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. Our overall strategy.
• 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 nine months ended September 26, 2009 to the three and nine months ended September 27, 2008.
• Business Outlook. Our expectations for selected financial items for the fourth 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 November 2, 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 second and third quarters of 2009 and the third quarter of 2008 were as follows:

              (In Millions)             Q3 2009      Q2 2009       Q3 2008
              Net revenue               $  9,389     $  8,024     $  10,217
              Gross margin              $  5,404     $  4,079     $   6,019
              Operating income (loss)   $  2,579     $    (12 )   $   3,098
              Net income (loss)         $  1,856     $   (398 )   $   2,014

We delivered strong financial results in the third quarter with revenue up 17% and our gross margin percentage up 7 points from the second quarter. Better than expected demand for microprocessors and chipsets led to the largest third quarter sequential revenue increase in over 30 years. We saw growth in all geographies as the recovering global economy was led by consumer demand and continued replenishment of supply chain inventory. Microprocessors and chipsets designed for notebooks outpaced the unit growth of our Intelฎ Atom™ processors and chipsets. Microprocessors and chipsets designed for notebooks were one of the primary drivers of our revenue growth in the third quarter and we expect that to continue in the future. The average selling prices for microprocessors declined slightly compared to the second quarter of 2009, as the mix of microprocessors sold in this consumer driven recovery have a lower average selling price than the microprocessors traditionally sold to businesses. Compared to the third quarter of 2008 revenue was down 8%, an improvement from 15% and 26% year over year declines in the second and first quarters of 2009 respectively. We expect that revenue in the fourth quarter will increase from the third quarter in line with seasonal patterns. Our inventories are down $1.3 billion from year end 2008; however, we do not expect shortages that would impact our revenue outlook.
Our gross margin percentage for the third quarter compared to the second quarter was positively impacted by higher microprocessor sales volume, lower microprocessor unit costs, lower factory underutilization charges, and lower startup costs as we transition into production using our 32nm process technology. These improvements to our gross margin percentage were partially offset by inventory write-offs of our new 32nm microprocessor products that were not yet qualified for sale. As we move into the fourth quarter we expect our gross margin percentage to increase further as 32nm products built in the fourth quarter are qualified for sale. In addition, our gross margin percentage is expected to increase due to higher microprocessor sales volume and lower factory underutilization charges on increased production.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Our strong third quarter financial results emphasizes that we have the right product offerings in the marketplace at the right cost. In the third quarter we began volume production using our new 32nm processor technology that features our 2nd generation Hi-k metal gate transistors. This process technology will allow us to improve upon our microprocessor portfolio by offering products with increased performance and lower power consumption that cost less to produce. The 32nm process technology will also allow us to significantly expand our system on chip products offerings which we believe will help us succeed in our key growth areas.
From a financial condition perspective, we ended the third quarter of 2009 with a high credit quality investment portfolio of $12.9 billion, consisting of cash and cash equivalents, debt instruments included in trading assets, and short term investments. During the third quarter of 2009 we generated $4.0 billion in cash from operations despite paying the €1.06 billion ($1.447 billion) European Commission fine recorded in the second quarter of 2009. During the third quarter we issued $2.0 billion of convertible debt and utilized the proceeds from the convertible debt to repurchase $1.7 billion of common stock through our common stock repurchase program. In addition, during the third quarter we completed the purchase of Wind River Systems, Inc., returned $771 million to shareholders through dividends, and paid $944 million for capital assets. We continue to make significant investment in capital assets to meet our strategic objectives, however, based on capital reuse and efficiencies, we now estimate that total capital expenditures in 2009 will be less than depreciation incurred in 2009. In September, our Board of Directors declared a dividend of $0.14 per common share to be paid in December.
Finally, in September we announced a broad reorganization to better align our business around the core competencies of Intel Architecture and our manufacturing operations. We are currently in the process of making these changes to our organization and our systems. Strategy
Our goal is to be the preeminent provider of semiconductor chips and platforms for the worldwide digital and Internet connected 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 can enable improved multitasking and energy efficient performance by distributing computing tasks across multiple cores.
• 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 financial 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 primarily 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
• 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 our Wind River Software Group, 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 expertise of our Wind River Software Group in the embedded and handheld market segments will expedite our growth strategy in these market segments.

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 and the increasing use of cloud computing, where a group of linked servers provide a variety of applications and data to users over the Internet, create a need for greater server infrastructure, including server products optimized for energy-efficient performance and virtualization.
In September 2009, we announced a broad reorganization to better align our business around the core competencies of Intel Architecture and our manufacturing operations. We are currently in the process of making these changes to our organization and our systems. Given the scope and size of the business lines being impacted, this reorganization is expected to be in effect and reported in our Annual Report on Form 10-K for the year ended December 26, 2009. Under the new operating structure, our reportable operating segments will include the PC Client Group and Data Center Group. The PC Client Group will include our mobile and desktop products and the Data Center Group will include our server and workstation products.
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 devices, handhelds, consumer electronics devices, nettops, and netbooks. We also believe that our Intel Atom Developer Program, which we expect to spur new applications that run on products using Intel Atom processors, will expedite our growth strategy in these new market segments. 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, consumer electronics, and various embedded market segments, we also offer, and are continuing to develop, System on Chip (SoC) products that integrate the core processing functionality of our Intel Atom processors with specific components, such as graphics, audio, and video, onto a single chip. This integration reduces cost, power consumption, and size. We are collaborating 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, the simultaneous use of multiple cores to execute a computing task. 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 other-than-temporary impairments of available-for-sale debt instruments within earnings;
• 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 $3.5 billion as of September 26, 2009 ($4.1 billion as of December 27, 2008). The majority of this balance as of September 26, 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 $1.4 billion ($1.7 billion as of December 27, 2008), our investment in IM Flash Singapore, LLP (IMFS) of $305 million ($329 million as of December 27, 2008), and our investment in Numonyx B.V. of $438 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.
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, financial markets and credit markets are volatile, 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 for disclosure purposes; however, the investments are only recorded at fair value when an impairment charge is recognized. 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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, which includes assessing 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 would not be significant to the fair value measurement.
Impairments of non-marketable equity investments were $50 million in the third quarter of 2009 ($168 million in the first nine months of 2009). Over the past 12 quarters, including the third 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 these investments 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 (based on expectations for 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.
Changes in management estimates to the unobservable inputs would change the fair value of the investments. The estimates for 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 nine months of 2009 or the first nine months 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 investments. 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 comparable to our investment in Numonyx. 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, earnings, and comparable performance multiples. 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Changes in management estimates to the unobservable inputs in our valuation models would change the fair value of the investment. The estimated projected revenue is the assumption that most significantly affects the fair value determination. Management judgment is also involved in determining how the income approach and the market approach are weighted in the fair value determination. We did not have an other-than-temporary impairment on our investment in Numonyx in the first nine months of 2009. 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. It is reasonably possible that the estimates used in the fair value determination could change in the near term . . .