Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated condensed financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. 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 as of June 27, 2009.
• Critical Accounting Estimates. Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
• Results of Operations. An analysis of our financial results comparing the three and six months ended June 27, 2009 to the three and six months ended June 28, 2008.
• Business Outlook. Our expectations for selected financial items for the third quarter of 2009 and the 2009 full year.
• 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 of Financial Instruments. Discussion of the methodologies used in the valuation of our financial instruments.

The various sections of this MD&A contain a number of forward-looking statements. Words such as "expects," "goals," "plans," "believes," "continues," "may," "will," 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 II, Item 1A of this Form 10-Q). Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of August 3, 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 (loss), and net income (loss) for the first and second quarters of 2009 and the second quarter of 2008 were as follows:

               (In Millions)             Q2 2009      Q1 2009      Q2 2008
               Net revenue               $  8,024     $  7,145     $  9,470
               Gross margin              $  4,079     $  3,238     $  5,249
               Operating income (loss)   $    (12 )   $    647     $  2,255
               Net income (loss)         $   (398 )   $    629     $  1,601

Our second quarter results were better than expected. In anticipation of a seasonally up second half, the supply chain began refilling inventory positions that had been depleted over the past two quarters. As a result, revenue was up 12% sequentially on higher microprocessor and chipset revenue. Revenue from Intelฎ Atomtm processors and chipsets also significantly increased sequentially. Compared to Q2 2008, revenue was down 15%, an improvement from the 26% year over year decline we saw in the first quarter of 2009. While this may signal increased market confidence, we believe the global economic environment remains volatile, creating an uncertain demand environment.
Our overall gross margin dollars for the second quarter of 2009 were up 26% compared to the first quarter of 2009, and down 22% compared to the second quarter of 2008. Our overall gross margin percentage for the second quarter of 2009 was higher than our outlook at 50.8%, compared to 45.3% in the first quarter of 2009 and 55.4% in the second quarter of 2008. Compared to the first quarter of 2009, higher microprocessor sales volume and reductions in factory underutilization charges positively impacted our gross margin while higher start-up costs associated with our new 32nm process technology and lower average selling prices on microprocessors negatively impacted our gross margin. We expect reductions in both factory underutilization charges and start-up costs in the third quarter to positively impact our gross margin, in addition to anticipated improvements we expect in the microprocessor business with higher sales volumes and lower unit costs. We expect these reductions in costs to be partially offset by inventory write-offs on our new 32nm microprocessor products built prior to qualification for sale and lower microprocessor average selling prices.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Despite the company's strong execution, we had a net loss per common share for the quarter of $0.07, which included the impact of the decision received from the European Commission (EC) on May 13, 2009. We recorded the full amount of the fine, €1.06 billion ($1.447 billion), which reduced earnings per common share by $0.25. Our tax provision for the quarter was $348 million on negative pre-tax income as the fine is not tax deductible. We disagree with the EC decision and have filed our appeal.
From a financial condition perspective, we were able to generate nearly $3.4 billion in cash from operations and pay $784 million in dividends despite being in a net loss position for the quarter. As of June 27, 2009, cash and cash equivalents, debt instruments included in trading assets, and short-term investments totaled $11.3 billion and continued to be of high credit quality. Subsequent to the end of the second quarter of 2009, we completed the acquisition of Wind River Systems Inc., a leading software vendor in embedded devices, in exchange for $884 million to be paid to the stockholders of Wind River. With this acquisition we expect to create a new class of differentiated products for the embedded and handheld market segments. 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.
• 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. 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. Through Wind River, which we acquired in the third quarter of 2009, we license software products and provide services that are optimized for the needs of customers in the embedded and handheld market segments. We believe that the software expertise of Wind River in the embedded and handheld market segments will expedite our growth strategy in these market segments.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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. 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.
We believe the trend of mobile microprocessor unit growth outpacing the growth in desktop microprocessor units will continue. 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. We also believe that these products will result in demand that is incremental to that of microprocessors designed for notebook and desktop computers, as a growing number of households have multiple devices for different computing functions. Our silicon and manufacturing technology leadership allows us to develop low-power microprocessors for these and other new uses and form factors. We believe that Intel Atom processors 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, handheld solutions, 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.
To meet the demands of new and evolving mobile markets segments and various embedded market segments, we also offer, and are continuing to develop, System on Chip (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. In the first quarter of 2009, we announced plans to collaborate with Taiwan Semiconductor Manufacturing Company, Ltd. (TSMC), a large semiconductor foundry, in an effort to broaden the market opportunities for Intel Atom processors in SoC products by integrating our Intel Atom processor cores with TSMC's process technology platform.
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. Strategy by Operating Segment
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 handhelds 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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.
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. In addition, we have formed an alliance with General Electric Company for the development of consumer/home health products and to address demand for independent living and disease management 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 credit-related 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 $3.7 billion as of June 27, 2009 ($4.1 billion as of December 27, 2008). The majority of this balance as of June 27, 2009 was concentrated in companies in the flash memory market segment. Our flash memory market segment investments include our investment in IM Flash Technologies, LLC (IMFT) of $1.5 billion ($1.7 billion as of December 27, 2008), our investment in IM Flash Singapore, LLP (IMFS) of $308 million ($329 million as of December 27, 2008), and our investment in Numonyx B.V. of $447 million ($484 million as of December 27, 2008). 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 10: Equity Method Investments" in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.
Our non-marketable equity investments are recorded using adjusted cost basis or the equity method of accounting, depending on the facts and circumstances of each investment. Our non-marketable equity investments are classified in other long-term assets on the consolidated condensed balance sheets.

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 the funds are 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, see "Risk Factors" in Part II, Item 1A of this Form 10-Q.
We measure the fair value of our non-marketable equity investments quarterly in accordance with FSP 107-1/APB 28-1; however, the investments are only recorded at fair value when the investments are impaired. 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).
For non-marketable equity investments, the measurement of fair value requires significant judgment and includes quantitative and qualitative analysis of events or circumstances identified that impact the fair value of the investment, including:
• 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.

If the fair value of an investment is below our carrying value, we determine if the investment is other than temporarily impaired based on our qualitative and quantitative analysis as well as 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. With the exception of Clearwire Communications, LLC (Clearwire LLC), the fair value of our non-marketable investments are classified as Level 3 when impaired, 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. If impaired, the fair value of our investment in Clearwire LLC would be classified as Level 2, as the unobservable inputs to the valuation methodology are not significant to the fair value measurement.
Impairments of non-marketable equity investments were $39 million in the second quarter of 2009 ($118 million in the first half of 2009). Over the past 12 quarters, including the second quarter of 2009, impairments of non-marketable equity investments have ranged from $11 million to $896 million per quarter. This range includes impairments of $896 million during the fourth quarter of 2008, which were primarily related to a $762 million impairment charge on our investment in Clearwire LLC.
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 Technology, Inc. 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.
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) 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Changes in management estimates to the unobservable inputs would change the fair value of the investment. The estimates for the projected revenue and discount rate are the assumptions that most significantly affect the fair value determination. We did not have an other-than-temporary impairment on our investments in IMFT and IMFS in the first half of 2009 or the first half of 2008. It is reasonably possible that the estimates used in the fair value determination could change in the near term and result in an impairment of our investment.
Numonyx
We determine the fair value of our investment in Numonyx using a combination of . . .