10-K 1 f50771e10vk.htm FORM 10-K e10vk
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
 
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
         For the fiscal year ended December 27, 2008.
      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 LOGO)
 
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 (408) 765-8080
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of each class
 
Name of each exchange on which registered
Common stock, $0.001 par value
  The NASDAQ Global Select Market*
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x
 
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 x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
             
Large accelerated filer x
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x
 
Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 27, 2008, based upon the closing price of the common stock as reported by The NASDAQ Global Select Market* on such date, was approximately
$120.9 billion
5,562 million shares of common stock outstanding as of February 6, 2009
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s Proxy Statement related to its 2009 Annual Stockholders’ Meeting to be filed subsequently—Part III of this Form 10-K.
 
 


 

 
INTEL CORPORATION
 
FORM 10-K
 
FOR THE FISCAL YEAR ENDED DECEMBER 27, 2008
 
INDEX
 
         
        Page
  Business   1
  Risk Factors   16
  Unresolved Staff Comments   23
  Properties   23
  Legal Proceedings   23
  Submission of Matters to a Vote of Security Holders   23
 
PART II
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   24
  Selected Financial Data   26
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
  Quantitative and Qualitative Disclosures About Market Risk   53
  Financial Statements and Supplementary Data   55
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   115
  Controls and Procedures   115
  Other Information   115
 
PART III
  Directors, Executive Officers and Corporate Governance   116
  Executive Compensation   116
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   116
  Certain Relationships and Related Transactions, and Director Independence   116
  Principal Accounting Fees and Services   116
 
PART IV
  Exhibits, Financial Statement Schedules   117


Table of Contents

 
PART I
 
ITEM 1. BUSINESS
 
Industry
 
We are the world’s largest semiconductor chip maker, based on revenue. We develop advanced integrated digital technology products, primarily integrated circuits, for industries such as computing and communications. Integrated circuits are semiconductor chips etched with interconnected electronic switches. We also develop platforms, which we define as integrated suites of digital computing technologies that are designed and configured to work together to provide an optimized user computing solution compared to components that are used separately. Our goal is to be the preeminent provider of semiconductor chips and platforms for the worldwide digital economy.
 
We were incorporated in California in 1968 and reincorporated in Delaware in 1989. Our Internet address is www.intel.com. On this web site, we publish voluntary reports, which we update annually, outlining our performance with respect to corporate responsibility, including environmental, health, and safety compliance.
 
We use our Investor Relations web site, www.intc.com, as a channel for routine distribution of important information, including news releases, analyst presentations, and financial information. We post filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC), including our annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K; our proxy statements; and any amendments to those reports or statements. All such postings and filings are available on our Investor Relations web site free of charge. In addition, this web site allows investors and other interested persons to sign up to automatically receive e-mail alerts when we post news releases and financial information on our web site. The SEC also maintains a web site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The content on any web site referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
 
Products
 
We strive to design and manufacture computing and communications components and platforms with improved overall performance and/or improved energy efficiency. Improved overall performance can include faster processing performance and other improved capabilities, such as multithreading and multitasking. Performance can also be improved through enhanced connectivity, storage, security, manageability, utilization, reliability, ease of use, and interoperability among devices. Improved energy-efficient performance is achieved by balancing performance factors with lower power consumption. Lower power consumption may extend utilization time for battery-powered form factors and reduce system heat output, thereby providing power savings and reducing the total cost of ownership.
 
We offer products at various levels of integration, to allow our customers flexibility in creating computing and communications systems.
 
Components
 
Microprocessors
 
A microprocessor—the central processing unit (CPU) of a computer system—processes system data and controls other devices in the system, acting as the “brains” of the computer. We offer microprocessors with one or multiple processor cores designed for desktops, nettops, workstations, servers, embedded products, communications products, notebooks, netbooks, mobile Internet devices (MIDs), and consumer electronics. The following are characteristics of our microprocessors:
  •  Multi-core microprocessors contain two or more processor cores, which can enable improved multitasking and energy-efficient performance by distributing computing tasks across multiple cores.
  •  Cache is a memory that can be located directly on the microprocessor, permitting quicker access to frequently used data and instructions. Incorporating additional amounts and/or levels of cache can enable higher performance.
  •  Our microprocessors can also include integrated memory controllers, which increase the speed of data transfer from cache and system memory.


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During 2008, we introduced a new microarchitecture based on our 45-nanometer (nm) Hi-k metal gate silicon process technology (latest generation Intel® Coretm microarchitecture). Microarchitecture refers to the layout, density, and logical design of a microprocessor. The latest generation Intel Core microarchitecture incorporates features designed to increase performance and energy efficiency, such as:
 
     
Feature   Performance Enhancement
Intel® QuickPath Technology
  Utilizes an integrated memory controller to allow faster memory access than a standard front side bus
Intel® Turbo Boost Technology
  Increases processor frequency when applications demand more performance
Intel® Hyper-Threading Technology
  Allows each processor core to process two software tasks or threads simultaneously
 
During 2008, we also introduced the Intel® Atomtm processor family. These low-power processors are specifically designed for embedded solutions, MIDs, consumer electronics, and two new classes of simple and affordable Internet-focused computers called netbooks and nettops.
 
Chipsets
 
The chipset operates as the “nervous system” in a PC or other computing device, sending data between the microprocessor and input, display, and storage devices, such as the keyboard, mouse, monitor, hard drive, and CD or DVD drive. We offer chipsets designed for desktops, nettops, workstations, servers, embedded products, communications products, notebooks, netbooks, MIDs, and consumer electronics. The following are functions of chipsets:
  •  Chipsets perform essential logic functions, such as balancing the performance of the system and removing bottlenecks.
  •  Chipsets extend the graphics, audio, video, and other capabilities of many systems.
  •  Chipsets may also control access between the CPU and system memory.
 
Motherboards
 
We offer motherboard products designed for our desktop, workstation, and server platforms. A motherboard is the principal board within a system, and typically contains the CPU, chipset, memory, and other components. The motherboard also has connectors for attaching devices to the bus, which is the subsystem that transfers data between various components of a computer.
 
Wired and Wireless Connectivity
 
We offer wired and wireless connectivity products, including network adapters and embedded wireless cards, based on industry-standard protocols used to translate and transmit data across networks. Wireless connectivity products based on WiFi technology allow users to wirelessly connect to high-speed local area networks, typically within a close range. We have also developed wireless connectivity products for both mobile and fixed networks based on WiMAX, a standards-based wireless technology providing high-speed broadband connectivity, which links users and networks up to several miles apart.
 
Platforms
 
We offer platforms that incorporate various components and technologies. A platform typically includes a microprocessor, chipset, and enabling software, and may include additional hardware, services, and support. In developing our platforms, we may include components made by other companies. A component is one of any number of software or hardware features that may be incorporated into a computer, handheld device, or other computing system, including a microprocessor, chipset, motherboard, memory, wired or wireless connectivity device, or software. Platforms based on our latest generation Intel Core microarchitecture integrate a memory controller into each microprocessor and connect processors and other components with a high-speed interconnect. We refer to certain platform brands within our product offerings as processor technologies.


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Microprocessor and Platform Technologies
 
We offer features to improve microprocessor and platform capabilities that can enhance system performance and user experience. For example, we offer technologies that can help information technology managers diagnose, fix, and protect enabled systems that are plugged into a power source and connected to a network, even if a computer is turned off or has a failed hard drive or operating system. Additional features can enable virtualization, in which a single computer system can function as multiple virtual systems by running multiple operating systems and applications. Virtualization can consolidate workloads and provide increased security and management capabilities. To take advantage of these and other features that we offer, a computer system must have a microprocessor that supports a chipset and BIOS (basic input/output system) that use the technology, and software that is optimized for the technology. Performance will vary depending on the system hardware and software used.
 
Additional Product Offerings
 
NAND flash memory is a specialized type of memory component primarily used in memory cards, digital audio players, and system-level applications, such as solid-state drives used to store data and program code. NAND flash memory retains information even when the power is off, and provides faster access to data than traditional hard drives. Flash memory does not have any moving parts, unlike a device such as a rapidly spinning disk drive, allowing flash memory to be more tolerant of bumps and shocks.
 
Communications infrastructure products are the basic building blocks for modular communications platforms and include advanced, fully programmable processors used in networking equipment to rapidly manage and direct data moving across networks and the Internet.
 
Network and server storage products include small-business and home-network memory systems built for performance, security, and manageability. These products allow data storage resources to be added to either of the two most prevalent types of networking technology: Ethernet or Fibre Channel.
 
Software products primarily help enable the creation of applications with software development tools designed to complement our latest hardware technologies.
 
Revenue by Major Operating Segment
 
Net revenue for our major operating segments, the Digital Enterprise Group (DEG) and the Mobility Group (MG), presented as a percentage of our consolidated net revenue, was as follows:
 
Percentage of Revenue
(Dollars in Millions)
 
(PERCENTAGE OF REVENUE GRAPHIC)


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Revenue from sales of microprocessors for our major operating segments, presented as a percentage of our consolidated net revenue, was as follows:
 
Percentage of Revenue
(Dollars in Millions)
 
(PERCENTAGE OF REVENUE PIE CHARTS)
 
Below, we discuss the key products and processor technologies, including some key introductions, of our major operating segments. For a discussion of our strategy, see “Strategy” in Part II, Item 7 of this Form 10-K.
 
Digital Enterprise Group
 
The Digital Enterprise Group offers products that are incorporated into desktop and nettop computers, enterprise computing servers and workstations, a broad range of embedded applications, and other products that help make up the infrastructure for the Internet. DEG’s products include microprocessors and related chipsets and motherboards designed for the desktop and enterprise computing market segments; microprocessors and chipsets for embedded applications; components for communications infrastructure equipment, such as network processors; wired connectivity devices; and products for network and server storage.
 
Desktop Market Segment
 
Our current desktop microprocessor offerings include the:
     
•     Intel® Coretm i7 processor Extreme Edition
  •     Intel® Pentium® Dual-Core processor
•     Intel® Coretm i7 processor
  •     Intel® Celeron® Dual-Core processor
•     Intel® Coretm2 Extreme processor
  •     Intel® Celeron® processor
•     Intel® Coretm2 Quad processor
  •     Intel® Atomtm processor
•     Intel® Coretm2 Duo processor
   
 
Most of these Intel Core microarchitecture-based processors are manufactured using our 45nm Hi-k metal gate silicon technology (45nm process technology). We offer desktop microprocessors at a variety of price/performance points, from the high-end Intel Core i7 processor Extreme Edition—a quad-core processor based on our latest generation Intel Core microarchitecture designed for processor-intensive tasks in demanding multitasking environments—to the Intel Celeron processor designed to provide value, quality, and reliability for basic computing needs. In addition, we offer the Intel Atom processor designed for low-power and affordable Internet-focused devices. The related chipsets for our desktop microprocessor offerings primarily include Intel® 4 Series Express Chipsets, Intel® 3 Series Express Chipsets, and Intel® 900 Series Express Chipsets.
 
We also offer processor technologies based on our microprocessors, chipsets, and motherboard products that are optimized for the desktop market segment. For business desktop PCs, we offer the Intel® Coretm2 Duo processor with vProtm technology and the Intel® Coretm2 Quad processor with vProtm technology, which are designed to provide increased security and manageability, energy-efficient performance, and lower cost of ownership.


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Our new product offerings in 2008 and early 2009 include:
  •  The Intel Core i7 processor family, including the Intel Core i7 processor Extreme Edition, based on our latest generation Intel Core microarchitecture, and designed for high-performance, power-efficient computing.
  •  Intel Atom processors designed for low-power and affordable Internet-focused devices.
  •  Intel 4 Series Express Chipsets designed to be used with 45nm Intel Core 2 Duo and Intel Core 2 Quad processors, helping to improve mainstream desktop system performance, energy efficiency, and video and sound quality.
  •  Desktop motherboards that support a new generation of Intel® vProtm technology for business desktop PCs with enhanced manageability and security features.
 
Enterprise Market Segment
 
Our current server and workstation microprocessor offerings include the Intel® Xeon® processor and the Intel® Itanium® processor. Our Intel Xeon processor family of products supports a range of entry-level to high-end technical and commercial computing applications such as IP data centers. Compared to our Intel Xeon processor family, our Intel Itanium processor family generally supports an even higher level of reliability and computing performance for data processing, handling high transaction volumes, and other compute-intensive applications for enterprise-class servers, as well as supercomputing solutions. Servers, which usually have multiple microprocessors or cores working together, manage large amounts of data, direct data traffic, perform complex transactions, and control central functions in local and wide area networks and on the Internet. Workstations typically offer higher performance than standard desktop PCs and are used for applications such as engineering design, digital content creation, and high-performance computing.
 
Our new product offerings in 2008 and early 2009 include:
  •  Low-voltage Quad-Core Intel Xeon processors based on our 45nm process technology.
  •  Intel Xeon processors designed to reduce the use of environmentally sensitive materials.
  •  Intel Xeon processors with up to six processing cores and 16 megabytes (MB) of shared cache memory. These processors are built using our 45nm process technology, and are designed for high-end servers with up to 16 processor sockets.
 
Embedded and Communications Market Segments
 
We offer microprocessors and chipsets for embedded applications, and components—such as network processors—for communications infrastructure equipment.
 
Our new product offerings in 2008 and early 2009 include:
  •  Quad-Core and Dual-Core Intel Xeon processors for embedded market segments, based on our 45nm process technology. These processors are designed for storage, router, security, medical, communications, and other high-performance, memory-intensive applications.
  •  Intel Atom processors designed for embedded applications such as in-vehicle information/entertainment systems, portable point-of-sale retail devices, and industrial robotics.
  •  A new category of highly integrated, purpose-built System on Chip (SoC) products designed for embedded security, storage, communications, and industrial robotic applications. SoC products integrate core processing functionality with specific components, such as graphics, audio, and video, onto a single chip with reduced power consumption and size. These SoC products are based on Intel® architecture.
 
Mobility Group
 
The Mobility Group offers products including microprocessors and related chipsets designed for the notebook and netbook market segments, wireless connectivity products, and energy-efficient products designed for the MID and ultra-mobile PC market segments. We also offer Intel® Centrino® and Intel® Centrino® 2 processor technologies based on our microprocessors, chipsets, and wireless network connections.
 
Our current mobile microprocessor offerings include the:
     
•     Intel® Coretm2 Extreme mobile processor
  •     Intel® Celeron® Dual-Core processor
•     Intel® Coretm2 Quad mobile processor
  •     Intel® Celeron® M processor
•     Intel® Coretm2 Duo mobile processor
  •     Intel® Celeron® processor
•     Intel® Coretm2 Solo mobile processor
  •     Intel® Atomtm processor


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We offer mobile microprocessors for notebooks at a variety of price/performance points, from the Intel Core 2 Extreme mobile processor designed for gaming to the Intel Celeron processor designed to provide value, quality, and reliability for basic computing needs. In addition, we offer the Intel Atom processor designed for netbooks, MIDs, and ultra-mobile PCs. We offer these processors in various packaging options, giving our customers flexibility for a wide range of system designs for notebook PCs and other mobile computing devices. The related chipsets for our mobile microprocessor offerings primarily include Mobile Intel® 4 Series Express Chipsets and Mobile Intel® 900 Series Express Chipsets.
 
In 2008, the majority of the revenue in the MG operating segment was from the sale of products that make up our Intel Centrino and Intel Centrino 2 processor technologies. These technologies are designed to provide high performance with improved multitasking, power-saving features to improve battery life, smaller form factors, wireless network connectivity, and improved boot times compared to similar microprocessors that do not incorporate our Intel Centrino and Intel Centrino 2 processor technologies. Intel® Centrino® with vProtm technology and Intel® Centrino® 2 with vProtm technology include the features of Intel Centrino and Intel Centrino 2 processor technologies, respectively, and are designed to provide mobile business PCs with increased security, manageability, and energy-efficient performance.
 
Our new product offerings in 2008 and early 2009 include:
  •  Intel Core 2 Quad mobile processors, designed to handle complex compute and visualization tasks on notebook workstations.
  •  Intel Centrino 2 processor technology and Intel Centrino 2 with vPro technology, designed to deliver higher performance, longer battery life, faster wireless connectivity, and enhanced manageability and security capabilities compared to earlier versions of Intel Centrino processor technology. These platforms are based on new versions of Intel Core 2 Duo mobile processors.
  •  Mobile Intel 4 Series Express Chipsets designed to be used with 45nm Intel Core 2 Duo and Intel Core 2 Quad mobile processors.
  •  Intel Atom processors specifically designed for MIDs and netbooks.
 
Other Products
 
NAND Solutions Group
 
We offer NAND flash memory products primarily used in memory cards and system-level applications, such as solid-state drives. Our solid-state drives, available in densities ranging from 1 gigabyte (GB) to 160 GB, are designed to enable faster boot times, lower power consumption, increase reliability, improve performance, and weigh less than standard hard disk drives. Components for our NAND flash memory products are manufactured by IM Flash Technologies, LLC (IMFT) using 34nm or 50nm process technology. See “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.
 
Our new product offerings in 2008 and early 2009 include:
  •  80-GB and 160-GB solid-state drives based on NAND flash technology, designed for laptop and desktop computers.
  •  High-performance, 32-GB and 64-GB solid-state drives based on NAND flash technology, designed for use in servers, workstations, and storage systems.
 
Digital Home Group
 
The Digital Home Group offers products, including SoC designs, for use in 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. In addition, we offer components for consumer electronics devices such as digital TVs, high-definition media players, and set-top boxes, which receive, decode, and convert incoming data signals.
 
Digital Health Group
 
The Digital Health Group offers technology-enabled products for healthcare providers as well as for use in personal healthcare. In 2008, we introduced the Intel® Health Guide, a personal health system designed to allow clinicians to remotely monitor and manage patients’ care through an online interface.


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Manufacturing and Assembly and Test
 
As of December 27, 2008, 70% of our wafer fabrication, including microprocessors and chipsets, was conducted within the U.S. at our facilities in Arizona, Oregon, Massachusetts, New Mexico, and California. The remaining 30% of our wafer fabrication was conducted outside the U.S. at our facilities in Ireland and Israel.
 
As of December 27, 2008, we primarily manufactured our products in wafer fabrication facilities at the following locations:
 
                 
Products   Wafer Size     Process Technology   Locations
Microprocessors
    300mm     45nm   Arizona, New Mexico, Israel
Chipsets and microprocessors
    300mm     65nm   Ireland, Arizona, Oregon
Chipsets, microprocessors, and other products
    300mm     90nm   Ireland
Chipsets
    200mm     130nm   Oregon, Massachusetts, Arizona, California
NOR flash memory
    200mm     65nm–130nm   Ireland
Chipsets
    200mm     180nm and above   Ireland
 
We expect to increase the capacity of certain facilities listed above through additional investments in capital equipment. In addition to our current facilities, we are building a 300mm wafer fabrication facility in China. Subsequent to the end of 2008, management approved plans to restructure some of our manufacturing and assembly and test operations, and align our manufacturing and assembly and test capacity to current market conditions. These actions, which are expected to take place beginning in 2009, include stopping production at a 200mm wafer fabrication facility in Oregon and ending production at our 200mm wafer fabrication facility in California.
 
As of December 27, 2008, the substantial majority of our microprocessors were manufactured on 300mm wafers using our 45nm process technology. In the second half of 2009, we expect to begin manufacturing microprocessors using our 32nm process technology. As we move to each succeeding generation of manufacturing process technology, we incur significant start-up costs to prepare each factory for manufacturing. However, continuing to advance our process technology provides benefits that we believe justify these costs. The benefits of moving to each succeeding generation of manufacturing process technology can include using less space per transistor, reducing heat output from each transistor, and/or increasing the number of integrated features on each chip. These advancements can result in microprocessors that are higher performing, consume less power, and/or cost less to manufacture.
 
To augment capacity, we use third-party manufacturing companies (foundries) to manufacture wafers for certain components, including networking and communications products. In addition, we primarily use subcontractors to manufacture board-level products and systems, and purchase certain communications networking products from external vendors, principally in the Asia-Pacific region.
 
Our NAND flash memory products are manufactured by IMFT, a NAND flash memory manufacturing company that we formed with Micron Technology, Inc. We currently purchase 49% of the manufactured output of IMFT. Assembly and test of NAND flash memory products is performed by Micron and other external subcontractors. See “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.
 
During the second quarter of 2008, we completed the divestiture of our NOR flash memory business in exchange for an ownership interest in Numonyx B.V. We entered into supply and services agreements that involved the manufacture and the assembly and test of NOR flash memory products for Numonyx through 2008. In the fourth quarter of 2008, we agreed with Numonyx to extend certain supply and service agreements through the end of 2009. In addition, we are leasing a wafer fabrication facility located in Israel to Numonyx. That facility is not shown in our above listing of wafer fabrication facilities. See “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.
 
Following the manufacturing process, the majority of our components are subject to assembly and test. We perform our components assembly and test at facilities in Malaysia, China, Costa Rica, and the Philippines. We are building a new assembly and test facility in Vietnam that is expected to begin production in 2010. To augment capacity, we use subcontractors to perform assembly of certain products, primarily chipsets and networking and communications products. The restructuring plans described above include closing two assembly and test facilities in Malaysia, one facility in the Philippines, and one facility in China, and are expected to take place beginning in 2009.


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Our employment practices are consistent with, and we expect our suppliers and subcontractors to abide by, local country law. In addition, we impose a minimum employee age requirement as well as progressive environmental, health, and safety (EHS) requirements, regardless of local law.
 
We have thousands of suppliers, including subcontractors, providing our various materials and service needs. We set expectations for supplier performance and reinforce those expectations with periodic assessments. We communicate those expectations to our suppliers regularly and work with them to implement improvements when necessary. We seek, where possible, to have several sources of supply for all of these materials and resources, but we may rely on a single or limited number of suppliers, or upon suppliers in a single country. In those cases, we develop and implement plans and actions to reduce the exposure that would result from a disruption in supply. We have entered into long-term contracts with certain suppliers to ensure a portion of our silicon supply.
 
Our products typically are produced at multiple Intel facilities at various sites around the world, or by subcontractors who have multiple facilities. However, some products are produced in only one Intel or subcontractor facility, and we seek to implement actions and plans to reduce the exposure that would result from a disruption at any such facility. See “Risk Factors” in Part I, Item 1A of this Form 10-K.
 
Research and Development
 
We are committed to investing in world-class technology development, particularly in the design and manufacture of integrated circuits. Research and development (R&D) expenditures in 2008 were $5.7 billion ($5.8 billion in fiscal year 2007 and $5.9 billion in fiscal year 2006).
 
Our R&D activities are directed toward developing the technology innovations that we believe will deliver our next generation of products and platforms, which will in turn enable new form factors and new usage models for businesses and consumers. Our R&D activities range from design and development of products, to developing and refining manufacturing processes, to researching future technologies and products.
 
We are focusing our R&D efforts on advanced computing, communications, and wireless technologies as well as energy efficiency by developing new microarchitectures, advancing our silicon manufacturing process technology, delivering the next generation of microprocessors and chipsets, improving our platform initiatives, and developing software solutions and tools to support our technologies. Our R&D efforts enable new levels of performance and address areas such as scalability for multi-core architectures, energy efficiency, system manageability and security, ease of use, and new communications capabilities. In addition, we are making significant R&D investments in growth areas such as SoC, MIDs, embedded applications, consumer electronics, and graphics.
 
As part of our R&D efforts, we plan to introduce a new microarchitecture for our mobile, desktop, and Intel Xeon processors approximately every two years and ramp the next generation of silicon process technology in the intervening years. We refer to this as our “tick-tock” technology development cadence. Our leadership in silicon technology has enabled us to make “Moore’s Law” a reality. Moore’s Law predicted that transistor density on integrated circuits would double about every two years. Our leadership in silicon technology has also helped to expand on the advances anticipated by Moore’s Law by bringing new capabilities into silicon and producing new products and platforms optimized for a wider variety of applications. In 2008, we introduced a new microarchitecture using our 45nm process technology. We are currently developing 32nm process technology, our next-generation process technology, and expect to begin manufacturing products using that technology in the second half of 2009.
 
Our R&D model is based on a global organization that emphasizes a collaborative approach to identifying and developing new technologies, leading standards initiatives, and influencing regulatory policy to accelerate the adoption of new technologies. Our R&D initiatives are performed by various business groups within the company, and we centrally manage key cross-business group product initiatives to align and prioritize our R&D activities across these groups. In addition, we may augment our R&D initiatives by investing in companies or entering into agreements with companies that have similar R&D focus areas. For example, we have an agreement with Micron for joint development of NAND flash memory technologies.


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Employees
 
As of December 27, 2008, we had approximately 83,900 employees worldwide, with more than 50% of these employees located in the U.S. Worldwide, we had approximately 86,300 employees as of December 29, 2007 and 94,100 as of December 30, 2006.
 
Sales and Marketing
 
Customers
 
We sell our products primarily to original equipment manufacturers (OEMs) and original design manufacturers (ODMs). ODMs provide design and/or manufacturing services to branded and unbranded private-label resellers. In addition, we sell our products to other manufacturers, including makers of a wide range of industrial and communications equipment. Our customers also include PC and network communications products users who buy PC components and our other products through distributor, reseller, retail, and OEM channels throughout the world. In certain instances, we have entered into supply agreements to continue to manufacture and sell products of divested business lines to acquiring companies during certain transition periods.
 
Our worldwide reseller sales channel consists of thousands of indirect customers who are systems builders that purchase Intel microprocessors and other products from our distributors. We have a boxed processor program that allows distributors to sell Intel microprocessors in small quantities to these systems-builder customers; boxed processors are also available in direct retail outlets.
 
In 2008, Hewlett-Packard Company accounted for 20% of our net revenue (17% in 2007) and Dell Inc. accounted for 18% of our net revenue (18% in 2007). No other customer accounted for more than 10% of our net revenue. For information about revenue and operating income by operating segment, and revenue from unaffiliated customers by geographic region/country, see “Results of Operations” in Part II, Item 7 and “Note 25: Operating Segment and Geographic Information” in Part II, Item 8 of this Form 10-K.
 
Sales Arrangements
 
Our products are sold or licensed through sales offices throughout the world. Sales of our products are typically made via purchase orders that contain standard terms and conditions covering matters such as pricing, payment terms, and warranties, as well as indemnities for issues specific to our products, such as patent and copyright indemnities. From time to time, we may enter into additional agreements with customers covering, for example, changes from our standard terms and conditions, new product development and marketing, private-label branding, and other matters. Most of our sales are made using electronic and web-based processes that allow the customer to review inventory availability and track the progress of specific goods ordered. Pricing on particular products may vary based on volumes ordered and other factors. We also offer discounts, rebates, and other incentives to customers to increase acceptance of our products and technology.
 
Our products are typically shipped under terms that transfer title to the customer, even in arrangements for which the recognition of revenue and related costs of sales is deferred. Our standard terms and conditions of sale typically provide that payment is due at a later date, generally 30 days after shipment, delivery, or the customer’s use of the product. Our credit department sets accounts receivable and shipping limits for individual customers to control credit risk to Intel arising from outstanding account balances. We assess credit risk through quantitative and qualitative analysis, and from this analysis, we establish credit limits and determine whether we will seek to use one or more credit support devices, such as obtaining some form of third-party guaranty or standby letter of credit, or obtaining credit insurance for all or a portion of the account balance if necessary. Credit losses may still be incurred due to bankruptcy, fraud, or other failure of the customer to pay. For information about our allowance for doubtful receivables, see “Schedule II—Valuation and Qualifying Accounts” in Part IV of this Form 10-K.
 
Most of our sales to distributors are made under agreements allowing for price protection on unsold merchandise and a right of return on stipulated quantities of unsold merchandise. Under the price protection program, we give distributors credits for the difference between the original price paid and the current price that we offer. On most products, there is no contractual limit on the amount of price protection, nor is there a limit on the time horizon under which price protection is granted. The right of return granted generally consists of a stock rotation program in which distributors are able to exchange certain products based on the number of qualified purchases made by the distributor. Although we have the option to grant credit for, repair, or replace defective product, there is no contractual limit on the amount of credit granted to a distributor.


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Distribution
 
Typically, distributors handle a wide variety of products, including those that compete with our products, and fill orders for many customers. We also utilize third-party sales representatives who generally do not offer directly competitive products but may carry complementary items manufactured by others. Sales representatives do not maintain a product inventory; instead, their customers place orders directly with us or through distributors.
 
Backlog
 
We do not believe that backlog as of any particular date is meaningful, as our sales are made primarily pursuant to standard purchase orders for delivery of products. Only a small portion of our orders is non-cancelable, and the dollar amount associated with the non-cancelable portion is not significant.
 
Seasonal Trends
 
Our microprocessor sales generally have followed a seasonal trend. Historically, our sales have been higher in the second half of the year than in the first half of the year. Consumer purchases of PCs have historically been higher in the second half of the year, primarily due to back-to-school and holiday demand. In addition, purchases from businesses have also historically tended to be higher in the second half of the year. This seasonal trend did not occur in 2008, and there can be no assurance that it will resume in the future.
 
Marketing
 
Our corporate marketing objectives are to build a strong Intel corporate brand that connects with consumers, and have a limited set of product brands for our advanced microprocessors and related technologies. Our intention is to have a limited number of meaningful and valuable brands in our portfolio to aid in making informed choices and making technology purchase decisions easier for both businesses and consumers. The Intel Core i7, Intel Core 2 Extreme, Intel Core 2 Quad, Intel Core 2 Duo, Intel Atom, Pentium, Celeron, Intel Xeon, and Itanium trademarks make up our processor brands. Microprocessors are at the center of our most advanced processor technologies, which include Intel Centrino processor technology and Intel Core 2 processors with vPro technology.
 
We promote brand awareness and generate demand through our own direct marketing as well as co-marketing programs. Our direct marketing activities include television, print and web-based advertising, as well as press relations, consumer and trade events, and industry and consumer communications. We market to consumer and business audiences, and focus on building awareness and generating demand for increased performance, power efficiency, and new capabilities.
 
Purchases by customers often allow them to participate in cooperative advertising and marketing programs such as the Intel Inside® Program. This program broadens the reach of our brands beyond the scope of our own direct advertising. Through the Intel Inside Program, certain customers are licensed to place Intel logos on computers containing our microprocessors and processor technologies, and to use our brands in marketing activities. The program includes a market development component that accrues funds based on purchases and partially reimburses the OEMs for marketing activities for products featuring Intel brands, subject to the OEMs meeting defined criteria. These marketing activities primarily include television, web-based marketing, and print; and in the beginning of 2008, we increased our focus on web-based marketing. We have also entered into joint marketing arrangements with certain customers.
 
Competition
 
The semiconductor industry is dynamic, characterized by rapid advances in technology and frequent product introductions. As unit volumes of a product grow, production experience is accumulated and costs typically decrease, further competition develops, and prices decline. The life cycle of our products is very short, sometimes less than a year. These short product life cycles and other factors lead to frequent negotiations with our OEM customers, which typically are large, sophisticated buyers who are also operating in very competitive environments. Our ability to compete depends on our ability to navigate this environment, by improving our products and processes faster than our competitors, anticipating changing customer requirements, developing and launching new products and platforms, pricing our products competitively, and reducing average unit costs. See “Risk Factors” in Part I, Item 1A of this Form 10-K.


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Our products compete primarily based on performance, features, price, quality, reliability, brand recognition, and availability. We are focused on offering innovative products and worldwide support for our customers at competitive prices, including providing improved energy-efficient performance, enhanced security, manageability, and integrated solutions. We believe that our platform strategy provides us with a competitive advantage. We offer platforms that incorporate various components designed and configured to work together to provide an optimized user computing solution compared to components that are used separately.
 
Our competitors range in size from large established multinational companies with multiple product lines to smaller companies and new entrants to the marketplace that compete in specialized market segments. Some of our competitors may have development agreements with other companies, and in some cases our competitors may also be our customers or suppliers. Product offerings may cross over into multiple product categories, providing us with new opportunities but also resulting in more competition. It may be difficult for us to compete in market segments in which our competitors have established products and brand recognition.
 
We believe that our network of manufacturing facilities and assembly and test facilities gives us a competitive advantage. This network enables us to have more direct control over our processes, quality control, product cost, volume, timing of production, and other factors. These facilities require significant up-front capital spending, and many of our competitors do not own such facilities because they may not be able to afford to do so or because their business models involve the use of third-party facilities for manufacturing and assembly and test. These “fabless semiconductor companies” include Broadcom Corporation, NVIDIA Corporation, QUALCOMM Incorporated, and VIA Technologies, Inc. (VIA). Some of our competitors own portions of such facilities through investment or joint-venture arrangements with other companies. Advanced Micro Devices, Inc. (AMD) intends to sell an interest in its manufacturing operations.
 
A group of foundries and assembly and test subcontractors offers their services to companies that do not own facilities or to companies needing additional capacity. These foundries and subcontractors may also offer intellectual property, design services, and other goods and services to our competitors. A disadvantage of our approach compared to fabless semiconductor companies is that it is more difficult for us to reduce our costs in the short term. Also, competitors who outsource their manufacturing and assembly and test operations can significantly reduce their capital expenditures.
 
We plan to continue to cultivate new businesses and work with the computing and communications industries through standards bodies, trade associations, OEMs, ODMs, and independent software and operating system vendors to help align the industry to offer products that take advantage of the latest market trends and usage models. 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. Our competitors may also participate in the same initiatives and specification development. Our participation does not ensure that any standards or specifications adopted by these organizations will be consistent with our product planning.
 
Microprocessors
 
We continue to be largely dependent on the success of our microprocessor business. Our ability to compete depends on our ability to deliver new microprocessor products with improved overall performance and improved energy-efficient performance at competitive prices. Some of our microprocessor competitors, such as AMD, market software-compatible products that compete with our processors. We also face competition from companies offering rival architecture designs, such as Cell Broadband Engine Architecture developed jointly by International Business Machines Corporation (IBM), Sony Corporation, and Toshiba Corporation; Power Architecture* offered by IBM; ARM architecture developed by ARM Limited; and Scalable Processor Architecture (SPARC*) offered by Sun Microsystems, Inc. NVIDIA has developed a programming interface to attempt to expand the use of its graphics processors to accomplish general-purpose computing functions typically performed by a microprocessor in highly parallel applications.
 
The following is a list of our main microprocessor competitors by market segment:
  •  Desktop: AMD and VIA
  •  Mobile: AMD and VIA
  •  Enterprise: AMD, IBM, and Sun Microsystems
  •  Embedded: AMD, Freescale Semiconductor, Inc., and VIA
 
In addition, our Intel Atom processor family competes against processors offered by AMD and VIA, and from companies using rival architectures, such as ARM and MIPS.


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Chipsets
 
Our chipsets compete in the various market segments against different types of chipsets that support either our microprocessor products or rival microprocessor products. Competing chipsets are produced by companies such as AMD (including chipsets marketed under the ATI Technologies, Inc. brand), NVIDIA, Silicon Integrated Systems Corporation, and VIA.
 
We also compete with companies offering graphics components and other special-purpose products used in the desktop, mobile, and enterprise market segments. One aspect of our business model is to incorporate improved performance and advanced properties into our microprocessors and chipsets, for which demand may increasingly be affected by competition from companies, such as NVIDIA and AMD (including products marketed under the ATI Technologies, Inc. brand), whose business models are based on incorporating improved performance into dedicated chipsets and other components, such as graphics controllers.
 
Flash Memory
 
Our NAND flash memory products currently compete with NOR and NAND products primarily manufactured by Hynix Semiconductor Inc., Micron, Numonyx, Samsung Electronics Co., Ltd., SanDisk Corporation, Spansion Inc., and Toshiba.
 
Connectivity
 
We offer products designed for wired and wireless connectivity; the communications infrastructure, including network processors; and networked storage. Our WiFi and WiMAX products currently compete with products manufactured by Atheros Communications, Inc., Broadcom, QUALCOMM, and other smaller companies.
 
Competition Lawsuits and Government Investigations
 
We are currently a party to a variety of lawsuits and government investigations involving our competitive practices. See “Note 24: Contingencies” in Part II, Item 8 of this Form 10-K.
 
Acquisitions and Strategic Investments
 
During 2008, we completed two acquisitions qualifying as business combinations. See “Note 11: Acquisitions” in Part II, Item 8 of this Form 10-K. Also, we completed the divestiture of our NOR flash memory business in exchange for an ownership interest in Numonyx.
 
Additionally, in 2008, we made a significant strategic investment in Clearwire Communications, LLC (Clearwire LLC). During the fourth quarter of 2008, Clearwire Corporation and Sprint Nextel Corporation combined their respective WiMAX businesses in conjunction with additional capital contributions from Intel and other investors to form a new company that retained the name Clearwire Corporation. The additional capital contributions included our cash investment of $1.0 billion. Our pre-existing investment in Clearwire Corporation (old Clearwire Corporation) was converted into shares of the new company (new Clearwire Corporation), and the additional capital contribution of $1.0 billion was invested in Clearwire LLC, a wholly owned subsidiary of the new Clearwire Corporation. For further discussion of our equity method investment in Clearwire LLC, see “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.


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Intellectual Property and Licensing
 
Intellectual property rights that apply to our various products and services include patents, copyrights, trade secrets, trademarks, and maskwork rights. We maintain a program to protect our investment in technology by attempting to ensure respect for our intellectual property rights. The extent of the legal protection given to different types of intellectual property rights varies under different countries’ legal systems. We intend to license our intellectual property rights where we can obtain adequate consideration. See “Competition” in Part I, Item 1, “Risk Factors” in Part I, Item 1A, and “Note 24: Contingencies” in Part II, Item 8 of this Form 10-K.
 
We have filed and obtained a number of patents in the U.S. and other countries. While our patents are an important element of our success, our business as a whole is not significantly dependent on any one patent. We and other companies in the computing, telecommunications, and related high-technology fields typically apply for and receive, in the aggregate, tens of thousands of overlapping patents annually in the U.S. and other countries. We believe that the duration of the applicable patents that we are granted is adequate relative to the expected lives of our products. Because of the fast pace of innovation and product development, our products are often obsolete before the patents related to them expire, and sometimes are obsolete before the patents related to them are even granted. As we expand our product offerings into new industries, we also seek to extend our patent development efforts to patent such product offerings. Established competitors in existing and new industries, as well as companies that purchase and enforce patents and other intellectual property, may already have patents covering similar products. There is no assurance that we will be able to obtain patents covering our own products, or that we will be able to obtain licenses from such companies on favorable terms or at all.
 
The majority of the software that we distribute, including software embedded in our component- and system-level products, is entitled to copyright protection. To distinguish Intel products from our competitors’ products, we have obtained certain trademarks and trade names for our products, and we maintain cooperative advertising programs with certain customers to promote our brands and to identify products containing genuine Intel components. We also protect certain details about our processes, products, and strategies as trade secrets, keeping confidential the information that we believe provides us with a competitive advantage. We have ongoing programs designed to maintain the confidentiality of such information.
 
Compliance with Environmental, Health, and Safety Regulations
 
Our compliance efforts focus on monitoring regulatory and resource trends and setting company-wide performance targets for key resources and emissions. These targets address several parameters, including product design; chemical, energy, and water use; climate change; waste recycling; and emissions.
 
Intel focuses on reducing natural resource use, the solid and chemical waste by-products of our manufacturing processes, and the environmental impact of our products. We currently use a variety of materials in our manufacturing process that have the potential to adversely impact the environment and are subject to a variety of EHS laws and regulations. For example, lead and halogenated materials (such as certain flame retardants and plastics) have been used by the electronics industry for decades. Finding suitable replacements has been a technical challenge for the industry, and we have worked for years with our suppliers and others in the industry to develop lead-free and halogen-free solutions.
 
We work with the U.S. Environmental Protection Agency (EPA), non-governmental organizations, OEMs, and retailers to help manage e-waste (which includes electronic products nearing the end of their useful lives) and promote recycling. The European Union requires producers of certain electrical and electronic equipment to develop programs that allow consumers to return products for recycling. Many states in the U.S. have similar e-waste take-back laws. The inconsistency of many e-waste take-back laws and the lack of local e-waste management options in many areas pose a challenge for our compliance efforts. To mitigate these problems, we work with our distributors to provide recycling options for our products.


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Intel seeks to reduce our global greenhouse gas emissions by investing in energy conservation projects in our factories and working with suppliers to improve energy efficiency. We take a holistic approach to power management, addressing the challenge at the silicon, package, circuit, micro/macro architecture, platform, and software levels. We recognize that climate change may cause general economic risk. For additional information on the risks of climate change, see “Risk Factors” in Item 1A of this Form 10-K. We routinely monitor energy costs to understand the long-range impacts that rising costs may have on our business. We see the potential for higher energy costs driven by climate change regulations. This could include items applied to utilities that are passed along to customers, such as carbon taxes or costs associated with emission cap and trade programs or renewable portfolio standards. In particular, regulations associated with the Western Climate Initiative could have an impact on our company, because a number of our large manufacturing facilities are located in the western United States. Similarly, our operations in Ireland are already subject to the European Union’s mandatory cap and trade scheme for global-warming emissions. All of our sites also may be impacted by utility programs directed by legislation, regulatory, or other pressures that are targeted to pass costs through to users.
 
We maintain business recovery plans that are intended to ensure our ability to recover from natural disasters or other events that can be disruptive to our business. Many of our operations are located in semi-arid regions, such as Israel and the southwestern United States. Some climate change scenarios predict that such regions can become even more vulnerable to prolonged droughts due to climate change. We have had an aggressive water conservation program in place for many years. We believe that our water conservation and recovery programs will help reduce our risk if water availability becomes more constrained in the future. We further maintain long-range plans to identify potential future water conservation actions that we can take.
 
We are committed to sustainability and take a leadership position in promoting voluntary environmental initiatives and working proactively with governments, environmental groups, and industry to promote global environmental sustainability. We believe that technology will be fundamental to finding solutions to the world’s environmental challenges, and we are joining forces with industry, business, and governments to find and promote ways that technology can be used as a tool to combat climate change.
 
For several years, we have been evaluating “green” design standards and incorporating green building concepts and practices into the construction of our buildings. We are in the process of obtaining Leadership in Energy and Environmental Design (LEED) certification for an office building under construction in Israel and a newly constructed fabrication building in Arizona. We have been purchasing wind power and other forms of renewable energy at some of our major sites for several years. At the beginning of 2008, we announced plans to purchase renewable energy certificates under a multi-year contract. The purchase placed Intel at the top of the EPA’s Green Power Partnership for 2008. The purchase was intended to help stimulate the market for green power, leading to additional generating capacity and, ultimately, lower costs.


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Executive Officers of the Registrant
 
The following sets forth certain information with regard to our executive officers as of February 20, 2009 (ages are as of December 27, 2008):
 
     
Craig R. Barrett, age 69
•   2005 – present,
  Chairman of the Board
•   1998 – 2005,
  Chief Executive Officer
•   Member of Intel Board of Directors since 1992
•   Joined Intel 1974
 
Paul S. Otellini, age 58
•   2005 – present,
  President, Chief Executive Officer
•   2002 – 2005,
  President, Chief Operating Officer
•   Member of Intel Board of Directors since 2002
•   Member of Google, Inc. Board of Directors
•   Joined Intel 1974
 
Andy D. Bryant, age 58
•   2007 – present,
  Executive VP, Finance and Enterprise Services, Chief Administrative Officer
•   2001 – 2007,
  Executive VP, Chief Financial and Enterprise Services Officer
•   Member of Columbia Sportswear Company and
   McKesson Corporation Board of Directors
•   Joined Intel 1981
 
Stacy J. Smith, age 46
•   2007 – present,
  VP, Chief Financial Officer
•   2006 – 2007,
  VP, Assistant Chief Financial Officer
•   2004 – 2006,
  VP of Finance and Enterprise Services, Chief Information Officer
•   2002 – 2004,
  VP of Sales and Marketing Group, General Manager (GM) of Europe, Middle East, and Africa
•   Joined Intel 1988
 
Sean M. Maloney, age 52
•   2008 – present,
  Executive VP, Chief Sales and Marketing Officer
•   2006 – 2008,
  Executive VP, GM of Sales and Marketing Group, Chief Sales and Marketing Officer
•   2005 – 2006,
  Executive VP, GM of Mobility Group
•   2001 – 2005,
  Executive VP, GM of Intel Communications Group
•   Member of Autodesk, Inc. Board of Directors
•   Joined Intel 1982
     
David Perlmutter, age 55
•   2007 – present,
  Executive VP, GM of Mobility Group
•   2005 – 2007,
  Senior VP, GM of Mobility Group
•   2005
  VP, GM of Mobility Group
•   2000 – 2005,
  VP, GM of Mobile Platforms Group
•   Joined Intel 1980
 
Arvind Sodhani, age 54
•   2007 – present,
  Executive VP of Intel, President of Intel Capital
•   2005 – 2007,
  Senior VP of Intel, President of Intel Capital
•   1990 – 2005,
  VP, Treasurer
•   Joined Intel 1981
 
Robert J. Baker, age 53
•   2001 – present,
  Senior VP, GM of Technology and Manufacturing Group
•   Joined Intel 1979
 
Patrick P. Gelsinger, age 47
•   2005 – present,
  Senior VP, GM of Digital Enterprise Group
•   2002 – 2005,
  Senior VP, Chief Technology Officer
•   Joined Intel 1979
 
William M. Holt, age 56
•   2006 – present,
  Senior VP, GM of Technology and Manufacturing Group
•   2005 – 2006,
  VP, Co-GM of Technology and Manufacturing Group
•   1999 – 2005,
  VP, Director of Logic Technology Development
•   Joined Intel 1974
 
D. Bruce Sewell, age 50
•   2005 – present,
  Senior VP, General Counsel
•   2004 – 2005,
  VP, General Counsel
•   2001 – 2004,
  VP of Legal and Government Affairs, Deputy General Counsel
•   Joined Intel 1995
 
Thomas M. Kilroy, age 51
•   2005 – present,
  VP, GM of Digital Enterprise Group
•   2003 – 2005,
  VP of Sales and Marketing Group, Co-President of Intel Americas
•   Joined Intel 1990


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ITEM 1A. RISK FACTORS
 
Fluctuations in demand for our products may harm our financial results and are difficult to forecast.
Current uncertainty in global economic conditions poses a risk to the overall economy, as consumers and businesses have deferred and may continue to defer purchases in response to tighter credit and less discretionary spending, which negatively affect product demand and other related matters. If demand for our products fluctuates as a result of economic conditions or for other reasons, our revenue and gross margin could be harmed. Important factors that could cause demand for our products to fluctuate include:
  •  changes in business and economic conditions, including a downturn in the semiconductor industry and/or the overall economy;
  •  changes in consumer confidence caused by changes in market conditions, including changes in the credit market, expectations for inflation, and energy prices;
  •  changes in the level of customers’ components inventory;
  •  competitive pressures, including pricing pressures, from companies that have competing products, chip architectures, manufacturing technologies, and marketing programs;
  •  changes in customer product needs;
  •  strategic actions taken by our competitors; and
  •  market acceptance of our products.
 
If product demand decreases, our manufacturing or assembly and test capacity could be under-utilized, and we may be required to record an impairment on our long-lived assets, including facilities and equipment, as well as intangible assets, which would increase our expenses. In addition, if product demand decreases or we fail to forecast demand accurately, we could be required to write off inventory or record under-utilization charges, which would have a negative impact on our gross margin. Factory-planning decisions may shorten the useful lives of long-lived assets, including facilities and equipment, and cause us to accelerate depreciation. In the long term, if product demand increases, we may not be able to add manufacturing or assembly and test capacity fast enough to meet market demand. These changes in demand for our products, and changes in our customers’ product needs, could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our revenue, increase our costs, lower our gross margin percentage, or require us to recognize impairments of our assets.
 
The recent financial crisis could negatively affect our business, results of operations, and financial condition.
The recent financial crisis affecting the banking system and financial markets and the going concern threats to financial institutions have resulted in a tightening in the credit markets; a low level of liquidity in many financial markets; and extreme volatility in credit, fixed income, and equity markets. There could be a number of follow-on effects from the credit crisis on Intel’s business, including insolvency of key suppliers, resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies; counterparty failures negatively impacting our treasury operations; increased expense or inability to obtain short-term financing of Intel’s operations from the issuance of commercial paper; and increased impairment charges due to declines in the fair values of marketable debt or equity investments. The current volatility in the financial markets and overall economic uncertainty increase the risk that the actual amounts realized in the future on our debt and equity investments will differ significantly from the fair values currently assigned to them.
 
The semiconductor industry and our operations are characterized by a high percentage of costs that are fixed or difficult to reduce in the short term, and by product demand that is highly variable and subject to significant downturns that may harm our business, results of operations, and financial condition.
The semiconductor industry and our operations are characterized by high costs, such as those related to facility construction and equipment, R&D, and employment and training of a highly skilled workforce, that are either fixed or difficult to reduce in the short term. At the same time, demand for our products is highly variable and there have been downturns, often in connection with maturing product cycles as well as downturns in general economic market conditions, such as the current economic environment. These downturns have been characterized by reduced product demand, manufacturing overcapacity and resulting excess capacity charges, high inventory levels, and lower average selling prices. The combination of these factors may cause our revenue, gross margin, cash flow, and profitability to vary significantly in both the short and long term.


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We operate in intensely competitive industries, and our failure to respond quickly to technological developments and incorporate new features into our products could harm our ability to compete.
We operate in intensely competitive industries that experience rapid technological developments, changes in industry standards, changes in customer requirements, and frequent new product introductions and improvements. If we are unable to respond quickly and successfully to these developments, we may lose our competitive position, and our products or technologies may become uncompetitive or obsolete. To compete successfully, we must maintain a successful R&D effort, develop new products and production processes, and improve our existing products and processes at the same pace or ahead of our competitors. We may not be able to develop and market these new products successfully, the products we invest in and develop may not be well received by customers, and products developed and new technologies offered by others may affect demand for our products. These types of events could have a variety of negative effects on our competitive position and our financial results, such as reducing our revenue, increasing our costs, lowering our gross margin percentage, and requiring us to recognize impairments on our assets.
 
We may be subject to litigation proceedings that could harm our business.
We may be subject to legal claims or regulatory matters involving stockholder, consumer, competition, and other issues on a global basis. As described in “Note 24: Contingencies” in Part II, Item 8 of this Form 10-K, we are currently engaged in a number of litigation matters, particularly with respect to competition. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or, in cases for which injunctive relief is sought, an injunction prohibiting us from manufacturing or selling one or more products. If we were to receive an unfavorable ruling in a matter, our business and results of operations could be materially harmed.
 
We invest in companies for strategic reasons and may not realize a return on our investments.
We make investments in companies around the world to further our strategic objectives and support our key business initiatives. Such investments include equity or debt instruments of public or private companies, and many of these instruments are non-marketable at the time of our initial investment. These companies range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. The success of these companies is dependent on product development, market acceptance, operational efficiency, and other key business factors. The companies in which we invest may fail because they may not be able to secure additional funding, obtain favorable investment terms for future financings, or take advantage of liquidity events such as public offerings, mergers, and private sales. The current economic environment may increase the risk of failure for many of the companies in which we invest due to limited access to credit and reduced frequency of liquidity events. If any of these private companies fail, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for an equity investment in a public or private company in which we have invested, we write down the investment to its fair value and recognize the related write-down as an investment loss. The majority of our non-marketable equity investment portfolio balance is concentrated in companies in the flash memory market segment and wireless connectivity market segment, and declines in these market segments or changes in management’s plans with respect to our investments in these market segments could result in significant impairment charges, impacting gains/losses on equity method investments and gains/losses on other equity investments.
 
Furthermore, when the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment. Our non-marketable equity investments in private companies are not liquid, and we may not be able to dispose of these investments on favorable terms or at all. The occurrence of any of these events could harm our results of operations. Additionally, for cases in which we are required under equity method accounting to recognize a proportionate share of another company’s income or loss, such income and loss may impact our earnings. Gains or losses from equity securities could vary from expectations depending on gains or losses realized on the sale or exchange of securities, gains or losses from equity method investments, and impairment charges related to debt instruments as well as equity and other investments.
 
Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Estimates” in Part II, Item 7 of this Form 10-K). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. The current volatility in the financial markets and overall economic uncertainty increase the risk that the actual amounts realized in the future on our debt and equity investments will differ significantly from the fair values currently assigned to them.


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Fluctuations in the mix of products sold may harm our financial results.
Because of the wide price differences among and within 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 and gross margin. Our financial results also depend in part on the mix of other products that we sell, such as chipsets, flash memory, and other semiconductor products. In addition, more recently introduced products tend to have higher associated costs because of initial overall development and production ramp. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover the fixed costs and investments associated with a particular product, and as a result can harm our financial results.
 
Our global operations subject us to risks that may harm our results of operations and financial condition.
We have sales offices, R&D, manufacturing, and assembly and test facilities in many countries, and as a result, we are subject to risks associated with doing business globally. Our global operations may be subject to risks that may limit our ability to manufacture, assemble and test, design, develop, or sell products in particular countries, which could, in turn, harm our results of operations and financial condition, including:
  •  security concerns, such as armed conflict and civil or military unrest, crime, political instability, and terrorist activity;
  •  health concerns;
  •  natural disasters;
  •  inefficient and limited infrastructure and disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers and supply chain interruptions;
  •  differing employment practices and labor issues;
  •  local business and cultural factors that differ from our normal standards and practices;
  •  regulatory requirements and prohibitions that differ between jurisdictions; and
  •  restrictions on our operations by governments seeking to support local industries, nationalization of our operations, and restrictions on our ability to repatriate earnings.
 
In addition, although most of our products are sold in U.S. dollars, we incur a significant amount of certain types of expenses, such as payroll, utilities, tax, and marketing expenses, as well as certain investing and financing activities, in local currencies. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements, and therefore fluctuations in exchange rates could harm our business operating results and financial condition. In addition, changes in tariff and import regulations and in U.S. and non-U.S. monetary policies may harm our operating results and financial condition by increasing our expenses and reducing our revenue. Varying tax rates in different jurisdictions could harm our operating results and financial condition by increasing our overall tax rate.
 
We maintain a program of insurance coverage for various types of property, casualty, and other risks. We place our insurance coverage with various carriers in numerous jurisdictions. The types and amounts of insurance that we obtain vary from time to time and from location to location, depending on availability, cost, and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. Losses not covered by insurance may be substantial and may increase our expenses, which could harm our results of operations and financial condition. In addition, the recent financial crisis could pose solvency risks for our insurers, which could reduce our coverage if one or more of our insurance providers is unable to pay a claim.
 
Failure to meet our production targets, resulting in undersupply or oversupply of products, may harm our business and results of operations.
Production of integrated circuits is a complex process. Disruptions in this process can result from interruptions in our processes, errors, and difficulties in our development and implementation of new processes; defects in materials; disruptions in our supply of materials or resources; and disruptions at our fabrication and assembly and test facilities due to, for example, accidents, maintenance issues, or unsafe working conditions—all of which could affect the timing of production ramps and yields. We may not be successful or efficient in developing or implementing new production processes. The occurrence of any of the foregoing may result in our failure to meet or increase production as desired, resulting in higher costs or substantial decreases in yields, which could affect our ability to produce sufficient volume to meet specific product demand. The unavailability or reduced availability of certain products could make it more difficult to implement our platform strategy. We may also experience increases in yields. A substantial increase in yields could result in higher inventory levels and the possibility of resulting excess capacity charges as we slow production to reduce inventory levels. The occurrence of any of these events could harm our business and results of operations.


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We may have difficulties obtaining the resources or products we need for manufacturing, assembling and testing our products, or operating other aspects of our business, which could harm our ability to meet demand for our products and may increase our costs.
We have thousands of suppliers providing various materials that we use in the production of our products and other aspects of our business, and we seek, where possible, to have several sources of supply for all of those materials. However, we may rely on a single or a limited number of suppliers, or upon suppliers in a single country, for these materials. The inability of such suppliers to deliver adequate supplies of production materials or other supplies could disrupt our production processes or could make it more difficult for us to implement our business strategy. In addition, production could be disrupted by the unavailability of the resources used in production, such as water, silicon, electricity, and gases. The unavailability or reduced availability of the materials or resources that we use in our business may require us to reduce production of products or may require us to incur additional costs in order to obtain an adequate supply of those materials or resources. The occurrence of any of these events could harm our business and results of operations.
 
Costs related to product defects and errata may harm our results of operations and business.
Costs associated with unexpected product defects and errata (deviations from published specifications) due to, for example, unanticipated problems in our manufacturing processes, include:
  •  writing off the value of inventory of defective products;
  •  disposing of defective products that cannot be fixed;
  •  recalling defective products that have been shipped to customers;
  •  providing product replacements for, or modifications to, defective products; and/or
  •  defending against litigation related to defective products.
 
These costs could be substantial and may therefore increase our expenses and lower our gross margin. In addition, our reputation with our customers or users of our products could be damaged as a result of such product defects and errata, and the demand for our products could be reduced. These factors could harm our financial results and the prospects for our business.
 
We may be subject to claims of infringement of third-party intellectual property rights, which could harm our business.
From time to time, third parties may assert against us or our customers alleged patent, copyright, trademark, or other intellectual property rights to technologies that are important to our business. As described in “Note 24: Contingencies” in Part II, Item 8 of this Form 10-K, we are currently engaged in a number of litigation matters involving intellectual property rights. We may be subject to intellectual property infringement claims from certain individuals and companies who have acquired patent portfolios for the sole purpose of asserting such claims against other companies. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending, and resolving such claims, and may divert the efforts and attention of our management and technical personnel from our business. As a result of such intellectual property infringement claims, we could be required or otherwise decide that it is appropriate to:
  •  pay third-party infringement claims;
  •  discontinue manufacturing, using, or selling particular products subject to infringement claims;
  •  discontinue using the technology or processes subject to infringement claims;
  •  develop other technology not subject to infringement claims, which could be time-consuming and costly or may not be possible; and/or
  •  license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms.
 
The occurrence of any of the foregoing could result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of our assets and increase expenses. In addition, if we alter or discontinue our production of affected items, our revenue could be harmed.


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We may not be able to enforce or protect our intellectual property rights, which may harm our ability to compete and harm our business.
Our ability to enforce our patents, copyrights, software licenses, and other intellectual property rights is subject to general litigation risks, as well as uncertainty as to the enforceability of our intellectual property rights in various countries. When we seek to enforce our rights, we are often subject to claims that the intellectual property right is invalid, is otherwise not enforceable, or is licensed to the party against whom we are asserting a claim. In addition, our assertion of intellectual property rights often results in the other party seeking to assert alleged intellectual property rights of its own against us. If we are not ultimately successful in defending ourselves against these claims in litigation, we may not be able to sell a particular product or family of products due to an injunction, or we may have to pay damages that could, in turn, harm our results of operations. In addition, governments may adopt regulations or courts may render decisions requiring compulsory licensing of intellectual property to others, or governments may require that products meet specified standards that serve to favor local companies. Our inability to enforce our intellectual property rights under these circumstances may harm our competitive position and our business.
 
Our licenses with other companies and our participation in industry initiatives may allow other companies, including our competitors, to use our patent rights.
Companies in the semiconductor industry often rely on the ability to license patents from each other in order to compete. Many of our competitors have broad licenses or cross-licenses with us, and under current case law, some of these licenses may permit these competitors to pass our patent rights on to others. If one of these licensees becomes a foundry, our competitors might be able to avoid our patent rights in manufacturing competing products. In addition, our participation in industry initiatives may require us to license our patents to other companies that adopt certain industry standards or specifications, even when such organizations do not adopt standards or specifications proposed by us. As a result, our patents implicated by our participation in industry initiatives might not be available for us to enforce against others who might otherwise be deemed to be infringing those patents, our costs of enforcing our licenses or protecting our patents may increase, and the value of our intellectual property may be impaired.
 
Changes in our decisions with regard to restructuring and efficiency efforts, and other factors, could affect our results of operations and financial condition.
Factors that could cause actual results to differ materially from our expectations with regard to restructuring actions include:
  •  timing and execution of plans and programs that may be subject to local labor law requirements, including consultation with appropriate work councils;
  •  changes in assumptions related to severance and postretirement costs;
  •  future dispositions;
  •  new business initiatives and changes in product roadmap, development, and manufacturing;
  •  changes in employment levels and turnover rates;
  •  changes in product demand and the business environment, including changes related to the current uncertainty in global economic conditions; and
  •  changes in the fair value of certain long-lived assets.
 
In order to compete, we must attract, retain, and motivate key employees, and our failure to do so could harm our results of operations.
In order to compete, we must attract, retain, and motivate executives and other key employees. Hiring and retaining qualified executives, scientists, engineers, technical staff, and sales representatives are critical to our business, and competition for experienced employees in the semiconductor industry can be intense. To help attract, retain, and motivate qualified employees, we use share-based incentive awards such as employee stock options and non-vested share units (restricted stock units). If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations.


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Our failure to comply with applicable environmental laws and regulations worldwide could harm our business and results of operations.
The manufacturing and assembling and testing of our products require the use of hazardous materials that are subject to a broad array of EHS laws and regulations. Our failure to comply with any of these applicable laws or regulations could result in:
  •  regulatory penalties, fines, and legal liabilities;
  •  suspension of production;
  •  alteration of our fabrication and assembly and test processes; and
  •  curtailment of our operations or sales.
 
In addition, our failure to manage the use, transportation, emissions, discharge, storage, recycling, or disposal of hazardous materials could subject us to increased costs or future liabilities. Existing and future environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify our product designs, or incur other expenses associated with such laws and regulations. Many new materials that we are evaluating for use in our operations may be subject to regulation under existing or future environmental laws and regulations that may restrict our use of one or more of such materials in our manufacturing, assembly and test processes, or products. Any of these restrictions could harm our business and results of operations by increasing our expenses or requiring us to alter our manufacturing and assembly and test processes.
 
Climate change poses both regulatory and physical risks that could harm our results of operations or affect the way we conduct our business.
In addition to the possible direct economic impact that climate change could have on us, climate change mitigation programs and regulation can increase our costs. For example, the cost of perfluorocompounds (PFCs), a gas that we use in our manufacturing, could increase over time under some climate-change-focused emissions trading programs that may be imposed by government regulation. If the use of PFCs is prohibited, we would need to obtain substitute materials that may cost more or be less available for our manufacturing operations. We also see the potential for higher energy costs driven by climate change regulations. Our costs could increase if utility companies pass on their costs, such as those associated with carbon taxes, emission cap and trade programs, or renewable portfolio standards. While we maintain business recovery plans that are intended to allow us to recover from natural disasters or other events that can be disruptive to our business, we cannot be sure that our plans will fully protect us from all such disasters or events. Many of our operations are located in semi-arid regions, such as Israel and the southwestern United States. Some scenarios predict that these regions may become even more vulnerable to prolonged droughts due to climate change.
 
Changes in our effective tax rate may harm our results of operations.
A number of factors may increase our future effective tax rates, including:
  •  the jurisdictions in which profits are determined to be earned and taxed;
  •  the resolution of issues arising from tax audits with various tax authorities;
  •  changes in the valuation of our deferred tax assets and liabilities;
  •  adjustments to income taxes upon finalization of various tax returns;
  •  increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill in connection with acquisitions;
  •  changes in available tax credits;
  •  changes in tax laws or the interpretation of such tax laws, and changes in generally accepted accounting principles; and
  •  our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes.
 
Any significant increase in our future effective tax rates could reduce net income for future periods.


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Interest and other, net could be harmed by macroeconomic and other factors.
Factors that could cause interest and other, net in our consolidated statements of income to fluctuate include:
  •  fixed-income, equity, and credit market volatility, such as that which is being experienced in the current global economic environment;
  •  fluctuations in foreign currency exchange rates;
  •  fluctuations in interest rates;
  •  changes in our cash and investment balances; and
  •  changes in our hedge accounting treatment.
 
Our acquisitions, divestitures, and other transactions could disrupt our ongoing business and harm our results of operations.
In pursuing our business strategy, we routinely conduct discussions, evaluate opportunities, and enter into agreements regarding possible investments, acquisitions, divestitures, and other transactions, such as joint ventures. Acquisitions and other transactions involve significant challenges and risks, including risks that:
  •  we may not be able to identify suitable opportunities at terms acceptable to us;
  •  the transaction may not advance our business strategy;
  •  we may not realize a satisfactory return on the investment we make;
  •  we may not be able to retain key personnel of the acquired business; or
  •  we may experience difficulty in integrating new employees, business systems, and technology.
 
When we decide to sell assets or a business, we may encounter difficulty in finding or completing divestiture opportunities or alternative exit strategies on acceptable terms in a timely manner, and the agreed terms and financing arrangements could be renegotiated due to changes in business or market conditions. These circumstances could delay the accomplishment of our strategic objectives or cause us to incur additional expenses with respect to businesses that we want to dispose of, or we may dispose of a business at a price or on terms that are less favorable than we had anticipated, resulting in a loss on the transaction.
 
If we do enter into agreements with respect to acquisitions, divestitures, or other transactions, we may fail to complete them due to:
  •  failure to obtain required regulatory or other approvals;
  •  intellectual property or other litigation;
  •  difficulties that we or other parties may encounter in obtaining financing for the transaction; or
  •  other factors.
 
Further, acquisitions, divestitures, and other transactions require substantial management resources and have the potential to divert our attention from our existing business. These factors could harm our business and results of operations.


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ITEM 1B. UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 2. PROPERTIES
 
As of December 27, 2008, our major facilities consisted of:
 
                         
(Square Feet in Millions)
  United States     Other Countries     Total  
Owned facilities1
    27.2       16.8       44.0  
Leased facilities2
    1.7       2.8       4.5  
                         
Total facilities
    28.9       19.6       48.5  
                         
 
 
1 Leases on portions of the land used for these facilities expire at varying dates through 2062.
 
2 Leases expire at varying dates through 2028 and generally include renewals at our option.
 
Our principal executive offices are located in the U.S. The majority of our wafer fabrication activities are also located in the U.S. Outside the U.S., we have wafer fabrication at our facilities in Ireland and Israel. In addition, we are building a new wafer fabrication facility in China. Our assembly and test facilities are located overseas, specifically in Malaysia, China, Costa Rica, and the Philippines. We are building a new assembly and test facility in Vietnam that is expected to begin production in 2010. In addition, we have sales and marketing offices worldwide. These facilities are generally located near major concentrations of users.
 
We have placed for sale certain facilities (see “Note 15: Restructuring and Asset Impairment Charges” in Part II, Item 8 of this Form 10-K). Additionally, subsequent to the end of 2008, management approved plans to restructure some of our manufacturing and assembly and test operations, and align our manufacturing and assembly and test capacity to current market conditions. These actions, which are expected to take place beginning in 2009, include closing two assembly and test facilities in Malaysia, one facility in the Philippines, and one facility in China; stopping production at a 200mm wafer fabrication facility in Oregon; and ending production at our 200mm wafer fabrication facility in California. Except for these facilities, we believe that our existing facilities are suitable and adequate. We recorded under-utilization charges in the fourth quarter of 2008 as a result of our decision to reduce our facility loadings at certain facilities, due to a significant decrease in demand. We expect to continue to have under-utilization charges in 2009; however, we do plan to utilize the productive capacity of these facilities in the future.
 
We do not identify or allocate assets by operating segment. For information on net property, plant and equipment by country, see “Note 25: Operating Segment and Geographic Information” in Part II, Item 8 of this Form 10-K.
 
ITEM 3. LEGAL PROCEEDINGS
 
For a discussion of legal proceedings, see “Note 24: Contingencies” in Part II, Item 8 of this Form 10-K.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.


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PART II
 
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Information regarding the market price range of Intel common stock and dividend information may be found in “Financial Information by Quarter (Unaudited)” in Part II, Item 8 of this Form 10-K.
 
In 2008, during the first quarter we paid a cash dividend of $0.1275 per common share, and during the second, third, and fourth quarters we paid a cash dividend of $0.14 per common share, for a total of $0.5475 for the year ($0.1125 each quarter during 2007 for a total of $0.45 for the year). We have paid a cash dividend in each of the past 65 quarters. In January 2009, our Board of Directors declared a cash dividend of $0.14 per common share for the first quarter of 2009. The dividend is payable on March 1, 2009 to stockholders of record on February 7, 2009.
 
As of February 6, 2009, there were approximately 180,000 registered holders of record of Intel’s common stock. A substantially greater number of holders of Intel common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
 
Issuer Purchases of Equity Securities
 
We have an ongoing authorization, amended in November 2005, from our Board of Directors to repurchase up to $25 billion in shares of our common stock in open market or negotiated transactions. As of December 27, 2008, $7.4 billion remained available for repurchase under the existing repurchase authorization. A portion of our purchases in 2008 was executed under privately negotiated forward purchase agreements. In the third quarter of 2008, we executed a forward purchase agreement with Lehman Brothers OTC Derivatives Inc. (Lehman Brothers) in which we prepaid $1.0 billion and received an equivalent $1.0 billion of cash collateral from Lehman Brothers. However, in the fourth quarter, Lehman Brothers failed to deliver shares of Intel common stock, and we foreclosed on the $1.0 billion collateral.
 
Common stock repurchases under our authorized plan in each quarter of 2008 were as follows (in millions, except per share amounts):
 
                         
                Total
 
                Number of
 
                Shares
 
          Average
    Purchased
 
    Total
    Price
    as Part of
 
    Number
    Paid
    Publicly
 
    of Shares
    Per
    Announced
 
Period
  Purchased     Share     Plans  
 
December 30, 2007–March 29, 2008
    121.9     $ 20.51       121.9  
March 30, 2008–June 28, 2008
    108.8     $ 22.98       108.8  
June 29, 2008–September 27, 2008
    93.4     $ 22.67       93.4  
September 28, 2008–December 27, 2008
        $        
                         
Total
    324.1     $ 21.96       324.1  
                         
 
We did not make any common stock repurchases under our authorized plan during the fourth quarter of 2008.
 
For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the statutory withholding requirements that we pay on behalf of our employees. These withheld shares are not included in the common stock repurchase totals in the tables above. For further discussion, see “Note 20: Common Stock Repurchases” in Part II, Item 8 of this Form 10-K.


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Stock Performance Graph
 
The line graph below compares the cumulative total stockholder return on our common stock with the cumulative total return of the Dow Jones Technology Index and the Standard & Poor’s (S&P) 500 Index for the five fiscal years ended December 27, 2008. The graph and table assume that $100 was invested on December 26, 2003 (the last day of trading for the fiscal year ended December 27, 2003) in each of our common stock, the Dow Jones Technology Index, and the S&P 500 Index, and that all dividends were reinvested. Cumulative total stockholder returns for our common stock, the Dow Jones Technology Index, and the S&P 500 Index are based on our fiscal year.
 
Comparison of Five-Year Cumulative Return for Intel,
the Dow Jones Technology Index, and the S&P 500 Index
 
(GRAPHIC BOC)
 
                                                 
    2003     2004     2005     2006     2007     2008  
 
Intel Corporation
  $ 100     $ 76     $ 81     $ 67     $ 91     $ 49  
Dow Jones Technology Index
  $ 100     $ 103     $ 107     $ 117     $ 137     $ 76  
S&P 500 Index
  $ 100     $ 112     $ 118     $ 137     $ 145     $ 88  


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ITEM 6.  SELECTED FINANCIAL DATA
 
                                         
(In Millions, Except Per Share Amounts)
  2008     2007     2006     20051     20041  
 
Net revenue
  $ 37,586     $ 38,334     $ 35,382     $ 38,826     $ 34,209  
Gross margin
  $ 20,844     $ 19,904     $ 18,218     $ 23,049     $ 19,746  
Research and development
  $ 5,722     $ 5,755     $ 5,873     $ 5,145     $ 4,778  
Operating income
  $ 8,954     $ 8,216     $ 5,652     $ 12,090     $ 10,130  
Net income
  $ 5,292     $ 6,976     $ 5,044     $ 8,664     $ 7,516  
Earnings per common share
                                       
Basic
  $ 0.93     $ 1.20     $ 0.87     $ 1.42     $ 1.17  
Diluted
  $ 0.92     $ 1.18     $ 0.86     $ 1.40     $ 1.16  
Weighted average diluted shares outstanding
    5,748       5,936       5,880       6,178       6,494  
Dividends per share
                                       
Declared
  $ 0.5475     $ 0.45     $ 0.40     $ 0.32     $ 0.16  
Paid
  $ 0.5475     $ 0.45     $ 0.40     $ 0.32     $ 0.16  
 
                                         
(Dollars in Millions)
  Dec. 27, 2008     Dec. 29, 2007     Dec. 30, 2006     Dec. 31, 2005     Dec. 25, 2004  
 
Property, plant and equipment, net
  $ 17,544     $ 16,918     $ 17,602     $ 17,111     $ 15,768  
Total assets
  $ 50,715     $ 55,651     $ 48,368     $ 48,314     $ 48,143  
Long-term debt
  $ 1,886     $ 1,980     $ 1,848     $ 2,106     $ 703  
Stockholders’ equity
  $ 39,088     $ 42,762     $ 36,752     $ 36,182     $ 38,579  
Additions to property, plant and equipment
  $ 5,197     $ 5,000     $ 5,860     $ 5,871     $ 3,843  
Employees (in thousands)
    83.9       86.3       94.1       99.9       85.0  
 
 
1 We started recognizing the provisions of SFAS No. 123(R) beginning in fiscal year 2006. See “Note 2: Accounting Policies” and “Note 19: Employee Equity Incentive Plans” in Part II, Item 8 of this Form 10-K.
 
The ratio of earnings to fixed charges for each of the five years in the period ended December 27, 2008 was as follows:
 
                 
2008
  2007   2006   2005   2004
 
51x
  72x   50x   169x   107x
 
Fixed charges consist of interest expense, capitalized interest, and the estimated interest component of rent expense.


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ITEM 7.  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 financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
  •  Overview. Discussion of our business and overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A.
  •  Strategy. Overall strategy and the strategy for our operating segments.
  •  Critical Accounting Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
  •  Results of Operations. Analysis of our financial results comparing 2008 to 2007 and comparing 2007 to 2006.
  •  Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including the credit quality of our investment portfolio and potential sources of liquidity.
  •  Fair value. Discussion of the methodologies used in the valuation of our financial instruments.
  •  Contractual Obligations and Off-Balance-Sheet Arrangements. Overview of contractual obligations and contingent liabilities and commitments outstanding as of December 27, 2008, including expected payment schedule, and explanation of off-balance-sheet arrangements.
  •  Business Outlook. Our expectations for selected financial items for the 2009 fiscal year.
 
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 (see also “Risk Factors” in Part I, Item 1A of this Form 10-K). 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 February 18, 2009.
 
Overview
 
Our goal is to be the preeminent provider of semiconductor chips and platforms for the worldwide digital economy. Our primary component-level products include microprocessors, chipsets, and flash memory.
 
Net revenue, gross margin, operating income, and net income for 2008 and 2007 were as follows:
 
                 
(In Millions)
  2008     2007  
 
Net revenue
  $ 37,586     $ 38,334  
Gross margin
  $ 20,844     $ 19,904  
Operating income
  $ 8,954     $ 8,216  
Net income
  $ 5,292     $ 6,976  
 
The slowing of the worldwide economy resulted in a weak fourth quarter. The pace of the revenue decline in the fourth quarter was dramatic and resulted from reduced demand and inventory contraction across the supply chain. The 19% sequential decline from the third quarter of 2008 to the fourth quarter of 2008 was only the second time in the last 20 years that our fourth-quarter revenue fell below our third-quarter revenue. It is unclear when a turnaround may occur, and there remains a high degree of uncertainty around demand, which may continue to decline. However, we believe that our competitive position, manufacturing process technologies, cash flow from operations, and balance sheet remain strong, and that we are well positioned to manage through this economic downturn.
 
We continue to invest in our leading-edge technologies and growth initiatives in order to strengthen our competitive position and enter new market segments. We have a strong belief that technology companies successfully emerge from recessions with tomorrow’s products, not today’s products. In 2008, we introduced the Intel Atom processor family, which is designed to enable new mobile Internet form factors at attractive system price points. Our product offerings continue to strengthen, with the launch of our new microarchitecture, code-named “Nehalem,” in the fourth quarter of 2008. Additionally, we expect to begin manufacturing products using our next-generation 32nm process technology in the second half of 2009, which we believe will increase performance and energy efficiency, and lower product costs.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Our gross margin toward the end of the year was impacted by approximately $250 million of factory under-utilization charges as well as inventory write-offs on computing-related products, which were primarily demand-related. The under-utilization charges were a result of our decision to reduce factory loadings at the end of the fourth quarter in response to the drop-off in demand. As a result, factory under-utilization charges are expected to increase significantly in the first quarter, impacting our gross margin. We also expect our gross margin to be negatively impacted as our start-up costs associated with our 32nm process technology increase and as we transition 32nm design resources from research and development to manufacturing. Additionally, changes in demand levels and pricing of products could impact inventory write-offs, mix, and unit costs, creating additional variability in margin. Despite reducing our factory loadings, we increased our inventory in the fourth quarter of 2008 due to lower than expected demand and inventory reductions in the supply chain. We expect further reduction in the supply chain inventory levels in the first quarter of 2009 as our customers manage their business through the current economic uncertainty. Subsequent to the end of 2008, management approved plans to restructure some of our manufacturing and assembly and test operations, and align our manufacturing and assembly and test capacity to current market conditions. These actions, which are expected to take place beginning in 2009, include closing two assembly and test facilities in Malaysia, one facility in the Philippines, and one facility in China; stopping production at a 200mm wafer fabrication facility in Oregon; and ending production at our 200mm wafer fabrication facility in California.
 
We continue to focus on our commitment to efficiency and controlling spending. We have reduced our headcount by over 2,000 from the end of 2007 and nearly 20,000 from our highest levels during 2006. During 2008, we had additional divestitures of non-strategic businesses and divested our NOR flash memory business. Also, in a joint decision with Micron, we discontinued the supply of NAND flash memory from a 200mm facility within the IMFT manufacturing network, which resulted in restructuring charges of $215 million.
 
In the fourth quarter of 2008, we made a $1.0 billion investment in Clearwire LLC, adding to our pre-existing investments. However, we recorded an impairment of our investments in the new Clearwire Corporation and Clearwire LLC of $938 million, primarily due to the fair value being significantly lower than the cost basis of our investments.
 
From a financial condition perspective, we ended 2008 with an investment portfolio valued at $14.5 billion, consisting of cash and cash equivalents and marketable debt instruments included in trading assets and short- and long-term investments. In addition, we generated $10.9 billion in cash from operations in 2008. The credit quality of our investment portfolio remains high during this difficult credit environment, with other-than-temporary impairments on our available-for-sale investments in debt instruments limited to $44 million during 2008. In addition, we continue to be able to invest in high-quality investments. However, we have seen a reduction in the volume of available commercial paper from certain market segments. As a result, our investments in short-term government funds have increased, which will reduce our average investment return. Despite the tightening of the credit markets, we continue to be able to access funds through the credit markets, including through the issuance of commercial paper. With the exception of a limited amount of investments for which we have recognized other-than-temporary impairments, we have not seen significant liquidation delays, and for those that have matured we have received the full par value of our original debt investments. For additional details on our investment portfolio, see “Liquidity and Capital Resources.”
 
During 2008, we repurchased $7.1 billion of stock through our stock repurchase program and paid $3.1 billion to stockholders as dividends. In the fourth quarter of 2008, we did not repurchase additional stock, as we felt that it was better to conserve cash, given the economic environment. In January 2009, our Board of Directors declared a dividend of $0.14 per common share for the first quarter of 2009.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Strategy
 
Our goal is to be the preeminent provider of semiconductor chips and platforms for 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. We believe that we have the scale, capacity, and global reach to establish new technologies and respond to customers’ needs quickly.
 
Some of our key focus areas are listed below:
  •  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 offer platforms that incorporate various components designed and configured to work together to provide an optimized user computing solution compared to components that are used separately.
  •  Architecture and Platforms. We are developing integrated platform solutions by moving the memory controller and graphics functionality from the chipset to the microprocessor. This platform repartitioning is designed to provide improved performance due to higher integration, lower power consumption, and reduced platform size. In addition, we are focusing on improved energy-efficient performance for computing and communications systems and devices. Improved energy-efficient performance involves balancing improved performance with lower power consumption. We continue to develop multi-core microprocessors with an increasing number of cores, which enable improved multitasking and energy efficiency. We are also focusing on the development of a new highly scalable, many-core architecture aimed at parallel processing. This architecture will initially be used in developing discrete graphics processors designed for gaming and media creation. Over time, this architecture may be utilized in the development of products for scientific and professional workstations as well as high-performance computing applications.
  •  Silicon 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 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. We refer to this as our “tick-tock” technology development cadence.
  •  Strategic Investments. We make equity investments in companies around the world that we believe will generate returns, further our strategic objectives, and support our key business initiatives. Our investments, including those made through our Intel Capital program, 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 investments focus on the following areas: advancing flash memory products, enabling mobile wireless devices, advancing the digital home, enhancing the digital enterprise, advancing high-performance communications infrastructures, and developing the next generation of silicon process technologies. Our focus areas and investment activities tend to develop and change over time due to rapid advancements in technology and changes in the economic climate.
  •  Business Environment and Software. We believe that we are well positioned in the technology industry to help drive innovation, foster collaboration, and promote industry standards that will yield innovation and improved technologies for users. We plan to continue to cultivate new businesses and work to encourage the industry to offer products that take advantage of the latest market trends and usage models. 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. Lastly, through our Software and Services Group (SSG), we help enable and advance the computing ecosystem by providing development tools and support to help software developers create software applications and operating systems that take advantage of our platforms.
 
We believe that the proliferation of the Internet, including user demand for premium content and rich media, drives the need for greater performance in PCs and servers. A growing number of older PCs are increasingly incapable of handling the tasks that users demand, such as streaming video, uploading photos, and online gaming. As these tasks become even more demanding and require more computing power, we believe that users will need and want to buy new PCs to perform everyday tasks on the Internet. We also believe that increased Internet traffic creates a need for greater server infrastructure, including server products optimized for energy-efficient performance.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
The trend of mobile microprocessor unit growth outpacing the growth in desktop microprocessor units has continued, and shipments of our mobile microprocessors exceeded our desktop microprocessors for the first time in the second quarter of 2008. We believe that the demand for mobile microprocessors will result in the increased development of products with form factors and uses that require low-power microprocessors.
 
Our silicon and manufacturing technology leadership allows us to develop low-power microprocessors for new uses and form factors. We believe that these low-power microprocessors give us the ability to extend Intel architecture and drive growth in new market segments, including a growing number of products that require processors specifically designed for embedded solutions, MIDs, consumer electronics devices, nettops, and netbooks. We believe that the common elements for products in these new market segments are low power consumption and the ability to access the Internet. We also offer, and are continuing to develop, SoC products that integrate core processing functionality with specific components, such as graphics, audio, and video, onto a single chip to form a purpose-built solution. This integration reduces cost, power consumption, and size.
 
Strategy by Operating Segment
 
We completed a reorganization in the second quarter of 2008 that transferred the revenue and costs associated with a portion of the Digital Home Group’s consumer PC components business to the Digital Enterprise Group. The Digital Home Group now focuses on the consumer electronics components business. The strategy by operating segment presented below is based on the new organizational structure.
 
The strategy for our Digital Enterprise Group (DEG) is to offer computing and communications products for businesses, service providers, and consumers. DEG products are incorporated into desktop and nettop computers, enterprise computer servers and workstations, and products that make up the infrastructure for the Internet. We also offer products for embedded designs, such as industrial equipment, point-of-sale systems, telecommunications, panel PCs, in-vehicle information/entertainment systems, and medical equipment. Our strategy for the desktop computing market segment is to offer products that provide increased manageability, security, and energy-efficient performance while at the same time lowering total cost of ownership for businesses. For consumers in the desktop computing market segment, we also focus on the design of components for high-end enthusiast PCs and mainstream PCs with rich audio and video capabilities. Our strategy for the nettop computing market segment is to offer products that enable affordable, Internet-focused devices with small form factors. Our strategy for the enterprise computing market segment is to offer products that provide energy-efficient performance and virtualization technology for server, workstation, and storage platforms. We are also increasing our focus on products designed for high-performance computing, data centers, and blade server systems. Our strategy for the embedded computing market segment is to drive Intel architecture as an embedded solution by delivering long life cycle support, architectural scalability, and platform integration.
 
The strategy for our 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 smaller, lighter, and thinner form factors. We are also increasing our focus on products designed for the business and consumer environments by offering technologies that provide increased manageability and security, and we continue to invest in the build-out of WiMAX. We also offer, and are continuing to develop, products that enable mobile devices to deliver digital content and the Internet to users in new ways, including products for MIDs and netbooks.
 
The strategy for our NAND Solutions Group is to offer advanced NAND flash memory products, focusing on system-level solutions for Intel architecture platforms such as solid-state drives. Additionally, we offer NAND products used in memory cards. 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.
 
The strategy for our Digital Home Group is to offer products and solutions, including SoC designs, for use in 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 consumer electronics devices, such as digital TVs, high-definition media players, and set-top boxes, which receive, decode, and convert incoming data signals.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
The strategy for our Digital Health Group is to design and deliver technology-enabled products and explore global business opportunities in healthcare information technology and healthcare research, 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.
 
The strategy for our Software and Services Group is to promote Intel architecture as the platform of choice for software and services. SSG works with the worldwide software and services ecosystem by providing software products, engaging with developers, and driving strategic software investments.
 
Critical Accounting Estimates
 
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that 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 regarding matters that are inherently uncertain. Our most critical accounting estimates include:
  •  the valuation of non-marketable equity investments and the determination of other-than-temporary impairments, which impact gains (losses) on equity method investments, net, or gains (losses) on other equity investments, net when we record impairments;
  •  the valuation of investments in debt instruments and the determination of other-than-temporary impairments, which impact our investment portfolio balance when we assess fair value, and interest and other, net when we record impairments of available-for-sale debt instruments;
  •  the assessment of recoverability of long-lived assets, which primarily impacts gross margin or operating expenses when we record asset impairments or accelerate their depreciation;
  •  the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions), which impact our provision for taxes; and
  •  the valuation of inventory, which impacts gross margin.
 
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 those 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.
 
Non-Marketable Equity Investments
 
The carrying value of our non-marketable equity investment portfolio, excluding equity derivatives, totaled $4.1 billion as of December 27, 2008 ($3.4 billion as of December 29, 2007). The majority of the balance as of December 27, 2008 was concentrated in companies in the flash memory market segment and wireless connectivity market segment. Our flash memory market segment investments include our investment in IMFT of $1.7 billion ($2.2 billion as of December 29, 2007), our investment in IM Flash Singapore, LLP (IMFS) of $329 million ($146 million as of December 29, 2007), and our investment in Numonyx of $484 million. Our wireless connectivity market segment investments include our non-marketable investment in Clearwire LLC of $238 million (see “Note 5: Available-for-Sale Investments” in Part II, Item 8 of this Form 10-K for information on our additional marketable equity investment in the new Clearwire Corporation of $148 million). In addition, we regularly invest in non-marketable equity instruments of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. For additional information, see “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.
 
Our non-marketable equity investments are recorded using adjusted historical cost basis or the equity method of accounting, depending on the facts and circumstances of each investment (see “Note 2: Accounting Policies” in Part II, Item 8 of this Form 10-K). Our non-marketable equity investments are classified in other long-term assets on the consolidated balance sheets.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Non-marketable equity investments are inherently risky, and a number of the companies in which we invest are likely to fail. Their success is dependent on product development, market acceptance, operational efficiency, and other key business factors. Depending on their future prospects, the companies 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 our investments would likely become impaired. Additionally, the current financial markets are extremely volatile and there has been a tightening of the credit markets, which could negatively affect the prospects of the companies we invest in, their ability to raise additional capital, and the likelihood of our being able to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales. For further information about our investment portfolio risks, including those specific to our investments in the flash memory market segment and wireless connectivity market segment, see “Risk Factors” in Part I, Item 1A of this Form 10-K.
 
We review our investments quarterly for indicators of impairment; however, for non-marketable equity investments, the impairment analysis requires significant judgment to identify events or circumstances that would significantly harm the fair value of the investment. The indicators that we use to identify those events or circumstances primarily include:
  •  the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects;
  •  the technological feasibility of the investee’s products and technologies;
  •  the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes;
  •  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
  •  the investee’s receipt of additional funding at a lower valuation.
 
Investments that we identify as having an indicator of impairment are subject to further analysis to determine if the fair value of the investment is below our carrying value. If the fair value of the investment is below our carrying value, we determine if the investment is other than temporarily impaired based on the severity and duration of the impairment. If the investment is considered to be other than temporarily impaired, we write down the investment to its fair value. Beginning in the first quarter of 2008, the assessment of fair value for non-marketable investments is based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157), as amended. With the exception of Clearwire LLC, we classified our impaired non-marketable investments as Level 3, as we use unobservable inputs to the valuation methodology that are significant to the fair value measurement, and the valuation requires management judgment due to the absence of quoted market prices and inherent lack of liquidity. We classified our investment in Clearwire LLC as Level 2, as the unobservable inputs to the valuation methodology were not significant to the fair value measurement. See “Note 3: Fair Value” in Part II, Item 8 of this Form 10-K.
 
Impairments of non-marketable equity investments were $1.2 billion in 2008. Over the past 12 quarters, including the fourth quarter of 2008, impairments of non-marketable equity investments have ranged from $10 million to $896 million per quarter.
 
The following is a discussion of the methods, estimates, and judgments that management uses in our analysis to determine if our non-marketable equity investments are other than temporarily impaired.
 
IMFT/IMFS
 
IMFT and IMFS are variable interest entities that are designed to manufacture and sell NAND products to Intel and Micron at manufacturing cost. Our NAND Solutions Group operating segment purchases 49% of these NAND products from IMFT and sells them to our customers. As a result, we generate cash flows from our investments in IMFT, IMFS, and our intangible assets related to the NAND product designs through our NAND Solutions Group business. Therefore, we determine the fair value of our investments in IMFT and IMFS using the income approach, based on a weighted average of multiple discounted cash flow scenarios of our NAND Solutions Group business.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
The discounted cash flow scenarios require the use of unobservable inputs, including assumptions of projected revenues (including product volume, product mix, and average selling prices), expenses, capital spending, and other costs, as well as a discount rate. Estimates of projected revenues, expenses, capital spending, and other costs are developed by IMFT, IMFS, and Intel using historical data and available market data. Management also determines how multiple discounted cash flow scenarios are weighted in the fair value determination. Additionally, the development of several inputs used in our income model (such as discount rate and tax rate) requires the selection of comparable companies within the NAND flash memory market segment. The selection of comparable companies requires management judgment and is based on a number of factors, including NAND products and services lines within the flash memory market segment, comparable companies’ sizes, growth rates, and other relevant factors. Based on our fair value determination, the fair value of our investment in IMFT and IMFS approximated carrying value as of December 27, 2008.
 
Changes in management estimates to the unobservable inputs would change the valuation of the investment. The estimates for the projected revenue and discount rate are the assumptions that most significantly affect the fair value determination. For example, the impact of a 5% decline in projected revenue in each of our cash flow scenarios could result in a decline in the fair value of our investment of up to approximately $300 million. The impact of a one percentage point increase in the discount rate would result in a decline in the fair value of our investment of approximately $225 million.
 
The fair value determined by the income approach is compared to the carrying value of our investments in IMFT and IMFS and our intangible asset related to the NAND product designs that we purchased from Micron as part of the formation of IMFT. We did not have an other-than-temporary impairment on our investments in IMFT and IMFS in 2008, 2007, or 2006.
 
Numonyx
 
We determine the fair value of our investment in Numonyx using a combination of the income approach and the market approach. The income approach includes the use of a weighted average of multiple discounted cash flow scenarios of Numonyx, which requires the use of unobservable inputs, including assumptions of projected revenues, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the flash memory market segment. Estimates of projected revenues, expenses, capital spending, and other costs are developed by Numonyx and Intel. The market approach includes using financial metrics and ratios of comparable public companies, such as projected revenues, expenses, and other costs. The selection of comparable companies used in the market approach requires management judgment and is based on a number of factors, including NOR products and services lines within the flash memory market segment, comparable companies’ sizes, growth rates, and other relevant factors.
 
Changes in management estimates to the unobservable inputs in our valuation models would change the valuation of the investment. The estimated projected revenue is the assumption that most significantly affects the fair value determination. For example, the impact of a 5% decline in projected revenue to each of our models and cash flow scenarios could result in a decline in the fair value of our investment of up to approximately $140 million. Management judgment is involved in determining how the income approach and the market approach are weighted in the fair value determination. Our fair value determination was more heavily weighted toward the market approach due to the comparability of similar companies in the market and the availability of market-based data. Increasing the relative weighting of the income approach would have resulted in a decline in the fair value of our investment by approximately $30 million.
 
We recorded a $250 million impairment charge on our investment in Numonyx during the third quarter of 2008 to write down our investment to its fair value. Estimates for revenue, earnings, and future cash flows were revised lower due to a general decline in the NOR flash memory market segment.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Clearwire LLC
 
We determine the fair value of our investment in Clearwire LLC primarily using the quoted prices of its parent company, the new Clearwire Corporation. The effects of adjusting the quoted price for premiums that we believe market participants would consider for Clearwire LLC, such as tax benefits and voting rights associated with our investment, were mostly offset by the effects of discounts to the fair value, such as those due to transfer restrictions, lack of liquidity, and differences in dividend rights that are included in the value of the new Clearwire Corporation stock. During the fourth quarter of 2008, we recorded a $762 million impairment charge on our investment in Clearwire LLC to write down our investment to its fair value, primarily due to the fair value being significantly lower than the cost basis of our investment.
 
In addition, during the fourth quarter of 2008, we recorded a $176 million impairment charge on our available-for-sale marketable investment in the new Clearwire Corporation due to the fair value being significantly lower than the cost basis of our investment.
 
Other Non-Marketable Equity Investments
 
We determine the fair value of our other non-marketable equity investments using the market approach and/or the income approach. The market approach includes the use of financial metrics and ratios of comparable public companies. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies’ sizes, growth rates, products and services lines, development stage, and other relevant factors. The income approach includes the use of a discounted cash flow model, which requires the following significant estimates for the investee: revenue, based on assumed market segment size and assumed market segment share; estimated costs; and appropriate discount rates based on the risk profile of comparable companies. Estimates of market segment size, market segment share, and costs are developed by the investee and/or Intel using historical data and available market data. The valuation of our other non-marketable investments also takes into account movements of the equity and venture capital markets, recent financing activities by the investees, changes in the interest rate environment, the investee’s capital structure, liquidation preferences for the investee’s capital, and other economic variables. The valuation of some of our investments in the wireless connectivity market segment was based on the income approach to determine the value of the investee’s spectrum licenses, transmission towers, and customer lists.
 
We recorded a total of $200 million of impairment charges in 2008 on our other non-marketable equity investments. Over the past 12 quarters, including the fourth quarter of 2008, impairments of our other non-marketable equity investments have ranged from $10 million to $134 million per quarter.
 
Investments in Debt Instruments
 
Fair Value
 
In the current market environment, the assessment of the fair value of debt instruments can be difficult and subjective. The volume of trading activity of certain debt instruments has declined, and the rapid changes occurring in today’s financial markets can lead to changes in the fair value of financial instruments in relatively short periods of time. SFAS No. 157 establishes three levels of inputs that may be used to measure fair value (see “Note 3: Fair Value” in Part II, Item 8 of this Form 10-K). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.
 
Level 1 instruments represent quoted prices in active markets. Therefore, determining fair value for Level 1 instruments does not require significant management judgment, and the estimation is not difficult.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Level 2 instruments include observable inputs other than Level 1 prices, such as quoted prices for identical instruments in markets with insufficient volume or infrequent transactions (less active markets), issuer credit ratings, non-binding market consensus prices that can be corroborated with observable market data, model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities, or quoted prices for similar assets or liabilities. These Level 2 instruments require more management judgment and subjectivity compared to Level 1 instruments, including:
  •  Determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating, and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced.
  •  Determining whether a market is considered active requires management judgment. Our assessment of an active market for our marketable debt instruments generally takes into consideration activity during each week of the one-month period prior to the valuation date of each individual instrument, including the number of days each individual instrument trades and the average weekly trading volume in relation to the total outstanding amount of the issued instrument.
  •  Determining which model-derived valuations to use in determining fair value requires management judgment. When observable market prices for identical securities or similar securities are not available, we price our marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data or pricing models, such as discounted cash flow models, with all significant inputs derived from or corroborated with observable market data.
 
Level 3 instruments include unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity. Most of our marketable debt instruments classified as Level 3 are valued using a non-binding market consensus price or a non-binding broker quote, both of which we corroborate with unobservable data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical and/or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs, and to a lesser degree non-observable market inputs. Adjustments to the fair value of instruments priced using non-binding market consensus prices and non-binding broker quotes, and classified as Level 3, were not significant in 2008.
 
Other-Than-Temporary Impairment
 
After determining the fair value of our available-for-sale debt instruments, gains or losses on these investments are recorded to other comprehensive income, until either the investment is sold or we determine that the decline in value is other-than-temporary. Determining whether the decline in fair value is other-than-temporary requires management judgment based on the specific facts and circumstances of each investment. For investments in debt instruments, these judgments primarily consider: the financial condition and liquidity of the issuer, the issuer’s credit rating, and any specific events that may cause us to believe that the debt instrument will not mature and be paid in full; and our ability and intent to hold the investment to maturity. Given the current market conditions, these judgments could prove to be wrong, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their obligations. In addition, if management decides not to hold an investment until maturity, it may result in the recognition of an other-than-temporary impairment.
 
As of December 27, 2008, our investments included $11.3 billion of available-for-sale debt instruments. During 2008, we recognized $44 million in impairment charges on our available-for-sale debt instruments. As of December 27, 2008, our cumulative unrealized losses related to debt instruments classified as available-for-sale were approximately $215 million (approximately $55 million as of December 29, 2007). As of December 27, 2008, this amount included approximately $170 million of unrecognized losses that could be recognized in the future if our other-than-temporary assessment changes.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
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. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value 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 comparing the difference between the asset grouping’s carrying value 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, we accelerate the rate of depreciation over the assets’ new, shorter useful lives. Over the past 12 quarters, including the fourth quarter of 2008, impairments and accelerated depreciation of long-lived assets ranged from $1 million to $320 million per quarter. For further discussion on these asset impairment charges, see “Note 15: Restructuring and Asset Impairment Charges” in Part II, Item 8 of this Form 10-K.
 
Long-lived assets such as goodwill; intangible assets; and property, plant and equipment are considered non-financial assets, and are measured at fair value only when indicators of impairment exist. The accounting and disclosure provisions of SFAS No. 157 are effective for these assets beginning in the first quarter of 2009. For further discussion, see “Note 2: Accounting Policies” in Part II, Item 8 of this Form 10-K.
 
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, 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 related to 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 majority of the deferred tax assets. 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 likely. In 2008, we recorded gross additional valuation allowances of approximately $270 million, primarily related to our anticipated inability to take the full tax benefit of impairment charges. Changes in management’s plans with respect to holding or disposing of investments could affect our future provision for taxes.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of SFAS No. 109,” and related guidance, we recognize liabilities for uncertain tax positions based on a two-step process. 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. If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have 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, settled and 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.
 
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 estimate of future demand is compared to work in process and finished goods inventory levels to determine the amount, if any, of obsolete or excess inventory. As of December 27, 2008, we had total work-in-process inventory of $1,577 million and total finished goods inventory of $1,559 million. 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 the demand accurately, we could be required to write off inventory, which would negatively impact our gross margin.
 
Recent Accounting Pronouncements and Accounting Changes
 
For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Note 2: Accounting Policies” in Part II, Item 8 of this Form 10-K.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Results of Operations
 
The following table sets forth certain consolidated statements of income data as a percentage of net revenue for the periods indicated:
 
                                                 
    2008     2007     2006  
          % of
          % of
          % of
 
(Dollars in Millions, Except Per Share Amounts)
  Dollars     Revenue     Dollars     Revenue     Dollars     Revenue  
Net revenue
  $ 37,586       100.0 %   $ 38,334       100.0 %   $ 35,382       100.0 %
Cost of sales
    16,742       44.5 %     18,430       48.1 %     17,164       48.5 %
                                                 
Gross margin
    20,844       55.5 %     19,904       51.9 %     18,218       51.5 %
                                                 
Research and development
    5,722       15.2 %     5,755       15.0 %     5,873       16.6 %
Marketing, general and administrative
    5,458       14.6 %     5,417       14.2 %     6,138       17.3 %
Restructuring and asset impairment charges
    710       1.9 %     516       1.3 %     555       1.6 %
                                                 
Operating income
    8,954       23.8 %     8,216       21.4 %     5,652       16.0 %
Gains (losses) on equity method investments, net
    (1,380 )     (3.7 )%     3       %     2       %
Gains (losses) on other equity investments, net
    (376 )     (1.0 )%     154       0.4 %     212       0.6 %
Interest and other, net
    488       1.3 %     793       2.1 %     1,202       3.4 %
                                                 
Income before taxes
    7,686       20.4 %     9,166       23.9 %     7,068       20.0 %
Provision for taxes
    2,394       6.3 %     2,190       5.7 %     2,024       5.7 %
                                                 
Net income
  $ 5,292       14.1 %   $ 6,976       18.2 %   $ 5,044       14.3 %
                                                 
Diluted earnings per share
  $ 0.92             $ 1.18             $ 0.86          
                                                 
 
The following graphs set forth revenue information of geographic regions for the periods indicated:
 
Geographic Breakdown of Revenue
 
(BAR CHARTS)
 
Our net revenue was $37.6 billion in 2008, a decrease of 2% compared to 2007. Higher revenue from the sale of microprocessors and chipsets was more than offset by the impacts of divestitures and lower revenue from the sale of motherboards. Revenue from the sale of NOR flash memory and cellular baseband products declined approximately $1.7 billion, primarily as a result of divestiture of these businesses. Revenue in the Americas region decreased 4% in 2008 compared to 2007. Revenue in the Asia-Pacific, Europe, and Japan regions remained approximately flat in 2008 compared to 2007.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Although net revenue for 2008 declined only slightly from 2007, net revenue for the fourth quarter of 2008 declined 19% from the third quarter as customers reduced inventory levels to keep pace with the dramatic decline in end-user demand that occurred over the course of the quarter. It is unclear when a turnaround may occur, and there remains a high degree of uncertainty around demand, which may continue to decline.
 
Our overall gross margin dollars for 2008 were $20.8 billion, an increase of $940 million, or 5%, compared to 2007. Our overall gross margin percentage increased to 55.5% in 2008 from 51.9% in 2007. The increase in gross margin percentage was primarily attributable to the gross margin percentage increase in the Digital Enterprise Group operating segment. In addition, our gross margin percentage increased due to the divestiture of our NOR flash memory business. We derived most of our overall gross margin dollars and operating profit in 2008 and 2007 from the sale of microprocessors in the Digital Enterprise Group and Mobility Group operating segments. See “Business Outlook” for a discussion of gross margin expectations.
 
Our net revenue was $38.3 billion in 2007, an increase of 8% compared to 2006. Higher microprocessor unit sales were partially offset by lower microprocessor average selling prices. Higher mobile chipset unit sales also contributed to the increase in net revenue. Lower NOR flash memory revenue in 2007 compared to 2006 was mostly offset by the ramp of our NAND flash memory business. The decrease in NOR flash memory revenue was due to a significant decline in average selling prices. Lower royalty revenue was offset by higher unit sales. Revenue in the Asia-Pacific region increased 11% and revenue in the Europe region increased 10% in 2007 compared to 2006, and revenue in the Americas region and Japan increased 3% in 2007 compared to 2006.
 
Our overall gross margin dollars for 2007 were $19.9 billion, an increase of $1.7 billion, or 9%, compared to 2006. Our overall gross margin percentage was relatively flat at 51.9% in 2007 compared to 51.5% in 2006. The gross margin percentage increase in the Digital Enterprise Group operating segment was mostly offset by a decrease in the gross margin percentage in the Mobility Group operating segment and costs associated with the ramp of our NAND flash memory business. We derived most of our overall gross margin dollars and operating profit in 2007 and 2006 from the sale of microprocessors in the Digital Enterprise Group and Mobility Group operating segments.
 
Digital Enterprise Group
 
The revenue and operating income for the Digital Enterprise Group (DEG) for the three years ended December 27, 2008 were as follows:
 
                         
(In Millions)
  2008     2007     2006  
Microprocessor revenue
  $ 16,078     $ 15,945     $ 15,248  
Chipset, motherboard, and other revenue
    4,554       5,359       5,437  
                         
Net revenue
  $ 20,632     $ 21,304     $ 20,685  
Operating income
  $ 6,462     $ 5,295     $ 3,299  
 
Net revenue for the DEG operating segment decreased by $672 million, or 3%, in 2008 compared to 2007. Microprocessors within DEG include those designed for the desktop and enterprise computing market segments as well as embedded microprocessors. The increase in microprocessor revenue was due to higher enterprise microprocessor average selling prices and higher embedded microprocessor unit sales, partially offset by lower desktop microprocessor unit sales. The decrease in chipset, motherboard, and other revenue was primarily due to lower motherboard unit sales and lower revenue from the sale of communications products. In addition, lower chipset average selling prices were partially offset by higher chipset unit sales.
 
Operating income increased by $1.2 billion, or 22%, in 2008 compared to 2007. The increase in operating income was primarily due to lower desktop microprocessor and chipset unit costs. Lower start-up costs of approximately $350 million and lower operating expenses were partially offset by sales in 2007 of desktop microprocessors that had previously been written off and higher write-offs of desktop microprocessor inventory in 2008.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
For 2007, net revenue for the DEG operating segment increased by $619 million, or 3%, compared to 2006. The increase in microprocessor revenue was due to higher microprocessor unit sales and higher enterprise average selling prices. These increases were partially offset by lower desktop average selling prices in a competitive pricing environment. The decrease in chipset, motherboard, and other revenue was due to lower motherboard unit sales as well as a decrease in communications infrastructure revenue, which was primarily due to divestitures of certain communications infrastructure businesses that were completed in 2006 and 2007. Partially offsetting these decreases was higher chipset revenue.
 
Operating income increased by $2.0 billion, or 61%, in 2007 compared to 2006. The increase in operating income was primarily due to lower desktop microprocessor unit costs and lower operating expenses, and to a lesser extent, sales of desktop microprocessor inventory that had been previously written off. Partially offsetting these increases were higher chipset unit costs and approximately $500 million of higher start-up costs, primarily related to our 45nm process technology. In 2007, we began including share-based compensation in the computation of operating income (loss) for each operating segment and adjusted the 2006 operating segment results to reflect this change.
 
Mobility Group
 
The revenue and operating income for the Mobility Group (MG) for the three years ended December 27, 2008 were as follows:
 
                         
(In Millions)
  2008     2007     2006  
Microprocessor revenue
  $ 11,439     $ 10,660     $ 9,212  
Chipset and other revenue
    4,209       4,021       3,097  
                         
Net revenue
  $ 15,648     $ 14,681     $ 12,309  
Operating income
  $ 5,199     $ 5,611     $ 4,602  
 
Net revenue for the MG operating segment increased by $967 million, or 7%, in 2008 compared to 2007. The increase in microprocessor revenue was due to significantly higher microprocessor unit sales, which were partially offset by significantly lower microprocessor average selling prices. A portion of the increase in microprocessor unit sales, as well as a portion of the decrease in average selling prices, was due to the ramp of Intel Atom processors. The increase in chipset and other revenue was primarily due to significantly higher chipset unit sales, which were partially offset by lower revenue from the sale of cellular baseband products. We are winding down the sales from the manufacturing agreement entered into as part of the divestiture of the cellular baseband business.
 
Operating income decreased by $412 million, or 7%, in 2008 compared to 2007. The decrease in operating income was primarily due to higher operating expenses, which were partially offset by lower microprocessor unit costs.
 
For 2007, net revenue for the MG operating segment increased by $2.4 billion, or 19%, compared to 2006. The increase in microprocessor revenue was due to a significant increase in unit sales, partially offset by significantly lower average selling prices. The increase in chipset and other revenue was due to higher unit sales of chipsets and, to a lesser extent, higher revenue from sales of cellular baseband 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, in 2007 we continued to manufacture and sell those products as part of a manufacturing and transition services agreement.
 
Operating income increased by $1.0 billion, or 22%, in 2007 compared to 2006. The increase in operating income was primarily due to higher revenue. Lower microprocessor unit costs were more than offset by approximately $330 million of higher start-up costs, primarily related to our 45nm process technology. Lower unit costs on wireless connectivity and cellular baseband products were offset by higher chipset unit costs. Operating expenses were higher in 2007 compared to 2006; however, operating expenses as a percentage of revenue decreased in 2007 compared to 2006.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Operating Expenses
 
Operating expenses for the three years ended December 27, 2008 were as follows:
 
                         
(In Millions)
  2008     2007     2006  
Research and development
  $ 5,722     $ 5,755     $ 5,873  
Marketing, general and administrative
  $ 5,458     $ 5,417     $ 6,138  
Restructuring and asset impairment charges
  $ 710     $ 516     $ 555  
 
Research and Development. R&D spending was flat in 2008 compared to 2007 and decreased $118 million, or 2%, in 2007 compared to 2006. In 2008 compared to 2007, we had lower product development expenses resulting from our divested businesses and slightly lower profit-dependent compensation. These decreases were offset by higher process development costs as we transition from manufacturing start-up costs related to our 45nm process technology to research and development of our next-generation 32nm process technology. The decrease in 2007 compared to 2006 was primarily due to lower process development costs as we transitioned from R&D to manufacturing using our 45nm process technology, partially offset by higher profit-dependent compensation.
 
Marketing, General and Administrative. Marketing, general and administrative expenses were flat in 2008 compared to 2007 and decreased $721 million, or 12%, in 2007 compared to 2006. In 2008 compared to 2007, we had higher legal expenses that were offset by lower profit-dependent compensation and lower advertising expenses. The decrease in 2007 compared to 2006 was primarily due to lower headcount, lower share-based compensation, and lower cooperative advertising expenses, partially offset by higher profit-dependent compensation.
 
R&D, combined with marketing, general and administrative expenses, were 30% of net revenue in 2008, 29% of net revenue in 2007, and 34% of net revenue in 2006.
 
Restructuring and Asset Impairment Charges. The following table summarizes restructuring and asset impairment charges by plan for the three years ended December 27, 2008:
 
                         
(In Millions)
  2008     2007     2006  
2008 NAND plan
  $ 215     $     $  
2006 efficiency program
    495       516       555  
                         
Total restructuring and asset impairment charges
  $ 710     $ 516     $ 555  
                         
 
We may incur additional restructuring charges in the future for employee severance and benefit arrangements, and facility-related or other exit activities. Subsequent to the end of 2008, management approved plans to restructure some of our manufacturing and assembly and test operations, and align our manufacturing and assembly and test capacity to current market conditions. These actions, which are expected to take place beginning in 2009, include closing two assembly and test facilities in Malaysia, one facility in the Philippines, and one facility in China; stopping production at a 200mm wafer fabrication facility in Oregon; and ending production at our 200mm wafer fabrication facility in California. Our outlook for the first quarter of 2009 is for additional restructuring and asset impairment charges of $160 million.
 
2008 NAND Plan
 
In the fourth quarter of 2008, management approved a plan with Micron to discontinue the supply of NAND flash memory from the 200mm facility within the IMFT manufacturing network. The agreement resulted in a $215 million restructuring charge, primarily related to the IMFT 200mm supply agreement. The restructuring charge resulted in a reduction of our investment in IMFT of $184 million, a cash payment to Micron of $24 million, and other cash payments of $7 million.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
2006 Efficiency Program
 
The following table summarizes charges for the 2006 efficiency program for the three years ended December 27, 2008:
 
                         
(In Millions)
  2008     2007     2006  
Employee severance and benefit arrangements
  $ 151     $ 289     $ 238  
Asset impairments
    344       227       317  
                         
Total restructuring and asset impairment charges
  $ 495     $ 516     $ 555  
                         
 
In the third quarter of 2006, management approved several actions recommended by our structure and efficiency task force as part of a restructuring plan designed to improve operational efficiency and financial results. Some of these activities have involved cost savings or other actions that did not result in restructuring charges, such as better utilization of assets, reduced spending, and organizational efficiencies. The efficiency program has included targeted headcount reductions for various groups within the company, which we have met through employee attrition and terminations. Business divestures have further reduced headcount.
 
During 2006, we completed the divestiture of three businesses. For further discussion, see “Note 12: Divestitures” in Part II, Item 8 of this Form 10-K. In connection with the divestiture of certain assets of our communications and application processor business, we recorded impairment charges of $103 million related to the write-down of manufacturing tools to their fair value, less the cost to dispose of the assets. We determined the fair value using a market-based valuation technique. In addition, as a result of both this divestiture and a subsequent assessment of our worldwide manufacturing capacity operations, we placed for sale our fabrication facility in Colorado Springs, Colorado. This plan resulted in an impairment charge of $214 million to write down to fair value the land, building, and equipment asset grouping that has been principally used to support our communications and application processor business. We determined the fair market value of the asset grouping using an average of the results from using the cost approach and market approach valuation techniques.
 
During 2007, we incurred an additional $54 million in asset impairment charges as a result of market conditions related to the Colorado Springs facility. Also, we recorded land and building write-downs related to certain facilities in Santa Clara, California. In addition, we incurred $85 million in asset impairment charges related to assets that we sold in conjunction with the divestiture of our NOR flash memory business. We determined the impairment charges based on the fair value, less selling costs, that we expected to receive upon completion of the divestiture.
 
During 2008, we incurred additional asset impairment charges related to the Colorado Springs facility, based on market conditions. Also, we incurred $275 million in additional asset impairment charges related to assets that we sold in conjunction with the divestiture of our NOR flash memory business. We determined the impairment charges using the revised fair value of the equity and note receivable that we received upon completion of the divestiture, less selling costs. The lower fair value was primarily a result of a decline in the outlook for the flash memory market segment. For further information on this divestiture, see “Note 12: Divestitures” in Part II, Item 8 of this Form 10-K.
 
The following table summarizes the restructuring and asset impairment activity for the 2006 efficiency program during 2007 and 2008:
 
                         
    Employee Severance
             
(In Millions)
  and Benefits     Asset Impairments     Total  
Accrued restructuring balance as of December 30, 2006
  $ 48     $     $ 48  
Additional accruals
    299       227       526  
Adjustments
    (10 )           (10 )
Cash payments
    (210 )           (210 )
Non-cash settlements
          (227 )     (227 )
                         
Accrued restructuring balance as of December 29, 2007
  $ 127     $     $ 127  
Additional accruals
    167       344       511  
Adjustments
    (16 )           (16 )
Cash payments
    (221 )           (221 )
Non-cash settlements
          (344 )     (344 )
                         
Accrued restructuring balance as of December 27, 2008
  $ 57     $     $ 57  
                         


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
We recorded the additional accruals, net of adjustments, as restructuring and asset impairment charges. The remaining accrual as of December 27, 2008 was related to severance benefits that we recorded within accrued compensation and benefits.
 
From the third quarter of 2006 through the fourth quarter of 2008, we incurred a total of $1.6 billion in restructuring and asset impairment charges related to this program. These charges included a total of $678 million related to employee severance and benefit arrangements for approximately 11,900 employees, of which 10,800 employees had left the company as of December 27, 2008. A substantial majority of these employee terminations affected employees within manufacturing, information technology, and marketing. Of the employee severance and benefit charges incurred as of December 27, 2008, we had paid $621 million. The restructuring and asset impairment charges also included $888 million in asset impairment charges.
 
We estimate that employee severance and benefit charges from the third quarter of 2006 to the fourth quarter of 2008 will result in gross annual savings of approximately $1.1 billion, a portion of which we began to realize in the third quarter of 2006. We are realizing these savings within marketing, general and administrative expenses; cost of sales; and R&D.
 
Share-Based Compensation
 
Share-based compensation totaled $851 million in 2008, $952 million in 2007, and $1.4 billion in 2006. Share-based compensation was included in cost of sales and operating expenses. The decrease in share-based compensation from 2006 to 2007 was a result of fewer equity awards vesting in 2007 compared to 2006.
 
As of December 27, 2008, unrecognized share-based compensation costs and the weighted average periods over which the costs are expected to be recognized were as follows:
 
             
    Unrecognized
     
    Share-Based
    Weighted
    Compensation
    Average
(Dollars in Millions)
  Costs     Period
Stock options
  $ 335     1.2 years 
Restricted stock units
  $ 937     1.4 years 
Stock purchase plan
  $ 18     1 month
 
Gains (Losses) on Equity Method Investments, Net
 
Net losses on equity method investments were $1.4 billion in 2008 compared to a net gain of $3 million in 2007. We recognized higher impairment charges and higher equity method losses in 2008 compared to 2007. Impairment charges in 2008 included a $762 million impairment charge recognized on our investment in Clearwire LLC and a $250 million impairment charge recognized on our investment in Numonyx. We recognized the impairment charge on our investment in Clearwire LLC to write down our investment to its fair value, primarily due to the fair value being significantly lower than the cost basis of our investment. The impairment charge on our investment in Numonyx was due to a general decline in the NOR flash memory market segment. Our equity method losses were primarily related to Numonyx ($87 million in 2008) and the old Clearwire Corporation ($184 million 2008 and $104 million in 2007). See “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.
 
Net gains on equity method investments were flat in 2007 compared to 2006. Approximately $110 million of income recognized in 2007 due to the reorganization of one of our investments was offset by higher equity method losses, primarily from our investment in the old Clearwire Corporation. Equity method losses were not significant in 2006.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Gains (Losses) on Other Equity Investments, Net
 
Gains (losses) on other equity investments, net were as follows:
 
                         
(In Millions)
  2008     2007     2006  
 
Impairment charges
  $ (455 )   $ (92 )   $ (72 )
Gains on sales
    60       204       151  
Other, net
    19       42       133  
                         
Total gains (losses) on other equity investments, net
  $ (376 )   $ 154     $ 212  
                         
 
Net losses on other equity investments were $376 million in 2008 compared to a net gain of $154 million in 2007. We recognized higher impairment charges and lower gains on sales in 2008 compared to 2007. Impairment charges in 2008 included a $176 million impairment charge recognized on our investment in the new Clearwire Corporation and $97 million of impairment charges on our investment in Micron. The impairment charge on our investment in the new Clearwire Corporation was due to the fair value being significantly lower than the cost basis of our investment. The impairment charges on our investment in Micron reflect the difference between our cost basis and the fair value of our investment in Micron at the end of the second and third quarters of 2008, and were principally based on our assessment of Micron’s financial results and the competitive environment.
 
Net gains on other equity investments were $154 million in 2007 compared to $212 million in 2006. During 2007, we recognized lower gains on third-party merger transactions and higher impairment charges, partially offset by higher gains on sales of equity investments. Net gains on equity investments in 2006 included a gain of $103 million on the sale of a portion of our investment in Micron, which was sold for $275 million.
 
Interest and Other, Net
 
The components of interest and other, net were as follows:
 
                         
(In Millions)
  2008     2007     2006  
 
Interest income
  $ 592     $ 804     $ 636  
Interest expense
    (8 )     (15 )     (24 )
Other, net
    (96 )     4       590  
                         
Total interest and other, net
  $ 488     $ 793     $ 1,202  
                         
 
Interest and other, net decreased to $488 million in 2008 compared to $793 million in 2007. The decrease was due to lower interest income and fair value losses that we experienced in 2008 on our trading assets. Interest income was lower in 2008 compared to 2007 as a result of lower interest rates, partially offset by higher average investment balances.
 
Interest and other, net decreased to $793 million in 2007 compared to $1.2 billion in 2006, primarily due to lower divestiture gains, partially offset by higher interest income resulting primarily from higher average investment balances, and to a lesser extent higher interest rates. Results for 2006 included net gains of $612 million for three divestitures. See “Note 12: Divestitures” in Part II, Item 8 of this Form 10-K.
 
Provision for Taxes
 
Our effective income tax rate was 31.1% in 2008 (23.9% in 2007 and 28.6% in 2006). The rate increased in 2008 compared to 2007, primarily due to the recognition of a valuation allowance on our deferred tax assets due to the uncertainty of realizing tax benefits related to impairments of our equity investments. In addition, the rate increased in 2008 compared to 2007, due to the reversal of previously accrued taxes of $481 million (including $50 million of accrued interest) related to settlements with the U.S. Internal Revenue Service (IRS) in the first and second quarters of 2007. Our effective income tax rate was lower in 2007 compared to 2006, primarily due to the settlements with the IRS.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Liquidity and Capital Resources
 
Cash, short-term investments, marketable debt instruments included in trading assets, and debt at the end of each period were as follows:
 
                 
    Dec. 27,
    Dec. 29,
 
(Dollars in Millions)
  2008     2007  
 
Cash, short-term investments, and marketable debt instruments included in trading assets
  $ 11,544     $ 14,871  
Short-term and long-term debt
  $ 1,988     $ 2,122  
Debt as % of stockholders’ equity
    5.1 %     5.0 %
 
In summary, our cash flows were as follows:
 
                         
(In Millions)
  2008     2007     2006  
 
Net cash provided by operating activities
  $ 10,926     $ 12,625     $ 10,632  
Net cash used for investing activities
    (5,865 )     (9,926 )     (4,988 )
Net cash used for financing activities
    (9,018 )     (1,990 )     (6,370 )
                         
Net increase (decrease) in cash and cash equivalents
  $ (3,957 )   $ 709     $ (726 )
                         
 
Operating Activities
 
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities. For 2008 compared to 2007, the $1.7 billion decrease in cash provided by operating activities was primarily due to the $1.7 billion decrease in net income, while total adjustments to reconcile net income to cash provided by operating activities, including net changes in assets and liabilities, were approximately flat.
 
Inventories as of December 27, 2008 increased compared to December 29, 2007, due to higher chipset and microprocessor inventories partially offset by lower inventories of other products. As of December 27, 2008, our other accrued liabilities included $447 million in customer credit balances, which were reclassified from accounts receivable. Accounts receivable as of December 27, 2008 decreased significantly compared to December 29, 2007, due to a significant decline in revenue during the last month in the fourth quarter of 2008. Customer credit balances were not significant as of December 29, 2007. For 2008, our two largest customers accounted for 38% of our net revenue (35% in 2007). In 2008, one of these customers accounted for 20% of our net revenue (17% in 2007), and another customer accounted for 18% of our net revenue (18% in 2007). Additionally, these two largest customers accounted for 46% of our accounts receivable as of December 27, 2008 (35% as of December 29, 2007).
 
Due to the adoption of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS No. 159), in 2008, the related cash flows for marketable debt instruments classified as trading assets are now included in investing activities.
 
For 2007 compared to 2006, the increase in cash provided by operating activities was primarily due to higher net income. Changes to working capital in 2007 from 2006 were approximately flat, with a decrease in inventory levels compared to an increase in 2006, offset by higher purchases of trading assets exceeding maturities.
 
Investing Activities
 
Investing cash flows consist primarily of capital expenditures, net investment purchases, maturities, and disposals.
 
The decrease in cash used for investing activities in 2008 compared to 2007 was primarily due to a decrease in purchases of available-for-sale debt investments. In addition, due to the adoption of SFAS No. 159 in 2008, the related cash flows for marketable debt instruments classified as trading assets were included in investing activities for 2008, and previously they had been included in operating activities. Our investments in non-marketable equity investments were higher in 2008 and included $1.0 billion for an ownership interest in Clearwire LLC.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Our capital expenditures were $5.2 billion in 2008 ($5.0 billion in 2007 and $5.9 billion in 2006). Capital expenditures for fiscal year 2009 are currently expected to be flat to slightly down from our 2008 expenditures. Capital expenditures during fiscal year 2009 are expected to be funded by cash flows from operating activities.
 
The increase in cash used in investing activities in 2007 compared to 2006 was primarily due to higher purchases of available-for-sale investments. Lower capital spending was mostly offset by lower proceeds from divestitures.
 
Financing Activities
 
Financing cash flows consist primarily of repurchases and retirement of common stock, payment of dividends to stockholders, and proceeds from the sale of shares through employee equity incentive plans.
 
The higher cash used in financing activities in 2008 compared to 2007 was primarily due to an increase in repurchases and retirement of common stock, and lower proceeds from the sale of shares pursuant to employee equity incentive plans. During 2008, we repurchased $7.2 billion of common stock compared to $2.8 billion in 2007. As of December 27, 2008, $7.4 billion remained available for repurchase under the existing repurchase authorization of $25 billion. We base our level of common stock repurchases on internal cash management decisions, and this level may fluctuate. Proceeds from the sale of shares through employee equity incentive plans totaled $1.1 billion in 2008 compared to $3.1 billion in 2007, as a result of a lower volume of employee exercises of stock options. Our dividend payment was $3.1 billion in 2008, higher than the $2.6 billion in 2007, due to increases in quarterly cash dividends per common share. On January 23, 2009, our Board of Directors declared a cash dividend of $0.14 per common share for the first quarter of 2009.
 
The lower cash used in financing activities in 2007 compared to 2006 was primarily due to an increase in proceeds from the sale of shares through employee equity incentive plans and a decrease in repurchases and retirement of common stock.
 
Liquidity
 
Cash generated by operations is used as our primary source of liquidity. As of December 27, 2008, we also had an investment portfolio valued at $14.5 billion, consisting of cash and cash equivalents and marketable debt instruments included in trading assets and short- and long-term investments.
 
Our investment policy requires all investments with original maturities of up to 6 months to be rated at least A-1/P-1 by Standard & Poor’s/Moody’s, and specifies a higher minimum rating for investments with longer maturities. For instance, investments with maturities of greater than three years require a minimum rating of AA-/Aa3 at the time of investment. Government regulations imposed on investment alternatives of our non-U.S. subsidiaries, or the absence of A rated counterparties in certain countries, result in some minor exceptions. Substantially all of our investments in debt instruments are with A/A2 or better rated issuers, and the majority of the issuers are rated
AA-/Aa2 or better. Additionally, we limit the amount of credit exposure to any one counterparty based on our analysis of that counterparty’s relative credit standing. As of December 27, 2008, the total credit exposure to any single counterparty did not exceed $500 million.
 
Credit rating criteria for derivative instruments are similar to those for other investments. The amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which a counterparty’s obligations exceed our obligations with that counterparty, because we enter into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions subject to International Swaps and Derivatives Association, Inc. (ISDA) agreements.
 
The credit quality of our investment portfolio remains high during this difficult credit environment, with other-than-temporary impairments on our available-for-sale debt instruments limited to $44 million during 2008. In addition, we continue to be able to invest in high-quality investments. However, we have seen a reduction in the volume of available commercial paper from certain market segments. As a result, our investments in short-term government funds have increased, which will reduce our average investment return. With the exception of a limited amount of investments for which we have recognized other-than-temporary impairments, we have not seen significant liquidation delays, and for those that have matured we have received the full par value of our original debt investments. We have the intent and ability to hold our debt investments that have unrealized losses in accumulated other comprehensive income for a sufficient period of time to allow for recovery of the principal amounts invested, which may occur at or near the maturity of those investments.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
As of December 27, 2008, $10.2 billion of our portfolio had a remaining maturity of less than one year. As of December 27, 2008, our cumulative unrealized losses, net of corresponding hedging activities, related to debt instruments classified as trading assets were approximately $145 million (approximately $25 million as of December 29, 2007). As of December 27, 2008, our cumulative unrealized losses related to debt instruments classified as available-for-sale were approximately $215 million (approximately $55 million as of December 29, 2007). Substantially all of our unrealized losses can be attributed to fair value fluctuations in an unstable credit environment that resulted in a decrease in the market liquidity for debt instruments.
 
Our portfolio included $1.1 billion of asset-backed securities as of December 27, 2008. Approximately half of these securities were collateralized by first-lien mortgages or credit card debt. The remaining asset-backed securities were collateralized by student loans or auto loans. During 2008, our asset-backed securities experienced net unrealized fair value declines totaling $131 million, of which $108 million was recognized in our consolidated statements of income. As of December 27, 2008, the expected weighted average remaining maturity was less than two years.
 
We continually monitor the credit risk in our portfolio and mitigate our credit and interest rate exposures in accordance with the policies approved by our Board of Directors. We intend to continue to closely monitor future developments in the credit markets and make appropriate changes to our investment policy as deemed necessary. Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of either the current credit environment or potential investment fair value fluctuations.
 
Our commercial paper program provides another potential source of liquidity. We have an ongoing authorization from our Board of Directors to borrow up to $3.0 billion, including through the issuance of commercial paper. Maximum borrowings under our commercial paper program during 2008 were approximately $1.3 billion, although no commercial paper remained outstanding as of December 27, 2008. Our commercial paper was rated A-1+ by Standard & Poor’s and P-1 by Moody’s as of December 27, 2008. Despite the tightening of the credit markets, we continue to be able to access funds through the credit markets, including through the issuance of commercial paper. We also have an automatic shelf registration statement on file with the SEC pursuant to which we may offer an unspecified amount of debt, equity, and other securities.
 
We believe that we have the financial resources needed to meet business requirements for the next 12 months, including capital expenditures for the expansion or upgrading of worldwide manufacturing and assembly and test capacity, working capital requirements, and potential dividends, common stock repurchases, and acquisitions or strategic investments.
 
Fair Value
 
Beginning in the first quarter of 2008, the assessment of fair value for our financial instruments was based on the provisions of SFAS No. 157. SFAS No. 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. A financial instrument’s categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
Credit risk is factored into the valuation of financial instruments that we measure at fair value on a recurring basis. When fair value is determined using observable market prices, the credit risk is incorporated into the market price of the financial instrument. When fair value is determined using pricing models, such as a discounted cash flow model, the issuer’s credit risk and/or Intel’s credit risk is factored into the calculation of the fair value, as appropriate. During 2008, the valuation of our liabilities measured at fair value as well as our derivative instruments in a current or potential net liability position were not impacted by changes in our credit risk. The credit ratings of certain of our counterparties have deteriorated. However, the deterioration of these credit ratings did not have a significant impact on the valuation of either our marketable debt instruments or derivative instruments in a current or potential net asset position.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
When values are determined using inputs that are both unobservable and significant to the values of the instruments being measured, we classify those instruments as Level 3 under the SFAS No. 157 hierarchy. As of December 27, 2008, our financial instruments measured at fair value on a recurring basis included $15.0 billion of assets, of which $1.7 billion (11%) were classified as Level 3. In addition, our financial instruments measured at fair value on a recurring basis included $421 million of liabilities, of which $147 million (35%) were classified as Level 3. During 2008, we transferred approximately $680 million of assets from Level 3 to Level 2. These assets primarily consisted of floating-rate notes that were transferred from Level 3 to Level 2 due to a greater availability of observable market data and/or non-binding market consensus prices to value or corroborate the value of our instruments. During 2008, we recognized an insignificant amount of losses on the assets that were transferred from Level 3 to Level 2.
 
During 2008, the Level 3 assets and liabilities that are measured at fair value on a recurring basis experienced net unrealized fair value declines totaling $160 million. Of these declines, $111 million was recognized in our consolidated statements of income. We believe that the remaining $49 million, included in other comprehensive income, represents a temporary decline in the fair value of available-for-sale investments. During 2008, we did not experience any significant realized gains (losses) related to the Level 3 assets or liabilities in our portfolio.
 
Marketable Debt Instruments
 
As of December 27, 2008, our assets measured at fair value on a recurring basis included $14.2 billion of marketable debt instruments. Of these instruments, approximately $525 million was classified as Level 1, approximately $12.0 billion as Level 2, and approximately $1.6 billion as Level 3.
 
When available, we use observable market prices for identical securities to value our marketable debt instruments. If observable market prices are not available, we use non-binding market consensus prices that we seek to corroborate with observable market data, if available, or non-observable market data. When prices from multiple sources are available for a given instrument, we use observable market quotes to price our instruments, in lieu of prices from other sources.
 
Our balance of marketable debt instruments that are measured at fair value on a recurring basis and classified as Level 1 was classified as such due to the usage of observable market prices for identical securities that are traded in active markets. Marketable debt instruments in this category generally include certain of our floating-rate notes, corporate bonds, and money market fund deposits. Management judgment was required to determine our policy that defines the levels at which sufficient volume and frequency of transactions are met for a market to be considered active. Our assessment of an active market for our marketable debt instruments generally takes into consideration activity during each week of the one-month period prior to the valuation date of each individual instrument, including the number of days each individual instrument trades and the average weekly trading volume in relation to the total outstanding amount of the issued instrument.
 
Approximately 10% of our balance of marketable debt instruments that are measured at fair value on a recurring basis and classified as Level 2 was classified as such due to the usage of observable market prices for identical securities that are traded in less active markets. When observable market prices for identical securities are not available, we price our marketable debt instruments using: non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical and/or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and to a lesser degree non-observable market inputs. We corroborate the non-binding market consensus prices with observable market data using statistical models when observable market data exists. The discounted cash flow model uses observable market inputs, such as LIBOR-based yield curves, currency spot and forward rates, and credit ratings. Approximately 45% of our balance of marketable debt instruments that are measured at fair value on a recurring basis and classified as Level 2 was classified as such due to the usage of a discounted cash flow model, approximately 40% due to the usage of non-binding market consensus prices that are corroborated with observable market data, and approximately 5% due to the usage of quoted market prices for similar instruments. Marketable debt instruments classified as Level 2 generally include commercial paper, bank time deposits, municipal bonds, certain of our money market fund deposits, and a majority of floating-rate notes and corporate bonds.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Our marketable debt instruments that are measured at fair value on a recurring basis and classified as Level 3 were classified as such due to the lack of observable market data to corroborate either the non-binding market consensus prices or the non-binding broker quotes. When observable market data is not available, we corroborate the non-binding market consensus prices and non-binding broker quotes using unobservable data, if available. Marketable debt instruments in this category generally include asset-backed securities and certain of our floating-rate notes and corporate bonds. All of our investments in asset-backed securities were classified as Level 3, and substantially all of them were valued using non-binding market consensus prices that we were not able to corroborate with observable market data due to the lack of transparency in the market for asset-backed securities.
 
Money Market Fund Deposits
 
As of December 27, 2008, our marketable debt instruments included $422 million of money market fund deposits. Of these money market fund deposits, $373 million was classified as Level 1 and $49 million was classified as Level 2.
 
Equity Securities
 
As of December 27, 2008, our portfolio of assets measured at fair value on a recurring basis included $352 million of marketable equity securities. Of these securities, $308 million was classified as Level 1 because the valuations were based on quoted prices for identical securities in active markets. Our assessment of an active market for our marketable equity securities generally takes into consideration activity during each week of the one-month period prior to the valuation date for each individual security, including the number of days each individual equity security trades and the average weekly trading volume in relation to the total outstanding shares of that security. The fair values of our investments in the new Clearwire Corporation ($148 million) and VMware, Inc. ($137 million) constituted most of the fair values of the marketable equity securities that we classified as Level 1. Our investment in VMware was reclassified from Level 2 to Level 1 during 2008, due to the expiration of our transfer restriction on VMware stock.
 
The remaining marketable equity securities ($44 million) were classified as Level 2 because their valuations were either based on quoted prices for identical securities in less active markets or adjusted for security-specific restrictions. The fair value of our investment in Micron ($42 million) constituted substantially all of the fair values of the marketable equity securities that we classified as Level 2. In measuring the fair value of our investment in Micron, our valuation reflected a discount from the quoted market price of Micron’s stock, due to our investment being in a form of rights exchangeable into unregistered Micron stock.
 
As of December 27, 2008, our portfolio of assets measured at fair value on a recurring basis included $299 million of equity securities offsetting deferred compensation. All of these securities were classified as Level 1, because their valuations were based on quoted prices for identical securities in active markets.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Contractual Obligations
 
The following table summarizes our significant contractual obligations as of December 27, 2008:
 
                                         
    Payments Due by Period  
          Less Than
                More Than
 
(In Millions)
  Total     1 Year     1–3 Years     3–5 Years     5 Years  
Operating lease obligations
  $ 350     $ 106     $ 130     $ 68     $ 46  
Capital purchase obligations1
    2,862       2,782       80              
Other purchase obligations and commitments2
    1,180       492       554       9       125  
Long-term debt obligations3
    3,382       80       272       108       2,922  
Other long-term liabilities3, 4, 5
    645       260       157       98       130  
                                         
Total6
  $ 8,419     $ 3,720     $ 1,193     $ 283     $ 3,223  
                                         
 
 
1 Capital purchase obligations represent commitments for the construction or purchase of property, plant and equipment. They were not recorded as liabilities on our consolidated balance sheet as of December 27, 2008, as we had not yet received the related goods or taken title to the property.
 
2 Other purchase obligations and commitments include payments due under various types of licenses, agreements to purchase raw materials or other goods, as well as payments due under non-contingent funding obligations. Funding obligations include, for example, agreements to fund various projects with other companies.
 
3 Amounts represent total anticipated cash payments, including anticipated interest payments that are not recorded on the consolidated balance sheets and the short-term portion of the obligation. Any future settlement of convertible debt would reduce anticipated interest and/or principal payments. Amounts exclude fair value adjustments such as discounts or premiums that affect the amount recorded on the consolidated balance sheets.
 
4 We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, $736 million of income taxes payable has been excluded from the table above. However, long-term income taxes payable, included on our consolidated balance sheet, includes these uncertain tax positions, reduced by the associated federal deduction for state taxes and non-U.S. tax credits.
 
5 Other long-term liabilities in the table above include the short-term portion of other long-term liabilities. Expected contributions to our U.S. and non-U.S. pension plans and other postretirement benefit plans of $67 million to be made during 2009 are also included; however, funding projections beyond 2009 are not practical to estimate.
 
6 Total generally excludes contractual obligations already recorded on the consolidated balance sheet as current liabilities.
 
Contractual obligations for purchases of goods or services generally include agreements that are enforceable and legally binding on Intel and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. The table above also includes agreements to purchase raw materials that have cancellation provisions requiring little or no payment. The amounts under such contracts are included in the table above because management believes that cancellation of these contracts is unlikely and expects to make future cash payments according to the contract terms or in similar amounts for similar materials. For other obligations with cancellation provisions, the amounts included in the table above were limited to the non-cancelable portion of the agreement terms and/or the minimum cancellation fee.
 
We have entered into certain agreements for the purchase of raw materials or other goods that specify minimum prices and quantities based on a percentage of the total available market or based on a percentage of our future purchasing requirements. Due to the uncertainty of the future market and our future purchasing requirements, obligations under these agreements are not included in the table above. We estimate our obligation under these agreements as of December 27, 2008 to be approximately as follows: less than one year—$309 million; one to three years—$315 million; three to five years—zero; more than five years—zero. Our purchase orders for other products are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, some of our purchase orders represent authorizations to purchase rather than binding agreements.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Contractual obligations that are contingent upon the achievement of certain milestones are not included in the table above. These obligations include milestone-based co-marketing agreements, contingent funding/payment obligations, and milestone-based equity investment funding. These arrangements are not considered contractual obligations until the milestone is met by the third party. As of December 27, 2008, assuming that all future milestones are met, additional required payments would be approximately $150 million.
 
For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the statutory withholding requirements paid by Intel on behalf of our employees. The obligation to pay the relative taxing authority is not included in the table above, as the amount is contingent upon continued employment. In addition, the amount of the obligation is unknown, as it is based in part on the market price of our common stock when the awards vest.
 
The expected timing of payments of the obligations above are estimates based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations. Amounts disclosed as contingent or milestone-based obligations are dependent on the achievement of the milestones or the occurrence of the contingent events and can vary significantly.
 
We have a contractual obligation to purchase the output of IMFT and IMFS in proportion to our investments, currently 49% in each of these ventures. However, IMFS is in its construction phase and has had no production to date. See “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K. Additionally, we have entered into various contractual commitments in relation to our investments in IMFT and IMFS. Some of these commitments are with Micron, and some are directly with IMFT or IMFS. The following are the significant contractual commitments:
  •  Subject to certain conditions, Intel and Micron each agreed to contribute up to approximately $1.7 billion for IMFS in the three years following the initial capital contribution. Of that amount, as of December 27, 2008, our remaining commitment was approximately $1.3 billion. However, the construction of the IMFS fabrication facility has been placed on hold.
  •  We also have several agreements with Micron related to intellectual property rights, and R&D funding related to NAND flash manufacturing and IMFT. See “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.
 
Off-Balance-Sheet Arrangements
 
As of December 27, 2008, with the exception of a guarantee for the repayment of $275 million in principal of the payment obligations of Numonyx under its senior credit facility, as well as accrued unpaid interest, expenses of the lenders, and penalties, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. See “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
Business Outlook
 
Our future results of operations and the topics of other forward-looking statements contained in this Form 10-K, including this MD&A, involve a number of risks and uncertainties—in particular, current economic uncertainty, including the tightening of credit markets, as well as future economic conditions; our goals and strategies; new product introductions; plans to cultivate new businesses; divestitures or investments; revenue; pricing; gross margin and costs; capital spending; depreciation; R&D expenses; marketing, general and administrative expenses; potential impairment of investments; our effective tax rate; pending legal proceedings; net gains (losses) from equity investments; and interest and other, net. The current uncertainty in global economic conditions makes it particularly difficult to predict product demand and other related matters, and makes it more likely that our actual results could differ materially from our expectations. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ materially from our expectations. See the risks described in “Risk Factors” in Part I, Item 1A of this Form 10-K.
 
Our expectations for 2009 are as follows:
  •  Total Spending. We expect spending on R&D, plus marketing, general and administrative expenses, in 2009 to be between $10.4 billion and $10.6 billion. This expectation for our total spending in 2009 is lower than our 2008 spending by approximately 6% due to targeted spending reductions, lower spending for revenue and profit-dependent items, and the standard shift between R&D and cost of sales spending as we ramp our new 32nm process technology.
  •  Research and Development Spending. Approximately $5.4 billion.
  •  Capital Spending. We expect capital spending in 2009 to be flat to slightly down from capital spending in 2008 of $5.2 billion. We expect capital spending for 2009 to primarily consist of investments in 32nm process technology.
  •  Depreciation. Approximately $4.8 billion, plus or minus $100 million.
  •  Tax Rate. Approximately 27%. The estimated effective tax rate is based on tax law in effect as of December 27, 2008 and expected income.
 
Status of Business Outlook
 
We expect that our corporate representatives will, from time to time, meet privately with investors, investment analysts, the media, and others, and may reiterate the forward-looking statements contained in the “Business Outlook” section and elsewhere in this Form 10-K, including any such statements that are incorporated by reference in this Form 10-K. At the same time, we will keep this Form 10-K and our most current business outlook publicly available on our Investor Relations web site at www.intc.com. The public can continue to rely on the business outlook published on the web site as representing our current expectations on matters covered, unless we publish a notice stating otherwise. The statements in the “Business Outlook” and other forward-looking statements in this Form 10-K are subject to revision during the course of the year in our quarterly earnings releases and SEC filings and at other times.
 
From the close of business on February 27, 2009 until our quarterly earnings release is published, presently scheduled for April 14, 2009, we will observe a “quiet period.” During the quiet period, the “Business Outlook” and other forward-looking statements first published in our Form 8-K filed on January 15, 2009, as reiterated or updated as applicable, in this Form 10-K, should be considered historical, speaking as of prior to the quiet period only and not subject to update. During the quiet period, our representatives will not comment on our business outlook or our financial results or expectations. The exact timing and duration of the routine quiet period, and any others that we utilize from time to time, may vary at our discretion.


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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to financial market risks, primarily changes in currency exchange rates, interest rates, and equity prices. We use derivative financial instruments primarily to manage currency exchange rate risk and interest rate risk, and to a lesser extent, equity market risk and commodity price risk. All of the potential changes noted below are based on sensitivity analyses performed on our financial positions as of December 27, 2008 and December 29, 2007. Actual results may differ materially.
 
Currency Exchange Rates
 
We generally hedge currency risks of non-U.S.-dollar-denominated investments in debt instruments with offsetting currency borrowings, currency forward contracts, or currency interest rate swaps. Gains and losses on these non-U.S.-currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in a negligible net exposure.
 
A majority of our revenue, expense, and capital purchasing activities are transacted in U.S. dollars. However, certain operating expenditures and capital purchases are incurred in or exposed to other currencies, primarily the euro, the Japanese yen, and the Israeli shekel. We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in exchange rates. We generally utilize currency forward contracts and, to a lesser extent, currency options in these hedging programs. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency exchange rate movements (see “Risk Factors” in Part I, Item 1A of this Form 10-K). We considered the historical trends in currency exchange rates and determined that it was reasonably possible that a weighted average adverse change of 20% in currency exchange rates could be experienced in the near term. Such an adverse change, after taking into account hedges and offsetting positions, would have resulted in an adverse impact on income before taxes of less than $55 million at the end of 2008 (less than $35 million at the end of 2007, using a weighted average adverse change of 15% in currency exchange rates). The weighted average adverse change increased from the end of 2007 to the end of 2008, due to a higher relative weighting of more volatile currencies.
 
Interest Rates
 
We are exposed to interest rate risk related to our investment portfolio and debt issuances. The primary objective of our investments in debt instruments is to preserve principal while maximizing yields. To achieve this objective, the returns on our investments in debt instruments are generally based on three-month LIBOR, or, if the maturities are longer than three months, the returns are generally swapped into U.S. dollar three-month LIBOR-based returns. The current financial markets are extremely volatile. A hypothetical 1.0% decrease in interest rates, after taking into account hedges and offsetting positions, would have resulted in a decrease in the fair value of our net investment position of approximately $135 million as of December 27, 2008 and $80 million as of December 29, 2007. The hypothetical 1.0% interest rate decrease would have resulted in an increase in the fair value of our debt issuances of approximately $150 million as of December 27, 2008 and would have resulted in an increase in the fair value of our investment portfolio of approximately $15 million as of December 27, 2008 (an increase in the fair value of our debt issuances of approximately $95 million as of December 29, 2007 and an increase in the fair value of our investment portfolio of approximately $15 million as of December 29, 2007). The fluctuations in fair value of our debt issuances and investment portfolio reflect only the direct impact of the change in interest rates. Other economic variables, such as equity market fluctuations and changes in relative credit risk, could result in a significantly higher decline in our net investment portfolio. For further information on how credit risk is factored into the valuation of our investment portfolio and debt issuances, see “Fair Value” in Part II, Item 7 of this Form 10-K.
 
Equity Prices
 
Our marketable equity investments include marketable equity securities and equity derivative instruments such as warrants and options. To the extent that our marketable equity securities have strategic value, we typically do not attempt to reduce or eliminate our equity market exposure through hedging activities; however, for our investments in strategic equity derivative instruments, including warrants, we may enter into transactions to reduce or eliminate the equity market risks. For securities that we no longer consider strategic, we evaluate legal, market, and economic factors in our decision on the timing of disposal and whether it is possible and appropriate to hedge the equity market risk.


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The marketable equity securities included in trading assets are held to generate returns that seek to offset changes in liabilities related to the equity and other market risks of certain deferred compensation arrangements. The gains and losses from changes in fair value of these equity securities are offset by the gains and losses on the related liabilities. Assuming a decline in market prices of approximately 25%, our net exposure to loss was approximately $40 million as of December 27, 2008 and approximately $20 million as of December 29, 2007.
 
As of December 27, 2008, the fair value of our available-for-sale marketable equity securities and our equity derivative instruments, including hedging positions, was $362 million ($1.0 billion as of December 29, 2007). Our investments in the new Clearwire Corporation, VMware, and Micron constituted 90% of our marketable equity securities as of December 27, 2008, and were carried at a fair market value of $148 million, $137 million, and $42 million, respectively. The current equity markets are extremely volatile. Assuming a loss of 60% in market prices, and after reflecting the impact of hedges and offsetting positions, the aggregate value of our marketable equity investments could decrease by approximately $220 million, based on the value as of December 27, 2008 (a decrease in value of $565 million, based on the value as of December 29, 2007 using an assumed loss of 55%). The increase in the assumed loss percentage from December 29, 2007 to December 27, 2008 is due to a higher relative weighting of more volatile investments.
 
Many of the same factors that could result in an adverse movement of equity market prices affect our non-marketable equity investments, although we cannot always quantify the impact directly. The current financial markets are extremely volatile and there has been a tightening of the credit markets, which could negatively affect the prospects of the companies we invest in, their ability to raise additional capital, and the likelihood of our being able to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales. These types of investments involve a great deal of risk, and there can be no assurance that any specific company will grow or become successful; consequently, we could lose all or part of our investment. Our non-marketable equity investments, excluding investments accounted for under the equity method, had a carrying amount of $1.0 billion as of December 27, 2008 ($805 million as of December 29, 2007). As of December 27, 2008, the carrying amount of our non-marketable equity method investments was $3.0 billion ($2.6 billion as of December 29, 2007). Most of the balance as of December 27, 2008 was concentrated in companies in the flash memory market segment and wireless connectivity market segment. Our flash memory market segment investments include our investment of $1.7 billion in IMFT ($2.2 billion as of December 29, 2007), $329 million in IMFS ($146 million as of December 29, 2007), and $484 million in Numonyx. Our wireless connectivity market segment investments include our non-marketable equity method investment in Clearwire LLC of $238 million. See “Note 6: Equity Method and Cost Method Investments” in Part II, Item 8 of this Form 10-K.


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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
     
    Page
     
  56
     
  57
     
  58
     
  59
     
  60
     
  112
     
  114


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INTEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
                         
Three Years Ended December 27, 2008
                 
(In Millions, Except Per Share Amounts)
  2008     2007     2006  
Net revenue
  $ 37,586     $ 38,334     $ 35,382  
Cost of sales
    16,742       18,430       17,164  
                         
Gross margin
    20,844       19,904       18,218  
                         
Research and development
    5,722       5,755       5,873  
Marketing, general and administrative
    5,458       5,417       6,138  
Restructuring and asset impairment charges
    710       516       555  
                         
Operating expenses
    11,890       11,688       12,566  
                         
Operating income
    8,954       8,216       5,652  
Gains (losses) on equity method investments, net
    (1,380 )     3       2  
Gains (losses) on other equity investments, net
    (376 )     154       212  
Interest and other, net
    488       793       1,202  
                         
Income before taxes
    7,686       9,166       7,068  
Provision for taxes
    2,394       2,190       2,024  
                         
Net income
  $ 5,292     $ 6,976     $ 5,044  
                         
Basic earnings per common share
  $ 0.93     $ 1.20     $ 0.87  
                         
Diluted earnings per common share
  $ 0.92     $ 1.18     $ 0.86  
                         
Weighted average shares outstanding:
                       
Basic
    5,663       5,816       5,797  
                         
Diluted
    5,748       5,936       5,880  
                         
 
See accompanying notes.


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INTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
 
                 
December 27, 2008 and December 29, 2007
           
(In Millions, Except Par Value)
  2008     2007  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 3,350     $ 7,307  
Short-term investments
    5,331       5,490  
Trading assets
    3,162       2,566  
Accounts receivable, net of allowance for doubtful accounts of $17 ($27 in 2007)
    1,712       2,576  
Inventories
    3,744       3,370  
Deferred tax assets
    1,390       1,186  
Other current assets
    1,182       1,390  
                 
Total current assets
    19,871       23,885  
                 
Property, plant and equipment, net
    17,544       16,918  
Marketable equity securities
    352       987  
Other long-term investments
    2,924       4,398  
Goodwill
    3,932       3,916  
Other long-term assets
    6,092       5,547  
                 
Total assets
  $ 50,715     $ 55,651  
                 
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Short-term debt
  $ 102     $ 142  
Accounts payable
    2,390       2,361  
Accrued compensation and benefits
    2,015       2,417  
Accrued advertising
    807       749  
Deferred income on shipments to distributors
    463       625  
Other accrued liabilities
    2,041       2,277  
                 
Total current liabilities
    7,818       8,571  
                 
Long-term income taxes payable
    736       785  
Deferred tax liabilities
    46       411  
Long-term debt
    1,886       1,980  
Other long-term liabilities
    1,141       1,142  
Commitments and contingencies (Notes 18 and 24)
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value, 50 shares authorized; none issued
           
Common stock, $0.001 par value, 10,000 shares authorized; 5,562 issued and outstanding (5,818 in 2007) and capital in excess of par value
    12,944       11,653  
Accumulated other comprehensive income (loss)
    (393 )     261  
Retained earnings
    26,537       30,848  
                 
Total stockholders’ equity
    39,088       42,762  
                 
Total liabilities and stockholders’ equity
  $ 50,715     $ 55,651  
                 
 
See accompanying notes.


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INTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
Three Years Ended December 27, 2008
                 
(In Millions)
  2008     2007     2006  
Cash and cash equivalents, beginning of year
  $ 7,307     $ 6,598     $ 7,324  
                         
Cash flows provided by (used for) operating activities:
                       
Net income
    5,292       6,976       5,044  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    4,360       4,546       4,654  
Share-based compensation
    851       952       1,375  
Restructuring, asset impairment, and net loss on retirement of assets
    795       564       635  
Excess tax benefit from share-based payment arrangements
    (30 )     (118 )     (123 )
Amortization of intangibles
    256       252       258  
(Gains) losses on equity method investments, net
    1,380       (3 )     (2 )
(Gains) losses on other equity investments, net
    376       (154 )     (212 )
(Gains) losses on divestitures
    (59 )     (21 )     (612 )
Deferred taxes
    (790 )     (443 )     (325 )
Changes in assets and liabilities:
                       
Trading assets
    193       (1,429 )     324  
Accounts receivable
    260       316       1,229  
Inventories
    (395 )     700       (1,116 )
Accounts payable
    29       102       7  
Accrued compensation and benefits
    (569 )     354       (435 )
Income taxes payable and receivable
    (834 )     (248 )     (60 )
Other assets and liabilities
    (189 )     279       (9 )
                         
Total adjustments
    5,634       5,649       5,588  
                         
Net cash provided by operating activities
    10,926       12,625       10,632  
                         
Cash flows provided by (used for) investing activities:
                       
Additions to property, plant and equipment
    (5,197 )     (5,000 )     (5,860 )
Acquisitions, net of cash acquired
    (16 )     (76 )      
Purchases of available-for-sale investments
    (6,479 )     (11,728 )     (5,272 )
Maturities and sales of available-for-sale investments
    7,993       8,011       7,147  
Purchases of trading assets
    (2,676 )            
Maturities and sales of trading assets
    1,766              
Investments in non-marketable equity investments
    (1,691 )     (1,459 )     (1,722 )
Return of equity method investment
    316              
Proceeds from divestitures
    85       32       752  
Other investing activities
    34       294       (33 )
                         
Net cash used for investing activities
    (5,865 )     (9,926 )     (4,988 )
                         
Cash flows provided by (used for) financing activities:
                       
Increase (decrease) in short-term debt, net
    (40 )     (39 )     (114 )
Proceeds from government grants
    182       160       69  
Excess tax benefit from share-based payment arrangements
    30       118       123  
Additions to long-term debt
          125        
Repayment of notes payable
                (581 )
Proceeds from sales of shares through employee equity incentive plans
    1,105       3,052       1,046  
Repurchase and retirement of common stock
    (7,195 )     (2,788 )     (4,593 )
Payment of dividends to stockholders
    (3,100 )     (2,618 )     (2,320 )
                         
Net cash used for financing activities
    (9,018 )     (1,990 )     (6,370 )
                         
Net increase (decrease) in cash and cash equivalents
    (3,957 )     709       (726 )
                         
Cash and cash equivalents, end of year
  $ 3,350     $ 7,307     $ 6,598  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid during the year for:
                       
Interest, net of amounts capitalized of $86 in 2008 ($57 in 2007 and $60 in 2006)
  $ 6     $ 15     $ 25  
Income taxes, net of refunds
  $ 4,007     $ 2,762     $ 2,432  
 
See accompanying notes.


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INTEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
                                         
    Common Stock
                   
    and Capital
    Accumulated
             
    in Excess of Par Value     Other
             
Three Years Ended December 27, 2008
  Number of
          Comprehensive
    Retained
       
(In Millions, Except Per Share Amounts)
  Shares     Amount     Income (Loss)     Earnings     Total  
Balance as of December 31, 2005
    5,919     $ 6,245     $ 127     $ 29,810     $ 36,182  
Components of comprehensive income, net of tax:
                                       
Net income
                      5,044       5,044  
Other comprehensive income
                26             26  
                                         
Total comprehensive income
                                    5,070  
                                         
Adjustment for initially applying SFAS No. 158, net of tax1
                (210 )           (210 )
Proceeds from sales of shares through employee equity incentive plans, net excess tax benefit, and other
    73       1,248                   1,248  
Share-based compensation
          1,375                   1,375  
Repurchase and retirement of common stock
    (226 )     (1,043 )           (3,550 )     (4,593 )
Cash dividends declared ($0.40 per share)
                      (2,320 )     (2,320 )
                                         
Balance as of December 30, 2006
    5,766       7,825       (57 )     28,984       36,752  
Cumulative-effect adjustments, net of tax1:
                                       
Adoption of EITF 06-02
                      (181 )     (181 )
Adoption of FIN 48
                      181       181  
Components of comprehensive income, net of tax:
                                       
Net income
                      6,976       6,976  
Other comprehensive income
                318             318  
                                         
Total comprehensive income
                                    7,294  
                                         
Proceeds from sales of shares through employee equity incentive plans, net excess tax benefit, and other
    165       3,170                   3,170  
Share-based compensation
          952                   952  
Repurchase and retirement of common stock
    (113 )     (294 )           (2,494 )     (2,788 )
Cash dividends declared ($0.45 per share)
                      (2,618 )     (2,618 )
                                         
Balance as of December 29, 2007
    5,818       11,653       261       30,848       42,762  
Components of comprehensive income, net of tax:
                                       
Net income
                      5,292       5,292  
Other comprehensive income
                (654 )           (654 )
                                         
Total comprehensive income
                                    4,638  
                                         
Proceeds from sales of shares through employee equity incentive plans, net excess tax benefit, and other
    72       1,132                   1,132  
Share-based compensation
          851                   851  
Repurchase and retirement of common stock
    (328 )     (692 )           (6,503 )     (7,195 )
Cash dividends declared ($0.5475 per share)
                      (3,100 )     (3,100 )
                                         
Balance as of December 27, 2008
    5,562     $ 12,944     $ (393 )   $ 26,537     $ 39,088  
                                         
 
 
1 For further discussion of the adjustments recorded at the beginning of fiscal years 2006 and 2007, see “Accounting Changes” in “Note 2: Accounting Policies.”
 
See accompanying notes.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
Note 1: Basis of Presentation
 
We have a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2008, a 52-week year, ended on December 27, 2008. Fiscal year 2007, a 52-week year, ended on December 29, 2007. Fiscal year 2006, a 52-week year, ended on December 30, 2006. The next 53-week year will end on December 31, 2011.
 
Our consolidated financial statements include the accounts of Intel Corporation and our wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated. We use the equity method to account for equity investments in instances in which we own common stock or similar interests (as described by the Emerging Issues Task Force (EITF) Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock”), and have the ability to exercise significant influence, but not control, over the investee.
 
The U.S. dollar is the functional currency for Intel and our subsidiaries; therefore, we do not have a translation adjustment recorded through accumulated other comprehensive income (loss). Monetary accounts denominated in non-U.S. currencies, such as cash or payables to vendors, have been remeasured to the U.S. dollar.
 
In accordance with the adoption of Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS No. 159), we have classified cash flows from certain trading assets as cash flows from investing activities beginning in 2008. For further discussion, see “Accounting Changes” in “Note 2: Accounting Policies.”
 
As of December 27, 2008, our other accrued liabilities included $447 million in customer credit balances. Customer credit balances were not significant as of December 29, 2007.
 
Note 2: Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. The accounting estimates that require our most significant, difficult, and subjective judgments include:
  •  the valuation of non-marketable equity investments and the determination of other-than-temporary impairments;
  •  the valuation of investments in debt instruments and the determination of other-than-temporary impairments;
  •  the assessment of recoverability of long-lived assets;
  •  the recognition and measurement of current and deferred income taxes (including the measurement of uncertain tax positions); and
  •  the valuation of inventory.
 
The actual results that we experience may differ materially from our estimates.
 
Cash and Cash Equivalents
 
We consider all liquid available-for-sale debt instruments with original maturities from the date of purchase of approximately three months or less as cash and cash equivalents.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Trading Assets
 
Investments that we designate as trading assets are reported at fair value, with gains or losses resulting from changes in fair value recognized in earnings. Our trading asset investments include:
  •  Marketable debt instruments when the interest rate or foreign exchange rate risk is hedged at inception by a related derivative instrument. We record the gains or losses of these investments arising from changes in fair value due to interest rate and currency market fluctuations and credit market volatility, offset by losses or gains on the related derivative instruments, in interest and other, net. We also designate certain floating-rate securitized financial instruments, primarily asset-backed securities purchased after December 30, 2006, as trading assets.
  •  Equity securities offsetting deferred compensation when the investments seek to offset changes in liabilities related to equity and other market risks of certain deferred compensation arrangements. We offset the gains or losses from changes in fair value of these equity securities against losses or gains on the related liabilities and include them in interest and other, net.
  •  Marketable equity securities when we deem the investments not to be strategic in nature at the time of original classification, and generally have the ability and intent to mitigate equity market risk through the sale or the use of derivative instruments. For these marketable equity securities, we include gains or losses from changes in fair value, primarily offset by losses or gains on related derivative instruments, in gains (losses) on other equity investments, net.
 
Debt Instrument Investments
 
We classify available-for-sale debt instruments with original maturities at the date of purchase greater than approximately three months and remaining maturities less than one year as short-term investments. We classify available-for-sale debt instruments with remaining maturities greater than one year as other long-term investments. We account for cost basis loan participation notes at amortized cost and classify them as short-term investments and other long-term investments based on stated maturities.
 
Available-for-Sale Investments
 
Investments that we designate as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss). We determine the cost of the investment sold based on the specific identification method. Our available-for-sale investments include:
  •  Marketable debt instruments when the interest rate and foreign currency risks are not hedged at inception of the investment or when our designation for trading assets is not met. We hold these debt instruments to generate a return commensurate with three-month LIBOR. We record the interest income and realized gains and losses on the sale of these instruments in interest and other, net.
  •  Marketable equity securities when the investments are considered strategic in nature at the time of original classification or there are barriers to mitigating equity market risk through the sale or use of derivative instruments at the time of original classification. We acquire these equity investments for the promotion of business and strategic objectives. To the extent that these investments continue to have strategic value, we typically do not attempt to reduce or eliminate the inherent equity market risks through hedging activities. We record the realized gains or losses on the sale or exchange of marketable equity securities in gains (losses) on other equity investments, net.
 
Non-Marketable and Other Equity Investments
 
We account for non-marketable and other equity investments under either the cost or equity method and include them in other long-term assets. Our non-marketable and other equity investments include:
  •  Equity method investments when we have the ability to exercise significant influence, but not control, over the investee. We record equity method adjustments in gains (losses) on equity method investments, net, and may do so with up to a one-quarter lag. Equity method adjustments include: our proportionate share of investee income or loss, gains or losses resulting from investee capital transactions, adjustments to recognize certain differences between our carrying value and our equity in net assets of the investee at the date of investment, impairments, and other adjustments required by the equity method. Equity method investments include marketable and non-marketable investments.
  •  Non-marketable cost method investments when the equity method does not apply. We record the realized gains or losses on the sale of non-marketable cost method investments in gains (losses) on other equity investments, net.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Other-Than-Temporary Impairment
 
All of our available-for-sale investments and non-marketable and other equity investments are subject to a periodic impairment review. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary, for the following investments:
  •  Marketable equity securities when the resulting fair value is significantly below cost basis and/or the significant decline has lasted for an extended period of time. The evaluation that we use to determine whether a marketable equity security is other than temporarily impaired is based on the specific facts and circumstances present at the time of assessment, which include the consideration of general market conditions, the duration and extent to which the fair value is below cost, and our intent and ability to hold the investment for a sufficient period of time to allow for recovery in value in the foreseeable future. We also consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, operational and financing cash flow factors, and changes in the investee’s credit rating.
  •  Non-marketable equity investments when events or circumstances are identified that would significantly harm the fair value of the investment and the fair value is significantly below cost basis and/or the significant decline has lasted for an extended period of time. The indicators that we use to identify those events and circumstances include:
  •  the investee’s revenue and earning trends relative to predefined milestones and overall business prospects;
  •  the technological feasibility of the investee’s products and technologies;
  •  the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes;
  •  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
  •  the investee’s receipt of additional funding at a lower valuation. If an investee obtains additional funding at a valuation lower than our carrying amount, or a new round of equity funding is required for the investee to remain in business and the new round of equity does not appear imminent, it is presumed that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise.
  •  Marketable debt instruments when the fair value is significantly below amortized cost and/or the significant decline has lasted for an extended period of time and we do not have the intent and ability to hold the investment for a sufficient period of time to allow for recovery in the foreseeable future. The evaluation that we use to determine whether a marketable debt instrument is other than temporarily impaired is based on the specific facts and circumstances present at the time of assessment, which include the consideration of the financial condition and liquidity of the issuer, the issuer’s credit rating, specific events that may cause us to believe that the debt instrument will not mature and be paid in full, and the duration and extent to which the fair value is below cost.
 
Investments that we identify 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 fair value. We record impairment charges for:
  •  marketable equity securities and non-marketable cost method investments in gains (losses) on other equity investments, net;
  •  non-marketable and marketable equity method investments in gains (losses) on equity method investments, net; and
  •  marketable debt instruments in interest and other, net.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Derivative Financial Instruments
 
Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk, and to a lesser extent, equity market risk and commodity price risk. Our derivative financial instruments are recorded at fair value and are included in other current assets, other long-term assets, other accrued liabilities, or other long-term liabilities. Derivative instruments recorded as assets totaled $173 million as of December 27, 2008 ($118 million as of December 29, 2007). Derivative instruments recorded as liabilities totaled $299 million as of December 27, 2008 ($130 million as of December 29, 2007). For further discussion of our derivative instruments, see “Note 8: Derivative Financial Instruments.”
 
Our accounting policies for derivative financial instruments are based on whether they meet the criteria for designation as cash flow or fair value hedges. A designated hedge of the exposure to variability in the future cash flows of an asset or a liability, or of a forecasted transaction, is referred to as a cash flow hedge. A designated hedge of the exposure to changes in fair value of an asset or a liability, or of an unrecognized firm commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge include the assessment of the instrument’s effectiveness in risk reduction, matching of the derivative instrument to its underlying transaction, and the probability that the underlying transaction will occur. For derivatives with cash flow hedge accounting designation, we report the after-tax gain or loss from the effective portion of the hedge as a component of accumulated other comprehensive income (loss) and reclassify it into earnings in the same period or periods in which the hedged transaction affects earnings, and within the same income statement line item as the impact of the hedged transaction. For derivatives with fair value hedge accounting designation, we recognize gains or losses from the change in fair value of these derivatives, as well as the offsetting change in the fair value of the underlying hedged item, in earnings. Derivatives that we designate as hedges are classified in the consolidated statements of cash flows in the same section as the underlying item, primarily within cash flows from operating activities.
 
We recognize gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes within the income statement line item most closely associated with the economic underlying, primarily in interest and other, net, except for equity-related gains or losses, which we primarily record in gains (losses) on other equity investments, net. Derivatives not designated as hedges are classified in cash flows from operating activities.
 
As part of our strategic investment program, we also acquire equity derivative instruments, such as warrants and equity conversion rights associated with debt instruments, which we do not designate as hedging instruments. We recognize the gains or losses from changes in fair values of these equity derivative instruments in gains (losses) on other equity investments, net.
 
Measurement of Effectiveness
  •  Effectiveness for forwards is generally measured by comparing the cumulative change in the fair value of the hedge contract with the cumulative change in the present value of the forecasted cash flows of the hedged item. For currency forward contracts used in cash flow hedging strategies related to capital purchases, forward points are excluded, and effectiveness is measured using spot rates to value both the hedge contract and the hedged item. For currency forward contracts used in cash flow hedging strategies related to operating expenditures, forward points are included and effectiveness is measured using forward rates to value both the hedge contract and the hedged item.
  •  Effectiveness for currency options and equity options with hedge accounting designation is generally measured by comparing the cumulative change in the fair value of the hedge contract with the cumulative change in the fair value of an option instrument representing the hedged risks in the hedged item for cash flow hedges. For fair value hedges, time value is excluded and effectiveness is measured based on spot rates to value both the hedge contract and the hedged item.
  •  Effectiveness for interest rate swaps is generally measured by comparing the change in fair value of the hedged item with the change in fair value of the interest rate swap.
 
If a cash flow hedge were discontinued because it was no longer probable that the original hedged transaction would occur as anticipated, the unrealized gain or loss on the related derivative would be reclassified into earnings. Subsequent gains or losses on the related derivative instrument would be recognized in income in each period until the instrument matures, is terminated, is re-designated as a qualified hedge, or is sold. Any ineffective portion of both cash flow and fair value hedges, as well as amounts excluded from the assessment of effectiveness, is recognized in earnings in interest and other, net.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Securities Lending
 
We may enter into securities lending agreements with financial institutions, generally to facilitate hedging and certain investment transactions. Selected securities may be loaned, secured by collateral in the form of cash or securities. The loaned securities continue to be carried as investment assets on our consolidated balance sheets. Cash collateral is recorded as an asset with a corresponding liability. For lending agreements collateralized by securities, we do not record the collateral as an asset or a liability, unless the collateral is repledged.
 
Inventories
 
We compute inventory cost on a currently adjusted standard basis (which approximates actual cost on an average or first-in, first-out basis). 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. It is reasonably possible that our estimate of future demand for our products could change in the near term and result in additional inventory write-offs, which would negatively impact our gross margin. Inventory in excess of saleable amounts is not valued, and the remaining inventory is valued at the lower of cost or market. Inventories at fiscal year-ends were as follows:
 
                 
(In Millions)
  2008     2007  
 
Raw materials
  $ 608     $ 507  
Work in process
    1,577       1,460  
Finished goods
    1,559       1,403  
                 
Total inventories
  $ 3,744     $ 3,370  
                 
 
Property, Plant and Equipment
 
Property, plant and equipment, net at fiscal year-ends was as follows:
 
                 
(In Millions)
  2008     2007  
 
Land and buildings
  $ 16,546     $ 15,267  
Machinery and equipment
    28,812       27,754  
Construction in progress
    2,730       3,031  
                 
      48,088       46,052  
Less: accumulated depreciation
    (30,544 )     (29,134 )
                 
Total property, plant and equipment, net
  $ 17,544     $ 16,918  
                 
 
We state property, plant and equipment at cost, less accumulated depreciation. We compute depreciation for financial reporting purposes using the straight-line method over the following estimated useful lives: machinery and equipment, 2 to 4 years; buildings, 4 to 40 years. We regularly perform reviews if facts and circumstances indicate that the carrying amount of assets may not be recoverable or that the useful life is shorter than we had originally estimated. We assess the recoverability of our assets held for use by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If we determine that the useful lives are shorter than we had originally estimated, we depreciate the net book value of the assets over the newly determined remaining useful lives. For a discussion of restructuring-related asset impairment charges, see “Note 15: Restructuring and Asset Impairment Charges.”
 
We identify property, plant and equipment as held for sale when it meets the criteria of SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” We reclassify held for sale assets to other current assets and cease recording depreciation.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
We capitalize interest on borrowings related to eligible capital expenditures. We add capitalized interest to the cost of qualified assets and amortize it over the estimated useful lives of the assets. We record capital-related government grants earned as a reduction to property, plant and equipment.
 
Goodwill
 
We record goodwill when the purchase price of an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Each year during the fourth quarter, we perform an impairment review for each reporting unit using a fair value approach. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. In determining the carrying value of the reporting unit, we make an allocation of our manufacturing and assembly and test assets because of the interchangeable nature of our manufacturing and assembly and test capacity. We base this allocation on each reporting unit’s relative percentage utilization of the manufacturing and assembly and test assets. In the event that an individual business within a reporting unit is divested, we allocate goodwill to that business based on its fair value relative to its reporting unit. For further discussion of goodwill, see “Note 13: Goodwill.”
 
Identified Intangible Assets
 
Intellectual property assets primarily represent rights acquired under technology licenses and are generally amortized on a straight-line basis over the periods of benefit, ranging from 3 to 17 years. We amortize acquisition-related developed technology on a straight-line basis over approximately 4 years. We amortize other intangible assets over 4 years. We classify all identified intangible assets within other long-term assets. In the quarter following the period in which identified intangible assets become fully amortized, the fully amortized balances are removed from the gross asset and accumulated amortization amounts. For further discussion of identified intangible assets, see “Note 14: Identified Intangible Assets.”
 
We perform a quarterly review of identified intangible assets to determine if facts and circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets.
 
Product Warranty
 
We generally sell products with a limited warranty on product quality and a limited indemnification for customers against intellectual property infringement claims related to our products. We accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated, and accrue for estimated incurred but unidentified issues based on historical activity. The accrual and the related expense for known issues were not significant during the periods presented. Due to product testing and the short time typically between product shipment and the detection and correction of product failures, and considering the historical rate of payments on indemnification claims, the accrual and related expense for estimated incurred but unidentified issues were not significant during the periods presented.
 
Revenue Recognition
 
We recognize net revenue when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title, and acceptance, if applicable, as well as fixed pricing and probable collectibility. We record pricing allowances, including discounts based on contractual arrangements with customers, when we recognize revenue as a reduction to both accounts receivable and net revenue. Because of frequent sales price reductions and rapid technology obsolescence in the industry, we defer the revenue and related costs of sales from sales made to distributors under agreements allowing price protection and/or right of return until the distributors sell the merchandise. The right of return granted generally consists of a stock rotation program in which distributors are able to exchange certain products based on the number of qualified purchases made by the distributor. Under the price protection program, we give distributors credits for the difference between the original price paid and the current price that we offer. We record the net deferred income from sales to distributors on our balance sheet as deferred income on shipments to distributors. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of sales.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Advertising
 
Cooperative advertising programs reimburse customers for marketing activities for certain of our products, subject to defined criteria. We accrue cooperative advertising obligations and record the costs at the same time that the related revenue is recognized. We record cooperative advertising costs as marketing, general and administrative expenses to the extent that an advertising benefit separate from the revenue transaction can be identified and the fair value of that advertising benefit received is determinable. We record any excess in cash paid over the fair value of the advertising benefit received as a reduction in revenue. Advertising costs recorded within marketing, general and administrative expenses were $1.86 billion in 2008 ($1.90 billion in 2007 and $2.32 billion in 2006).
 
Employee Equity Incentive Plans
 
We have employee equity incentive plans, which are described more fully in “Note 19: Employee Equity Incentive Plans.” Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123(R)). SFAS No. 123(R) requires employee equity awards to be accounted for under the fair value method. Accordingly, we measure share-based compensation at the grant date based on the fair value of the award.
 
Under the modified prospective method of adoption for SFAS No. 123(R), the compensation cost that we recognized beginning in 2006 includes 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 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). We use the straight-line attribution method to recognize share-based compensation 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, we eliminate deferred tax assets for options and restricted stock units with multiple vesting dates for each vesting period on a first-in, first-out basis as if each vesting period were a separate award.
 
Accounting Changes
 
Fiscal Year 2006
 
Effective at the end of fiscal year 2006, we adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS No. 158). SFAS No. 158 requires that the funded status of defined-benefit postretirement plans be recognized on our consolidated balance sheets and that changes in the funded status be reflected in other comprehensive income. SFAS No. 158 also requires that the measurement date of the plan’s funded status be the same as our fiscal year-end. Prior to adopting the provisions of SFAS No. 158, the measurement date for all non-U.S. plans was our fiscal year-end, and the measurement date for the U.S. plan was November. Therefore, the change in measurement date had an insignificant impact on the projected benefit obligation and accumulated other comprehensive income (loss). Upon adoption of SFAS No. 158 in 2006, we recorded an adjustment, net of tax, of $210 million to accumulated other comprehensive income (loss).
 
Fiscal Year 2007
 
In fiscal year 2007, we adopted 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 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 in retained earnings of $181 million at the beginning of 2007.
 
We also adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), and related guidance in fiscal year 2007. For further discussion, see “Note 23: Taxes.”


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Fiscal Year 2008
 
In the first quarter of 2008, we adopted SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), for all financial assets and financial liabilities, and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. The adoption of SFAS No. 157 did not have a significant impact on our consolidated financial statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different from the fair values that would have been calculated under previous guidance. For further details on our fair value measurements, see “Note 3: Fair Value.”
 
In February 2008, the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1), and FSP 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope and was effective upon initial adoption of SFAS No. 157. FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities (for further details, see “Recent Accounting Pronouncements” below).
 
In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The adoption of FSP 157-3 did not have a significant impact on our consolidated financial statements or the fair values of our financial assets and liabilities.
 
In the first quarter of 2008, we adopted SFAS No. 159. SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value using an instrument-by-instrument election. The standard requires unrealized gains and losses to be reported in earnings for items measured using the fair value option. For further discussion, see “Note 3: Fair Value.”
 
SFAS No. 159 also requires cash flows from purchases, sales, and maturities of trading securities to be classified based on the nature and purpose for which the securities were acquired. We assessed the nature and purpose of our trading assets and determined that our marketable debt instruments will be classified on the statement of cash flows as investing activities, as they are held with the purpose of generating returns. Our equity securities offsetting deferred compensation will continue to be classified as operating activities, as they are maintained to offset changes in liabilities related to the equity market risk of certain deferred compensation arrangements. SFAS No. 159 does not allow for retrospective application to periods prior to fiscal year 2008; therefore, all trading asset activity for prior periods will continue to be presented as operating activities on the statement of cash flows.
 
Staff Accounting Bulletin No. 110 (SAB 110) issued by the U.S. Securities and Exchange Commission (SEC) was effective for us beginning in the first quarter of 2008. SAB 110 amends the SEC’s views discussed in Staff Accounting Bulletin No. 107 (SAB 107) regarding the use of the simplified method in developing estimates of the expected lives of share options in accordance with SFAS No. 123(R). The amendment, in part, allowed the continued use, subject to specific criteria, of the simplified method in estimating the expected lives of share options granted after December 31, 2007. We will continue to use the simplified method until we have the historical data necessary to provide reasonable estimates of expected lives in accordance with SAB 107, as amended by SAB 110.
 
Recent Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2009.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
In February 2008, the FASB issued FSP 157-2, which delayed the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal year 2009. The adoption of SFAS No. 157 for non-financial assets and non-financial liabilities that are not measured at fair value on a recurring basis is not expected to have a significant impact on our consolidated financial statements.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (SFAS No. 161). The standard requires additional quantitative disclosures (provided in tabular form) and qualitative disclosures for derivative instruments. The required disclosures include how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows; the relative volume of derivative activity; the objectives and strategies for using derivative instruments; the accounting treatment for those derivative instruments formally designated as the hedging instrument in a hedge relationship; and the existence and nature of credit-risk-related contingent features for derivatives. SFAS No. 161 does not change the accounting treatment for derivative instruments. SFAS No. 161 is effective for us beginning in the first quarter of fiscal year 2009.
 
In May 2008, the FASB issued FSP Accounting Principles Board (APB) Opinion 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 requires recognition of both the liability and equity components of convertible debt instruments with cash settlement features. The debt component is required to be recognized at the fair value of a similar instrument that does not have an associated equity component. The equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. FSP APB 14-1 also requires an accretion of the resulting debt discount over the expected life of the debt. Retrospective application to all periods presented is required. This standard is effective for us beginning in the first quarter of fiscal year 2009 and will change the accounting for our junior subordinated convertible debentures issued in 2005. The adoption of FSP APB 14-1 is expected to result in a decrease in our long-term debt of approximately $700 million; an increase in our deferred tax liability of approximately $275 million; an increase in our stockholders’ equity of approximately $450 million; and an increase in our net property, plant and equipment of approximately $25 million as of the beginning of the first quarter of fiscal year 2009. The adoption of FSP APB 14-1 will not result in a change to our prior-period consolidated statements of income, as the interest associated with our debt issuances is capitalized and added to the cost of qualified assets.
 
In December 2008, the FASB issued FSP 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1). FSP 132(R)-1 requires additional disclosures for plan assets of defined benefit pension or other postretirement plans. The required disclosures include a description of our investment policies and strategies, the fair value of each major category of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets. FSP 132(R)-1 does not change the accounting treatment for postretirement benefits plans. FSP 132(R)-1 is effective for us for fiscal year 2009.
 
Note 3: Fair Value
 
Our financial instruments are carried at fair value, except for cost basis loan participation notes, equity method and cost method investments, and most of our long-term debt. SFAS No. 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Our financial instruments carried at fair value are detailed in the tables below, and the carrying values of our trading assets and available-for-sale investments for 2008 and 2007 are detailed in “Note 4: Trading Assets” and “Note 5: Available-for-Sale Investments.” The fair value of our cost basis loan participation notes approximated the carrying value as of December 27, 2008 (the fair value exceeded the carrying value by approximately $50 million as of December 29, 2007). We did not hold any marketable equity method investments as of December 27, 2008; however, as of December 29, 2007, the fair value of our marketable equity method investment exceeded the carrying value by $14 million. The fair value of our non-marketable equity investments exceeded the carrying value by approximately $300 million as of December 27, 2008 and included gross unrealized losses of approximately $100 million, a majority of which were in a continuous unrealized loss position for less than 12 months. The fair value of our non-marketable equity investments exceeded the carrying value by approximately $600 million as of December 29, 2007. The fair value of these investments takes into account the movements of the equity and venture capital markets as well as changes in the interest rate environment, and other economic variables.
 
The fair value of our long-term debt was approximately $280 million lower than the carrying value as of December 27, 2008 (the fair value exceeded the carrying value by approximately $65 million as of December 29, 2007). The fair value of our long-term debt takes into consideration credit rating changes, equity price movements, interest rate changes, and other economic variables.
 
Fair Value Hierarchy
 
SFAS No. 157 establishes three levels of inputs that may be used to measure fair value:
 
Level 1. Quoted prices in active markets for identical assets or liabilities.
 
Level 1 assets and liabilities consist of certain of our money market fund deposits and marketable debt and equity instruments, including equity securities offsetting deferred compensation, that are traded in an active market with sufficient volume and frequency of transactions.
 
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
 
Level 2 assets consist of certain of our marketable debt and equity instruments with quoted market prices that are traded in less active markets or priced using a quoted market price for similar instruments. Level 2 assets also include marketable debt instruments priced using non-binding market consensus prices that can be corroborated with observable market data, marketable equity securities with security-specific restrictions that would transfer to the buyer, as well as debt instruments and derivative contracts priced using inputs that are observable in the market or can be derived principally from or corroborated with observable market data. Marketable debt instruments in this category generally include commercial paper, bank time deposits, municipal bonds, certain of our money market fund deposits, and a majority of floating-rate notes and corporate bonds.
 
Level 3. Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
 
Level 3 assets and liabilities include marketable debt instruments, non-marketable equity investments, derivative contracts, and company-issued debt whose values are determined using inputs that are both unobservable and significant to the values of the instruments being measured. Level 3 assets also include marketable debt instruments that are priced using non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data. Marketable debt instruments in this category generally include asset-backed securities and certain of our floating-rate notes and corporate bonds.


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Assets/Liabilities Measured at Fair Value on a Recurring Basis
 
Assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types of instruments as of December 27, 2008:
 
                                 
    Fair Value Measurements at Reporting Date Using        
    Quoted Prices in
                   
    Active Markets
    Significant Other
    Significant
       
    for Identical
    Observable
    Unobservable
       
    Instruments
    Inputs
    Inputs
       
(In Millions)
  (Level 1)     (Level 2)     (Level 3)     Total  
Assets
                               
Commercial paper
  $     $ 4,387     $     $ 4,387  
Bank time deposits
          633             633  
Money market fund deposits
    373       49             422  
Floating-rate notes
    126       5,997       392       6,515  
Corporate bonds
    26       594       163       783  
Asset-backed securities
                1,083       1,083  
Municipal bonds
          383             383  
Marketable equity securities
    308       44             352  
Equity securities offsetting deferred compensation
    299                   299  
Derivative assets
          158       15       173  
                                 
Total assets measured at fair value
  $ 1,132     $ 12,245     $ 1,653     $ 15,030  
                                 
                                 
Liabilities
                               
Long-term debt
  $     $     $ 122     $ 122  
Derivative liabilities
          274       25       299  
                                 
Total liabilities measured at fair value
  $     $ 274     $ 147     $ 421  
                                 
 
Assets and liabilities measured and recorded at fair value on a recurring basis, excluding accrued interest components, were presented on our consolidated balance sheets as of December 27, 2008 as follows:
 
                                 
    Fair Value Measurements at Reporting Date Using        
    Quoted Prices in
                   
    Active Markets
    Significant Other
    Significant
       
    for Identical
    Observable
    Unobservable
       
    Instruments
    Inputs
    Inputs
       
(In Millions)
  (Level 1)     (Level 2)     (Level 3)     Total  
Assets
                               
Cash and cash equivalents
  $ 336     $ 2,772     $     $ 3,108  
Short-term investments
    149       4,953       227       5,329  
Trading assets
    328       2,020       814       3,162  
Other current assets
          158       3       161  
Marketable equity securities
    308       44             352  
Other long-term investments
    11       2,298       597       2,906  
Other long-term assets
                12       12  
                                 
Total assets measured at fair value
  $ 1,132     $ 12,245     $ 1,653     $ 15,030  
                                 
                                 
Liabilities
                               
Other accrued liabilities
  $     $ 236     $ 25     $ 261  
Long-term debt
                122       122  
Other long-term liabilities
          38             38  
                                 
Total liabilities measured at fair value
  $     $ 274     $ 147     $ 421  
                                 


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
All of our long-term debt was eligible for the fair value option allowed by SFAS No. 159 as of the effective date of the standard; however, we elected the fair value option only for the bonds issued in 2007 by the Industrial Development Authority of the City of Chandler, Arizona (2007 Arizona bonds). In connection with the 2007 Arizona bonds, we entered into an interest rate swap agreement that effectively converts the fixed rate obligation on the bonds to a floating LIBOR-based rate. As a result, changes in the fair value of this debt are primarily offset by changes in the fair value of the interest rate swap agreement, without the need to apply the hedge accounting provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). We elected not to adopt SFAS No. 159 for our Arizona bonds issued in 2005, since the bonds were carried at amortized cost and were not eligible to apply the hedge accounting provisions of SFAS No. 133 due to the use of non-derivative hedging instruments. The 2007 Arizona bonds are included within the long-term debt balance on our consolidated balance sheets. As of December 27, 2008 and December 29, 2007, no other long-term debt instruments were similar to the instrument for which we have elected the SFAS No. 159 fair value treatment.
 
The fair value of the 2007 Arizona bonds approximated its carrying value at the time we elected the fair value option under SFAS No. 159. As such, we did not record a cumulative-effect adjustment to the beginning balance of retained earnings or to the deferred tax liability. As of December 27, 2008, the fair value of the 2007 Arizona bonds did not significantly differ from the contractual principal balance. The fair value of the 2007 Arizona bonds was determined using inputs that are observable in the market or that can be derived from or corroborated with observable market data as well as significant unobservable inputs. Gains and losses on the 2007 Arizona bonds are recorded in interest and other, net on the consolidated statements of income. We capitalize interest associated with the 2007 Arizona bonds. We add capitalized interest to the cost of qualified assets and amortize it over the estimated useful lives of the assets.
 
The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for 2008:
 
                                                         
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)        
                      Other
                   
                Other
    Current and
    Other
             
    Short-Term
    Trading
    Long-Term
    Long-Term
    Accrued
    Long-Term
    Total Gains
 
(In Millions)
  Investments     Assets     Investments     Assets     Liabilities     Debt     (Losses)  
Balance as of December 29, 2007
  $ 798     $ 1,004     $ 771     $ 18     $ (15 )   $ (125 )        
Transfers from long-term to
short-term investments
    229             (229 )                          
Total gains or losses (realized and unrealized):
                                                       
Included in earnings
          (83 )     (22 )     4       (13 )     3       (111 )
Included in other comprehensive income
    1             (50 )                       (49 )
Purchases, sales, issuances, and settlements, net
    (631 )     (12 )     543       (10 )     3                
Transfers in (out) of Level 3
    (170 )     (95 )     (416 )     3                      
                                                         
Balance as of December 27, 2008
  $ 227     $ 814     $ 597     $ 15     $ (25 )   $ (122 )        
                                                         
The amount of total gains or losses for the period included in earnings attributable to the changes in unrealized gains or losses related to assets and liabilities still held as of December 27, 2008
  $     $ (83 )   $ (22 )   $ 4     $ (13 )   $ 3     $ (111 )


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Gains and losses (realized and unrealized) included in earnings for the year ended December 27, 2008 are reported in interest and other, net and gains (losses) on other equity investments, net on the consolidated statements of income, as follows:
 
                 
    Level 3  
    2008  
          Gains (Losses)
 
    Interest and
    on Other Equity
 
(In Millions)
  Other, Net     Investments, Net  
Total gains (losses) included in earnings
  $ (115 )   $ 4  
Change in unrealized gains (losses) related to assets and liabilities still held as of December 27, 2008
  $ (115 )   $ 4  
 
Assets/Liabilities Measured at Fair Value on a Non-recurring Basis
 
The following table presents the financial instruments that were measured at fair value on a non-recurring basis as of December 27, 2008, and the gains (losses) recorded during 2008 on those assets:
 
                                         
          Fair Value Measured Using        
          Quoted Prices in
    Significant
          Total Gains
 
    Carrying
    Active Markets
    Other
    Significant
    (Losses) for 12
 
    Value as of
    for Identical
    Observable
    Unobservable
    Months Ended
 
    December 27,
    Instruments
    Inputs
    Inputs
    December 27,
 
(In Millions)
  2008     (Level 1)     (Level 2)     (Level 3)     2008  
Clearwire Communications, LLC
  $ 238     $     $ 238     $     $ (762 )
Numonyx B.V.1
  $ 484     $     $     $ 503     $ (250 )
Other non-marketable equity investments
  $ 84     $     $     $ 84     $ (200 )
                                         
Total gains (losses) for assets held as of December 27, 2008
      $ (1,212 )
             
Gains (losses) for assets no longer held
      $  
             
Total gains (losses) for
non-recurring measurement
      $ (1,212 )
             
 
1 Our carrying value as of December 27, 2008 did not equal our fair value measurement at the time of impairment due to the subsequent recognition of equity method adjustments.
 
A portion of our non-marketable equity investments were measured at fair value during 2008 due to events or circumstances we identified that significantly impacted the fair value of these investments, resulting in other-than-temporary impairment charges.
 
During the fourth quarter of 2008, we recorded a $762 million impairment charge on our investment in Clearwire Communications, LLC (Clearwire LLC) to write down our investment to its fair value, primarily due to the fair value being significantly lower than the cost basis of our investment. The impairment charge was included in gains (losses) on equity method investments, net on the consolidated statements of income. We determine the fair value of our investment in Clearwire LLC primarily using the quoted prices for its parent company, the new Clearwire Corporation. The effects of adjusting the quoted price for premiums that we believe market participants would consider for Clearwire LLC, such as tax benefits and voting rights associated with our investment, were mostly offset by the effects of discounts to the fair value, such as those due to transfer restrictions, lack of liquidity, and differences in dividend rights that are included in the value of the new Clearwire Corporation stock. We classified our investment in Clearwire LLC as Level 2, as the unobservable inputs to the valuation methodology were not significant to the measurement of fair value. For additional information about Clearwire, see “Note 6: Equity Method and Cost Method Investments.”


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
We recorded a $250 million impairment charge on our investment in Numonyx B.V. during the third quarter of 2008 to write down our investment to its fair value. Estimates for revenue, earnings, and future cash flows were revised lower due to a general decline in the NOR flash memory market segment. We measure the fair value of our investment in Numonyx using a combination of the income approach and the market approach. The income approach included the use of a weighted average of multiple discounted cash flow scenarios of Numonyx, which required the use of unobservable inputs, including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the flash memory market segment. The market approach included using financial metrics and ratios of comparable public companies. The impairment charge was included in gains (losses) on equity method investments, net on the consolidated statements of income.
 
We also measured other non-marketable equity investments at fair value during 2008 when we recognized other-than-temporary impairment charges. We classified these impaired non-marketable equity investments as Level 3, as we use unobservable inputs to the valuation methodology that are significant to the fair value measurement, and the valuation requires management judgment due to the absence of quoted market prices and inherent lack of liquidity. We calculated these fair value measurements using the market approach and/or the income approach. The market approach includes the use of financial metrics and ratios of comparable public companies. The selection of comparable companies requires management judgment and is based on a number of factors, including comparable companies’ sizes, growth rates, products and services lines, development stage, and other relevant factors. The income approach includes the use of a discounted cash flow model, which requires the following significant estimates for the investee: revenue, based on assumed market segment size and assumed market segment share; estimated costs; and appropriate discount rates based on the risk profile of comparable companies. Estimates of market segment size, market segment share, and costs are developed by the investee and/or Intel using historical data and available market data. The valuation of our other non-marketable equity investments also takes into account movements of the equity and venture capital markets, recent financing activities by the investees, changes in the interest rate environment, the investee’s capital structure, liquidation preferences for the investee’s capital, and other economic variables. The valuation of some of our investments in the wireless connectivity market segment was based on the income approach to determine the value of the investee’s spectrum licenses, transmission towers, and customer lists.
 
Note 4: Trading Assets
 
Trading assets outstanding at fiscal year-ends were as follows:
 
                                 
    2008     2007  
    Net
          Net
       
    Unrealized
          Unrealized
       
(In Millions)
  Gains (Losses)     Fair Value     Gains (Losses)     Fair Value  
Marketable debt instruments
  $ (96 )   $ 2,863     $ 51     $ 2,074  
Equity securities offsetting deferred compensation
    (41 )     299       163       492  
                                 
Total trading assets
  $ (137 )   $ 3,162     $ 214     $ 2,566  
                                 
 
Net losses on marketable debt instruments that we classified as trading assets held at the reporting date were $132 million in 2008 (gains of $19 million in 2007 and $31 million in 2006). Our net losses in 2008 on marketable debt instruments that we classified as trading assets held at the reporting date included $87 million of losses related to asset-backed securities. Net losses on the related derivatives were $5 million in 2008 (losses of $37 million in 2007 and $22 million in 2006). We maintain certain equity securities within our trading assets portfolio to generate returns that seek to offset changes in liabilities related to the equity market risk of certain deferred compensation arrangements. These deferred compensation liabilities were $332 million in 2008 ($483 million in 2007) and are included in other accrued liabilities. Net losses on equity securities offsetting deferred compensation arrangements still held at the reporting date were $209 million in 2008 (gains of $28 million in 2007 and $45 million in 2006).


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INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Note 5: Available-for-Sale Investments
 
Available-for-sale investments as of December 27, 2008 and December 29, 2007 were as follows:
 
                                                                 
    2008     2007  
          Gross
    Gross
                Gross
    Gross
       
    Adjusted
    Unrealized
    Unrealized
          Adjusted
    Unrealized
    Unrealized
       
(In Millions)
  Cost     Gains     Losses     Fair Value     Cost     Gains     Losses     Fair Value  
Floating-rate notes
  $ 6,321     $ 3     $ (127 )   $ 6,197     $ 6,254     $ 3     $ (31 )   $ 6,226  
Commercial paper
    2,329       3             2,332       4,981                   4,981  
Non-U.S. government securities
    816       1             817       118                   118  
Bank time deposits1
    606       2             608       1,891       1             1,892  
Corporate bonds
    488       4       (12 )     480       610       2       (8 )     604  
Money market fund deposits
    419                   419       1,824       1             1,825  
Marketable equity securities
    393       2       (43 )     352       421       616       (50 )     987  
Asset-backed securities
    374             (43 )     331       937             (23 )     914  
Domestic government securities
    159                   159       121                   121  
Repurchase agreements
                            150                   150  
                                                                 
Total available-for-sale investments
  $ 11,905     $ 15     $ (225 )   $ 11,695     $ 17,307     $ 623     $ (112 )   $ 17,818  
                                                                 
 
                                                                 
                      2008
                      2007
 
                      Carrying
                      Carrying
 
(In Millions)
                    Amount                       Amount  
Available-for-sale investments
  $ 11,695                             $ 17,818  
Investments in loan participation notes (cost basis)
    20                               111  
Cash on hand
    242                               253  
                                         
Total
  $ 11,957                             $ 18,182