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 June 30, 2007.

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 incorporation or organization)		(I.R.S. Employer Identification No.)

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

(Registrant’s telephone number, including area code)

 

(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 July 27, 2007
Common stock, $0.001 par value		5,840 million

 

 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
(In Millions, Except Per Share Amounts)		2007				2006				2007				2006
Net revenue		$	8,680			$	8,009			$	17,532			$	16,949
Cost of sales			4,605				3,838				9,025				7,835
Gross margin			4,075				4,171				8,507				9,114
Research and development			1,353				1,496				2,753				3,058
Marketing, general and administrative			1,284				1,593				2,561				3,237
Restructuring and asset impairment charges			82				—				157				—
Amortization of acquisition-related intangibles and costs			6				10				11				29
Operating expenses			2,725				3,099				5,482				6,324
Operating income			1,350				1,072				3,025				2,790
Gains (losses) on equity investments, net			(1	)			37				28				39
Interest and other, net			180				144				349				298
Income before taxes			1,529				1,253				3,402				3,127
Provision for taxes			251				368				488				885
Net income		$	1,278			$	885			$	2,914			$	2,242
Basic earnings per common share		$	0.22			$	0.15			$	0.50			$	0.38
Diluted earnings per common share		$	0.22			$	0.15			$	0.49			$	0.38
Cash dividends declared per common share		$	—			$	—			$	0.225			$	0.20
Weighted average shares outstanding:
Basic			5,809				5,801				5,793				5,827
Diluted			5,917				5,868				5,895				5,911

See accompanying notes.

INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)

		June 30,				Dec. 30,
(In Millions)		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	4,709			$	6,598
Short-term investments			4,217				2,270
Trading assets			1,735				1,134
Accounts receivable, net			2,531				2,709
Inventories			4,127				4,314
Deferred tax assets			1,060				997
Other current assets			1,269				258
Total current assets			19,648				18,280
Property, plant and equipment, net of accumulated depreciation of $29,662 ($29,482 at December 30, 2006)			17,143				17,602
Marketable strategic equity securities			350				398
Other long-term investments			4,346				4,023
Goodwill			3,861				3,861
Other long-term assets			4,946				4,204
Total assets		$	50,294			$	48,368
Liabilities and stockholders’ equity
Current liabilities:
Short-term debt		$	221			$	180
Accounts payable			2,179				2,256
Accrued compensation and benefits			1,455				1,644
Accrued advertising			660				846
Deferred income on shipments to distributors			535				599
Other accrued liabilities			1,414				1,192
Income taxes payable			—				1,797
Total current liabilities			6,464				8,514
Long-term income taxes payable			814				—
Deferred tax liabilities			235				265
Long-term debt			1,848				1,848
Other long-term liabilities			1,235				989
Contingencies
Stockholders’ equity:
Preferred stock			—				—
Common stock and capital in excess of par value, 5,823 shares issued and outstanding (5,766 at December 30, 2006)			9,597				7,825
Accumulated other comprehensive income (loss)			(96	)			(57	)
Retained earnings			30,197				28,984
Total stockholders’ equity			39,698				36,752
Total liabilities and stockholders’ equity		$	50,294			$	48,368

See accompanying notes.

INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

		Six Months Ended
		June 30,				July 1,
(In Millions)		2007				2006
Cash and cash equivalents, beginning of period		$	6,598			$	7,324
Cash flows provided by (used for) operating activities:
Net income			2,914				2,242
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			2,340				2,295
Share-based compensation			521				706
Restructuring, asset impairment, and net loss on retirement of assets			183				48
Excess tax benefit from share-based payment arrangements			(56	)			(106	)
Amortization of intangibles and other acquisition-related costs			124				134
Gains on equity investments, net			(28	)			(39	)
Deferred taxes			(213	)			(363	)
Changes in assets and liabilities:
Trading assets			(601	)			236
Accounts receivable			351				746
Inventories			162				(1,096	)
Accounts payable			(77	)			229
Accrued compensation and benefits			(367	)			(641	)
Income taxes payable and receivable			(1,178	)			(853	)
Other assets and liabilities			(106	)			100
Total adjustments			1,055				1,396
Net cash provided by operating activities			3,969				3,638
Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment			(2,639	)			(3,524	)
Purchases of available-for-sale investments			(5,422	)			(2,750	)
Maturities and sales of available-for-sale investments			3,216				4,336
Purchases and investments in non-marketable equity investments			(800	)			(683	)
Other investing activities			49				(102	)
Net cash used for investing activities			(5,596	)			(2,723	)
Cash flows provided by (used for) financing activities:
Increase (decrease) in short-term debt, net			40				(21	)
Proceeds from government grants			82				18
Excess tax benefit from share-based payment arrangements			56				106
Repayment of notes payable			—				(290	)
Proceeds from sales of shares through employee equity incentive plans			1,362				494
Repurchase and retirement of common stock			(500	)			(3,943	)
Payment of dividends to stockholders			(1,302	)			(1,167	)
Net cash used for financing activities			(262	)			(4,803	)
Net (decrease) in cash and cash equivalents			(1,889	)			(3,888	)
Cash and cash equivalents, end of period		$	4,709			$	3,436
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest		$	4			$	6
Income taxes, net of refunds		$	1,734			$	2,105

See accompanying notes.

INTEL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — Unaudited

Note 1: Basis of Presentation

We prepared our interim consolidated condensed financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles, consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended December 30, 2006. We have made estimates and judgments affecting the amounts reported in these financial statements and the accompanying notes. Our actual results may differ from these estimates. The accounting estimates requiring our most significant, difficult, and subjective judgments include:

	•		the valuation of non-marketable equity investments;
	•		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 interim financial information is unaudited, but reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This interim information should be read with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 30, 2006. We reclassified certain amounts reported in previous periods to conform to the current presentation.

Note 2: Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. The measurement and disclosure requirements are effective for us beginning in the first quarter of fiscal 2008. We are currently evaluating the impact of SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS No. 159 is effective for us beginning in the first quarter of fiscal year 2008. Currently, we do not believe that the adoption of SFAS No. 159 will have a significant impact on our consolidated financial statements.

In June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3). EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and expensing the payments when the research and development activities are performed. EITF 07-3 applies prospectively for new contractual arrangements entered into in fiscal years beginning after December 15, 2007. We currently recognize these non-refundable advanced payments as an expense upon payment. The adoption of EITF 07-3 is not expected to have a significant impact on our consolidated financial statements or financial position.

Note 3: Accounting Changes

In the first quarter of 2007, we adopted Emerging Issues Task Force 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 these compensated absences over the service period. We adopted EITF 06-2 through a cumulative-effect adjustment, resulting in an additional liability of $280 million, additional deferred tax assets of $99 million, and a reduction to retained earnings of $181 million at the beginning of the first quarter of 2007.

We also adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), and related guidance in the first quarter of 2007. See “Note 15: Taxes” for further discussion.

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

Note 4: Employee Equity Incentive Plans

Our equity incentive plans are broad-based, long-term retention programs intended to attract and retain talented employees and align stockholder and employee interests.

In May 2007, stockholders approved an extension of the 2006 Equity Incentive Plan (the 2006 Plan). Stockholders approved 119 million additional shares for issuance, increasing the total shares of common stock available for issuance as equity awards to employees and non-employee directors to 294 million shares. The approval also extended the expiration date of the 2006 Plan to June 2010. In addition, the maximum shares to be awarded as non-vested shares (restricted stock) or non-vested share units (restricted stock units) were increased to 168 million shares. As of June 30, 2007, 235 million shares remain available for grant under the 2006 Equity Incentive Plan.

The 2006 Stock Purchase Plan allows eligible employees to purchase shares of our common stock at 85% of the market price on specific dates. Under the 2006 Stock Purchase Plan, 240 million shares of common stock were made available for issuance through August 2011. As of June 30, 2007, 225 million shares are available for issuance under the 2006 Stock Purchase Plan.

Share-Based Compensation

The following table summarizes the share-based compensation charges:

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
(In Millions)		2007				2006				2007				2006
Cost of sales		$	64			$	66			$	142			$	152
Research and development		$	94			$	126			$	208			$	261
Marketing, general and administrative		$	79			$	140			$	171			$	293

We use the Black-Scholes option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our 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 used in calculating these values, were based on estimates at the date of grant as follows:

		Stock Options																Stock Purchase Plan1
		Three Months Ended								Six Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006				2007				2006
Estimated values		$	5.18			$	5.07			$	5.24			$	5.15			$	4.72			$	5.02
Expected life (in years)			4.7				4.8				4.9				4.7				0.5				0.5
Risk free interest rate			4.6	%			5.0	%			4.6	%			4.9	%			5.3	%			4.7	%
Volatility			25	%			27	%			25	%			27	%			26	%			29	%
Dividend yield			2.1	%			2.0	%			2.1	%			2.0	%			2.1	%			1.8	%

We began issuing restricted stock units in the second quarter of 2006. The estimated fair value of restricted stock unit awards was calculated based on the market price of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting. The weighted average estimated values of restricted stock unit grants, as well as the weighted average assumptions that were used in calculating fair value, were based on estimates at the date of grant as follows:

										Three &
		Three Months				Six Months				Six Months
		Ended				Ended				Ended
		June 30, 2007				June 30, 2007				July 1, 2006
Estimated values		$	20.49			$	20.48			$	18.60
Risk free interest rate			4.8	%			4.8	%			4.9	%
Dividend yield			2.1	%			2.1	%			2.0	%

Stock Option Awards

Information with respect to outstanding stock options as of June 30, 2007 was as follows:

						Weighted				Aggregate
		Number of				Average				Intrinsic
(In Millions, Except Per Share Amounts)		Shares				Exercise Price				Value1
December 30, 2006			839.5			$	26.98
Grants			18.9			$	21.44
Exercises			(61.5	)		$	18.35			$	191
Cancellations and forfeitures			(49.1	)		$	31.55
June 30, 2007			747.8			$	27.24
Options exercisable at:
December 30, 2006			567.6			$	28.66
June 30, 2007			596.1			$	28.39

Restricted Stock Unit Awards

Information with respect to outstanding restricted stock units as of June 30, 2007 was as follows:

						Weighted
						Average				Aggregate
		Number of				Grant-Date				Intrinsic
(In Millions, Except Per Share Amounts)		Shares				Fair Value				Value1
December 30, 2006			27.4			$	18.71
Granted			28.3			$	20.48
Vested			(5.8	)		$	18.60			$	127
Forfeited			(1.6	)		$	19.03
June 30, 2007			48.3			$	19.75

Stock Purchase Plan

Under the 2006 Stock Purchase Plan, employees purchased 15.2 million shares for $234 million in the first half of 2007 (13.8 million shares for $245 million in the first half of 2006 under the expired 1976 Stock Participation Plan).

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

Note 5: Earnings Per Share

The computation of basic and diluted earnings per common share was as follows:

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
(In Millions, Except Per Share Amounts)		2007				2006				2007				2006
Net income		$	1,278			$	885			$	2,914			$	2,242
Weighted average common shares outstanding — basic			5,809				5,801				5,793				5,827
Dilutive effect of employee equity incentive plans			57				16				51				33
Dilutive effect of convertible debt			51				51				51				51
Weighted average common shares outstanding — diluted			5,917				5,868				5,895				5,911
Basic earnings per common share		$	0.22			$	0.15			$	0.50			$	0.38
Diluted earnings per common share		$	0.22			$	0.15			$	0.49			$	0.38

Basic earnings per common share was computed using net income and the weighted average number of common shares outstanding during the period. Diluted earnings per common share was computed using net income and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options, assumed vesting of outstanding 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 second quarter of 2007, we excluded 538 million outstanding stock options (552 million for the first half of 2007) 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 (777 million for the second quarter of 2006 and 678 million for the first half of 2006). These options could be included in future calculations if the average market value of the common shares increases and becomes greater than the exercise price of these options.

Note 6: Common Stock Repurchase Program

During the second quarter of 2007, we repurchased 4.6 million shares of common stock at a cost of $100 million (54.3 million shares at a cost of $1.0 billion during the second quarter of 2006). During the first half of 2007, we repurchased 23.8 million shares of common stock at a cost of $500 million (192.8 million shares at a cost of $3.9 billion during the first half of 2006). Since the repurchase program began in 1990, we have repurchased and retired approximately 2.9 billion shares of common stock at a cost of approximately $58 billion. As of June 30, 2007, $16.8 billion remained available under the existing repurchase authorization.

Note 7: Trading Assets

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

		June 30,				Dec. 30,
(In Millions)		2007				2006
Marketable debt securities		$	1,256			$	684
Equity securities offsetting deferred compensation			479				450
Total		$	1,735			$	1,134

All floating-rate asset-backed securities purchased after December 30, 2006 are designated as trading assets.

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

Note 8: Equity Investments

The carrying value for our investment in Clearwire Corporation as of June 30, 2007 was $609 million. Based on the quoted closing stock price as of June 29, 2007, the fair value of our ownership interest in Clearwire was $896 million; however since we account for our investment under the equity method, the investment is not carried at fair value. We record our proportionate share of Clearwire’s operating loss on a one-quarter lag. The Clearwire investment is classified within other long-term assets on the consolidated condensed balance sheets.

In March 2007, Clearwire completed an initial public offering (IPO) of 24 million shares of common stock at a price of $25 per share on The NASDAQ Global Select Market*. Accordingly, our ownership interest in Clearwire decreased from approximately 27% as of December 30, 2006 to 23% after the IPO. We recognized a gain of $39 million within gains (losses) on equity investments, net, in the first quarter of 2007 as a result of the IPO.

Note 9: Inventories

Inventories at the end of each period were as follows:

		June 30,				Dec. 30,
(In Millions)		2007				2006
Raw materials		$	583			$	608
Work in process			2,063				2,044
Finished goods			1,481				1,662
Total		$	4,127			$	4,314

Note 10: Gains (Losses) on Equity Investments, Net

Gains (losses) on equity investments, net which includes investments accounted for under the equity method and certain equity derivatives, were a net loss of $1 million for the second quarter of 2007 and a net gain of $28 million for the first half of 2007 (net gains of $37 million for the second quarter of 2006 and $39 million for the first half of 2006). Included in these amounts were impairment charges on equity investments of $44 million for the second quarter of 2007 and $80 million for the first half of 2007 ($10 million for the second quarter of 2006 and $33 million for the first half of 2006). For the second quarter of 2007, these impairment charges, as well as losses on equity method investments, were offset by higher gains on sales of equity investments. The first half of 2007 includes a gain of $39 million from the first quarter of 2007 as a result of Clearwire’s IPO. See “Note 8: Equity Investments” for further discussion.

Note 11: Interest and Other, Net

Interest and other, net included:

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
(In Millions)		2007				2006				2007				2006
Interest income		$	192			$	152			$	376			$	320
Interest expense			(4	)			(7	)			(7	)			(14	)
Other, net			(8	)			(1	)			(20	)			(8	)
Total		$	180			$	144			$	349			$	298

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

Note 12: Comprehensive Income

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

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
(In Millions)		2007				2006				2007				2006
Net income		$	1,278			$	885			$	2,914			$	2,242
Change in net unrealized holding gain on available-for-sale investments			5				(1	)			(29	)			32
Change in net unrealized holding gain on derivatives			(9	)			27				(10	)			32
Total comprehensive income		$	1,274			$	911			$	2,875			$	2,306

The components of accumulated other comprehensive income (loss), net of tax, at the end of each period were as follows:

		June 30,				Dec. 30,
(In Millions)		2007				2006
Accumulated net unrealized holding gain on available-for-sale investments		$	84			$	113
Accumulated net unrealized holding gain on derivatives			70				80
Accumulated net prior service costs			(16	)			(16	)
Accumulated net actuarial losses			(232	)			(232	)
Accumulated transition obligation			(2	)			(2	)
Total accumulated other comprehensive income (loss)		$	(96	)		$	(57	)

Note 13: Pending Divestiture

On May 22, 2007, we announced that we entered into a definitive agreement to form a private, independent semiconductor company with STMicroelectronics N.V. and Francisco Partners L.P. The new company is expected to supply flash memory solutions for wireless communications, consumer devices, and other applications. Under the terms of the agreement, we expect to sell certain NOR flash memory assets to the new company. We expect to obtain a 45.1% ownership interest in the new company, which will be accounted for under the equity method of accounting. STMicroelectronics N.V. will sell certain assets and obtain a 48.6% ownership interest in the new company. Francisco Partners L.P. will contribute $150 million for a 6.3% ownership interest in the new company. We presently expect this transaction to close during the second half of 2007, subject to regulatory and other closing terms and conditions. We expect to enter into supply and transition service agreements to provide support to the new company during the transition period. NOR flash memory assets totaling $499 million are classified as held for sale within other current assets on the consolidated condensed balance sheet as of June 30, 2007 as a result of the pending divestiture. We cease recording depreciation on assets that are classified as held for sale.

Note 14: Restructuring and Asset Impairment Charges

In the third quarter of 2006, management approved several actions as part of a restructuring plan designed to improve operational efficiency and financial results. Under this plan, we recorded $82 million in the second quarter of 2007 and $157 million in first half of 2007 in restructuring and asset impairment charges, net of adjustments. During the second quarter of 2007, we recorded $80 million in employee severance and benefits arrangements and $2 million in asset impairments. For the first half of 2007, we incurred $101 million in employee severance and benefits arrangements and $56 million in asset impairments. During the first quarter of 2007, we incurred $54 million in asset impairment charges as a result of softer than anticipated market conditions relating to the Colorado Springs, Colorado facility, which was originally placed for sale and written down in the fourth quarter of 2006.

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

The following table summarizes the restructuring and asset impairment activity for the first half of 2007:

		Employee
		Severance and				Asset
(In Millions)		Benefits				Impairments				Total
Accrued restructuring balance as of December 30, 2006		$	48			$	—			$	48
Additional accruals			106				56				162
Adjustments			(5	)			—				(5	)
Cash payments			(73	)			—				(73	)
Non-cash settlements			—				(56	)			(56	)
Accrued restructuring balance as of June 30, 2007		$	76			$	—			$	76

The additional accruals, net of adjustments, have been reflected as restructuring and asset impairment charges on the consolidated condensed statements of income. The remaining accrual as of June 30, 2007 relates to severance benefits that are recorded as a current liability within accrued compensation and benefits on the consolidated condensed balance sheets.

From the third quarter of 2006 through the second quarter of 2007, we incurred a total of $712 million in restructuring and asset impairment charges related to this plan. These charges include a total of $339 million related to employee severance and benefit arrangements due to the termination of approximately 7,900 employees and $373 million in asset impairment charges. We may incur additional restructuring charges in the future for employee severance and benefit arrangements, and facility-related or other exit activities.

Note 15: Taxes

Effective at the beginning of the first quarter of 2007, we adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

As a result of the implementation of FIN 48, we reduced the liability for net unrecognized tax benefits by $181 million, and accounted for the reduction as a cumulative effect of a change in accounting principle that resulted in an increase to retained earnings of $181 million. The total amount of gross unrecognized tax benefits as of the date of adoption was $1.9 billion. We have historically classified unrecognized tax benefits in current taxes payable. As a result of adoption of FIN 48, we reclassified unrecognized tax benefits to long-term income taxes payable. Long-term income taxes payable includes uncertain tax positions, reduced by the associated federal deduction of state taxes and foreign tax credits, and may also include certain other long-term tax liabilities.

During the first and second quarters of 2007, the total amount of unrecognized tax benefits was as follows:

(In Millions)
December 31, 2006 (after adoption of FIN 48)		$	1,896
Settlement with tax authorities			(739	)
Other changes in unrecognized tax benefits			42
March 31, 2007			1,199
Effective settlement with tax authorities and related remeasurements			(388	)
Other changes in unrecognized tax benefits			(3	)
June 30, 2007		$	808

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

Our U.S. federal, U.S. state, and foreign tax returns are periodically examined by tax authorities. In 2005 and 2006, the U.S. Internal Revenue Service (IRS), through examination of our U.S. federal tax returns, formally assessed for tax years 1999 through 2005, certain adjustments to the amounts reflected by us on those returns for tax benefits we claimed for export sales. In March 2007, we received written notification from the IRS that it had closed its examination of our tax returns for the years 1999 through 2002, resolving the issues related to the tax benefits for export sales as well as a number of other issues. Additionally, a settlement was reached for years 2003 through 2005 with respect to the tax benefits for export sales. Of the $739 million settlement with the IRS noted above, we reversed long-term taxes payable, which resulted in recording a $276 million tax benefit in the first quarter of 2007. For our U.S. state and foreign tax returns prior to 1996, we are generally no longer subject to tax examinations.

Sooner than expected, but during the second quarter of 2007, we effectively settled with the IRS on several matters relating to the audit for the 2003 and 2004 tax years. However, the IRS audit for these years remains open. In addition, all uncertain tax positions were re-evaluated based on all available information and certain remeasurements were required. As a result, we reversed a portion of long-term taxes payable, which resulted in recording a $155 million tax benefit in the second quarter of 2007. The total amount of gross unrecognized tax benefits was $808 million as of June 30, 2007. These gross unrecognized tax benefits would affect the effective tax rate if realized.

We include interest and penalties related to unrecognized tax benefits within the provision for taxes on our consolidated condensed statements of income and as a result no change in classification was made upon adopting FIN 48. As of the date of adoption, we had accrued $257 million and as of June 30, 2007, we had accrued $93 million for the payment of interest and penalties relating to unrecognized tax benefits.

Although timing of the resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits would materially change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the range of possible adjustments to the balance of gross unrecognized tax benefits.

Note 16: Identified Intangible Assets

We classify identified intangible assets within other long-term assets on the consolidated condensed balance sheets. Identified intangible assets consisted of the following as of June 30, 2007:

		Gross				Accumulated
(In Millions)		Assets				Amortization				Net
Intellectual property assets		$	1,010			$	(360	)		$	650
Acquisition-related developed technology			4				(2	)			2
Other intangible assets			389				(116	)			273
Total identified intangible assets		$	1,403			$	(478	)		$	925

Identified intangible assets consisted of the following as of December 30, 2006:

		Gross				Accumulated
(In Millions)		Assets				Amortization				Net
Intellectual property assets		$	1,143			$	(434	)		$	709
Acquisition-related developed technology			4				(2	)			2
Other intangible assets			349				(73	)			276
Total identified intangible assets		$	1,496			$	(509	)		$	987

During the first half of 2007, we acquired intellectual property assets for $22 million with a weighted average life of six years and recorded additional other intangible assets of $40 million with a weighted average life of four years.

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

All of our identified intangible assets are subject to amortization. Amortization of intellectual property assets was $37 million for the second quarter of 2007 and $81 million for the first half of 2007 ($46 million for the second quarter of 2006 and $92 million for the first half of 2006). The amortization of intellectual property assets is generally included in cost of sales on the consolidated condensed statements of income. Amortization of acquisition-related developed technology was less than $1 million for the first half of 2007 ($5 million for the second quarter of 2006 and $17 million for the first half of 2006) and is included in amortization of acquisition-related intangibles and costs on the consolidated condensed statements of income. Amortization of other intangible assets was $24 million for the second quarter of 2007 and $43 million for the first half of 2007 ($8 million for the second quarter of 2006 and $24 million for the first half of 2006). We record amortization of other intangible assets as either a reduction of revenue or amortization of acquisition-related intangibles and costs on the consolidated condensed statements of income.

Based on identified intangible assets recorded at June 30, 2007, and assuming the underlying assets are not impaired in the future, we expect amortization expense for each period to be as follows:

(In Millions)		20071				2008				2009				2010				2011
Intellectual property assets		$	74			$	146			$	119			$	107			$	56
Acquisition-related developed technology		$	1			$	1			$	—			$	—			$	—
Other intangible assets		$	44			$	98			$	121			$	10			$	—

Note 17: Ventures

In January 2006, Micron Technology Inc. and Intel formed IM Flash Technologies, LLC (IMFT) and in February 2007 formed IM Flash Singapore, LLP (IMFS). These joint ventures were established to manufacture NAND flash memory products for Micron and Intel. Initial production from IMFT began in early 2006 while IMFS is in its initial construction phase. We own a 49% interest in each of these ventures. Subject to certain conditions, we agreed to contribute up to approximately $1.4 billion for IMFT and up to approximately $1.7 billion for IMFS in the three years following the initial capital contributions. Of these amounts, as of June 30, 2007, approximately $740 million remained as a commitment for IMFT and approximately $1.6 billion for IMFS.

Our portion of IMFT costs, primarily related to product purchases and start-up, was approximately $190 million during the second quarter of 2007 and approximately $350 million during the first half of 2007. Our portion of IMFT costs during the first half of 2006 was not significant. IMFS has had no production to date.

These joint ventures are variable interest entities as defined by FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (FIN 46(R)), because all positive and negative variances in cost structure will be passed on to Micron and Intel through our purchase agreements. However, we have determined that we are not the primary beneficiary of these joint ventures. Because we are not the primary beneficiary of these joint ventures, we account for our interests using the equity method of accounting and do not consolidate these joint ventures. Micron and Intel are also considered related parties under the provisions of FIN 46(R). Our proportionate share of income or losses from our investment will be recorded in gains (losses) on equity investments, net. As of June 30, 2007, our maximum exposure to loss is $1.8 billion for IMFT and $67 million for IMFS, which represent our investments in these ventures. Our investments in these ventures are classified within other long-term assets on the consolidated condensed balance sheets.

Note 18: Contingencies

Tax Matters

In connection with the regular examination of our tax returns for the years 1999 through 2005, the IRS had formally assessed adjustments to the amounts reflected by us on those returns as a tax benefit for export sales. In the first quarter of 2007, we resolved these matters with the IRS. See “Note 15: Taxes” for further discussion. The IRS may make a claim related to the tax benefit for export sales for 2006. Management believes that the ultimate outcome will not materially affect our financial position, cash flows, or overall trends in results of operations.

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

Legal Proceedings

We are currently a party to various legal proceedings, including those noted in this section. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm 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 us from selling one or more products. Were an unfavorable ruling to occur, our business or results of operations could be materially harmed.

Advanced Micro Devices, Inc. (AMD) and AMD International Sales & Service, Ltd. v. Intel Corporation and Intel Kabushiki Kaisha, and Related Consumer Class Actions and Government Investigations

In June 2005, AMD filed a complaint in the United States District Court for the District of Delaware alleging that we and our 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 our Japanese subsidiary, asserting violations of Japan’s Antimonopoly Law and alleging damages in each suit of approximately $55 million, plus various other costs and fees. At least 78 separate class actions 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. These actions generally repeat AMD’s allegations and assert various consumer injuries, including that consumers in various states have been injured by paying higher prices for Intel microprocessors. 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. We dispute AMD’s claims and the class-action claims, and intend to defend the lawsuits vigorously.

We are also subject to certain antitrust regulatory inquiries. In 2001, the European Commission commenced an investigation regarding claims by AMD that we used unfair business practices to persuade clients to buy our microprocessors. The European Commission sent us a Statement of Objections dated July 25, 2007 alleging that certain Intel marketing and pricing practices amounted to an abuse of a dominant position that infringed European law. We will now have an opportunity to respond to those allegations, which the Statement recognized were preliminary conclusions. We are reviewing those allegations and intend to contest this matter vigorously in the administrative procedure which has now begun and, if necessary, in European courts. In June 2005, we received an inquiry from the Korea Fair Trade Commission requesting documents from our Korean subsidiary related to marketing and rebate programs that we entered into with Korean PC manufacturers. We are cooperating with this agency in its investigation. We expect that these matters will be acceptably resolved.

Barbara’s Sales, et al. v. Intel Corporation, Gateway Inc., Hewlett-Packard Co. and HPDirect, Inc.

In June 2002, plaintiffs filed a putative class action against us, Gateway Inc., Hewlett-Packard Company, and HPDirect, Inc. in the Third Judicial Circuit Court, Madison County, Illinois. The lawsuit alleges 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 us an Illinois-only class of certain end-use purchasers of certain Pentium 4 processors or computers containing these 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 review of the Circuit Court’s class certification order. In July 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. In August 2006, the Illinois Supreme Court agreed to review the Appellate Court’s decision, and that review is pending. The plaintiffs seek unspecified damages and attorneys’ fees and costs. We dispute the plaintiffs’ claims and intend to defend the lawsuit vigorously.

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

Transmeta Corporation v. Intel Corporation

In October 2006, Transmeta Corporation filed a lawsuit against us in the United States District Court for the District of Delaware. Transmeta alleges that our P6, Pentium 4, Pentium^® M, Intel^® Core™, and Intel^® Core™ 2 processors infringe 10 Transmeta patents alleged to cover computer architecture and power-efficiency technologies. In December 2006, Transmeta filed an amended complaint alleging that our processors infringe an eleventh Transmeta patent. We filed counterclaims against Transmeta alleging that Transmeta’s Crusoe, Efficeon, and Efficeon 2 families of microprocessors infringe seven of our patents. Transmeta seeks damages, treble damages, an injunction, and attorneys’ fees. We dispute Transmeta’s allegations of infringement and intend to defend the lawsuit vigorously.

BIAX Corporation v. Intel Corporation and Analog Devices, Inc.

In May 2005, BIAX Corporation filed a lawsuit against us and Analog Devices, Inc. in the United States District Court for the Eastern District of Texas. The complaint alleged that certain Hyper-Threading-enabled processors, including Intel’s Pentium^® and Xeon^® processors supporting Hyper-Threading Technology, and Itanium^® and Itanium^® 2 processors, infringed four BIAX patents. The complaint sought unspecified damages, injunctive and other relief including enhanced damages for alleged willful infringement. In June 2007, the parties reached a settlement agreement pursuant to which, among other terms, we made a payment to BIAX and, in exchange, we received a license to BIAX’s patent portfolio. The settlement agreement did not significantly impact our results of operations or cash flows.

Note 19: Operating Segment Information

Our operating segments include the Digital Enterprise Group, Mobility Group, Flash Memory Group, Digital Home Group, and Digital Health Group. The Digital Home Group and Digital Health Group operating segments are included within the “all other” category. In the first quarter of 2007, the Channel Platforms Group began directly supporting our operating segments. We adjusted prior-period amounts to reflect certain minor reorganizations.

The Chief Operating Decision Maker (CODM), as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131), is our President and Chief Executive Officer. 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.

We report the financial results of the following operating segments:

	•		Digital Enterprise Group. Includes microprocessors and related chipsets and motherboards designed for the desktop and enterprise computing market segments; communications infrastructure components such as network processors, communications boards, and embedded processors; wired connectivity devices; and products for network and server storage.
	•		Mobility Group. Includes microprocessors and related chipsets designed for the notebook computing market segment and wireless connectivity products. Results of the Mobility Group for the first half of 2006 include sales of cellular baseband processors and application processors. In the fourth quarter of 2006, we completed the sale of certain assets of our communications and application processor business lines to Marvell Technology Group, Ltd. Related to the sale, we entered into a manufacturing and transition services agreement with Marvell. As a result, the Mobility Group’s sales for first half of 2007 include only sales of application and cellular baseband processors to Marvell.
	•		Flash Memory Group. 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 memory cards, digital audio players, cellular phones, and computing and embedded platforms. In the second quarter of 2007, we agreed to sell certain NOR flash memory assets to a new flash memory company that we plan to form with STMicroelectronics N.V. and Francisco Partners L.P. See “Note 13: Pending Divestiture” for further discussion.

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

We have sales and marketing, manufacturing, finance, and administration groups. Expenses for these groups are generally allocated to the operating segments and the expenses are included in the operating results reported below. Additionally, in the first quarter of 2007, we began allocating share-based compensation to the operating segments and adjusted results to reflect this change. Revenue for the “all other” category primarily relates to microprocessors and related chipsets sold by the Digital Home Group. The “all other” category also includes certain corporate-level operating expenses and charges. These expenses and charges include:

With the exception of goodwill, we do not identify or allocate assets by operating segment, nor does the CODM evaluate operating segments using discrete asset information. We do not report inter-segment revenue because the operating segments do not record it. We do not allocate interest and other income, interest expense, or taxes to operating segments. Although the CODM uses operating income to evaluate the segments, operating costs included in one segment may benefit other segments. Except as discussed above, the accounting policies for segment reporting are the same as for Intel as a whole.

Segment information is summarized as follows:

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
(In Millions)		2007				2006				2007				2006
Net revenue
Digital Enterprise Group
Microprocessor revenue		$	3,465			$	3,338			$	7,026			$	7,230
Chipset, motherboard and other revenue			1,178				1,283				2,371				2,538
			4,643				4,621				9,397				9,768
Mobility Group
Microprocessor revenue			2,398				1,958				4,839				4,305
Chipset and other revenue			898				731				1,764				1,363
			3,296				2,689				6,603				5,668
Flash Memory Group			494				536				963				1,080
All other			247				163				569				433
Total net revenue		$	8,680			$	8,009			$	17,532			$	16,949
Operating income (loss)
Digital Enterprise Group		$	817			$	751			$	1,748			$	1,926
Mobility Group			1,250				851				2,631				1,901
Flash Memory Group			(291	)			(169	)			(574	)			(294	)
All other			(426	)			(361	)			(780	)			(743	)
Total operating income		$	1,350			$	1,072			$	3,025			$	2,790

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

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated condensed financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The MD&A is organized as follows:

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

Our overall gross margin dollars for the second quarter of 2007 decreased 8% compared to the first quarter of 2007 and decreased 2% compared to the second quarter of 2006. Our overall gross margin percentage for the second quarter of 2007 was 46.9%, compared to 50.1% in the first quarter of 2007 and 52.1% in the second quarter of 2006. The gross margin in the second quarter of 2007 decreased compared to the first quarter of 2007 primarily due to gross margin declines in the Mobility Group and Digital Enterprise Group operating segments. Unit sales for the second quarter of 2007 exceeded our expectations, however, gross margin came in below expectations primarily due to lower than expected average selling prices for microprocessors, chipsets, and flash memory. Additionally, demand in the NOR flash memory market segment was weaker than expected. The gross margin decreased compared to the second quarter of 2006 primarily due to gross margin declines in the Digital Enterprise Group and Flash Memory Group operating segments. Overall gross margin decreased primarily due to lower microprocessor average selling prices and higher start-up costs, partially offset by higher microprocessor unit sales and lower microprocessor unit costs.

Chipset unit sales were strong in the second quarter of 2007, a leading indicator of microprocessor orders in the third quarter of 2007, and a solid second half demand environment. Growth in our chipset unit sales occurred within the desktop, server, and mobile market segments. Our notebook and server revenue increased by double digit percentages compared to the second quarter of 2006. Our server revenue also increased by a double digit percentage compared to the first quarter of 2007. We have experienced, and expect to continue to experience, an overall shift in sales mix from desktop processors to mobile microprocessors. Due to the wide price differences among mobile, desktop, and server microprocessors, the mix and types of performance capabilities of microprocessors sold affect the average selling price of our products and have a substantial impact on our revenue.

In the server market, our Quad-Core Intel^® Xeon^® processor unit sales doubled compared to the first quarter of 2007. We continue to advance our server processor technologies as we expect to launch our first MP server processor on Intel Core microarchitecture in the third quarter of 2007. We plan to extend our technology leadership as we launch our Penryn family of processors using our next-generation 45-nanometer process technology in the second half of 2007. As we ramp our 45-nanometer process technology, we expect improvements in our gross margin as our startup costs decrease and we transition costs from manufacturing to research and development. The semiconductor industry is characterized by rapid advances in technology and new product introductions. Our failure to respond quickly to technological developments and incorporate new features into our products could harm our ability to compete.

Results for the second quarter of 2007 include restructuring and asset impairment charges of $82 million as we continue to implement plans to increase our business efficiencies to reduce costs. Our headcount has decreased by 12,200 employees compared to the second quarter of 2006. Spending as a percentage of revenue has decreased from 39% in the second quarter of 2006 to 30% in the second quarter of 2007. Additionally, our operating income has increased by 26% from the second quarter of 2006.

Our efficiency efforts have also contributed to faster factory throughput times, higher yields, and improved equipment utilization. Improvements in our equipment utilization have allowed us to lower our future capital spending outlook for fiscal 2007. Improved throughput times allow us to meet customer demands with lower inventory on hand. Due in part to these efficiencies and to higher unit demand, our raw materials, work in progress, and finished goods inventory levels were all down compared to the first quarter of 2007.

From a financial condition perspective, we ended the second quarter of 2007 with $8.9 billion in cash and short-term investments, and returned $500 million to stockholders through stock repurchases and $1.3 billion as dividends during the first half of 2007.

Other Highlights & Product Releases

	•		Intel, STMicroelectronics N.V. and Francisco Partners L.P. announced an agreement to form a new independent company by combining Intel’s NOR flash memory business and STMicroelectronics’ NOR and NAND flash businesses. See “Note 13: Pending Divestiture” for further discussion.
	•		We introduced a new generation of Intel® Centrino® processor technology (formerly codenamed Santa Rosa) that delivers faster Intel® Core™ 2 Duo processors, high-bandwidth 802.11n WiFi connectivity, richer graphics processing and optional Intel® Turbo Memory.

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

	•		We launched the first Intel® Core™ 2 Extreme processors for mobile, enabling notebook PCs for gamers, digital artists and media enthusiasts.
	•		Intel introduced the Intel® 3 Series chipset family which brings new capabilities to today’s systems and provides manufacturers with a socket-compatible migration path to Intel’s upcoming Penryn family of processors based on the industry’s first 45nm logic process technology.

Strategy

Some of the key strategic initiatives that we are focusing on are listed below and may change over time:

	•		Customer Orientation. Our strategy focuses on developing our next generation of products based on the needs and expectations of our customers. In turn, our products help enable the design and development of new form factors and 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 processor technologies that are designed and configured to work together to provide an optimized end-user solution as compared to ingredients that are sold separately. Our processor technologies typically include a microprocessor, a chipset, a connectivity device, and enabling software. The success of our strategy to offer processor technologies is dependent on our ability to select and incorporate ingredients that our customers value, and to market the processor technologies effectively. To further our strategy to offer products and processor technologies that address customer needs, we offer products at various market price points.
	•		Energy-Efficient Performance. We believe that users of computing and communications systems and devices want improved overall performance and energy-efficient performance. Improved overall performance can include faster processing performance and other capabilities such as multithreading and multitasking. Performance can also be improved through enhanced connectivity, security, manageability, reliability, ease of use, and interoperability among devices. Improved energy-efficient performance involves balancing the addition of these and other types of improved performance factors with lower power consumption. Additionally, we continue to develop multi-core microprocessors that enable improved multitasking and energy efficiency.
	•		Design and Manufacturing Technology Leadership. Our strategy for developing microprocessors with improved performance is to synchronize the introduction of a new microarchitecture with improvements in silicon process technology. We use the term “microarchitecture” when referring to the layout, density, and logical design of each product generation. We plan to introduce a new microarchitecture approximately every two years and ramp the next generation of silicon process technology in the intervening years. This coordinated schedule allows us to develop and introduce new products based on a common microarchitecture quickly, without waiting for the next generation of silicon process technology.
	•		Strategic Investments. We make equity investments in companies around the world to further our strategic objectives and to 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. Our current investment focus areas include helping to enable mobile wireless devices, including expanding and proliferating WiMAX technologies and products; helping to advance the digital home; provide access to premium digital content; enhance the digital enterprise; advance high-performance communications infrastructures; and develop the next generation of silicon processor technologies. Our focus areas tend to develop and change over time due to rapid advancements in technology.
	•		Business Environment. 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 processor technologies. 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.

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

The semiconductor industry is characterized by rapid advances in technology and new product introductions. Our ability to compete depends on our ability to improve our products and processor technologies faster than our competitors, anticipate changing customer requirements, develop and launch new products with features that customers want, and invest in technologies that will enhance our product offerings. See the risks described in “Risk Factors” in Part II, Item 1A of this Form 10-Q for additional discussion.

Strategy by Business Segment

The Digital Enterprise Group (DEG) offers computing and communications products for businesses, service providers, and consumers. DEG products are incorporated into desktop computers, enterprise computer servers, workstations, and the infrastructure for the Internet. We also offer products for the embedded market segment. Within DEG, our largest market segments are in desktop and enterprise computing. Our strategy for the desktop computing market segment is to offer products that provide increased manageability, security, and/or energy-efficient performance while at the same time lowering total cost of ownership for businesses. Our strategy for the enterprise computing market segment is to provide products that provide energy-efficient performance, ease of use, manageability, reliability, and security for entry-level to high-end servers and workstations.

The strategy for the Mobility Group is to offer notebook PC products designed to improve performance, battery life, and wireless connectivity, as well as to allow for the design of reduced form factors. We are also increasing our focus on notebooks designed for the business environment by offering products that provide increased manageability and security. For the ultra-mobile market segment we offer energy-efficient products that are designed primarily for mobile processing of digital content and Internet access, and we are developing new products to support this evolving market segment including products for mobile internet devices.

The strategy for the Flash Memory Group is to offer advanced NOR and NAND flash memory for products such as cellular phones, memory cards, digital audio players, and embedded form factors. In support of our strategy to provide advanced flash memory products we continue to focus on the development of innovative products designed to address the needs of customers for reliable, non-volatile, low cost, high density memory. In the second quarter of 2007, we agreed to sell certain NOR flash memory assets to a new flash memory company that we plan to form with STMicroelectronics N.V. and Francisco Partners L.P. See “Note 13: Pending Divestiture” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q for further discussion.

The strategy for the Digital Home Group is to offer products for use in PCs and in-home consumer electronics devices designed to access and share Internet, broadcast, optical media, and personal content through a variety of linked digital devices within the home. We are focusing on the design of components for high-end enthusiast PCs, mainstream PCs with rich audio/video capabilities, and consumer electronic devices such as digital TVs, high-definition media players, and set-top boxes.

The strategy for the Digital Health Group is to design and deliver technology-enabled products and explore global business opportunities in healthcare information technology, healthcare research, diagnostics, and productivity, as well as personal healthcare. In support of this strategy, we are focusing on the design of technology solutions and platforms for the digital hospital and consumer/home health products.

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

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. 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:

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

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 down the investment to its estimated fair value. When an investee is not considered viable from a financial or technological point of view, we write off the investment, since we consider the estimated fair 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. Impairments of investments in our portfolio of non-marketable equity investments were $44 million in the second quarter of 2007 and $80 million for the first half of 2007 ($10 million in the second quarter of 2006 and $33 million for the first half of 2006). Over the past twelve quarters, including the second quarter of 2007, impairments of investments in our portfolio of non-marketable equity investments have ranged between $10 million and $44 million per quarter.

Income Taxes. We adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), and related guidance in the first quarter of 2007. See “Note 15: Taxes” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q for further discussion.

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, benefits, and deductions, 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, as well as the interest and penalties relating to these uncertain tax positions. 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 we will ultimately recover a substantial majority of the deferred tax assets recorded on our consolidated condensed balance sheets. 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 is not probable.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that 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 requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

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 undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through the related undiscounted 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.

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

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 depreciate the assets over their new shorter useful lives. Impairments and accelerated depreciation of long-lived assets were $14 million during the second quarter of 2007 and $70 million for the first half of 2007 (less than $15 million in the second quarter of 2006 and the first half of 2006). Over the past twelve quarters, including the second quarter of 2007, impairments and accelerated depreciation of long-lived assets have ranged between $1 million and $320 million per quarter. This range includes restructuring charges for asset impairments occurring since the fourth quarter of 2006.

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. The demand forecast is included in the development of our short-term manufacturing plans to 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 forecast accurately the demand, we could be required to write off inventory, which would have a negative impact on our gross margin.

Share-Based Compensation. Total share-based compensation was $237 million in the second quarter of 2007 and $521 million for the first half of 2007 ($332 million in the second quarter of 2006 and $706 million for the first half of 2006). 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 Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (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 freely traded options 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 following:

	•		the volume of market activity of freely traded options, and determined that there was sufficient market activity;
	•		the ability to reasonably match the input variables of freely traded options to those of options granted by the company, such as the date of grant and the exercise price, and determined that the input assumptions were comparable; and
	•		the term of freely traded options used to derive implied volatility, which is generally one to two years, and determined that the length of term was sufficient.

We use the simplified calculation of expected life described in the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin 107 (SAB 107), due to differences in the vesting terms and contractual life of current option grants compared to our historical grants. If we determined that another method used 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. In addition, the simplified calculation of expected life is only allowed under SAB 107 through the end of fiscal 2007, after which time we will use an alternate method for estimating the useful life of options granted.

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

Higher volatility and longer 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 second quarter and the first half of 2007 is as follows:

		Q2 2007								First Half 2007
		Weighted				Increase in Total				Weighted				Increase in Total
		Average				Fair Value1				Average				Fair Value1
		Fair Value				(in millions)				Fair Value				(in millions)
As reported		$	5.18							$	5.24
Hypothetical:
Increase expected volatility by 5 percentage points2		$	5.93			$	13			$	6.01			$	14
Increase expected lives by 1 year		$	5.64			$	8			$	5.70			$	8

In addition, SFAS No. 123(R) requires us to develop an estimate of the number of share-based awards that 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 we recognize the cumulative effect of adjusting the rate for all expense amortization after January 1, 2006 in the period the forfeiture estimate is changed. We estimate and adjust forfeiture rates based on a quarterly review of recent forfeiture activity and expected future employee turnover. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, we make an adjustment that will result in a decrease to the expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, we make an adjustment that 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 and administrative expenses. The effect of forfeiture adjustments in the second quarter and the first half of 2007 was insignificant. We record cumulative adjustments to the extent that the related expense is recognized in the financial statements, beginning with implementation of SFAS No. 123(R) in the first quarter of 2006. Therefore, the potential impact from cumulative forfeiture adjustments will increase in future periods. The expense that we recognize in future periods could also differ significantly from the current period and from 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 - Second Quarter of 2007 Compared to Second Quarter of 2006

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

		Q2 2007								Q2 2006
						% of Net								% of Net
(Dollars in Millions, Except Per Share Amounts)		Dollars				Revenue				Dollars				Revenue
Net revenue		$	8,680				100.0	%		$	8,009				100.0	%
Cost of sales			4,605				53.1	%			3,838				47.9	%
Gross margin			4,075				46.9	%			4,171				52.1	%
Research and development			1,353				15.5	%			1,496				18.7	%
Marketing, general and administrative			1,284				14.8	%			1,593				19.9	%
Restructuring and asset impairment charges			82				0.9	%			—				—	%
Amortization of acquisition-related intangibles and costs			6				0.1	%			10				0.1	%
Operating income			1,350				15.6	%			1,072				13.4	%
Gains (losses) on equity investments, net			(1	)			—	%			37				0.4	%
Interest and other, net			180				2.0	%			144				1.8	%
Income before taxes			1,529				17.6	%			1,253				15.6	%
Provision for taxes			251				2.9	%			368				4.5	%
Net income		$	1,278				14.7	%		$	885				11.1	%
Diluted earnings per share		$	0.22							$	0.15

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

		Q2 2007								Q2 2006
(Dollars In Millions)		Revenue				% of Total				Revenue				% of Total
Asia-Pacific		$	4,457				51	%		$	4,015				50	%
Americas			1,823				21	%			1,713				22	%
Europe			1,485				17	%			1,375				17	%
Japan			915				11	%			906				11	%
Total		$	8,680				100	%		$	8,009				100	%

Our net revenue for Q2 2007 was $8.7 billion, an increase of 8% compared to Q2 2006. Higher microprocessor unit sales and higher server microprocessor average selling prices were partially offset by lower desktop and mobile microprocessor average selling prices.

Revenue in the Asia-Pacific region increased 11%, revenue in the Europe region increased 8%, revenue in the Americas region increased 6%, and revenue in Japan was approximately flat compared to Q2 2006. Revenue from both mature and emerging markets increased in Q2 2007 compared to Q2 2006. While the increase in mature markets occurred in all four geographic regions, the majority of the growth occurred in the Asia-Pacific region. Most of the increase in the emerging markets also occurred in the Asia-Pacific region.

Our overall gross margin dollars decreased slightly by 2% in Q2 2007 compared to Q2 2006. Our overall gross margin percentage decreased to 46.9% in Q2 2007, from 52.1% in Q2 2006. The decline in gross margin percentage was primarily attributable to gross margin declines in the Digital Enterprise Group and Flash Memory Group operating segments. We derived most of our overall gross margin dollars and operating profit from the sale of microprocessors in Q2 2006, and substantially all of our overall gross margin dollars and operating profit from the sale of microprocessors in Q2 2007. See “Business Outlook” later in this section for a discussion of gross margin expectations.

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

Digital Enterprise Group

The revenue and operating income for the Digital Enterprise Group operating segment for the second quarter of 2007 and the second quarter of 2006 were as follows:

(In Millions)		Q2 2007				Q2  2006
Microprocessor revenue		$	3,465			$	3,338
Chipset, motherboard, and other revenue			1,178				1,283
Net revenue		$	4,643			$	4,621
Operating income		$	817			$	751

Net revenue for the Digital Enterprise Group operating segment was approximately flat in Q2 2007 compared to Q2 2006. Higher microprocessor revenue was offset by lower chipset, motherboard, and other revenue. The increase in microprocessor revenue was due to higher unit sales of microprocessors, and to a lesser extent, an increase in server average selling prices, partially offset by lower desktop average selling prices in a competitive pricing environment. The decrease in chipset, motherboard, and other revenue was due to a decrease in communications infrastructure revenue, and to a lesser extent, lower motherboard unit sales, slightly offset by higher chipset revenue. Microprocessors within the Digital Enterprise Group include microprocessors designed for the desktop and enterprise computing market segments as well as embedded microprocessors.

Operating income increased by $66 million, or 9%, in Q2 2007 compared to Q2 2006. The increase in operating income was primarily due to lower operating expenses, partially offset by approximately $220 million of higher start-up costs, primarily related to our 45-nanometer process technology.

Mobility Group

The revenue and operating income for the Mobility Group operating segment for the second quarter of 2007 and the second quarter of 2006 were as follows:

(In Millions)		Q2 2007				Q2 2006
Microprocessor revenue		$	2,398			$	1,958
Chipset and other revenue			898				731
Net revenue		$	3,296			$	2,689
Operating income		$	1,250			$	851

Net revenue for the Mobility Group operating segment increased by $607 million, or 23%, in Q2 2007 compared to Q2 2006. Microprocessor revenue increased by $440 million, or 22%, in Q2 2007 compared to Q2 2006, and chipset and other revenue increased by $167 million, or 23%, in Q2 2007 compared to Q2 2006. The increase in microprocessor revenue was due to higher unit sales, partially offset by lower average selling prices. Most of the increase in chipset and other revenue was due to higher revenue from sales of chipsets and cellular baseband processors, and to a lesser extent, higher revenue from sales of wireless connectivity products. In the fourth quarter of 2006, we sold certain assets of the business line that included application and cellular baseband processors used in handheld devices, however we continue to manufacture and sell these processors as part of a manufacturing and transition services agreement.

Operating income increased significantly by $399 million, or 47%, in Q2 2007 compared to Q2 2006. The substantial majority of the increase in operating income was due to higher revenue, and to a lesser extent, lower unit costs and lower operating expenses. These increases were partially offset by approximately $115 million of higher start-up costs, primarily related to our 45-nanometer process technology.

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

Flash Memory Group

The revenue and operating loss for the Flash Memory Group operating segment for the second quarter of 2007 and the second quarter of 2006 were as follows:

(In Millions)		Q2 2007				Q2 2006
Net revenue		$	494			$	536
Operating loss		$	(291	)		$	(169	)

Net revenue for the Flash Memory Group operating segment decreased by $42 million, or 8%, in Q2 2007 compared to Q2 2006. The decrease in revenue was due to lower average selling prices for NOR flash memory products, partially offset by higher NAND revenue. In Q1 2006, we began shipping NAND flash memory products manufactured by IMFT. Operating loss increased from $169 million in Q2 2006 to $291 million in Q2 2007. The operating loss increase was driven by lower overall revenue and higher costs related to our new NAND flash memory business, partially offset by lower NOR flash memory unit costs.

In the second quarter of 2007, we agreed to sell certain NOR flash memory assets to a new flash memory company that we plan to form with STMicroelectronics N.V. and Francisco Partners L.P. See “Note 13: Pending Divestiture” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q for further discussion.

Share-Based Compensation

Share-based compensation decreased by $95 million to $237 million in Q2 2007 from $332 million in Q2 2006. This decrease was due primarily to fewer options vesting in Q2 2007. Additionally, the weighted average fair value of vesting options was lower in Q2 2007 compared to Q2 2006 mainly attributable to a lower weighted average volatility rate and shorter option vesting life. This decrease was partially offset by lower share-based compensation costs capitalized as part of inventory.

Operating Expenses

Operating expenses for the second quarter of 2007 and the second quarter of 2006 were as follows:

(In Millions)		Q2 2007				Q2 2006
Research and development (includes share-based compensation of $94 in 2007 and $126 in 2006)		$	1,353			$	1,496
Marketing, general and administrative (includes share-based compensation of $79 in 2007 and $140 in 2006)		$	1,284			$	1,593
Restructuring and asset impairment charges		$	82			$	—
Amortization of acquisition-related intangibles and costs		$	6			$	10

Research and Development. Research and development spending decreased $143 million, or 10%, in Q2 2007 compared to Q2 2006. This decrease was primarily due to lower development costs as we transition from research and development to manufacturing using our 45-nanometer process technology, and lower headcount.

Marketing, General and Administrative. Marketing, general and administrative expenses decreased $309 million, or 19%, in Q2 2007 compared to Q2 2006. This decrease was primarily due to lower headcount, lower cooperative advertising expenses, and lower marketing program expenses.

Research and development along with marketing, general and administrative expenses were 30% of net revenue in Q2 2007 (39% of net revenue in Q2 2006).

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

Restructuring and Asset Impairment Charges. During the second quarter of 2007, we recorded $82 million of restructuring and asset impairment charges, net of adjustments. We recorded $80 million related to employee severance and benefit arrangements and $2 million related to asset impairments. See Management’s Discussion and Analysis of Financial Condition and Results of Operations ‘First Half of 2007 compared to First Half of 2006’ of this Form 10-Q for further discussion.

Gains (Losses) on Equity Investments, Interest and Other, and Provision for Taxes

Gains (losses) on equity investments, net; interest and other, net; and provision for taxes for the second quarter of 2007 and the second quarter of 2006 were as follows:

(In Millions)		Q2 2007				Q2 2006
Gains (losses) on equity investments, net		$	(1	)		$	37
Interest and other, net		$	180			$	144
Provision for taxes		$	251			$	368

Gains (losses) on equity investments, net, which includes investments accounted for under the equity method and certain equity derivatives, for Q2 2007 was a net loss of $1 million compared to a net gain of $37 million for Q2 2006. The decrease was due to higher impairment charges on equity investments ($44 million in Q2 2007 and $10 million in Q2 2006) and losses on equity method investments partially offset by higher gains on sales of equity investments.

Interest and other, net increased to $180 million in Q2 2007 compared to $144 million in Q2 2006 reflecting higher interest income as a result of higher average investment balances and higher rates.

Our effective income tax rate for Q2 2007 was 16.4%, compared to 29.4% for Q2 2006. The Q2 2007 tax rate includes the reversal of previously accrued taxes of $155 million. The reversal relates to “effectively settling” several uncertain tax positions. See “Note 15: Taxes” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q for further discussion. In addition, the tax rate for the second quarter of 2007 was positively impacted by an increase in the expected percentage of profits in low tax jurisdictions as well as an increase in expected research and development credits.

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

Results of Operations - First Half of 2007 Compared to First Half of 2006

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

		YTD 2007								YTD 2006
(Dollars in Millions, Except Per Share Amounts)		Dollars				% of Net Revenue				Dollars				% of Net Revenue
Net revenue		$	17,532				100.0	%		$	16,949				100.0	%
Cost of sales			9,025				51.5	%			7,835				46.2	%
Gross margin			8,507				48.5	%			9,114				53.8	%
Research and development			2,753				15.7	%			3,058				18.0	%
Marketing, general and administrative			2,561				14.6	%			3,237				19.1	%
Restructuring and asset impairment charges			157				0.8	%			—				—	%
Amortization of acquisition-related intangibles and costs			11				0.1	%			29				0.2	%
Operating income			3,025				17.3	%			2,790				16.5	%
Gains on equity investments, net			28				0.1	%			39				0.2	%
Interest and other, net			349				2.0	%			298				1.7	%
Income before taxes			3,402				19.4	%			3,127				18.4	%
Provision for taxes			488				2.8	%			885				5.2	%
Net income		$	2,914				16.6	%		$	2,242				13.2	%
Diluted earnings per share		$	0.49							$	0.38