan). Under the 2006 Plan, 175 million shares of common stock were made available for issuance as equity awards to employees and non-employee directors through June 2008, of which a maximum of 80 million shares can be awarded as non-vested shares (restricted stock) or non-vested share units (restricted stock units). The 2006 Plan allows for time-based, performance-based, and market-based vesting for equity incentive awards. The 2004 Equity Incentive Plan (the 2004 Plan) was terminated upon stockholder approval of the 2006 Plan. Shares previously authorized for issuance under the 2004 Plan are no longer available for future grants, although options previously granted under the 2004 Plan remain outstanding. As of September 30, 2006, 174 million shares remain available for future grant under the 2006 Plan. Intel may assume the equity incentive plans and the outstanding equity awards of certain acquired companies. Once assumed, Intel does not grant additional stock under these plans.

Options granted by the company under the 2006 Plan will generally expire seven years from the grant date. Options granted to employees will generally vest annually over a four-year period from the date of grant. Options granted prior to the third quarter of 2004 under the company’s previous equity incentive plans generally expire ten years from the grant date. Under the 2006 Plan, certain grants to key officers and senior level employees generally expire ten years from the grant date and vest five years from the date of grant. Options granted to key officers and senior level employees prior to the second quarter of 2006 generally expire after ten years and have delayed vesting, generally beginning four to six years from the date of grant.

The company began issuing restricted stock units in the second quarter of 2006. Restricted stock units granted by the company generally vest annually over a four-year period from the grant date. Prior to vesting, restricted stock units do not have dividend equivalent rights, do not have voting rights, and the shares underlying the restricted stock units are not considered issued and outstanding. Shares are issued on the date the restricted stock units vest. The majority of shares issued are net of the statutory withholding requirements that are paid by Intel on behalf of its employees. As a result, the actual number of shares issued will be less than the number of restricted stock units granted. Furthermore, the liability for most of the withholding amounts to be paid by Intel will be recorded as a reduction in additional paid-in capital when the restricted stock units vest.

In May 2006, stockholder approval was obtained for the 2006 Stock Purchase Plan under which eligible employees may purchase shares of Intel’s common stock at 85% of the market price at specific, predetermined dates. Under the 2006 Stock Purchase Plan, 240 million shares of common stock were made available for issuance beginning in the third quarter of 2006 through August 2011. The 1976 Stock Participation Plan and all remaining shares available for issuance thereunder were cancelled as of its expiration in August 2006.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Effective January 1, 2006, the company adopted the provisions of SFAS No. 123(R). SFAS No. 123(R) requires employee equity awards to be accounted for under the fair value method. Accordingly, share-based compensation is measured at grant date, based on the fair value of the award. Prior to January 1, 2006, the company accounted for awards granted under its equity incentive plans under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations, and provided the required pro forma disclosures prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), as amended. The exercise price of options is equal to the market price of Intel common stock (defined as the average of the high and low trading prices reported by The NASDAQ Stock Market*) on the date of grant. Additionally, the stock purchase plan was deemed non-compensatory under APB 25. Accordingly, no share-based compensation, other than insignificant amounts of acquisition-related compensation, was recognized in the consolidated financial statements prior to 2006.

Under the modified prospective method of adoption for SFAS No. 123(R), the compensation cost recognized by the company beginning in 2006 includes (a) compensation cost for all equity incentive awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all equity incentive awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The company uses the straight-line attribution method to recognize share-based compensation costs over the service period of the award. Upon exercise, cancellation, forfeiture, or expiration of stock options, or upon vesting or forfeiture of restricted stock units, deferred tax assets for options and restricted stock units with multiple vesting dates are eliminated for each vesting period on a first-in, first-out basis as if each vesting period was a separate award. To calculate the excess tax benefits available for use in offsetting future tax shortfalls as of the date of adoption, the company followed the alternative transition method discussed in FASB Staff Position No. 123(R)-3.

The following table summarizes the effects of share-based compensation resulting from the application of SFAS No. 123(R):

		Three Months Ended								Nine Months Ended
		Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,
(In Millions, Except Per Share Amounts)		2006				2005				2006				2005
Cost of sales		$	103			$	—			$	255			$	—
Research and development			107				—				368				—
Marketing, general and administrative			125				—				418				—
Share-based compensation effects in income before taxes			335				—				1,041				—
Income taxes			(87	)			—				(290	)			—
Net share-based compensation effects in net income		$	248			$	—			$	751			$	—
Share-based compensation effects on basic earnings per common share		$	0.04			$	—			$	0.13			$	—
Share-based compensation effects on diluted earnings per common share		$	0.05			$	—			$	0.13			$	—
Share-based compensation effects on cash flow from operations		$	(8	)		$	—			$	(114	)		$	—
Share-based compensation effects on cash flow from financing activities		$	8			$	—			$	114			$	—

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

In accordance with SFAS No. 123(R), the company adjusts share-based compensation on a quarterly basis for changes to the estimate of expected equity award forfeitures based on a review of recent forfeiture activity and expected future employee turnover. The effect of adjusting the forfeiture rate for all expense amortization after January 1, 2006 is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments in the third quarter and the first nine months of 2006 was insignificant.

The total share-based compensation cost capitalized as part of inventory as of September 30, 2006 was $88 million. The amount that the company would have capitalized to inventory as of December 31, 2005, if it had applied the provisions of SFAS No. 123(R) retrospectively, was $66 million. Under the provisions of SFAS No. 123(R), $66 million has been recorded as a credit to common stock and capital in excess of par value. During the third quarter of 2006, the tax benefit realized for the tax deduction from option exercises and other awards totaled $15 million ($124 million for the first nine months of 2006).

Pro forma information required under SFAS No. 123(R) for periods prior to fiscal 2006, as if the company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the company’s equity incentive plans and rights to acquire stock granted under the company’s stock purchase plan, was as follows:

		Three Months				Nine Months
		Ended				Ended
(In Million, Except Per Share Amounts)		Oct. 1, 2005				Oct. 1, 2005
Net income, as reported		$	1,995			$	6,211
Less: total share-based employee compensation determined under the fair value method for all awards, net of tax			291				917
Pro forma net income		$	1,704			$	5,294
Reported basic earnings per common share		$	0.33			$	1.01
Pro forma basic earnings per common share		$	0.28			$	0.86
Reported diluted earnings per common share		$	0.32			$	1.00
Pro forma diluted earnings per common share		$	0.28			$	0.85

Share-based compensation recognized in 2006 as a result of the adoption of SFAS No. 123(R) as well as pro forma disclosures according to the original provisions of SFAS No. 123 for periods prior to the adoption of SFAS No. 123(R) use the Black-Scholes option pricing model for estimating the fair value of options granted under the company’s equity incentive plans and rights to acquire stock granted under the company’s stock purchase plan. The weighted average estimated values of employee stock option grants and rights granted under the stock purchase plan, as well as the weighted average assumptions that were used in calculating such values during the third quarter of 2006 and 2005, and the first nine months of 2006 and 2005, were based on estimates at the date of grant as follows:

		Stock Options																Stock Purchase Plan
		Three Months Ended								Nine Months Ended								Three Months Ended								Nine Months Ended
		Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,
		2006				20051				2006				20051				2006				20051				2006				20051
Estimated values		$	4.80			$	6.31			$	5.14			$	6.02			$	4.25			$	5.84			$	4.56			$	5.78
Expected life (in years)			4.5				4.5				4.7				4.8				.5				.5				.5				.5
Risk free interest rate			5.0	%			4.1	%			4.9	%			3.9	%			5.2	%			3.7	%			5.0	%			3.2	%
Volatility			32	%			23	%			27	%			26	%			30	%			22	%			29	%			23	%
Dividend yield			2.3	%			1.2	%			2.0	%			1.4	%			2.2	%			1.2	%			2.1	%			1.3	%

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

For all periods presented, expected volatility is based on implied volatility, as management determined that implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The expected life of options granted is based on the simplified calculation of expected life, described in the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin 107 due to changes in the vesting terms and contractual life of current option grants compared to the company’s historical grants.

Options outstanding that have vested and are expected to vest as of September 30, 2006 are as follows:

										Weighted
										Average
						Weighted				Remaining				Aggregate
		Number of				Average				Contractual				Intrinsic
(Shares and Intrinsic Value in Millions)		Shares				Exercise Price				Term				Value1
Vested			562.0			$	28.96				4.2			$	352
Expected to vest			279.5			$	23.36				6.1			$	131
Total			841.5			$	27.10				4.8			$	483

Options outstanding that are expected to vest are net of estimated future option forfeitures in accordance with the provisions of SFAS No. 123(R). Options with a fair value of $71 million completed vesting during the third quarter of 2006 and options with a fair value of $1.4 billion completed vesting during the first nine months of 2006. As of September 30, 2006, there was $1.3 billion of unrecognized compensation costs related to stock options granted under the company’s equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.1 years.

Additional information with respect to outstanding stock option activity is as follows:

						Weighted				Aggregate
		Number of				Average				Intrinsic
(In Millions, Except Per Share Amounts)		Shares				Exercise Price				Value1
December 31, 2005			899.9			$	26.71
Grants			43.8			$	19.87
Exercises			(32.4	)		$	10.27			$	322
Cancellations and forfeitures			(34.3	)		$	27.58
September 30, 2006			877.0			$	26.94
Options exercisable at:
December 31, 2005			469.2			$	29.16
September 30, 2006			562.0			$	28.96

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Share-based compensation expense related to restricted stock unit awards is calculated based on the market price of Intel common stock on the date of grant, reduced by the present value of dividends expected to be paid on Intel common stock prior to vesting of the restricted stock unit. The weighted average estimated values of restricted stock unit grants, as well as the weighted average assumptions that were used in calculating the fair value during the third quarter and first nine months of 2006, were based on estimates at the date of grant as follows:

		Restricted Stock Units
		Three Months Ended				Nine Months Ended
		Sept. 30, 2006				Sept. 30, 2006
Estimated values		$	16.27			$	18.58
Risk free interest rate			5.1	%			4.9	%
Dividend yield			2.3	%			2.0	%

Information with respect to restricted stock units as of September 30, 2006 is as follows:

						Weighted
		Number				Average				Aggregate
		of				Grant-Date				Intrinsic
(In Millions, Except Per Share Amounts)		Shares				Fair Value				Value1
Outstanding at December 31, 2005			—			$	—
Granted			26.9			$	18.58
Vested			—			$	—			$	—
Forfeited			(1.1	)		$	18.59
Outstanding at September 30, 2006			25.8			$	18.58

As of September 30, 2006, there was approximately $360 million of unrecognized compensation costs related to restricted stock units granted under the company’s equity incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.8 years.

The 1976 Stock Participation Plan and all remaining shares available for issuance were cancelled as of its expiration in August 2006. Employees purchased 26.0 million shares for $436 million in the first nine months of 2006 (19.6 million shares for $387 million in the first nine months of 2005) under the 1976 Stock Participation Plan. Under the 2006 Stock Purchase Plan, 240 million shares are available for issuance. The first scheduled purchase under the 2006 Stock Purchase Plan is in the first quarter of 2007.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Note 4: Earnings Per Share

The computation of the company’s basic and diluted earnings per common share is as follows:

		Three Months Ended								Nine Months Ended
		Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,
(In Millions, Except Per Share Amounts)		2006				2005				2006				2005
Net income		$	1,301			$	1,995			$	3,543			$	6,211
Weighted average common shares outstanding			5,769				6,062				5,808				6,139
Dilutive effect of employee equity incentive plans			12				82				26				72
Dilutive effect of convertible debt			51				—				51				—
Weighted average common shares outstanding, assuming dilution			5,832				6,144				5,885				6,211
Basic earnings per common share		$	0.23			$	0.33			$	0.61			$	1.01
Diluted earnings per common share		$	0.22			$	0.32			$	0.60			$	1.00

Basic earnings per common share is computed using net income and the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed using net income and the weighted average number of common shares outstanding, assuming dilution. Weighted average common shares outstanding, assuming dilution includes potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of stock options, assumed vesting of restricted stock units, and assumed issuance of stock under the stock purchase plan using the treasury stock method, as well as the assumed conversion of debt using the if-converted method.

For the third quarter of 2006, 826 million of the company’s outstanding stock options (727 million for the first nine months of 2006) were excluded from the calculation of diluted earnings per common share because the exercise prices of these stock options were greater than or equal to the average market value of the common shares (314 million for the third quarter of 2005 and 381 million for the first nine months of 2005). These options could be included in the calculation in the future if the average market value of the common shares increases and is greater than the exercise price of these options.

Note 5: Common Stock Repurchase Program

During the third quarter of 2006, the company repurchased 26.6 million shares of common stock at a cost of $500 million (93.6 million shares at a cost of $2.5 billion during the third quarter of 2005). During the first nine months of 2006, the company repurchased 219.4 million shares of common stock at a cost of $4.4 billion (300.4 million shares at a cost of $7.5 billion during the first nine months of 2005). Since the repurchase program began in 1990, the company has repurchased and retired 2.8 billion shares at a cost of approximately $57 billion. As of September 30, 2006, $17.4 billion remained available to make repurchases under the existing repurchase authorization.

Note 6: Trading Assets

Trading assets at fair value at the end of each period were as follows:

		Sept. 30,				Dec. 31,
(In Millions)		2006				2005
Debt instruments		$	677			$	1,095
Equity securities offsetting deferred compensation			419				363
Total		$	1,096			$	1,458

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Note 7: Non-Marketable Equity Securities

During the third quarter of 2006, Intel paid $600 million in cash for an investment in Clearwire Corporation. Clearwire is a provider of wireless high-speed internet access and internet phone service. This investment is part of Intel’s strategy to support the development and deployment of WiMAX networks. Clearwire is a variable interest entity as defined by FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (FIN 46). Intel’s maximum exposure to loss as a result of its investment in Clearwire is approximately $620 million as of September 30, 2006, which represents Intel’s total investment in Clearwire, and includes our previous investment of approximately $20 million. Intel’s investment in Clearwire is classified in other long-term assets on the balance sheet. The company has determined that Intel is not the primary beneficiary of Clearwire. Intel accounts for its investment in Clearwire, which represents an ownership interest of approximately 25%, using the equity method of accounting and its proportionate share of income or loss will be recorded on a one quarter lag within interest and other, net on the income statement. As such, during the third quarter of 2006, there was no equity income or loss recognized by Intel related to Clearwire.

Note 8: Inventories

Inventory cost is computed on a currently adjusted standard basis (which approximates actual cost on an average or first-in, first-out basis). The valuation of inventory requires the company to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires the company to estimate the future demand for its products. During the second quarter of 2006, the company completed a demand forecast accuracy analysis. As a result, the demand horizon now includes additional weeks of the demand forecast period for certain products compared to prior periods, and continues to include a review of product specific facts and circumstances. This change did not have a significant impact on the 2006 second quarter gross margin. Inventories at the end of each period were as follows:

		Sept. 30,				Dec. 31,
(In Millions)		2006				2005
Raw materials		$	535			$	409
Work in process			2,265				1,662
Finished goods			1,677				1,055
Total		$	4,477			$	3,126

Note 9: Gains (Losses) on Equity Securities, Net

Net gains on investments in equity securities and certain equity derivatives were $168 million for the third quarter of 2006 and $207 million for the first nine months of 2006. The net gains in the third quarter of 2006 included a gain of $103 million from the sale of a portion of the company’s investment in Micron Technology, Inc., which was sold for $275 million. Other net gains on equity securities and certain equity derivatives were $79 million during the third quarter of 2006 and $151 million during the first nine months of 2006. The company also recognized impairments on equity investments of $14 million for the third quarter of 2006 and $47 million for the first nine months of 2006. Net losses on investments in equity securities and certain equity derivatives were $2 million for the third quarter of 2005 and $20 million for the first nine months of 2005. The net loss included impairments of $20 million for the third quarter of 2005 and $168 million for the first nine months of 2005. Impairments of equity securities in the first nine months of 2005 primarily related to a $105 million impairment charge on the company’s investment in Micron to reflect the difference between the cost basis of the investment and the price of Micron’s stock at the end of the second quarter of 2005. Impairments were partially offset by other net gains on equity securities and certain equity derivatives of $18 million for the third quarter of 2005 and $148 million for the first nine months of 2005.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Note 10: Interest and Other, Net

Interest and other, net included:

		Three Months Ended								Nine Months Ended
		Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,
(In Millions)		2006				2005				2006				2005
Interest income		$	147			$	145			$	467			$	399
Interest expense			(6	)			(6	)			(20	)			(13	)
Other, net			131				6				123				1
Total		$	272			$	145			$	570			$	387

During the third quarter of 2006, the company realized gains of $129 million for the sale of two completed divestitures, included within “other, net,” in the table above. See “Note 13: Divestitures,” for further information.

Note 11: Restructuring

Intel is undertaking a restructuring plan designed to improve operational efficiency and results. In the third quarter of 2006, management approved several actions related to this plan that were recommended by the company’s structure and efficiency taskforce. A portion of these activities involve future cost savings or other actions which do not result in restructuring charges, such as better utilization of assets, reduced spending, and organizational efficiencies. The efficiency program includes headcount targets for various groups within the company, and we expect these targets to be met through ongoing employee attrition, business divestitures, and employee terminations as detailed below.

During the third quarter of 2006, Intel incurred restructuring charges related to employee severance and benefit arrangements for approximately 1,600 employees. There were no facility-related or other exit charges recorded in the third quarter. The following table summarizes the employee severance and benefit related restructuring activity for the third quarter:

		Employee Severance
(In Millions)		and Benefit
Accrued restructuring balance as of July 1, 2006		$	—
Additional accruals			98
Adjustments			—
Cash payments			(65	)
Non-cash settlements			—
Accrued restructuring balance as of September 30, 2006		$	33

The charges above have been reflected separately as restructuring in the consolidated condensed statements of income. All amounts have been recorded within the “all other” operating segment. The largest portion of these employee terminations occurred within manufacturing. The remaining accrual as of September 30, 2006 relates to severance benefits which will be paid within the next 12 months. As such, the restructuring accrual is recorded as a current liability within accrued compensation and benefits in the consolidated condensed balance sheet.

Intel expects to record additional employee severance and benefit charges of approximately $125 million in the fourth quarter of 2006 and $130 million in 2007. The number of employees that will be terminated in conjunction with these future charges is expected to total approximately 6,900, which does not include terminations related to future attrition and impacts of future divestitures. The majority of these future charges will be recorded within the next 12 months when the accrual criteria have been met. In addition, we may incur charges in the future under this restructuring for facility-related or other exit activities.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Finally, in conjunction with the efficiency program, Intel completed the divestiture of two business units in the third quarter, and the divestiture of a third business unit is currently pending. See “Note 13: Divestitures” for further details.

Note 12: Borrowings

In December 2005, the company issued $1.6 billion of 2.95% junior subordinated convertible debentures (the debentures) due 2035. The debentures are initially convertible, subject to certain conditions, into shares of the company’s common stock at a conversion rate of 31.7162 shares of common stock per $1,000 principal amount of debentures, representing an initial effective conversion price of approximately $31.53 per share of common stock. Holders may surrender the debentures for conversion at any time. The conversion rate will be subject to adjustment for certain events outlined in the indenture governing the debentures, but will not be adjusted for accrued interest. In addition, the conversion rate will increase for a holder who elects to convert the debentures in connection with certain share exchanges, mergers, or consolidations involving Intel as described in the indenture governing the debentures. The debentures, which pay a fixed rate of interest semiannually, have a contingent interest component that will require the company to pay interest based on certain thresholds and for certain events commencing on December 15, 2010, as outlined in the indenture. The maximum amount of contingent interest that will accrue is 0.40% per year and the fair value of the related embedded derivative was not significant at September 30, 2006 and December 31, 2005.

The company may settle any conversions of the debentures in cash or in shares of the company’s common stock at the company’s option. On or after December 15, 2012, the company may redeem all or part of the debentures for the principal amount plus any accrued and unpaid interest if the closing price of the company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading-day period prior to the date on which the company provides notice of redemption. If certain events occur in the future, the indenture provides that each holder of the debentures may, for a pre-defined period of time, require the company to repurchase the holder’s debentures for the principal amount plus any accrued and unpaid interest. The company may pay the repurchase price in cash or in shares of the company’s common stock. The debentures are subordinated in right of payment to the company’s existing and future senior debt and to the other liabilities of the company’s subsidiaries. The company concluded that the debentures are not conventional convertible debt instruments. In addition, the company has concluded that the embedded conversion option qualifies as a derivative under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Furthermore, in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the company has concluded that the embedded conversion option would be classified in stockholders’ equity if it were a freestanding instrument. As such, the embedded conversion option is not accounted for separately as a derivative.

The company has Euro borrowings, which were made in connection with the financing of manufacturing facilities and equipment in Ireland. The company has invested the proceeds in Euro-denominated loan participation notes of similar maturity to reduce currency and interest rate exposures. During the first nine months of 2006, the company retired approximately $70 million of the Euro borrowings ($230 million for the first nine months of 2005) prior to their maturity dates through the simultaneous settlement of an equivalent amount of investments in loan participation notes. Subsequent to the third quarter of 2006, the company retired approximately $230 million of Euro borrowings.

Note 13: Divestitures

During the third quarter of 2006, the company completed two divestitures and a third divestiture is currently pending.

In September 2006, the company completed the divestiture of its media and signaling business that was included in the Digital Enterprise Group operating segment. The company received $75 million in cash consideration. Intel also entered into a transition service agreement whereby Intel will provide operational support and manufacturing to the acquiring company for a limited time. Approximately 375 employees of Intel’s media and signaling business are expected to become employees of the acquiring company during the term of the transition service agreement. As a result of this divestiture, the company recorded a reduction of goodwill for $4 million. Additionally, a net gain of $52 million was recorded within interest and other, net.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

In September 2006, the company completed the divestiture of certain of the product lines and associated assets of its optical networking components business that was included in the Digital Enterprise Group operating segment. Consideration for the divestiture was approximately $115 million, including $86 million in cash, and shares of the acquiring company with an estimated value of $29 million. Intel entered into an agreement whereby Intel will provide certain manufacturing and transition services to the acquiring company for a limited time. Approximately 55 employees of Intel’s optical networking components business are expected to become employees of the acquiring company during the term of the transition service agreement. As a result of this divestiture, the company recorded a reduction of goodwill for $6 million. Additionally, a net gain of $77 million was recorded within interest and other, net.

In June 2006, Marvell Technology Group, Ltd. agreed to buy certain assets of the communications and application processor business of Intel for a cash purchase price of $600 million, plus the assumption of certain liabilities. Intel presently expects this transaction to close in the fourth quarter of 2006, subject to customary closing conditions. The results of the communications and application processor business are included in the Mobility Group operating segment. Intel and Marvell entered into an agreement whereby Intel will provide certain manufacturing and transition services to Marvell for a limited time. The communications and application processor business includes approximately 1,400 employees involved in a variety of functions, including engineering, product testing/validation, operations, and marketing. It is expected the majority of these employees will become employees of Marvell at closing. As a result of this agreement, certain assets and liabilities of this business were classified as held for sale as of July 1, 2006 and are included within other current assets and other accrued liabilities, respectively, on the balance sheet. The amount of assets and liabilities recorded as held for sale is not significant.

Note 14: Goodwill

Goodwill by operating segment was as follows:

		Digital
		Enterprise				Mobility
(In Millions)		Group				Group				All Other				Total
December 31, 2005		$	3,400			$	250			$	223			$	3,873
Divestitures			(10	)			—				—				(10	)
Other			—				(2	)			—				(2	)
September 30, 2006		$	3,390			$	248			$	223			$	3,861

Note 15: Identified Intangible Assets

Identified intangible assets are classified within other long-term assets on the balance sheet and consisted of the following as of September 30, 2006:

		Gross				Accumulated
(In Millions)		Assets				Amortization				Net
Intellectual property assets		$	1,103			$	(391	)		$	712
Acquisition-related developed technology			90				(87	)			3
Other intangible assets			349				(56	)			293
Total identified intangible assets		$	1,542			$	(534	)		$	1,008

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Identified intangible assets as of December 31, 2005 consisted of the following:

		Gross				Accumulated
(In Millions)		Assets				Amortization				Net
Intellectual property assets		$	976			$	(382	)		$	594
Acquisition-related developed technology			300				(275	)			25
Other intangible assets			112				(77	)			35
Total identified intangible assets		$	1,388			$	(734	)		$	654

During the first nine months of 2006, the company acquired intellectual property assets for $253 million with a weighted average life of 5 years. During the first nine months of 2006, there were $300 million in additions to other intangible assets with a weighted average life of 4 years.

All of the company’s identified intangible assets are subject to amortization. Amortization of intellectual property assets was $43 million for the third quarter of 2006 and $135 million for first nine months of 2006 ($30 million for the third quarter of 2005 and $89 million for the first nine months of 2005). The amortization of an intellectual property assets is generally included in either cost of sales or research and development on the income statement. Amortization of acquisition-related developed technology was $2 million for the third quarter of 2006 and $19 million for the first nine months of 2006 ($20 million for the third quarter of 2005 and $73 million for the first nine months of 2005) and is included in amortization of acquisition-related intangibles and costs on the income statement. Amortization of other intangible assets was $18 million for the third quarter of 2006 and $42 million for the first nine months of 2006 ($9 million for the third quarter of 2005 and $25 million for the first nine months of 2005). The amortization of other intangible assets is recorded as either amortization of acquisition-related intangibles and costs or as a reduction of revenue on the income statement.

Based on identified intangible assets recorded at September 30, 2006, and assuming no subsequent impairment of the underlying assets, the amortization expense for each period is expected to be as follows:

(In Millions)		20061				2007				2008				2009				2010
Intellectual property assets		$	43			$	150			$	140			$	113			$	101
Acquisition-related developed technology		$	1			$	1			$	1			$	—			$	—
Other intangible assets		$	16			$	80			$	86			$	111			$	—

Note 16: Comprehensive Income

The components of comprehensive income, net of tax, were as follows:

		Three Months Ended								Nine Months Ended
		Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,
(In Millions)		2006				2005				2006				2005
Net income		$	1,301			$	1,995			$	3,543			$	6,211
Change in net unrealized holding gain on available-for-sale investments			(23	)			92				9				59
Change in net unrealized holding gain on derivatives			1				(2	)			33				(65	)
Change in minimum pension liability			(1	)			—				(1	)			—
Total comprehensive income		$	1,278			$	2,085			$	3,584			$	6,205

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

The components of accumulated other comprehensive income, net of tax, were as follows:

		Sept. 30,				Dec. 31,
(In Millions)		2006				2005
Accumulated net unrealized holding gain on available-for-sale investments		$	109			$	100
Accumulated net unrealized holding gain on derivatives			70				37
Accumulated minimum pension liability			(11	)			(10	)
Total accumulated other comprehensive income		$	168			$	127

During the third quarter of 2006, a portion of the company’s investment in Micron was sold, which reduced the net unrealized holding gain on available for sale investments by $65 million (realized gain of $103 million, and related $38 million tax effect). This was more than offset by other unrealized holding gains on available for sale investments.

Note 17: Venture

During January 2006, Micron and Intel formed IM Flash Technologies, LLC (IMFT), a company that manufactures NAND flash memory products for Micron and Intel. Initial production from IMFT began in early 2006.

As part of the initial capital contribution to IMFT, Intel paid $500 million in cash, issued $581 million in non-interest-bearing notes, and owed an additional $115 million in cash in exchange for a 49% interest. During the first nine months of 2006, Intel paid the entire balance of $581 million towards the non-interest-bearing notes, which has been reflected as a financing activity on the statement of cash flows. The remaining $115 million owed in cash, which we expect will be paid in full during the fourth quarter of 2006, is included in other accrued liabilities on the balance sheet and has been reflected as a non-cash item on the statement of cash flows. In exchange for a 51% interest, Micron contributed assets valued at $995 million, and $250 million in cash. Intel is currently committed to purchase 49% of IMFT’s production output and production-related services. During the first nine months of 2006, the purchased products and services from IMFT were $185 million and the related payable as of September 30, 2006 was not significant.

IMFT is governed by a Board of Managers, with Intel and Micron initially appointing an equal number of managers to the Board of Managers. The number of managers appointed by each party adjusts depending upon the parties’ ownership interests in IMFT. IMFT will operate until 2015, but is subject to prior termination under certain terms and conditions.

Subject to certain conditions, Intel and Micron each agreed to contribute an additional $1.4 billion over three years, and in October 2006, Intel made an additional capital contribution to IMFT of $128 million. Subject to the approval of Intel and Micron, additional capital contributions to IMFT for new fabrication facilities may be required to be made by Micron and Intel.

IMFT is a variable interest entity as defined by FIN 46, because all positive and negative variances in IMFT’s cost structure are passed on to Intel and Micron through their purchase agreement with IMFT. Micron and Intel are considered related parties under the provisions of FIN 46, and Intel has determined that Intel is not the primary beneficiary of IMFT. Intel accounts for its interest in IMFT using the equity method of accounting. Intel’s proportionate share of income or losses from its investment in IMFT is recorded in interest and other, net. Intel’s maximum exposure to loss as a result of its involvement with IMFT is $1.2 billion as of September 30, 2006, which represents Intel’s investment. Intel’s investment in IMFT is classified in other long-term assets on the balance sheet.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Concurrent with the formation of IMFT, Intel paid Micron $270 million for product designs developed by Micron as well as certain other intellectual property. Intel owns the rights with respect to all product designs and licensed the designs to Micron. Micron paid Intel $40 million to license these initial product designs and will pay additional royalties on new product designs. Intel recorded its net investment in this technology of $230 million as an identified intangible asset. The identified intangible asset will be amortized into cost of sales over its expected five-year life. Costs incurred by Intel and Micron for product and process development related to IMFT are generally split evenly between Intel and Micron and are classified as research and development on the income statement.

Additionally, Intel has entered into a long-term supply agreement with Apple Computer, Inc. to supply a portion of the NAND flash memory output that Intel will purchase from IMFT through December 31, 2010. In January 2006, Apple pre-paid a refundable $250 million to Intel that will be applied to purchases of NAND flash memory by Apple beginning in 2008. Intel has reflected the $250 million as other long-term liabilities on the balance sheet.

Note 18: Contingencies

Tax Matters

In connection with the U.S. Internal Revenue Service’s (IRS) regular examination of Intel’s tax returns for the years 1999 through 2002, the IRS formally assessed, in 2005, certain adjustments to the amounts reflected by Intel on those returns as a tax benefit for its export sales. The company does not agree with these adjustments and has appealed the assessments. If the IRS prevails in its position, Intel’s federal income tax due for 1999 through 2002 would increase by approximately $1.0 billion, plus interest.

In the first quarter of 2006, in connection with the IRS’s regular examination of Intel’s tax returns for the years 2003 and 2004, the IRS proposed similar adjustments related to the amounts reflected by Intel on those returns as a tax benefit for its export sales. The company also intends to dispute these adjustments. If the IRS prevails in its position, Intel’s federal income tax due for 2003 and 2004 would increase by approximately $800 million, plus interest. The IRS will likely make similar claims for years subsequent to 2004 in future audits, and if the IRS prevails, income tax due for 2005 would increase by approximately $400 million, plus interest.

Although the final resolution of the adjustments is uncertain, based on currently available information, management believes that the ultimate outcome will not have a material adverse effect on the company’s financial position, cash flows, or overall trends in results of operations. There is the possibility of a material adverse impact on the results of operations of the period in which the matter is ultimately resolved, if it is resolved unfavorably, or in the period in which an unfavorable outcome becomes probable and reasonably estimable.

Legal Proceedings

Intel currently is a party to various legal proceedings, including those noted below. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the company’s financial position, cash flows, or overall trends in results of operations, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include money damages or, in cases for which injunctive relief is sought, an injunction prohibiting Intel from selling one or more products. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the business or results of operations for the period in which the ruling occurs or future periods.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

In June 2005, Advanced Micro Devices, Inc. (AMD) filed a complaint in the United States District Court for the District of Delaware alleging that Intel and Intel’s Japanese subsidiary engaged in various actions in violation of the Sherman Act and the California Business and Professions Code, including providing secret and discriminatory discounts and rebates and intentionally interfering with prospective business advantages of AMD. AMD’s complaint seeks unspecified treble damages, punitive damages, an injunction, and attorneys’ fees and costs. Subsequently, AMD’s Japanese subsidiary also filed suits in the Tokyo High Court and the Tokyo District Court against Intel’s Japanese subsidiary, asserting violations of Japan’s Antimonopoly Law and alleging damages of approximately $55 million, plus various other costs and fees. At least 78 separate class actions, generally repeating AMD’s allegations and asserting various consumer injuries, including that consumers in various states have been injured by paying higher prices for Intel microprocessors, have been filed in the U.S. District Courts for the Northern District of California, Southern District of California and the District of Delaware, as well as in various California, Kansas and Tennessee state courts. All the federal class actions have been consolidated by the Multidistrict Litigation Panel to the District of Delaware. All California class actions have been consolidated to the Superior Court of California in Santa Clara County. Intel disputes AMD’s claims and the class-action claims, and intends to defend the lawsuits vigorously.

Intel is also subject to certain antitrust regulatory inquiries. In 2001, the European Commission commenced an investigation regarding claims by AMD that Intel used unfair business practices to persuade clients to buy Intel microprocessors. In June 2005, Intel received an inquiry from the Korea Fair Trade Commission requesting documents from Intel’s Korean subsidiary related to marketing and rebate programs that Intel entered into with Korean PC manufacturers. Intel is cooperating with these agencies in their investigations and expects that these matters will be acceptably resolved.

In June 2002, various plaintiffs filed a lawsuit in the Third Judicial Circuit Court, Madison County, Illinois, against Intel, Gateway Inc., Hewlett Packard Company, and HPDirect, Inc. alleging that the defendants’ advertisements and statements misled the public by suppressing and concealing the alleged material fact that systems containing Intel^® Pentium^® 4 processors are less powerful and slower than systems containing Intel^® Pentium^® III processors and a competitor’s microprocessors. In July 2004, the court certified against Intel an Illinois-only class of certain end use purchasers of certain Pentium 4 processors or computers containing such microprocessors. In January 2005, the Circuit Court granted a motion filed jointly by the plaintiffs and Intel that stayed the proceedings in the trial court pending discretionary appellate review of the Circuit Court’s class certification order. On July 25, 2006, the Illinois Appellate Court, Fifth District, vacated the Circuit Court’s class certification order, and remanded the case to the Circuit Court with instructions to reconsider its class certification ruling applying California law. The plaintiffs seek unspecified damages and attorneys’ fees and costs. The company disputes the plaintiffs’ claims and intends to defend the lawsuit vigorously.

Beginning in May 2005, Intel and AmberWave Systems Corp. filed a series of lawsuits against each other that are now pending in the United States District Court for the District of Delaware. AmberWave claims that certain Intel semiconductor manufacturing processes infringe six AmberWave patents related to semiconductor fabrication. AmberWave seeks damages, treble damages for willful infringement, an injunction, and attorneys’ fees. Intel disputes AmberWave’s allegations of infringement and intends to defend the lawsuits vigorously.

In October 2006, Transmeta Corporation filed a lawsuit in the United States District Court for the District of Delaware. Transmeta alleges that Intel’s P6, Pentium 4, Pentium^® M, Core^TM and Core 2 processors infringe ten Transmeta patents alleged to cover computer architecture and power efficiency technologies. Transmeta seeks damages, treble damages, an injunction and attorneys’ fees. Intel disputes Transmeta’s allegations of infringement and intends to defend the lawsuits vigorously.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Note 19: Operating Segment Information

The company’s operating segments currently include the Digital Enterprise Group, the Mobility Group, the Flash Memory Group, the Digital Home Group, the Digital Health Group, and the Channel Platforms Group. The prior period amounts have been adjusted retrospectively to reflect reorganizations.

The Chief Operating Decision Maker (CODM), as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” is the company’s President and Chief Executive Officer (CEO), Paul S. Otellini. The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes.

The Digital Enterprise Group operating segment’s products include microprocessors and related chipsets and motherboards designed for the desktop (including consumer desktop) and enterprise computing market segments, communications infrastructure components such as network processors and embedded microprocessors, wired connectivity devices, and products for network and server storage. The Mobility Group operating segment’s products include microprocessors and related chipsets designed for the notebook computing market segment, wireless connectivity products, and application and cellular baseband processors used in handheld devices. In the second quarter of 2006, the company entered into an agreement to sell certain assets of the business line that includes application and cellular baseband processors used in handheld devices, see “Note 13: Divestitures.” The Flash Memory Group operating segment includes NOR flash memory products designed for cellular phones and embedded form factors, and NAND flash memory products manufactured by IMFT that are designed for digital audio players and memory cards. Revenue for the “all other” category primarily relates to microprocessors and related chipsets sold by the Digital Home Group.

In addition to these operating segments, the company has sales and marketing, manufacturing, finance, and administration groups. Expenses of these groups are generally allocated to the operating segments and are included in the operating results reported below. In addition to the operating results for the Digital Home Group, Digital Health Group, and Channel Platforms Group operating segments, the “all other” category includes certain corporate-level operating expenses, including a portion of profit-dependent bonus and other expenses not allocated to the operating segments. “All other” also includes the results of operations of seed businesses that support the company’s initiatives. Additionally, “all other” includes acquisition-related costs, including amortization and any impairment of acquisition-related intangibles and goodwill, and charges for purchased in-process research and development. Intel does not allocate share-based compensation charges or restructuring charges to the operating segments; as such, these charges are included in “all other.”

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited (continued)

Segment information is summarized as follows:

		Three Months Ended								Nine Months Ended
		Sept. 30,				Oct. 1,				Sept. 30,				Oct. 1,
(In Millions)		2006				2005				2006				2005
Net revenue
Digital Enterprise Group
Microprocessor revenue		$	3,521			$	4,936			$	10,751			$	14,483
Chipset, motherboard and other revenue			1,425				1,434				3,963				4,249
			4,946				6,370				14,714				18,732
Mobility Group
Microprocessor revenue			2,239				2,331				6,544				6,304
Chipset, motherboard and other revenue			809				639				2,172				1,722
			3,048				2,970				8,716				8,026
Flash Memory Group			507				573				1,587				1,678
All other			238				47				671				189
Total net revenue		$	8,739			$	9,960			$	25,688			$	28,625
Operating income (loss)
Digital Enterprise Group		$	858			$	2,164			$	3,165			$	6,574
Mobility Group			1,260				1,431				3,362				3,784
Flash Memory Group			(116	)			(30	)			(369	)			(142	)
All other			(628	)			(465	)			(1,994	)			(1,435	)
Total operating income		$	1,374			$	3,100			$	4,164			$	8,781

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a discussion on our use of Non-GAAP Financial Measures. We then discuss Intel’s overall strategy and the strategy for our major operating segments to give the reader an overview of the goals of our business and the direction in which our business and products are moving. The Strategy section is followed by a discussion of the Critical Accounting Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then discuss our Results of Operations, beginning with an “Overview.” Following the analysis of our results, we provide an analysis of changes in our balance sheet and cash flows, and discuss our financial condition in the section entitled “Liquidity and Capital Resources.” We then conclude this MD&A with our Business Outlook section, discussing our outlook for the fourth quarter and for 2006.

The various sections of this MD&A contain a number of forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Business Outlook” section (also see Item 1A “Risk Factors” in Part II of this Form 10-Q). Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of November 1, 2006.

Non-GAAP Financial Measures

In addition to disclosing financial results calculated in accordance with United States (U.S.) generally accepted accounting principles (GAAP), this MD&A contains non-GAAP financial measures that exclude the effects of share-based compensation and the requirements of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). The non-GAAP financial measures used by management and disclosed by the company exclude the income statement effects of all forms of share-based compensation and the effects of SFAS No. 123(R) upon the number of diluted common shares used in calculating non-GAAP diluted earnings per share. The non-GAAP financial measures disclosed by the company should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements should be carefully evaluated. The non-GAAP financial measures used by the company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. The company has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures. The company applied the modified prospective method of adoption of SFAS No. 123(R), under which the effects of SFAS No. 123(R) are reflected in the company’s GAAP financial statement presentations for and after the first quarter 2006, but are not reflected in results for prior periods.

In managing the company’s business on a consolidated basis, consistent with how we managed our business prior to the adoption of SFAS No. 123(R), management develops an annual budget that includes all components of the income statement, exclusive of share-based compensation. Gross margin, expenses (research and development and marketing, general and administrative), operating income, income taxes, net income and diluted earnings per share (EPS) are the primary consolidated financial measures management uses for planning and forecasting future periods that are affected by share-based compensation. The company’s budget and planning process commences with a segment-level evaluation which excludes share-based compensation, and culminates with the preparation of a consolidated annual and/or quarterly budget that includes these non-GAAP financial measures. This budget, once finalized and approved, serves as the basis for the allocation of resources and management of operations. The number of full-time equivalent employees working in manufacturing, research and development and marketing, general and administrative related roles is determined through the budgeting process exclusive of share-based compensation. Segment managers are not held accountable for share-based compensation charges and therefore the budget and planning process, which involves headcount planning, excludes the effects of share-based compensation. In addition, our tax strategies are determined on a consolidated basis exclusive of the expenses and related tax benefit relating to share-based compensation. The accounting expense impact of share-based compensation is not discussed nor considered when assessing and determining the appropriate level of budgeted expenses for gross margin, research and development, and marketing, general and administrative expenses. Accordingly, such

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

amounts are also excluded from the budgeted operating income, net income, and earnings per share. GAAP-basis financial statements which include the effects of share-based compensation are only reviewed and analyzed for purposes of external reporting where GAAP-basis financial statements are necessary.

Under our budget and planning process, consistent with our practice prior to the adoption of SFAS No. 123(R), when we seek to reduce unit costs with the goal of increasing gross margin, management does not consider the effects of share-based compensation. When assessing the level of research and development efforts currently or prospectively, consistent with our practice prior to the adoption of SFAS No. 123(R), management does not consider the effects of share-based compensation. When making decisions about project spending, administrative budgets, or marketing programs, management does not consider the effects of share-based compensation.

In addition to using the budget process for planning and resource allocation, on a quarterly basis we analyze the performance of our business on a consolidated basis by comparing our gross margin, expenses (research and development and marketing, general and administrative), operating income, net income, and diluted earnings per share, each excluding share-based compensation, to the prior period and forecasted amounts developed during the budget and planning process, also excluding share-based compensation. We use these quarterly assessments to evaluate the performance of the business against prior periods and budget and to develop our business outlook which we communicate to investors.

Consistent with our practice prior to the adoption of SFAS No. 123(R), the company’s share-based compensation programs are established and managed on a company-wide basis, including specification of grant types and amount ranges for employees by category and grade. Our philosophy relative to share-based compensation programs is built on the principle that equity compensation should seek to align employees’ actions and behaviors with stockholders’ interest; be market competitive; be able to attract, motivate and retain the best employees; and support Intel’s belief in a broad-based approach. Share based compensation granted to employees is in addition to, not in lieu of, cash compensation. Accordingly, our share-based compensation programs are evaluated separately from the cost of our other compensation programs. Specifically, our share-based compensation programs are carefully evaluated from the perspective of the resulting dilution and other metrics, and not from the resulting expense to be recorded. For example, our goal has been to keep the potential incremental dilution related to our equity incentive plans (stock options and restricted stock units) to a long-term average of less than 2% annually. The dilution percentage is calculated using the new equity-based awards, net of equity-based awards cancelled due to employees leaving the company and expired stock options, divided by the total outstanding shares at the beginning of the year. Further, as noted above, segment managers are not held accountable for share-based compensation charges, and these charges do not impact their business unit’s operating income (loss). Accordingly, share-based compensation charges also are excluded from the company’s measure of segment profitability (operating income). Therefore, when evaluating segment and operating income, management and the Board of Directors exclude share-based compensation.

Operating income and net income, both on a per-share basis, are calculated excluding share-based compensation for purposes of evaluating profit-dependent cash incentive compensation paid to employees, including senior management. For example, for 2006, the executive compensation cash incentive plan formula measures EPS as the greater of (a) Intel’s operating income or (b) Intel’s net income (in both cases excluding the effect of share-based compensation), divided by Intel’s weighted average diluted common shares outstanding, excluding the effects of share-based compensation. The calculation of diluted common shares outstanding, excluding the effects of share-based compensation, excludes the proceeds from the remaining unamortized share-based compensation, and adjusts the proceeds from tax benefits by excluding the effects of share-based compensation. The calculation of diluted common shares outstanding, excluding the effects of share-based compensation, is similar to the calculation of diluted common shares outstanding, as reported, prior to the adoption of SFAS No. 123(R). Accordingly, when budgeting for the company’s profit-dependent cash incentives, the company applies the formula above to calculate earnings per share excluding share-based compensation so as to be able to factor the appropriate amount of profit dependent cash incentive into the budget.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The company discloses this non-GAAP information to the public to enable investors to more easily assess the company’s performance on the same basis applied by management and to ease comparison on both a GAAP and non-GAAP basis to our prior period results. In particular, as the company begins to apply SFAS No. 123(R), the company believes that it is useful to investors to understand how the expenses and other adjustments associated with the application of SFAS No. 123(R) are being reflected on the company’s income statements. Management believes gross margin, excluding share-based compensation, research and development, excluding share-based compensation, and marketing, general, and administrative expense, excluding share-based compensation, are useful information for investors because the GAAP measure when compared in isolation with 2005 would indicate a level of increase in those expenses inconsistent with actual performance. We believe that the non-GAAP measures serve to provide a baseline for investors in this first year of adoption to compare actual results for the current year, excluding share-based compensation, to the prior year GAAP amounts, which exclude share-based compensation. We believe this comparison also is useful to allow investors to more easily evaluate our results from a period-to-period comparability perspective.

Management believes operating income and net income, excluding share-based compensation, is useful information to investors because it assists investors in evaluating operating income and net income consistent with how management evaluates performance and to understand the basis for the company’s profit dependent cash incentive plan. Especially in this first year of applying the provisions of SFAS No. 123(R), we believe operating and net income as reported in our income statement are not comparable to prior year period amounts, and may lead investors to believe business has declined more significantly than would be caused by actual changes in the business (as opposed to changes in accounting treatment between years). When presenting net income, excluding share-based compensation, we believe it appropriate to exclude the related tax benefit recognized in the financial statements for purposes of presenting net income or EPS, excluding share-based compensation. Providing diluted earnings per share, excluding share-based compensation assists investors in evaluating diluted earnings per share compared to prior periods. Especially in this first year of applying the provisions of SFAS No. 123(R), we believe diluted earnings per share as reported in our income statement is not comparable to prior year amounts.

The basis for the company’s decision to use these non-GAAP measures excluding share-based compensation is that management has determined in this first year of adoption of SFAS No. 123(R) to continue to evaluate the business on the same basis as prior to the adoption of SFAS No. 123(R) until there is greater familiarity with its effects and until the second year after adoption of SFAS No. 123(R), when financial information is prepared and presented on a consistent basis with the prior year. Share-based compensation represents: 1.2 points of gross margin, $107 million of research and development expenses, $125 million of marketing, general and administrative expenses, $335 million reduction in total operating income, $248 million reduction in total net income, and a $0.05 reduction in diluted earnings per share for the quarter ended September 30, 2006, compared to zero for all such measures in the quarter ended October 1, 2005. Share-based compensation represents: 1.0 points of gross margin, $368 million of research and development expenses, $418 million of marketing, general and administrative expenses, $1.0 billion reduction in total operating income, $751 million reduction in total net income, and a $0.13 reduction in diluted earnings per share for the nine months ended September 30, 2006, compared to zero for all such measures for the nine months ended October 1, 2005.

Unlike other forms of compensation, share-based compensation was not recognized prior to January 1, 2006 when we adopted the provisions of SFAS No. 123(R). Additionally, when management determines the annual merit and promotional budget for compensation, the effects of share-based compensation on the company’s financial statements are not considered. Rather share-based awards are generally granted via a fixed formula depending on position and level of the employee. In addition, segment managers are held accountable for other forms of compensation, and as such those compensation charges are included in the segments’ results and in the budget and planning processes of our reporting segments.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

A material limitation associated with the use of these measures as compared to the related GAAP measures is that they may reduce comparability with other companies who may use different types of equity incentive awards, or whose compensation structures may use share-based compensation to a greater or lesser extent as part of their overall compensation. These differences may cause our non-GAAP measures excluding share-based compensation to not be comparable to other companies’ non-GAAP measures excluding share-based compensation. Other material limitations associated with the use of these measures as compared to the GAAP comparable measure include: gross margin, excluding share-based compensation, does not include all costs related to the cost of inventory sold during the period; research and development, excluding share-based compensation, does not include all costs related to the research and development needed to bring new products to the market; marketing, general and administrative expenses, excluding share-based compensation, does not include all costs related to the marketing, general and administrative efforts required to manage our company and sell our products. A material limitation with using operating income, excluding share-based compensation, net income, excluding share-based compensation, and diluted earnings per share, excluding share-based compensation, is that they do not include all costs typically included in the presentation of the comparable GAAP measure, and they may not include all costs related to hiring and retaining qualified employees.

Although these non-GAAP financial measures adjust cost, expenses, and diluted share items to exclude the accounting treatment of share-based compensation, they should not be viewed as a pro forma presentation reflecting the elimination of the underlying share-based compensation programs. Thus, our non-GAAP presentations are not intended to present, and should not be used, as a basis for assessing what our operating results might be if we were to eliminate our share-based compensation programs. Our equity incentive plans are an important element of the company’s compensation structure and GAAP indicates that all forms of share-based payments should be valued and included as appropriate in results of operations.

Because of the foregoing limitations, management does not intend to use the non-GAAP financial measures when assessing the company’s performance against that of other companies. The company manages its share-based compensation programs in the aggregate against certain metrics rather than reviewing financial statement impacts by financial statement line item. Specifically, our goal has been to keep the potential incremental dilution related to our equity incentive plans (stock options and restricted stock units) to a long-term average of less than 2% annually. The dilution percentage is calculated using the new equity-based awards, net of equity-based awards cancelled due to employees leaving the company and expired stock options, divided by the total outstanding shares at the beginning of the year.

Strategy

Our goal is to be the preeminent provider of silicon chips and platform solutions to the worldwide digital economy. As part of our overall strategy to compete in each relevant market segment, we use our core competencies in the design and manufacture of integrated circuits, as well as our financial resources, global presence and brand recognition. Our primary focus is on developing advanced integrated silicon technology solutions.

Our strategy focuses on taking customer needs into account in developing the next generation of products and platforms that will enable new form factors and new usage models for businesses and consumers. We believe that end users, original equipment manufacturers (OEMs), third-party vendors, and service providers of computing and communications systems and devices want products based on platform solutions. We define a platform as a collection of technologies that are designed to work together to provide a better end-user solution than if the ingredients were used separately. Our platforms consist of various products based on: standards and initiatives; hardware and software that may include technologies such as Hyper-Threading Technology (HT Technology), Intel^® Virtualization Technology (Intel^® VT), and Intel^® Active Management Technology (Intel^® AMT); and services. In developing our platforms, we may include ingredients sold by other companies. The success of our strategy to offer platform solutions is dependent on our ability to select and incorporate ingredients that customers value, and to market the platforms effectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

We also believe that users of computing and communications systems and devices want improved overall performance and/or improved performance per watt. Improved overall performance can include faster processing performance and/or other improved capabilities such as multithreading and/or multitasking, and improved connectivity, security, manageability, utilization, reliability, ease of use, and interoperability among devices. Improved performance per watt involves balancing the addition of these types of improved performance factors with the power consumption of the platform. Lower power consumption may reduce system heat output, provide power savings, and reduce the total cost of ownership for the end user. It is our goal to incorporate these improvements in our various products and platforms to meet end-user demands. In line with these efforts, we are focusing our efforts on multi-core microprocessors. Multi-core microprocessors contain two or more processor cores, rather than just one processor core, which enable improved multitasking with improved performance per watt. In line with our efforts to improve overall performance, we will continue to invest in developing next-generation microarchitectures for microprocessors. The recent development of our new Intel^® Core^TM microarchitecture has enabled us to offer a three-tiered brand strategy of “good, better, and best” to address the various market price points.

We make equity investments in companies around the world to further our strategic objectives and support our key business initiatives, including investments through our Intel Capital program. We generally focus on investing in companies and initiatives to stimulate growth in the digital economy, create new business opportunities for Intel, and expand global markets for our products. The investments may support, among other things, Intel product initiatives, emerging trends in the technology industry, or worldwide Internet deployment. We invest in companies that develop software, hardware, or services supporting our technologies. Our current investment focus areas include helping to enable mobile wireless devices, advance the digital home, enhance the digital enterprise, advance high-performance communications infrastructures, and develop the next generation of silicon production technologies. Our focus areas tend to develop and change over time due to rapid advancements in technology.

We plan to continue to cultivate new businesses and work with the computing, communications, and consumer electronics industries through standards bodies, trade associations, OEMs, original design manufacturers, and independent software and operating system vendors, to encourage the industry to offer products that take advantage of the latest market trends and usage models. These efforts include helping to expand the infrastructure for wireless connectivity, including wireless broadband. We also provide development tools and support to help software developers create software applications and operating systems that take advantage of our platform solutions. We frequently participate in industry initiatives designed to discuss and agree upon technical specifications and other aspects of technologies that could be adopted as standards by standards-setting organizations. In addition, we work collaboratively with other companies to protect digital content and the consumer.

Digital Enterprise Group

The Digital Enterprise Group (DEG) designs and delivers computing and communications platforms for businesses, service providers, and consumers. DEG products are incorporated into desktop computers, the infrastructure for the Internet, and enterprise computing servers. DEG platforms for businesses are designed to increase employee productivity and reduce total cost of ownership. We develop these platforms based on our processors, chipsets, board-level products, wired connectivity products, and products for network and server storage. The processors offered by DEG are designed for various market segments, and include microprocessors that are optimized for use in the desktop and server computing market segments, and products designed for the communications infrastructure, including network processors, storage processors, and embedded microprocessors. Consumer desktop platforms that are designed and marketed specifically for the digital home are offered by the Digital Home Group.

Our strategy for the desktop computing market segment is to introduce platforms with improved performance per watt, tailored to the needs of different market segments. For high-end desktop platforms we offer the Intel^® Core^TM2 Duo processor, the Intel^® Pentium^® D processor, and the Intel Pentium 4 processor supporting HT Technology. For lower-price-point desktop platforms, we offer the Intel^® Celeron^® D processor and the Intel Celeron processor, which are designed to meet the core computing needs and affordability requirements of value-conscious PC users. We also offer chipsets designed and optimized for use in desktop platforms.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Our strategy for the enterprise computing market segment is to provide competitive price for performance in platforms that increase end-user value in the areas of power management, utilization, manageability, and reliability for entry-level to high-end servers and workstations. Our Intel^® Xeon^® processor family of products supports a range of entry-level to high-end technical and commercial computing applications. These products have been enhanced with Intel^® 64 architecture, our 64-bit extension technology. Our Intel^® Itanium^® processor family, which is based on Intel’s 64-bit architecture and includes the Intel^® Itanium^® 2 processor, generally supports an even higher level of reliability and computing performance for data processing, the handling of high transaction volumes and other compute-intensive applications for enterprise-class servers, as well as supercomputing solutions. We also offer chipsets and network controllers designed and optimized for use in both server and workstation platforms.

For the communications infrastructure, we deliver products that are basic building blocks for modular communications platforms. These products include advanced programmable network processors, based on Intel XScale^® technology, used to manage and direct data moving across the Internet and corporate networks. The agreement to sell certain assets of the communications and application processor business and license rights to Intel XScale technology, does not impact the communication infrastructure product offerings within DEG. See “Note 13: Divestitures” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q. We also offer embedded microprocessors that can be used for modular communications platform applications as well as for industrial equipment and point-of-sale systems.

In August 2006, we launched the Dual-Core Intel^® Xeon^® processor 7100 series, previously codenamed “Tulsa.” The 7100 series is designed for high-end multi-processor (MP) servers and is manufactured using our 65-nanometer process technology. The new processors run at speeds of up to 3.4 GHz, feature up to 16 MB of L3 cache, and support either a 667- or 800-MHz bus. The 7100 series is available in a lower-power, 95-watt version designed to reduce energy costs.

In September 2006, we introduced Intel^® vPro™ technology-based platforms for business desktop PCs. Intel vPro technology-based platforms are designed to provide increased security and manageability, energy-efficient performance, and lower cost of ownership. Platforms based on Intel vPro technology include the Intel Core 2 Duo processor, the Intel^® Q965 Express chipset, and the Intel^® 82566DM Gigabit Network Connection. Intel vPro technology also features Intel VT and Intel AMT.

Mobility Group

The Mobility Group designs and delivers platforms for notebook PCs and handheld devices. The Mobility Group’s products include microprocessors and related chipsets designed for the notebook market segment, wireless connectivity products, and application and cellular baseband processors used in handheld devices. In the second quarter of 2006 we announced an agreement to sell certain assets of the communications and application processor business line for a purchase price of $600 million plus the assumption of certain liabilities, to Marvell Technology Group, Ltd. We presently expect this transaction to close in the fourth quarter of 2006, subject to customary closing conditions. Intel and Marvell entered into an agreement whereby Intel will provide certain manufacturing and transition services to Marvell for a limited time. See “Note 13: Divestitures” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Our strategy for notebook PCs is to deliver platforms with optimized performance, battery life, form factor, and wireless connectivity. For high-end mobility platforms, we offer the Intel Core 2 Duo, the Intel^® Core^TM Duo, the Intel^® Core^TM Solo, and the Intel^® Pentium^® M processors. For lower-price-point mobile platforms, we offer the Intel^® Celeron^® M and the Mobile Intel Celeron processors. We also offer Intel^® Express Chipsets, with and without integrated graphics capability, which are designed for the notebook market segment. Additionally, we offer wireless connectivity solutions based on the Institute of Electrical and Electronics Engineers (“IEEE”) 802.11 industry standard as well the IEEE 802.16 industry standard, commonly known as WiMAX. The primary platforms offered by the Mobility Group are the Intel^® Centrino^® Duo mobile technology platform and the Intel Centrino mobile technology platform. Intel Centrino mobile technology consists of a mobile processor and a mobile chipset as well as a wireless network connection that together are designed and optimized specifically for improved performance, battery life, form factor, and wireless connectivity. Intel Centrino Duo mobile technology platform, launched in January 2006 expands on the capabilities of Intel Centrino, by increasing multitasking performance, and includes power-saving features to further improve battery life, and includes a more flexible network connection.

We currently offer application and cellular baseband processors utilizing Intel XScale technology. Intel XScale technology provides processing and multimedia graphics capability for handheld devices. We currently offer application processors sold as discrete chips or in stacked packaging solutions (stacking an application processor with memory).

In August 2006, we introduced a new version of the Intel Centrino Duo mobile technology platform, based on the new Intel Core 2 Duo mobile processors, the Mobile Intel^® 945 Express Chipset, and an Intel^® PRO/Wireless Network Connection. The Intel Core 2 Duo mobile processors are manufactured using our 65-nanometer process technology.

In October 2006, we introduced the Intel^® WiMAX Connection 2250, the first dual-mode baseband chip, designed for building cost-effective WiMAX modems. The Intel^® WiMAX Connection 2250 supports both mobile and fixed networks.

Flash Memory Group

The strategy for the Flash Memory Group is to provide advanced flash memory products for cellular phones, digital audio players, memory cards, and embedded form factors. We offer a broad range of memory densities, leading-edge packaging technology, and high-performance functionality. In support of our strategy, we offer NOR flash memory products such as Intel StrataFlash^® wireless memory, for advanced mobile phone designs. In addition to product offerings for cellular customers, we offer NOR flash memory products that meet the needs of other market segments, such as the embedded market segment. The embedded market segment includes various applications, including set-top boxes, networking products, and other devices including DVD players and DSL and cable modems. With the formation of IM Flash Technologies, LLC (IMFT), a NAND flash memory manufacturing company, with Micron Technology, Inc. in January 2006, we have been selling products manufactured by IMFT that are currently being used in digital audio players and memory cards.

We offer a variety of stacked memory products, including products based on our NOR flash, as well as our NOR flash plus SRAM and/or NAND flash, which we currently purchase from third-party vendors. Stacking of memory products refers to packaging several memory chips together.

In the second quarter of 2006, we announced changes to the organizational structure within the Flash Memory Group operating segment, designed to consolidate NOR manufacturing, research and development and product support into the Flash Memory Group. These organizational changes were designed to give the Flash Memory Group more flexibility by giving it greater control over its own cost structure and allowing for better management of product development and manufacturing. These changes do not change the revenue or costs attributed to the Flash Memory Group operating segment.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In August 2006, we introduced NOR flash memory products designed for the emerging low-cost cell phone market. These products feature cost-efficient NOR flash memory in densities ranging from 32Mb to 256Mb and optional RAM in a multi-chip package. They are configured to work with low-cost, single-chip baseband and radio frequency solutions from leading chipset suppliers.

In September 2006, we began shipping Intel^® Serial Flash Memory (S33) products designed for the NOR embedded market segment. These offerings include densities ranging from 16 MB to 64 MB. Intel serial flash memory offers smaller packages compared to traditional NOR flash memory.

Digital Home Group

The strategy for the Digital Home Group is to design and deliver consumer products and platforms for PCs, digital TVs, and networked media devices that meet the demands of consumers for enjoyment of digital media and other content through a variety of connected digital devices within the home. We are focusing on the design of components for digital home living-room entertainment applications and PCs for the digital home. We offer Intel^® Viiv^TM technology-based platforms for use in the digital home. Platforms based on Intel Viiv technology include one of the following processors: Intel Core 2 Duo, Intel^® Core^TM2 Extreme, Intel Core Duo, Intel Pentium D, or Pentium^® Processor Extreme Edition; as well as a chipset; a network connectivity device; and enabling software—all optimized to work together in the digital home environment. Certain Intel Viiv technology-based systems that include a mobile Intel Core 2 Duo processor are included within the Mobility Group. In addition, we offer products for display processing, demodulation and tuner applications as well as processors and chipsets for embedded consumer electronics designs such as digital televisions, digital video recorders, and set-top boxes.

Digital Health Group

The strategy for the Digital Health Group is to target global business opportunities in healthcare research, diagnostics and productivity, as well as personal healthcare. In support of this strategy, the Digital Health Group is focusing on healthcare information technologies, personal health products, and biomedical products.

Channel Platforms Group

The strategy for the Channel Platforms Group is to expand Intel’s worldwide presence and success in global markets by growing both the broad channel as well as local OEMs. The Channel Platforms Group tailors mainstream platforms to meet local market requirements, and develops and enables unique platform solutions for the needs of specific developing nations.

Critical Accounting Estimates

The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading “Results of Operations” following this section of our MD&A. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include the valuation of non-marketable equity securities, which impacts net gains (losses) on equity securities when we record impairments; recognition and measurement of current and deferred income tax assets and liabilities, which impacts our tax provision; assessment of recoverability of long-lived assets, which primarily impacts gross margin when we impair manufacturing assets or accelerate their depreciation; valuation of inventory, which impacts gross margin; and valuation and recognition of share-based compensation, which impacts gross margin, research and development expenses, and marketing, general and administrative expenses. Below, we discuss these policies further, as well as the estimates and judgments involved. We also have other policies that we consider key accounting policies, such as policies for revenue recognition, including the deferral of revenue on sales to distributors; however, these policies typically do not require us to make estimates or judgments that are difficult or subjective.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Non-Marketable Equity Securities. We typically invest in non-marketable equity securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support an Intel product or initiative. At September 30, 2006, the carrying value of our portfolio of strategic investments in non-marketable equity securities, excluding equity derivatives, totaled $2.6 billion ($561 million at December 31, 2005) and includes our investments in IMFT and Clearwire Corporation.

Investments in non-marketable equity securities are inherently risky, and a number of these companies are likely to fail. Their success is dependent on product development, market acceptance, operational efficiency, and other key business success factors. In addition, depending on their future prospects and market conditions, they may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment terms than in previous financings, and the investments would likely become impaired.

We review our investments quarterly for indicators of impairment; however, for non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators that we use to identify those events or circumstances include (a) the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects, (b) the technological feasibility of the investee’s products and technologies, (c) the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes, (d) factors related to the investee’s ability to remain in business, such as the investee’s liquidity, debt ratios and the rate at which the investee is using its cash, and (e) the investee’s receipt of additional funding at a lower valuation. To assess indicators of impairment related to our investment in IMFT we generally apply the above indicators to our NAND business versus only the investee. In particular, we evaluate the average selling prices of our NAND products.

Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case we write the investment down to its estimated fair value. When an investee is not considered viable from a financial or technological point of view, we write down the entire investment since we consider the estimated fair market value to be nominal. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new funding does not appear imminent, we presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise. With respect to our investment in IMFT, if indicators of impairment exist, we would determine the fair value of our NAND business using the income method which is based on a discounted future cash flow approach that uses assumptions we believe marketplace participants would use in evaluating estimated future cash flows. Our estimates are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our routine long-range planning process. Impairments of investments in our portfolio of non-marketable equity securities were $14 million in the third quarter of 2006 and $47 million in the first nine months of 2006 ($20 million in the third quarter of 2005 and $63 million in the first nine months of 2005). Over the past twelve quarters, impairments of investments in our portfolio of non-marketable equity securities have ranged between $10 million and $41 million per quarter.

Income Taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits, and deductions, such as the tax benefit for export sales and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that a substantial majority of the deferred tax assets recorded on our balance sheet will ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not probable.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax payments are probable. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes–an interpretation of SFAS No. 109.” The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The provisions are effective beginning in the first quarter of 2007. We are currently evaluating the impact FIN 48 will have on our consolidated financial statements. See “Note 2: Recent Accounting Pronouncements” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q for further discussion.

Long-Lived Assets. We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying amount of the asset grouping to our estimate of the related total future net cash flows. If an asset grouping’s carrying value is not recoverable through the related cash flows, the asset grouping is considered to be impaired. The impairment is measured by the difference between the asset grouping’s carrying amount and its fair value, based on the best information available, including market prices or discounted cash flow analysis.

Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows. Due to our asset usage model and the interchangeable nature of our semiconductor manufacturing capacity, we must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In addition, as we make manufacturing process conversions and other factory planning decisions, we must make subjective judgments regarding the remaining useful lives of assets, primarily process-specific semiconductor manufacturing tools and building improvements. When we determine that the useful lives of assets are shorter than we had originally estimated, and there are sufficient cash flows to support the carrying value of the assets, we accelerate the rate of depreciation charges in order to fully depreciate the assets over their new shorter useful lives. Impairments and accelerated depreciation of long-lived assets were less than $20 million during the third quarter of 2006 and the first nine months of 2006, and for the same periods during 2005. Over the past twelve quarters, impairments and accelerated depreciation of long-lived assets have ranged between $1 million and $42 million per quarter.

Inventory. The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. During the second quarter of 2006, we completed a demand forecast accuracy analysis. As a result, the demand horizon now includes additional weeks of the demand forecast period for certain products, compared to the prior period, and continues to include a review of product specific facts and circumstances. This change did not have a significant impact on gross margin in the second quarter of 2006. The demand forecast is also a direct input in the development of our short-term manufacturing plans, to help enable consistency between inventory valuation and build decisions. Product specific facts and circumstances reviewed in the inventory valuation process include a review of the customer base, the stage of the product life cycle of our products, consumer confidence, and customer acceptance of our products as well as an assessment of the selling price in relation to the product cost. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, or if we fail to accurately forecast the demand, we could be required to write down additional inventory, which would have a negative impact on our gross margin.

Share-Based Compensation. In the first quarter of 2006, we adopted SFAS No. 123(R), which requires the measurement at fair value and recognition of compensation expense for all share-based payment awards. Total share-based compensation during the third quarter of 2006 was $335 million and was $1.0 billion during the first nine months of 2006.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Determining the appropriate fair-value model and calculating the fair value of employee stock options and rights to purchase shares under stock purchase plans at the date of grant requires judgment. We use the Black-Scholes option pricing model to estimate the fair value of these share-based awards consistent with the provisions of SFAS No. 123(R). Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The assumptions for expected volatility and expected life are the two assumptions that significantly affect the grant date fair value. The expected dividend rate and expected risk-free rate of return are not significant to the calculation of fair value.

We use implied volatility based on options freely traded in the open market as we believe implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. In determining the appropriateness of implied volatility, we considered: the volume of market activity of freely traded options, and determined there was sufficient market activity; the ability to reasonably match the input variables of options freely traded to those of options granted by the company, such as date of grant and the exercise price, and determined the input assumptions were comparable; and the length of term of freely traded options used to derive implied volatility, which is generally 1 to 2 years, and determined the length of term was sufficient. We use the simplified calculation of expected life described in the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 107, due to changes in the vesting terms and contractual life of current option grants compared to our historical grants. If we determined another method to estimate expected volatility or expected life was more reasonable than our current methods, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and expected lives result in an increase to share-based compensation determined at the date of grant. The effect that changes in the volatility and the expected life would have on the weighted average fair value of grants and the increase in total fair value during the third quarter of 2006 and the first nine months of 2006 is as follows:

		Q3 2006								YTD 2006
		Weighted				Increase in Total				Weighted				Increase in Total
		Average				Fair Value1				Average				Fair Value1
		Fair Value				(in millions)				Fair Value				(in millions)
As reported		$	4.80							$	5.14
Hypothetical:
Increase expected volatility by 5 percentage points2		$	5.37			$	1			$	5.83			$	30
Increase expected life by 1 year		$	5.21			$	1			$	5.61			$	20

1		Amounts represent the hypothetical increase in the total fair value determined at the date of grant, which would be amortized over the vesting period, net of estimated forfeitures.
2		For example, an increase from 32% as reported volatility for Q3 2006 to a hypothetical 37% volatility.

In addition, SFAS No. 123(R) requires us to develop an estimate of the number of share-based awards which will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the rate for all expense amortization after January 1, 2006 is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. These adjustments affect our gross margin, research and development expenses, and marketing, general, administrative expenses. The effect of forfeiture adjustments in the third quarter and the first nine months of 2006 was insignificant. Cumulative adjustments are only recorded to the extent the related expense is recognized in the financial statements, beginning with implementation in the first quarter of 2006. Therefore, we expect the potential impact from cumulative forfeiture adjustments to increase in future periods. The expense we recognize in future periods could also differ significantly from the current period and/or our forecasts due to adjustments in the assumed forfeiture rates.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Results of Operations

Overview

In the third quarter of 2006, revenue increased 9% compared to the second quarter of 2006, and declined 12% from the third quarter of 2005. The increase in revenue from the second quarter is primarily due to higher unit sales of microprocessors, chipsets, motherboards, and wireless connectivity products, partially offset by lower microprocessor average selling prices. Our server business was an important part of the increased revenue, driven by strong demand for our new products. Factoring in a lower revenue base in the second quarter of 2006 as our customers reduced their inventories, our third quarter revenue increase was approximately in line with seasonality. A substantial majority of our revenue and gross margin continues to be dependent on the sale of microprocessors and specifically, the continued growth of mobile microprocessors. Our gross margin in the third quarter of 2006 was negatively affected by higher unit costs as we continue to ramp our dual-core microprocessors as well as higher write-offs for our mature products, in comparison to the second quarter of 2006. Higher unit costs have also contributed to the increase in our inventory dollars over the past year, however we believe that the inventory levels are appropriate for the business based on our current forecasts. Operating results for the third quarter of 2006 included gains from divestitures and sale of investments as well as restructuring charges.

We recognized $98 million in restructuring charges in the third quarter of 2006, which we estimate will result in gross annual savings of approximately $230 million. We expect additional charges of approximately $125 million in the fourth quarter of 2006 and $130 million in 2007, which we estimate will result in gross annual savings of approximately $800 million. These restructuring charges relate to employee severance and benefit arrangements, however additional charges such as fixed asset impairments and other exit costs may be recognized as we continue to evaluate our business operations. In addition, we have taken actions to focus on our core businesses and have completed two divestitures in the third quarter of 2006, with a third divestiture currently pending. Overall, our ongoing program to improve operational efficiency and results is expected to generate cost savings of $2 billion in 2007, and $3 billion in 2008. A portion of these cost savings, such as better utilization of assets, reduced spending, and organizational efficiencies, will not result in restructuring charges. See the risks described in “Risk Factors” in Part II, Item 1A of this Form 10-Q.

While the evaluation of our business has resulted in operational efficiencies, we have also positioned ourselves to maintain our lead and continue to grow our business given our technology and manufacturing leadership, leading-edge capacity, and portfolio of new products across our mobile, desktop and server businesses. Driven by the ramp of our new Core architecture, the majority of our microprocessors in the fourth quarter of 2006 are expected to be manufactured using our 65-nonometer process technology. We continue to focus on delivering next generation products and plan on introducing a new microarchitecture or shrinking the existing architecture every year. In line with this focus, we have recently announced that we will be shipping quad-core processors in the fourth quarter of 2006 and we expect to be the first to offer products based on 45-nanometer process technology.

From a financial condition perspective we ended the third quarter of 2006 with $7.1 billion in cash and short term investments and returned $500 million to stockholders through stock repurchases and $577 million as dividends in the third quarter of 2006.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Third Quarter of 2006 Compared to Third Quarter of 2005

The following table sets forth certain consolidated statements of income data as a percentage of net revenue for the periods indicated:

		Q3 2006								Q3 2005
(Dollars in Millions, Except Per Share Amounts)		Dollars				% of Net Revenue				Dollars				% of Net Revenue
Net revenue		$	8,739				100.0	%		$	9,960				100.0	%
Cost of sales			4,445				50.9	%			4,012				40.3	%
Gross margin			4,294				49.1	%			5,948				59.7	%
Research and development			1,389				15.9	%			1,341				13.5	%
Marketing, general and administrative			1,425				16.3	%			1,478				14.8	%
Restructuring			98				1.1	%			—				—	%
Amortization of acquisition-related intangibles and costs			8				0.1	%			29				0.3	%
Operating income			1,374				15.7	%			3,100				31.1	%
Gains (losses) on equity securities, net			168				2.0	%			(2	)			—	%
Interest and other, net			272				3.1	%			145				1.5	%
Income before taxes			1,814				20.8	%			3,243				32.6	%
Provision for taxes			513				5.9	%			1,248				12.6	%
Net income		$	1,301				14.9	%		$	1,995				20.0	%
Diluted earnings per share		$	0.22							$	0.32

The following tables present non-GAAP financial measures, which exclude the effects of share-based compensation, and reconciliations from the most directly comparable GAAP measure:

(Dollars in Millions, Except Per Share Amounts)		Q3 2006				Q3 2005
Gross margin		$	4,294			$	5,948
Add back: share-based compensation charges in cost of sales			103				—
Gross margin excluding share-based compensation		$	4,397			$	5,948
GAAP operating income		$	1,374			$	3,100
Adjustment for share-based compensation within:
Cost of sales			103				—
Research and development			107				—
Marketing, general and administrative			125				—
Operating income excluding share-based compensation		$	1,709			$	3,100
GAAP net income		$	1,301			$	1,995
Adjustment for share-based compensation within:
Cost of sales			103				—
Research and development			107				—
Marketing, general and administrative			125				—
Income taxes			(87	)			—
Net income excluding share-based compensation		$	1,549			$	1,995

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

		Q3 2006				Q3 2005
GAAP diluted earnings per share		$	0.22			$	0.32
Adjustment for share-based compensation			0.05				—
Diluted earnings per share excluding share-based compensation impact		$	0.27			$	0.32

The following table sets forth information on our geographic regions for the periods indicated:

		Q3 2006								Q3 2005
(Dollars in Millions)		Revenue				% of Total				Revenue				% of Total
Asia-Pacific		$	4,314				49	%		$	5,124				52	%
Americas			1,891				22	%			1,903				19	%
Europe			1,611				18	%			2,007				20	%
Japan			923				11	%			926				9	%
Total		$	8,739				100	%		$	9,960				100	%