Paul Otellini - Chief Executive Officer Andy Bryant - Chief Financial Officer Alex Lenke - Acting Director, Investor Relations

Sumit Dhanda - Banc of America Securities Tim Luke - Lehman Brothers Joe Osha - Merrill Lynch Krishna Shankar - JMP Securities Mark Lipacis - Prudential Equity Group John Lau - Jefferies & Co. Michael McConnell - Pacific Crest Securities Michael Masdea - Credit Suisse Adam Parker - Sanford C. Bernstein & Company, Inc. Glen Yeung - Citigroup Jim Covello - Goldman Sachs Chris Danely - JP Morgan Eric Gomberg - Thomas Weisel Partners Hans Mosesmann - Moors & Cabot, Inc.

Good day, ladies and gentlemen, and welcome to the Q2 2006 Intel Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Alex Lenke, acting Director of Investor Relations. Please proceed, sir.

Thank you. Welcome to the Intel second quarter earnings conference call. Attending from Intel are CEO Paul Otellini and CFO Andy Bryant. Before we begin, please bear with me while I read our Safe Harbor language. The second quarter earnings report discusses Intel's business outlook and contains forward-looking statements. These particular forward-looking statements, and all other statements that may be made on this call that are not historical facts, are subject to a number of risks and uncertainties. Actual results may differ materially. Please refer to our press release for more information on the risk factors that could cause actual results to differ. The specific forward-looking statements cover expectations for product mix and demand, revenue, gross margin, expenses, tax rates, interest and other income, capital spending, depreciation and amortization of acquisition related intangibles, and cost. These statements do not reflect the potential impact of any mergers, acquisitions, divestitures, investments, or other business combinations that may be completed after July 18, 2006. Lastly, if during this call we use any non-GAAP financial measure as defined by the SEC and Reg. G, you will find on our website. www.intc.com, the required reconciliation to the most directly comparable GAAP financial measure. With that, let me turn it over to Paul.

Thanks, Paul. The second quarter was the time for facing the challenges of the market, while moving ahead with plans to improve our products and capabilities. Competition, market softness, a product mix shift in customer inventory levels entering the quarter, were among the challenges. In growth and servers, chipsets for mobile computers and communications infrastructure were among the bright spots. While we have trimmed the outlook for gross margin for the year, we continue to tackle the cost structure with reductions in capital spending, R&D, and headcount. We have also reduced our level of cash and the number of shares outstanding. As Paul stated, we made excellent progress in pushing forward with new products to support a stronger second half. Revenue for the second quarter was $8 billion, at the low-end of our forecast in April, and down 10% from the first quarter. Most of the sequential change in revenue came from lower average selling prices and unit volumes of microprocessors for the desktop and notebook segments. Average selling prices declined as the market moved a bit to lower price mix within both performance and value segments in an unusually competitive pricing environment. In all geographies and in the channel, revenue was lower than seasonal, indicating some overall softness in the PC market segment. Some of the decline also can be attributed to customers working through first quarter inventory. We believe we have met our goal to get customer inventories of our products in balance with business levels and in an appropriate mix for our new product ramp. Chipsets and other products in the mobility group delivered revenue growth of 16%. In the server business, revenue was up on improving average selling prices and unit volumes. In a year to year comparison, quarterly revenue was down approximately $1.2 billion, or 13%. Revenue in the digital enterprise group was down 23%, while revenue for the mobility group was up slightly. Among the geographies, the year to year revenue decline was highest in Europe, which was down 24%, and Asia-Pacific, which was down 14%. Japan's revenue was up 3%, marking the 15th consecutive quarter of year-to-year revenue growth. Gross margin dollars of $4.2 billion, including share-based compensation of $66 million, were down 16% from the first quarter. Gross margin percentage was 52.1% on a GAAP basis. Without share-based compensation, gross margin percentage was 52.9%. A decrease from the first quarter of 3.4 points on a non-GAAP basis came primarily from lower average selling prices for microprocessors, lower overall unit volume for microprocessors, and a mix shift or lower margin product in certain areas, offset somewhat by lower inventory write-downs. In April, our quarterly forecast for gross margin percentage, excluding share-based compensation, was 50% plus or minus a couple points. The improvement of 2.9 points from the midpoint of the forecast was a function of better-than-expected inventory evaluations, including qualification for production for some new products and improvements in unit cost for chipsets and microprocessors, offset by the mix-shift in microprocessors toward products with lower average selling prices. In a year-to-year comparison, gross margin percentage, excluding share-based compensation, is 3.5 points lower than the second quarter of 2005, primarily as a result of lower revenue, offset somewhat by lower start-up costs. Spending, R&D and MG&A was $3.1 billion, in line with our forecast in April. Excluding share-based compensation of $266 million, spending decreased by approximately 3% from the first quarter but is up 12% from a year ago. Spending has grown as a percentage of revenue. However, cost-cutting efforts are in the initial phases. The number of employees declined during the quarter to 102,500, which does not reflect the loss of 1,400 people we expect to be employed by Marvell, and 1,000 people whose positions were recently eliminated. With these actions and attrition, we expect the number of employees to be below 100,000 by the end of the year. Fully diluted earnings per share were $0.15. Excluding share-based compensation, earnings per share would have been $0.19. Quarterly average shares outstanding are down nearly 6% from a year ago. On the balance sheet, inventories of $4.3 billion were up over $750 million from the first quarter, as we ramp production of microprocessors on a 65-nanometer process and produced associated chipsets. The Conroe microprocessor qualified for production during the quarter and contributed to higher inventories, as did the Broadwater chipset. Broadwater ramped nicely and had good demand, which provided better unit cost and lower than expected write-downs. We continue to reduce the levels of cash. Total cash investments, comprised of cash, short-term investments, and fixed income trading assets, ended the quarter at $7.2 billion, down by $1.5 billion from the first quarter. Stock repurchases were $1 billion. Capital spending was $1.7 billion, and dividend payments were nearly $600 million. As a reminder, we indicated in April that we expect to reduce the level of our stock repurchases over coming quarters to less than half the first quarter rate as we continue to manage our cash flow. As we turn now to the outlook for the third quarter, please keep in mind that the forecast data do not include the effect of any new acquisitions, divestitures, or external transactions that may be completed after July 18th. I will use a mid-point of forecast ranges when making comparisons to specific periods. We are planning for revenue in the third quarter to be between $8.3 billion and $8.9 billion, an increase of approximately 7.5%, in line with seasonal patterns. If revenue for the second quarter is adjusted for the inventory burn, then the growth rate for the third quarter forecast would be at the low end of seasonal patterns. This forecast for Q3 assumes higher revenue than the second quarter for microprocessors, chipsets, and flash memory. Our expectations for gross margin percentage in the third quarter is 49%, plus or minus a couple points. Without share-based compensation of approximately 1 point of margin, the forecast for gross margin percentage is 50%, plus or minus a couple points. Higher microprocessor unit costs, as we ramp production of the Dual-core product, and some erosion in average selling prices will lower gross margin percentage, while higher unit volumes will partially offset the decrease. Keep in mind that gross margin in the second quarter benefited from the qualification of new products. Spending, R&D plus MG&A should be approximately $3 billion. The forecast includes approximately $300 million of share-based compensation. Without the impact of these charges, spending should be approximately $2.7 billion. This level of spending is flat to down slightly from the second quarter on higher revenue, and indicates some progress at reducing spending as a percent of revenue. Looking beyond the third quarter, we anticipate a fourth quarter with seasonal growth from the third quarter. In the last ten years, growth from the third to fourth quarter has varied widely, and averaged approximately 10%. This is likely to result in annual revenue for the year that is lower than our outlook in April, when we forecast a decrease of approximately 3% compared to 2005 within a wide range of variability. We expect gross margin percentage for the year to be 51%, plus or minus a few points. Without share-based compensation of approximately 1 point of margin, the forecast is 52%, plus or minus a few points. The adjustment in the forecast reflects lower revenue, primarily due to lower ASPs. The main causes of the decline from 59.4% in 2005, are lower prices of microprocessors, higher unit costs as we move to Dual-core, and higher cost for chipsets mitigated by lower start-up costs. As a result of several cost savings actions, we have again lowered the forecast for R&D and capital spending for the year. The forecast for R&D is now $100 million lower, at approximately $6 billion. This brings us to our previous goal for total spending for R&D, marketing, and G&A of $12.1 billion. Without share-based compensation of approximately $500 million, the forecast for R&D is $5.5 billion, up 7% from 2005. Without share-based compensation of approximately $600 million, the forecast for total spending is $11 billion, essentially flat with 2005. This includes spending for the IM flash technology joint venture. We have also lowered the capital spending forecast by $400 million to $6.2 billion, plus or minus $200 million. The estimated tax rate for the third and fourth quarters of 2006 is unchanged at approximately 30.5%. In summary, we look ahead to our business improving in the second half, with outstanding new products and seasonal growth. While business remains competitive, we are focused on doing the right things -- delivering compelling products, competing for sales, proceeding with systematic and comprehensive cost-cutting, and executing superbly with 65-nanometer, while laying the groundwork for the next generation. With that, let me turn it over to Alex for Q&A.

Thanks, Andy. We will now open the conference call for Q&A. We will attempt to take questions from as many participants as possible. To help in this process, we ask that you please limit yourselves to only one question, and no more than one brief follow-up. Thank you.

(Operator Instructions) Your first question comes from the line of Sumit Dhanda with Banc of America Securities. Please proceed. Sumit Dhanda - Banc of America Securities: Andy, I had a couple of questions. First, it seems, at least on a sequential basis, the notebook business was off fairly significantly. Conversely, the mobile chipset business did very well. Could you help us understand what occurred there? Secondly, you have indicated that cost on the dual-core ramp will impact margins significantly for Q3. Is the expectation still that this will start to be a little bit of a tailwind in Q4, as you had indicated at the analyst day, or has that changed? Thank you.

On the cost one, I would expect us to start to see the turnover in cost units in the fourth quarter, and continuing into next year. My guess is the expensive dual-core product peak will be in the third quarter, and we will start to see the newer products have meaningful effect in the fourth quarter. In terms of the notebook...

Why don't I take that one? In general, what we are seeing is an expansion of the notebook segment as a percent of the overall PC market. In the second quarter shipments, we saw quite a bit of expansion shipped, if you will, in the mix from the high end to the low end, principally driven by retail purchases. Consumer notebooks tend to sell for a lot less than business notebooks and they tend to use a lower-end microprocessor. There may also have been some hesitation in front of our price move and in front of our Merom launch, so I think those three things combined to get you to the… The chipset business is up in mobile, which indicates the continuing growth in mobile. We have a fairly high market segment share in mobile chipsets anyway, so I think that one is a good leading indicator on where the notebook business is going, in terms of what you see. Sumit Dhanda - Banc of America Securities: Okay, thank you.

Your next question comes from the line of Tim Luke with Lehman Brothers. Please proceed. Tim Luke - Lehman Brothers: Thank you. Andy, with respect to the inventory levels, could you give us a sense on how you would expect them to look going forward, based on-hand, and maybe what you perceive in the channel? I was also wondering if you could give any color with respect to your guidance as a midpoint to 07 of how we should view the unit growth versus the ASP direction? Thank you.

In terms of inventory levels, I will give a long-winded answer, because I also want to explain a little bit about the second quarter, which [multiple speakers] …up over $750 million. If you remember at the beginning of the quarter, we expected a little less than half of that. We knew we would be trying to ramp Broadwater in that period of time. We did not expect Conroe to qualify until the third quarter. So what happened, if you look inside the quarter, the surprise increase in inventory is several hundred million for the Conroe product line, better health in Broadwater, so I took lower inventory reserves there. A third element is in the second quarter, my mix was a little lower so I had a little more dual-core content in inventory, so it is a little higher. Essentially what I am trying to paint to you is what happened in the second quarter is I built a lot of product that is 65-nanometer processors and 90-nanometer chipsets, which is why I think is an okay thing. Going into the third quarter, I would expect profits to be about flat. We had a big profit evaluation in the second quarter for the Conroe and Woodcrest. I would expect chipsets to still grow a little bit. I still think we are digging ourselves out of the chipset hole. At some point, we made steps to turn that over but not in the third quarter. So overall, expect a little increase in the third quarter, but I do not think it is a big increase. Tim Luke - Lehman Brothers: Sort of the $200 million, the same kind of range that you advocate or you thought before? That kind of framework? How should we view that?

Well, I hate to put a number on it. That's an acceptable magnitude. If I were to see $200 million, it would not startle me. Tim Luke - Lehman Brothers: Then you would expect it to go down, obviously, in the calendar fourth quarter?

I would expect fourth quarter to start to turn that down, yes. Tim Luke - Lehman Brothers: Can you give us any framework there?

As bad as I was at forecasting inventory in Q2, I want to wait but yes, I would expect a slight increase in the third quarter, a slight decrease in the fourth. Your other question was? Tim Luke - Lehman Brothers: Was with respect to the midpoint of your revenue grade, your expectations in terms of how we should think about unit growth and ASPs. Should we think about ASPs coming down a little bit?

ASPs do come down a bit in the third quarter. We do see a pretty tough pricing environment. If you look inside the second quarter, we came in at the low-end of our range and most of that was ASPs. If you look at the units we shipped into the marketplace, if you look at the units we think our customers burnt out of the inventories, it came in almost exactly has we had forecasted to you guys in April. The surprise was it was a little bit lower mix, a little bit lower price. When I look at my full year, even though our full year, if you do the math, is going to be down a fair amount, it is mostly pricing. The unit environment, the demand for product seems pretty normal in terms of purchasing -- a little weak, so don't change your mind -- again, we know Q1, Q2 was a little weak, but I would paint a normal second half off of the first half in terms of units. Tim Luke - Lehman Brothers: ASPs in the mid-single-digit decline, is that what I should think about in the third quarter? Just some kind of approximation?

I cannot go to that level of granularity. Tim Luke - Lehman Brothers: So despite the normal units, you have the extra inventory and you think the inventory goes up in the third quarter, what do you think is normal units then?

Again, go back and look at Gardner or anybody else's unit demand in Q3’s of years gone by. It is not too far off for revenue as well. You can get pretty close. Tim Luke - Lehman Brothers: Thank you, guys.

Your next question comes from the line of Joe Osha with Merrill Lynch. Please proceed. Joe Osha - Merrill Lynch: You are saying that you qualified Conroe more quickly than thought, so those wafers become part of inventory as opposed to just flowing through the P&L, right?

That's correct, and that was about $200 million worth. Joe Osha - Merrill Lynch: First question then, why does that not show up in the R&D, which basically came in where you thought? As I look at this, and I look at…

Slow down, slow down -- not so fast. Joe Osha - Merrill Lynch: Okay.

If the product had not qualified, the expense would have not been in R&D. It would have been in other costs of sales, similar to our start-up costs. So what it does is it flips out of cost of sales into inventory. Joe Osha - Merrill Lynch: Okay.

Our margin being a couple of points high, this is part of the reason, but with inventory being a $200 million high, again, they kind of balance. Joe Osha - Merrill Lynch: Okay. Second question, as I look at the timing and the mix of your ramp, it seems to me like an awful lot of this inventory addition has got to be dual-core Pentium D, right? Which is the expensive-to-manufacture part that you are going to sell and then end-of-life over the next couple of quarters, right?

Some of it is, yes. There was an increase in inventory of that product. Joe Osha - Merrill Lynch: Okay. As I look, I do some back-of-the-envelope math here, I see your SG&A and your R&D falling off in Q4. As I think of 2007, how should I think about the run rates for those operating expense lines?

I would think they are going down again, as Paul -- it is going to be hard for me to give you a magnitude. As Paul said, we are going through efficiency project evaluations now. We would be very disappointed not to see a significant dollar savings as we get into next year, but I really would like to finish that project before I give you a number. Joe Osha - Merrill Lynch: Just to clarify, down from the Q4 run rate, or down '07 on '06? The numbers, as I look at that Q4 run rate, are you saying that it goes down from there?

Again, since we are not done with the work yet, I am giving you a bias that I do not have studied numbers behind, okay? My belief is it is down from the Q4 run rate and down year over year, both. Joe Osha - Merrill Lynch: Okay. Paul, may I ask one philosophical question before I go away?

Certainly. Joe Osha - Merrill Lynch: You have a great new product lineup, and I think everybody knows that. Why on earth run up inventory like this? It creates a problem that appears to me to be obscuring the progress you would otherwise be making.

I do not think that we are running up inventory or creating a problem. If you look at the history of Intel, we generally take care of our inventory pretty well. If I have made one mistake in the last two years, it was that we did not build enough chips at inventory at the right time in second half '04, early '05. That got us in trouble in terms of market share and got us in trouble in terms of our customers and everything else. We think that we are starting wafers on the right products now and I am very comfortable with the current build plans and factory loadings. Joe Osha - Merrill Lynch: Thank you.

Your next question comes from the line of Krishna Shankar with JMP Securities. Please proceed. Krishna Shankar - JMP Securities: Yes, Andy, you talk about the $1 billion in operating expense, the savings there. Should we be looking at $1 billion taken out of part of op-ex between 2007 versus what the new guidance is for 2006? Can you give us some time frame for that op-ex reduction?

The $1 billion out of this year essentially kept us flat to last year. I want everyone to understand, it is not like we cut a billion out of last year's total. We cut a billion out of our run rate, which got us to flat. What will happen next year is going to be more a function of what happens in the efficiency project. I do expect it to go down. I do expect it to go down from Q4, but I really need to finish the work to know how much. I know you would like to have a number. I have to resist at this point but again, I expect to make real progress next year. I expect it to be a lower number. Krishna Shankar - JMP Securities: Paul, on the three-tiered pricing structure that you spoke about, does this imply a long tail to the NetBurst networks, where you have the three-brand structure, or should we anticipate a pretty quick flash out of the Pentium 4 NetBurst architecture?

We have the opportunity to use a number of micro-architectural dye in that brand. I do not think it implies a long tail to NetBurst as much as it implies a long tail to using Pentium and bringing that into newer, lower price points. In particular, we find this an intriguing opportunity in emerging markets, where Pentium is quite well known but as a percent of the overall sales, because of price points of systems, it has not been the predominant line item in the Intel lineup. By having new systems, new CPU price points, we enable new system price points for Pentium in these markets, and we think that is an advantage to us. Krishna Shankar - JMP Securities: Thank you.

Your next question comes from the line of Mark Lipacis. Please proceed, sir. Mark Lipacis - Prudential Equity Group: Two brief questions. First, Andy, can you give us a sense of the cash flow from operations for the quarter?

Cash flow from operations for the quarter -- no, I do not have that number with me. We did a $1 billion in buy back, we pulled cash down a little bit. It is probably some positive, but not a big number. I would have to get that, I do not have that. Mark Lipacis - Prudential Equity Group: Okay, fair enough. Second question, of the inventory that you have on the books, can you give us a sense of what percentage of those are from the new micro-architecture products?

If you look at the total, it's an odd answer. If you look at the growth of $750-some million, it is most of it. If you look at dual-core and you look add Broadwater, we grew in those spaces -- essentially all of the growth. You still have flash, you still have communications products, you still have motherboards -- all of those products are still there at about the same level they have been. Mark Lipacis - Prudential Equity Group: Thank you very much.

Your next question comes from the line of John Lau with Jefferies. Please proceed. John Lau - Jefferies & Co.: In terms of questions about your relationships with your major customer and the rumors about expanding usage from your competitor, what are the key issues that you think are driving the decisions? With new products out, is it performance anymore? Is it more pricing, supply chain management -- what are the key levers for the decision process now that you have your new products out, Paul?

I tend to be pretty monolithic in this thinking. I think it is a bit of all of the above, but technology and good products tend to be the overarching drivers of success in our industry. You have seen the write-ups on the new products, the new micro-architectures. You have seen customers talking about them in a very positive fashion. You have seen the press talking about them in very positive fashion. I think at the end of the day, our job is to make sure we build the best products. Great new products very often ignite markets -- examples, Centrino a few years back, and I think that with this new class of products, we can perhaps lift the entire market as we go forward. Independent of that, the addition of those products gives us a much better competitive posture, particularly when you look at the three-brand strategy now. John Lau - Jefferies & Co.: Along the lines of expanding the new markets, Paul, you do have the dual-cores now, quad cores coming by the end of the year. In terms of how the migration path in the market place when you have these new products in, what is the typical time in which you are going to see those next killer applications? Is it about a year away, or nine months from now?

Well, it depends on a -- segment by segment. In the server segment, quad core doesn't need new software. Server software today is all threaded, so it just takes advantage of that as long as you can keep the pipelines full. We have done a pretty good job on architecting that to get high efficiency out of those quad-core machines. These are dual processor quad core machines. In the extreme gamer community, the quad core also can be readily adopted quite quickly because the software is tuned for it. Ditto on the workstation business. When you start talking about mainstream microprocessors, I agree, we have a ways before the applications can take advantage of all of that horsepower, but it is not that far away. Most people are running multi-tasking environments today already. John Lau - Jefferies & Co.: Great. Thank you.

Your next question comes from the line of Michael McConnell with Pacific Crest Securities. Please proceed. Michael McConnell - Pacific Crest Securities: Thank you. Paul, just a longer term question with respect to pricing for the microprocessor industry. Obviously we have seen some of your larger customers begin to use your competitor on a more broader basis than at any time we have seen in history. If we look at the new product lineup, which looks like it is going to be much more competitive, are we expecting ASPs to begin to move up as we progress with the ramp of core-dual into next year?

I do not think we are giving out ASP guidance today, Michael, so I am going to avoid that. I think the criteria is going to be, how does the mix settle out, geography by geography, quarter by quarter? In terms of the percent of our products that are going to be dual-core micro-architecture based versus Pentium versus Celeron. I think that we have not had this kind of lineup in a long time, and we certainly have never had a three-brand strategy. To the extent that we can create pull and demand around these new products, you can get some lift. I will tell you that we have shifted virtually all of our direct advertising in the second half of this year to focus on Core 2 Duo, and you will start seeing those in billboards and print ads and television ads throughout the second half, particularly as we move into the peak selling season, from Labor Day on. Michael McConnell - Pacific Crest Securities: One follow-up, just on the restructuring. You said in the prepared comments that headcount could fall below 100,000 by the end of the year. There has been some pretty large numbers going around in terms of the amount of employees we could be seeing reductions for. Not trying to read the tea leaves, but should we be thinking that the restructuring or the employee reductions will not be on a very broad basis, or maybe more tempered?

Do not make that connection, yes. What you should be thinking of, if we did no new restructuring activity, I will get it below 100,000. We believe between now and to the next two months, we will make a variety of decisions, some of which may have [inaudible] headcount implications yet this year, which would take the number down even lower. So I am not making that next statement yet. On what we have done today, I will get below 100. We may have actions that will take it even lower before the end of the year. Michael McConnell - Pacific Crest Securities: Thank you.

Your next question comes from the line of Michael Masdea with Credit Suisse. Please proceed. Michael Masdea - Credit Suisse: Thank you. When we looked at your '06 estimate, you talked about how we have seen it go from the high-single digits now to the low, an increase to a high-single digit decrease. You stated a lot of that was really due to the ASP side. Help me understand kind of how that kind of happens. What kind of environment really led to that pricing environment? What gives you confidence that we are not going to see that again in your ability to forecast that we are not going to see that again?

Well, it is possible it will happen again. If you go through the math, we have a relatively wide range in Q3, and we said Q4 will be seasonal off whatever that final number would be. So right now, I am not picking a number for the year and saying thank God I finally figured it out. The environment we found ourselves in the second quarter, ASPs were down [inaudible] to price for two reasons. One is the competitive price environment, and one, it was a little bit lower mix than we expected. What we have done is assumed the competitive price environment stays. As Paul said, the product lineup gets stronger and stronger. Hopefully that allows us to gain some traction there. We have made a forecast that says we think that there will be a “normal” Q4 off of the third quarter, which is 7.5% off of a weak Q2. I do not think it is a particularly aggressive forecast for the rest of the year, but I certainly do not have a forecasting track record this year that says I can bet on it. Michael Masdea - Credit Suisse: That is fair enough. Then on the inventory side, given where we are now and given what you said about production and everything else, are you thinking about any sort of difference in your inventory target in terms of days going forward? Has it changed at all? Should we read anything into the cap-ex in terms of what you think production should be versus demand?

A couple things there. In terms of “inventory strategy”, no, I think we are in the middle of a product transition, and in the middle of a product transition, you want to aggressively build the new products and then carefully manage the older products. That is what we are doing. Hopefully up a little in the third quarter, down some in the fourth quarter, see where the market is and then figure out what we need to do for the rest of next year. If you asked me would I like to see it be lower, of course. If you ask me if I am concerned where it is, the answer is no because we need to make this product transition. On the capital spending side, think of it in two ways. One is, of the reduction of the midpoint by $400 million, half of it is essentially slower construction spending. So we have all of the same construction projects we thought we would have. We just slowed down some, which means some spending falls into next year instead of this year. The other half, about $200 million, actually comes from, I hate to use this word, it's not the “efficiency” project, but when a company starts to focus on getting more efficient, you start to find ways to increase utilization of tools. In this case, almost all of the second $200 million comes from the back-end processor [inaudible], where we found a way to increase the loadings into the equipment in those factories and we can save a couple hundred million dollars. We do not think it changes our capacity. We think it is just better use of the capacity we plan to have. Michael Masdea - Credit Suisse: So in other words, you are going to reassess at the end of the year, based on what you have done in the second half of this year and what ’07 looks like in terms of…

In terms of inventory, yes. In terms of capital, I hope that through this project, I find six more ways to increase my utilization of my equipment and save some more money. Michael Masdea - Credit Suisse: Thank you very much.

Your next question comes from the line of Adam Parker. Please proceed. Adam Parker - Sanford C. Bernstein & Company, Inc.: Just one on inventory and one around wireless. I am still not sure. I heard Paul say you do not think you are running up inventory, and Andy, you said this is kind of what happens in the middle of a product transition. I guess I’m wondering, what level would you be concerned about it? If I look at days of inventory, it is basically among the highest it has ever been, so why is that the wrong thing to look at? If it is only slightly up and it is slightly down the next couple of quarters, doesn't it create a problem heading into '07? Is there a risk you have to take, a big reserve here? Help me understand why you are so comfortable when history implies that you are in a danger zone here on inventory.

I don't think history implies I'm in a danger zone on inventory. It does show it is higher than it has historically been, but at $4.3 billion of inventory, that is about one-quarter’s worth cost of sales. That is not a danger zone, especially when you have a 13-week prepare time anyway. I am not uncomfortable with the level of inventory. Would I like it to be less? Of course. I would always like to manage it more tightly, but it does not lead to big write-offs. I am pretty comfortable with that situation. Now if you're telling me demand is going to fall off the table next year and I am going to have to unload factories, then it will be low. Keep in mind what Paul says -- the last time we built inventory, it was not quite this magnitude but it was a big number, we jerked down the factories, created shortages in chipsets, affected our microprocessor business. We are going to try to make sure this time we do not overreact to a one-quarter inventory build, particularly since we think we have built all the right stuff. Adam Parker - Sanford C. Bernstein & Company, Inc.: So you are viewing this as just kind of a one-quarter build, because it seems like it is more than that. When you guys had guided on your analyst day, you had said the net value of our microprocessor inventory will be down in Q2, and now it looks like, because of this qualification, it is up. I am just trying to figure out, could you have -- maybe it's a follow-up on Masdea’s question, could you have structurally higher days of inventory for the next year?

You could, but that is certainly not a conscious decision we have made. In the analyst day, we did say microprocessor inventory would be flat to down, no question. Again, I did not count on Q2 qualifying Conroe and Woodcrest for $200 million, so that was not in my thinking envelope before. The other thing that happened was we shipped from previously reserved inventories, so some of the lower-end mix products, I did not expect to ship those things. When I shipped those and replaced them with higher value dual-core in inventory, again, it grows a little bit. So yes, I would say that the first 200 is good news surprise. The fact that my inventory mix is a little richer, I will not call it a good news surprise but I will call it an understood surprise. In essence, it is not a place I am concerned about today. Now, if it grows another $800 million next quarter, then you can… Adam Parker - Sanford C. Bernstein & Company, Inc.: Have you ever been concerned about it in the past? I mean…

Have I been? Yes, I was concerned two years ago. I was the one who convinced Craig and Paul to slow down our inventories. I take responsibility for that and I was wrong. Adam Parker - Sanford C. Bernstein & Company, Inc.: I guess what I'm saying is it looks so much worse now than it did two years ago, particularly because the demand outlook, if you look at GDP projections from economists, looks weaker now than it did at the same point two years ago. It seems hard on the surface, unless you are just explaining it largely as the new products, or all as the new products and the chipset ramp, the optics of it seem more difficult to understand for us dumb guys.

I beg to differ. I think two years ago, we were looking at a potentially weaker economy. We also were looking at an overbuild that we had put in place for Prescott, which we knew was going to be a weak-yielding part to begin with, and it yielded well. We can relive the history, if you want. Adam Parker - Sanford C. Bernstein & Company, Inc.: Actually, if you look in Q2 of '04 at what the GDP projections were for the biggest 20 countries for the second half of the year and you compare them to what they are right now for the second half of this year, it looks weaker at this point now than it did two years ago. That is what I am worrying about, is you are going to get capacity growth exceeding revenue growth and have a further inventory build, and then your margins are impeded for longer than you currently expect, but it sounds like you have comfort around that.

It is possible. What we have built in for the rest of the year is, like we said, it's a seasonal back-half off of a weak first half. If you tell me you think the worldwide economy is going into recession, I will have an inventory problem. Adam Parker - Sanford C. Bernstein & Company, Inc.: Right, well, we will all have problems. The other thing I wanted to ask about was just the wireless sale. Is there anything about that you embedded into your Q3 guides in terms of revenue?

We think the business closes in the fourth quarter, so we kind of have it for the third quarter. Adam Parker - Sanford C. Bernstein & Company, Inc.: I'm sorry, say that again? I could not hear you.

We think the sale closes in the fourth quarter. We have it in the fourth quarter. Adam Parker - Sanford C. Bernstein & Company, Inc.: Okay, so the sale of this business, can you talk now that it's kind out, can you kind of remind us what -- I know, Andy, you do these kind of ten-year MPVs on your businesses, and obviously the assumptions there dramatically change but in retrospect, what can we learn from what happened to your original expectations, given a couple of years ago this was looked at a real big contributor to your future growth. How did that really change?

Well, I think our view of the markets evolved. Remember, we always aimed that business at the Smartphone market and our ability to penetrate. We did quite well in the PDA portion of the Smartphones. We just didn't do that well, with a couple of notable exceptions, in the generic Smartphone, mostly because the generic Smartphone business did not take off as a percent of the market. The cell phone market is still very much low-end driven in terms of unit growth. As we begin to evaluate our opportunity to participate in broader segments of that market going forward, we just did not see numbers that gave us a reasonable return on incremental investment going forward, hence the decision. On the other hand, as we talked about in the analyst day, we are very, very excited about mobile PCs and low-power Intel architecture moving into these things and having computers get smaller with the communication capability. That is where we are putting our energy at this point in time. Adam Parker - Sanford C. Bernstein & Company, Inc.: Was it pure coincidence that the same $600 million was the amount you invested in WiMAX the very next week?

It's pure coincidence. Adam Parker - Sanford C. Bernstein & Company, Inc.: All right. On the surface, you can say well, we did a ten-year MPV here that suggests this is going to be much better than we thought…

Two ships passing in the night and they happen to be the same number when they passed. Adam Parker - Sanford C. Bernstein & Company, Inc.: All right. Thank you for your time.

Your next question comes from the line of Glen Yeung with Citigroup. Please proceed. Glen Yeung - Citigroup: Thanks. Andy, when I look at your gross margin forecast for the year, I think I am reading it right that it is 51% for the year. If that is right, it implies that fourth quarter gross margins will actually be below third quarter gross margins. I want to make sure I am understanding that correctly.

I am not making a fourth quarter gross margin forecast right now. What you have to recognize is the full year has three years of baggage behind it -- three quarters of actual behind it. So if you look at that fourth quarter, you are going to find you have a wide range of outcomes that still leads to a midpoint of 51%, plus or minus a few. So do not overanalyze it at this point. Do what you think makes sense. Glen Yeung - Citigroup: I.E., if revenues are up and utilization is up, in theory, you should be up?

I believe cost per unit should get better in the fourth quarter. I believe the new products will be a higher percentage of our revenue in the fourth quarter, so there are some reasonably positive things out there. Again, let me wait a quarter before I give you a fourth quarter margin estimate. Glen Yeung - Citigroup: Okay, fair enough. I wanted to ask also some questions on the pricing trends for the third quarter, recognizing that you guys are making some changes. Most notably in notebook, because there are not any sort of specific changes that you are making for notebook. If I am understanding that correctly, you actually cut prices on notebook in March, and now your refresh in the third quarter actually comes back to the old ladder. How should we think about notebook pricing in terms of across the board for the third quarter?

The difference in the degree of reset of the price stack in desktop and notebooks reflects the strength we have in the notebook business. We are the performance leader, the volume leader by far there. We have designed the new products to come in and sit on top of the other ones, and yet we are driving dual-core farther and farther down the stack, particularly as it becomes appealing into consumer notebooks. It really reflects the competitive strength of the product line more than anything else. Glen Yeung - Citigroup: That makes sense. If we think about just the desktop part of it, you guys seem to be putting the single core chips on fire sale for Q3, fine because that is going to end of life at some point. With the dual-core processors only, is there a strategy here for you guys in trying to move the mix? Are you trying to get us to buy more high-end in the dual-core markets starting in Q3?

Heck, yes. Wouldn't you? Glen Yeung - Citigroup: Yeah.

That is always Intel's strategy to try and sell the richest mix possible. The thing that we are really focused on right now though, given that we have dual-core running on a number of new microprocessors and older ones, is really the penetration of dual-core, and making that much more pervasive in desktops in all segments. Glen Yeung - Citigroup: I am sorry, did you say what you thought dual-core was going to be as a percentage of desktop sales in Q3?

No, but I showed you Q3 -- I showed you a line through year end at the analyst meeting, and if anything, it has gotten a little bit richer than that. Glen Yeung - Citigroup: Okay, that is good to know. All right. Thanks a lot.

Your next question comes from the line of Jim Covello with Goldman Sachs. Please proceed. Jim Covello - Goldman Sachs: Thanks very much. Question on the margins for Q3, and then the sort of implied margins for Q4. Is all of the weakness in margins in Q3 ASP related, or are there other factors going on?

No, I think we will have a richer mix of dual-core, the early dual-core products, which means the cost of units will go up. In fact, I would guess cost is a bigger element than average selling price. Jim Covello - Goldman Sachs: Then, relative to Q4, to Glen's point, there are scenarios that Q4 is down again. If it was cost in Q3, wouldn't that improve as we went through to Q4?

Yes, I believe my cost units should improve in Q4 versus Q3. I believe the number of units shipped out of the new architecture products will be greater in Q4 versus Q3. I think I have a few good things happening in the fourth quarter for us. Jim Covello - Goldman Sachs: Again then, and I do not want to push it too much, but the margins are theoretically down for both quarters. If there's positive things going on, why isn't that showing up in the margins then?

Again, if you do the math with three quarters of actual at our midpoint and look at what the range of Q4 could be to still round to unit 51, I think you will see a wide range of possible outcomes. Jim Covello - Goldman Sachs: Sure, I don’t want to get wrapped up in semantics, but it is not up in conjunction -- if revenue is going to up 10%, you would think margins would be better than flat to up slightly. Yes, there are scenarios mathematically that the margins are up, but there are scenarios down too. Just trying to get a handle on why the margins wouldn't be up consistent with the revenues.

Okay. I do not know how many times I can say I am not giving a Q4 forecast. There is a wide range of outcomes. I agree there's no 10-point up margins outcome. Jim Covello - Goldman Sachs: Okay. I guess we'll have to deal with that. On the inventory, what would it take for the company to do an inventory write-off? Under what scenario would you decide to write off some of the inventory?

I want to be clear -- we always have some inventory write-offs. If you are asking an extraordinary inventory write-off? Jim Covello - Goldman Sachs: Yes.

It would take most likely a big change in demand. If suddenly demand dropped 10% or 15% and we decided to push all the new products and stop selling any of the single-core stuff, then we would take an inventory write-off. Jim Covello - Goldman Sachs: To be clear, a change in demand relative to normal seasonality? Because clearly demand is just okay now.

Change in demand from our expectations. Jim Covello - Goldman Sachs: Okay.

Again, I know we are in very different spaces on this. I have the equivalent of one month worth of cost of sales in my inventory -- one quarter's worth of cost of sales in my inventory. I would typically value a whole lot more than one quarters worth of inventory looking out into the future. It would take a pretty dramatic change to cause us to have a big inventory write-off. Jim Covello - Goldman Sachs: Terrific, thank you.

Your next question comes from the line of Chris with JP Morgan Chase. Please proceed. Chris Danely - JP Morgan: Thanks, guys. Just a follow-up on some of the gross margin stuff. Andy, it sounds like inventory's up a little this quarter and then down a little in Q4. Perhaps you want to take inventory down in the first half of next year. It seems as though depreciation should increase -- to make a short story long, should we expect gross margins to bottom in the second half of this year or the first half of next year?

Again, I am not making long-term gross margin forecasts. What I really believe is we have shown a cost-per-unit of microprocessors chart at the analyst meeting and what it showed was the highest point on cost-per-unit for microprocessors, I expect to be the third quarter. Then I expect to see period by period by period by period improvements. Now, there are other products that we sell as well. We sell flash, we sell motherboards, we sell chipsets, so it is not as clean as looking at that one chart and saying I can forecast Intel's margins. But microprocessors are clearly the biggest part of our revenue. I actually see our cost units improving quarter by quarter by quarter through next year. Chris Danely - JP Morgan: Okay. Just to follow with that, Paul, you said you want to keep the fabs full. Have you guys lowered utilization rates at all, or do you plan on lowering utilization rates?

I'm sorry, factory utilization rates, is that what you are asking? Chris Danely - JP Morgan: Yes. Have they been lowered, or do you plan on lowering them?

No, the factories are still operating, for the most part, at full capacity. Chris Danely - JP Morgan: Okay. So let's just say sales are a little bit lower than expected this quarter, you…

Then we might have to -- then one of the options we have is to take down wafer starts a bit, but right now, none of our projections show that. Chris Danely - JP Morgan: I guess I am just wondering, given what has happened the last couple of quarters, why aren't you guys a little more conservative on your guidance and inventory?

You mean why aren’t we forecasting it to grow more? Chris Danely - JP Morgan: I mean why forecast normal revenue growth and inventory going up, given what happened the last couple of quarters?

Because the fourth quarter is bigger than the third quarter in terms of shipments. You want to -- we need to be able to support that growth. It's still a seasonal year, and then first quarter, things drop off. Chris Danely - JP Morgan: Yes, I understand that, it's just us analysts remember what happened in 2004, so that's why we are all pretty nervous. Okay, thanks guys.

Operator, two more questions, please.

Your next question comes from the line of Eric Gomberg with Thomas Weisel Partners. Please proceed. Eric Gomberg - Thomas Weisel Partners: I was wondering if you could give anymore color, given the early qualification of some of the processors, where you would expect to be, either by the end of 3Q or year end in terms of Woodcrest, Conroe and Merom as percent of processors? Also, do you have any concern regarding being able to ship enough Conroe, given how good the reviews have been? Will you be able to meet all the OEM demand?

I showed a number in April at the analyst meeting on Woodcrest that said that we would, in terms of the percent of our Xeon products that were Woodcrest-based, it would be 75% by Q4. I think it was 50% in Q3, or whatever the number was. Those numbers have only gotten a little bit better since then. They have not gotten worse. Obviously the denominator is still at risk, but we're ramping Woodcrest as fast as possible, and our intent is to convert the product line. Similarly on Conroe and Merom. Right now, we have rolled up demand from our customers and from the channel and we believe we can satisfy all demand for both those products. Eric Gomberg - Thomas Weisel Partners: If I could just ask a follow-up, as you go through the strategic review, this is something you have been asked probably many times over the last few years, can you talk a little bit about the NOR flash business and why that remains a strategic and compelling business for Intel to be in, at $250 million operating loss in the first half?

Our focus on that business is to not have that kind of operating loss going forward, so we are going through a similar rigorous process inside of the NOR business. You have already seen one action that came out of that, about six weeks ago where we rolled, for the first time ever we broke out the manufacturing and technology development groups for flash from the rest of the company and put them under the flash group. We have already seen some pretty interesting ideas, the beginnings of some efficiencies rolling out of that as they learn how to be much more competitive with their peer group companies in the flash marketplace. My focus inside the company is to make sure that business gets to be a profitable one as quickly as possible.

I just want to clarify something. The losses you see in that business are not just the NOR flash. We are starting up the NAND flash business. Recognize in that business you have factories starting up pre-volume production, so you have pretty high start-up costs, you have pretty high R&D costs. A big portion of the increase in loss of the net business is that start-up, which we hope to turn profitable sometime in the near future. Eric Gomberg - Thomas Weisel Partners: Could you give any color in terms of what you would expect NAND contribution to be in the back half of the year?

In terms of revenue, no. It is still relatively small at this point, starting to finally ramp in the back half of this year as it is being set up in the front half. Hopefully next year will be meaningful enough we can talk about it. Eric Gomberg - Thomas Weisel Partners: Thank you.

Last question, please.

Your last question comes from the line of Hans Mosesmann with Moors & Cabot, Inc. Please proceed. Hans Mosesmann - Moors & Cabot, Inc.: Thank you. Paul, you mentioned that the rolled up demand from customers suggests that you could satisfy all of this demand. Can you satisfy it at launch? I just want to get a sense of how…

Yes. In fact, at launch you will even see Conroe stocked in the channel. Hans Mosesmann - Moors & Cabot, Inc.: Okay, so both OEMs and channel will have product then?

Yes, sir, and we have motherboards out there staged and so forth. This one is being done as broadly as we know how to do it. Hans Mosesmann - Moors & Cabot, Inc.: Okay, and then a follow-up. In terms of previous launches, how quick of a ramp pervasiveness did you see with this…

It is faster than the NetBurst. Hans Mosesmann - Moors & Cabot, Inc.: Faster than NetBurst?

Much faster. Hans Mosesmann - Moors & Cabot, Inc.: Thank you.

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