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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended April 2, 2005.

OR

For the transition period from                              to                             

Commission file number 0-06217

INTEL CORPORATION

(Exact name of registrant as specified in its charter)

(408) 765-8080

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x  No  ¨

Shares outstanding of the Registrant’s common stock:

PART I – FINANCIAL INFORMATION

INTEL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)

See accompanying notes.

2

INTEL CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)

See accompanying notes.

3

INTEL CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes.

4

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited

Note 1:  Basis of Presentation

Intel Corporation has a 52- or 53-week fiscal year that ends on the last Saturday in December. Fiscal year 2005 is a 53-week fiscal year, and the first quarter of 2005 was a 14-week quarter. Fiscal year 2004 was a 52-week fiscal year, and the first quarter of 2004 was a 13-week quarter.

The accompanying interim consolidated condensed financial statements of Intel Corporation have been prepared in conformity with United States (U.S.) generally accepted accounting principles, consistent in all material respects with those applied in the company’s Annual Report on Form 10-K for the year ended December 25, 2004. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most difficult and subjective judgments include: the assessment of recoverability of property, plant and equipment; the valuation of non-marketable equity securities and inventory; and the recognition and measurement of income tax assets and liabilities. The actual results experienced by the company may differ from management’s estimates.

The interim financial information is unaudited, but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. The interim financial statements should be read in connection with the financial statements in the company’s Annual Report on Form 10-K for the year ended December 25, 2004. Certain amounts reported in previous periods have been reclassified to conform to the current presentation.

Note 2:  Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123(R) requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, and allowed under the original provisions of SFAS No. 123 “Accounting for Stock-Based Compensation.” SFAS No. 123(R) requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods. In April 2005, the Securities and Exchange Commission (SEC) delayed the effective date of SFAS No. 123(R), which is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005. If the company had applied the provisions of SFAS No. 123(R) to the financial statements for the quarter ending April 2, 2005, net income would have been reduced by approximately $333 million. SFAS No. 123(R) allows for either prospective recognition of compensation expense or retrospective recognition. The company currently intends to apply the prospective recognition method and implement the provisions of SFAS No. 123(R) beginning in fiscal 2006.

Note 3:  Employee Equity Incentive Plans

Intel currently accounts for its equity incentive plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The exercise price of options is equal to the market price of Intel common stock (defined as the average of the high and low trading prices reported by The NASDAQ Stock Market*) on the date of grant. Accordingly, no stock-based compensation, other than acquisition-related stock-based compensation, is recognized in net income.

The following table illustrates the effect on net income and earnings per share as if the company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the company’s stock option plans and rights to acquire stock granted under the company’s Stock Participation Plan. For purposes of this pro forma disclosure, the value of the options and rights to acquire stock granted under the company’s Stock Participation Plan are estimated using a Black-Scholes option pricing model and amortized ratably to expense over the vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.

5

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited (Continued)

SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. The company’s employee stock options have characteristics significantly different from those of traded options. In addition, option pricing models require the input of subjective assumptions, including the option’s expected life and the price volatility of the underlying stock, and changes in the subjective input assumptions can materially affect the fair value estimate of employee stock options.

The weighted average estimated value of employee stock options granted during the first quarter of 2005 was $6.51 ($15.00 for the first quarter of 2004). The value of options granted was estimated at the date of grant using the following weighted average assumptions:

In light of recent regulatory guidance, the company reevaluated the assumptions used to estimate the value of employee stock options granted in the first quarter of 2005. Management determined that implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. Additionally, in the first quarter of 2005, the company began using the simplified calculation of expected life, described in the SEC’s Staff Accounting Bulletin 107, due to changes in the vesting terms and contractual life of current option grants compared to the company’s historical grants. Management believes this calculation provides a reasonable estimate of expected life for the company’s employee stock options. The expected life for options granted in the first quarter of 2005 and the first quarter of 2004 included the impact of options with extended vesting periods granted to key officers and other senior level employees.

6

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited (Continued)

The estimated value of rights granted under the Stock Participation Plan during the first quarter of 2005 was $5.72 ($7.29 during the first quarter of 2004). The value of rights granted during the first quarter of 2005 and 2004 was estimated at the date of grant using the following weighted average assumptions:

Additional information with respect to stock option activity is as follows:

Under the Stock Participation Plan, 57.1 million shares remained available for issuance at April 2, 2005 out of 944 million shares authorized. Employees purchased 10.4 million shares for $211 million in the first quarter of 2005 (9.5 million shares for $201 million in the first quarter of 2004). The next scheduled purchase under the Stock Participation Plan is in the third quarter of 2005.

7

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited (Continued)

Note 4:  Earnings Per Share

The shares used in the computation of the company’s basic and diluted earnings per common share are as follows:

Weighted average common shares outstanding, assuming dilution, includes the incremental effect of shares that would be issued upon the assumed exercise of stock options. For the first quarter of 2005, approximately 481 million of the company’s stock options were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive (197 million for the first quarter of 2004). These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.

Note 5:  Common Stock Repurchase Program

During the first quarter of 2005, the company repurchased 107.9 million shares of common stock at a cost of $2.5 billion (49.2 million shares for $1.5 billion during the first quarter of 2004). Since the program began in 1990, the company has repurchased and retired approximately 2.3 billion shares at a cost of approximately $44 billion. As of April 2, 2005, approximately 506 million shares remained available for repurchase under the existing repurchase authorization.

Note 6:  Trading Assets

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

Note 7:  Inventories

Inventories at the end of each period were as follows:

Note 8:  Gains on Equity Securities, Net

Net gains on investments in equity securities and certain equity derivatives were $4 million for the first quarter of 2005 (a gain of $19 million for the first quarter of 2004). Included in these amounts were impairments, primarily of non-marketable equity securities, of approximately $15 million for the first quarter of 2005 ($11 million for the first quarter of 2004).

8

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited (Continued)

Note 9:  Interest and Other, Net

Interest and other, net included:

Note 10:  Goodwill

During the first quarter of 2005, the company reorganized its business groups to bring all major product groups in line with the company’s strategy to design and deliver complete technology platforms. Under the new business unit structure, the Digital Enterprise Group is a single reporting unit. The Mobility Group is made up of two reporting units: the flash memory reporting unit and the mobility reporting unit. All of the Mobility Group operating segment goodwill is included in the mobility reporting unit. See “Note 16:  Operating Segment Information.”

Subsequent to the reorganization of the company’s business groups, the carrying value of goodwill was allocated to the new reporting units based on the estimated fair value of each business group within its original reporting unit relative to the estimated fair value of that reporting unit. No goodwill was impaired during the first quarter of 2005 or for the first quarter of 2004.

Goodwill by operating segment after the reorganization was as follows:

Note 11:  Identified Intangible Assets

Identified intangible assets as of April 2, 2005 consisted of the following:

9

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited (Continued)

Identified intangible assets as of December 25, 2004 consisted of the following:

Intellectual property assets primarily represent acquired technology licenses, including licenses with Intergraph Corporation. In March 2004, Intel and Intergraph entered into a settlement agreement, pursuant to which Intel agreed to pay Intergraph a total of $225 million and Intergraph agreed to dismiss certain pending litigation, granted license rights in favor of Intel and Intel’s customers, and covenanted not to sue any Intel customer for products that include an Intel microprocessor, Intel chipset and Intel motherboard. As a result of the 2004 settlement agreement, Intel recorded a $162 million charge to cost of sales in the first quarter of 2004. The remaining balance of $63 million represented the value of intellectual property assets acquired as part of the settlement. This balance is included in the table above and is being amortized over the assets’ remaining useful lives. Other acquisition-related intangibles include items such as workforce-in-place and customer lists. Identified intangible assets are classified within other assets on the balance sheet.

All of the company’s identified intangible assets are subject to amortization. Amortization of intellectual property assets was $29 million for the first quarter of 2005 ($35 million for the first quarter of 2004). The amortization of an intellectual property asset is generally included in either cost of sales or research and development. Amortization of acquisition-related intangibles and costs was $38 million for the first quarter of 2005 ($58 million for the first quarter of 2004).

Based on identified intangible assets recorded at April 2, 2005, and assuming no subsequent impairment of the underlying assets, the amortization expense for each period, excluding acquisition-related stock compensation and other acquisition-related costs, is expected to be as follows:

Note 12:  Borrowings

The company’s borrowings primarily consist of Euro borrowings, which were made in connection with the financing of manufacturing facilities and equipment in Ireland. Intel has invested the proceeds in Euro-denominated loan participation notes of similar maturity to hedge currency and interest rate exposures. During the first quarter of 2005, the company retired approximately $230 million of the Euro borrowings prior to their maturity dates through the simultaneous settlement of an equivalent amount of investments in loan participation notes.

10

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited (Continued)

Note 13:  Comprehensive Income

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

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

Note 14:  Provision for Taxes

U.S. income taxes were not provided for on a cumulative total of approximately $7.9 billion of undistributed earnings for certain non-U.S. subsidiaries as of the most recent fiscal year end. The company currently intends to reinvest these earnings in operations outside the U.S. The American Jobs Creation Act of 2004 (the Jobs Act) creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends-received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations, and currently the company is uncertain as to how to interpret numerous provisions in the Jobs Act. The company is not yet in a position to decide whether, and to what extent, foreign earnings that have not yet been remitted to the U.S. might be repatriated. Based on the analysis to date, however, it is reasonably possible that as much as $6.0 billion might be repatriated, with a respective tax liability of up to $475 million. The company expects to be in a position to finalize its analysis by October 2005.

Note 15:  Contingencies

Tax Matters

In August 2003, in connection with the U.S. Internal Revenue Service (IRS) regular examination of Intel’s tax returns for the years 1999 and 2000, the IRS proposed certain adjustments to the amounts reflected by Intel on these returns as a tax benefit for its export sales. In January 2005, the IRS issued formal assessments for these adjustments. The company does not agree with these adjustments and has appealed. If the IRS prevails in its position, Intel’s federal income tax due for these years would increase by approximately $600 million, plus interest. The IRS may make similar claims for years subsequent to 2000 in future audits.

Although the final resolution of the adjustments is uncertain, based on currently available information, management believes that the ultimate outcome will not have a material adverse effect on the company’s financial position, cash flows or overall trends in results of operations. There is the possibility of a material adverse impact on the results of operations of the period in which the matter is ultimately resolved, if it is resolved unfavorably, or in the period in which an unfavorable outcome becomes probable and reasonably estimable.

11

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited (Continued)

Legal Proceedings

In March 2004, MicroUnity, Inc. filed suit against Intel and Dell Inc. in the Eastern District of Texas. MicroUnity claims that Intel^® Pentium^® III, Pentium^® 4, Pentium^® M and Itanium^® 2 microprocessors infringe seven MicroUnity patents, and that certain Intel chipsets infringe one MicroUnity patent. MicroUnity also alleges that Dell products that contain these Intel products infringe the same patents. At Dell’s request, Intel agreed to indemnify Dell with respect to MicroUnity’s claims against Dell, subject to the terms of a prior agreement between Intel and Dell. MicroUnity seeks an injunction, unspecified damages, and attorneys’ fees against both Intel and Dell. Intel disputes MicroUnity’s claims and intends to defend the lawsuit vigorously.

In June 2002, various plaintiffs filed a lawsuit in the Third Judicial Circuit Court, Madison County, Illinois, against Intel, Gateway, Inc., Hewlett-Packard Company, and HPDirect, Inc., alleging that the defendants’ advertisements and statements misled the public by suppressing and concealing the alleged material fact that systems containing Intel^® Pentium 4^® microprocessors are less powerful and slower than systems containing Intel^® Pentium^® III microprocessors and a competitor’s microprocessors. In July 2004, the court certified against Intel an Illinois-only class of certain end-use purchasers of certain Pentium 4 microprocessors or computers containing such microprocessors. The Court denied plaintiffs’ motion for reconsideration of this ruling. In January 2005, the Court granted a motion filed jointly by the plaintiffs and Intel that stayed the proceedings in the trial court pending discretionary appellate review of the Court’s class certification order. Plaintiffs and Intel thereafter filed a joint application for discretionary appeal of the trial court’s class certification ruling. The plaintiffs seek unspecified damages, and attorneys’ fees and costs. Intel disputes the plaintiffs’ claims and intends to defend the lawsuit vigorously.

The company is currently a party to various claims and legal proceedings, including those noted above. If management believes that a loss arising from these matters is probable and can reasonably be estimated, the company records the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the company’s financial position or overall trends in results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction prohibiting Intel from selling one or more products. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.

Note 16:  Operating Segment Information

During the first quarter of 2005, the company reorganized its business groups to bring all major product groups in line with the company’s strategy to design and deliver complete technology platforms. These new business units include the Digital Enterprise Group, the Mobility Group, the Digital Home Group, the Digital Health Group and the Channel Platforms Group. The Digital Enterprise Group and the Mobility Group are reportable operating segments. The Digital Home Group, Digital Health Group and Channel Platforms Group operating segments do not meet the quantitative thresholds for reportable segments as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Therefore, these operating segments are included within the “all other” category below. All prior period amounts have been restated to reflect the new organizational structure. As a result of this platform reorganization, further organizational changes may occur through the remainder of 2005.

The company’s Executive Office currently consists of Chief Executive Officer (CEO) Craig R. Barrett and President and Chief Operating Officer (COO) Paul S. Otellini. The CEO and COO have joint responsibility as the Chief Operating Decision Maker (CODM), as defined by SFAS No. 131. The CODM allocates resources to and assesses the performance of each operating segment using information about their revenue and operating profit before interest and taxes. In 2004, the company announced that the Board of Directors elected Paul S. Otellini as President and CEO, and Craig R. Barrett as Chairman of the Board, effective as of completion of the Annual Stockholders’ Meeting scheduled for May 18, 2005.

12

INTEL CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – Unaudited (Continued)

The Digital Enterprise Group operating segment’s products include microprocessors and related chipsets and motherboards designed for the desktop and enterprise computing market segments, communications infrastructure components such as network processors and embedded microprocessors, wired connectivity devices and products for network and server storage. The Mobility Group operating segment’s products include microprocessors and related chipsets designed for the mobile computing market segment, flash memory, wireless connectivity products, application processors used in cellular handsets and handheld computing devices, and cellular baseband chipsets. Revenue for the “all other” category primarily consists of microprocessors and related chipsets used in consumer electronics devices. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported.

In addition to these operating segments, the company has sales and marketing, manufacturing, finance and administration groups. Expenses of these groups are allocated to the operating segments and are included in the operating results reported below.

In addition to the operating results for the Digital Home Group, Digital Health Group and Channel Platforms Group operating segments, the “all other” category also includes acquisition-related costs, including amortization and any impairments of acquisition-related intangibles and goodwill. Additionally, “all other” includes the results of operations of seed businesses that support the company’s initiatives. Finally, “all other” includes certain corporate-level operating expenses, including a portion of profit-dependent bonus and other expenses not allocated to the operating segments.

Segment information is summarized as follows:

13

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

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with Intel’s overall strategy and the strategy for our major business units, to give the reader an overview of the goals of our business and the direction in which our business and products are moving. The strategy section is followed by a discussion of the Critical Accounting Estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then discuss our Results of Operations, beginning with an “Overview.” We then provide an analysis of changes in our balance sheet and cash flows, in the section entitled “Financial Condition.” Finally, we conclude this MD&A with our “Business Outlook” section, discussing our outlook for 2005 and the second quarter of 2005.

The various sections of this MD&A contain a number of forward-looking statements, all of which 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. 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 May 6, 2005.

Strategy

Our goal is to be the preeminent provider of silicon chips and platform solutions to 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 and our financial resources, as well as our global presence and brand recognition. Our primary focus is on developing advanced integrated silicon technology solutions. We also provide key components for networking and communications infrastructures used to connect technology users.

We believe that users of computing and communications devices want improved performance, which includes faster processing performance and other improved capabilities such as multithreading or multitasking, lower system power consumption, seamless connectivity, improved security, manageability, reliability, ease of use or interoperability among devices. It is our goal to incorporate features addressing these capabilities in our various products to meet user demands. To deliver microprocessors with improved performance and platforms capable of meeting changing customer requirements, we have focused our efforts on providing dual- and multi-core microprocessors. Dual- and multi-core microprocessors contain two or more processor cores, rather than just one microprocessor core.

We believe that the end-users of computing and communications systems and devices will benefit from products based on platform solutions. We define a platform as a collection of technologies that better meet the requirements of end-users. By combining technology ingredients to work together in a platform, we believe we create a better end-user solution than if the ingredients were used separately. The success of our strategies to offer platform solutions is dependent on our ability to select and incorporate ingredients that customers value, and to market the platforms effectively. In developing our platforms, we may include ingredients sold by other companies.

We make equity investments in companies around the world to further our strategic objectives and support our key business initiatives through our Intel Capital program. The Intel Capital program generally focuses 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. The investments may support, among other things, Intel product initiatives, emerging trends in the technology industry or worldwide Internet deployment. We invest in companies that develop software, hardware or services supporting our technologies. Our current investment focus areas include enabling mobile wireless devices, helping to advance the digital home, enhancing the digital enterprise, advancing high-performance communications infrastructures and developing the next generation of silicon production technologies. Our focus areas tend to develop and change over time due to rapid advancements in technology.

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

We plan to continue to cultivate new businesses and work with the computing, communications and consumer electronics industries through standards bodies, trade associations, original equipment manufacturers, original design manufacturers, and independent software and operating system vendors, to align the industry to offer products that take advantage of the latest market trends and usage models. These efforts include helping to expand the infrastructure for wireless connectivity, including wireless broadband. We also provide development tools and support to help software developers create software applications and operating systems that take advantage of our platform solutions.

All of our businesses operate in highly innovative environments characterized by continuing and rapid introduction of new products that offer improved performance at lower prices. Worldwide, our competitors range in size from large established multinational companies with multiple product lines, to smaller companies and new entrants to the marketplace that compete in specialized market segments. With the trend toward convergence in computing and communications products, product offerings will likely cross over multiple categories, offering us new opportunities, but also resulting in more businesses that compete with us. Competition tends to increase pricing pressure on our products, which may mean that we must offer our products at lower prices than we had anticipated, resulting in lower profits. In market segments where our competitors have established products and brand recognition, it may be inherently difficult for us to compete against them. When we believe it is appropriate, we will take various steps, including introducing new products and discontinuing older products, reducing prices, and offering rebates and other incentives in order to increase acceptance of our latest products.

During the first quarter of 2005, we reorganized our business units to bring all major product groups in line with our strategy to design and deliver complete technology platforms. These new business units include the Digital Enterprise Group, the Mobility Group, the Digital Home Group, the Digital Health Group and the Channel Platforms Group. The Digital Home Group, Digital Health Group and Channel Platforms Group operating segments are included within the “all other” category (see “Note 16:  Operating Segment Information” in the Notes to Consolidated Condensed Financial Statements). The discussion below and the results of operations for our business units in this MD&A are presented under the new organizational structure, and all prior period amounts have been restated to conform to the new presentation.

Digital Enterprise Group

For the Digital Enterprise Group business unit, our strategy is to design and deliver computing and communications platforms for end-to-end solutions for businesses and service providers. Our products are incorporated into desktop computers, the infrastructure comprising the Internet, and enterprise computing servers. Specifically for businesses, our platforms seek to enable increased employee productivity and reduce total cost of ownership. The Digital Enterprise Group develops these platforms based on our processors, chipsets, board-level products, wired connectivity products, and products for network and server storage. The processors offered by the Digital Enterprise Group are designed for various market segments, and include microprocessors that are optimized for use in the desktop and server computing market segments, and products designed for the communications infrastructure, including network processors and embedded microprocessors. Although the Digital Enterprise Group’s strategic focus is on business platform solutions, the group’s products also include microprocessors marketed to the consumer desktop computing market segment. Future consumer desktop microprocessors that are designed specifically for the digital home will be offered by the Digital Home Group business unit.

Our strategy for the desktop computing market segment is to introduce platforms with improved performance, tailored to the needs of different market segments using a tiered branding approach. For desktop performance platforms, we offer the Intel^® Pentium^® 4 processor supporting HT Technology. For desktop value platforms, we offer the Intel^® Celeron^® processor, designed to meet the core computing needs and affordability requirements of value-conscious PC users. We offer chipsets designed and optimized for use in desktop platforms. In April 2005, we introduced the Intel^® 955X Express Chipset family. Also in April 2005, we released our first dual-core processor, the Intel^® Pentium^® Processor Extreme Edition 840 for high-end desktop and workstation platforms. We expect to release our first mainstream dual-core processor for the desktop market segment, the Pentium D^® processor, in the second quarter.

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

Our strategy for the enterprise computing market segment is to provide platforms that have competitive price for performance and that increase end-user value in the areas of manageability and security for entry-level to high-end servers and workstations. Our Intel^® Xeon^™ processor family of products supports a range of entry-level to high-end technical and commercial computing applications. These products have been enhanced with Intel^® Extended Memory 64 Technology, our 64-bit extension technology. Our Intel^® Itanium^® processor family, which is based on Intel’s 64-bit architecture and includes the Intel^® Itanium^® 2 processor, generally supports an even higher level of computing performance for data processing, the handling of high transaction volumes and other compute-intensive applications for enterprise-class servers, as well as supercomputing solutions. We also offer chipsets designed and optimized for use in both server and workstation platforms.

For the communications infrastructure, we deliver products that are basic building blocks for modular communications platforms. These products include advanced programmable network processors, based on Intel^® XScale technology, used to manage and direct data moving across the Internet and corporate networks. We also offer embedded microprocessors that can be used for modular communications platform applications as well as for industrial equipment and point-of-sale systems.

Mobility Group

For the Mobility Group business unit, our strategy is to design and deliver platforms for notebook PCs and handheld computing and communications devices that are designed to make the growing number of mobile devices work together more easily. In support of this strategy, the Mobility Group develops platform solutions based on our mobile computing microprocessors, chipsets, flash memory products, wireless connectivity products, application processors and cellular baseband chipsets.

Our strategy for notebook PCs is to deliver products optimized for the four mobility vectors: performance, battery life, form factor (the physical size and shape of a device) and wireless connectivity. For performance mobility users, we offer Intel^® Centrino^™ mobile technology, which consists of an Intel^® Pentium^® M processor, a chipset from the Mobile Intel^® 915 Express chipset family, and a wireless connectivity solution that is based on the 802.11 industry standard. For mobile value platforms, we offer the Intel^® Celeron^® M processor and the Mobile Intel^® Celeron^® processor. In April 2005, we introduced the Intel^® PRO/Wireless 5116, our first wireless connectivity product based on the 802.16 industry standard (or WiMAX). These products enable the creation of high-speed, fixed wireless broadband networks for broadband connectivity.

Our strategy for our flash memory products is to offer a broad range of memory densities, leading-edge packaging technology and high-performance functionality. In support of this strategy, we offer NOR flash memory products such as Intel StrataFlash^® Wireless Memory, which uses two-bit-per-cell technology to provide a single-chip solution for fast code execution with higher storage densities optimized for advanced mobile phone designs. We offer a variety of stacked memory products, including products based on NOR flash, as well as NOR plus Static Random Access Memory (SRAM) and/or NAND flash as requested by our customers. Stacking of memory products refers to packaging several memory chips together. In addition to product offerings for cellular customers, we offer flash memory products that meet the needs of other market segments, such as the embedded market segment. The embedded market segment includes flash memory products found in various applications, including set-top boxes, networking products, and other devices such as DVD players and DSL cable modems.

Our application processors utilize Intel XScale^® technology, which provides the processing and multimedia graphics capability for data-enabled mobile phones and PDAs. We also offer these application processors in stacked packaging solutions (stacking an application processor with memory).

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

Digital Home Group

For the Digital Home Group business unit, our strategy is to design and deliver computing and communications oriented platforms that meet the demands of consumers as digital content becomes increasingly used with a variety of connected digital devices. Our initial focus will be on living room entertainment applications and consumer electronics devices. We offer microprocessors and chipsets for embedded consumer electronics designs, such as digital televisions, video recorders and set-top boxes. In addition, we are developing products and platforms which are optimized for consumer electronics devices and digital home PCs to enhance the end-user experience.

Digital Health Group

For the Digital Health Group business unit, our strategy is to design and deliver products and explore global business opportunities for our products in healthcare research, diagnostics and productivity, as well as personal healthcare. In support of this strategy, the Digital Health Group is focusing on the digital hospital, consumer/home health and bio-medical products.

Channel Platforms Group

For the Channel Platforms Group business unit, our strategy is to expand on Intel’s success in global markets. In support of this effort, the Channel Platforms Group makes our products and platforms available to a worldwide network of third-party distributors, dealers, system integrators and solution providers. The Channel Platforms Group will also focus on developing unique products and solutions, including platform solutions, designed to meet the needs of users in specific geographies.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading “Results of Operations” following this section of our MD&A. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include the valuation of non-marketable equity securities, which impacts net gains (losses) on equity securities when we record impairments; valuation of inventory, which impacts gross margin; assessment of recoverability of long-lived assets, which primarily impacts gross margin when we impair manufacturing assets or accelerate their depreciation; and recognition and measurement of current and deferred income tax assets and liabilities, which impact our tax provision. 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 for revenue recognition, including the deferral of revenue on sales to distributors; however, these policies do not require us to make estimates or judgments that are difficult or subjective.

Non-Marketable Equity Securities.  Under our Intel Capital program, we typically invest in non-marketable equity securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support an Intel product or initiative. At April 2, 2005, the carrying value of our portfolio of strategic investments in non-marketable equity securities, excluding equity derivatives, totaled $508 million ($507 million at December 25, 2004).

Investments in non-marketable equity securities are inherently risky and a number of these companies are likely to fail. Their success (or lack thereof) is dependent on product development, market acceptance, operational efficiency and other key business success factors. In addition, depending on their future prospects, they may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment terms than in previous financings, and the investments would likely become impaired. In the current equity market environment, while the availability of additional funding from venture capital sources has improved, the companies’ ability to take advantage of liquidity events, such as initial public offerings, mergers and private sales, remains uncertain.

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

We review all of our investments quarterly for indicators of impairment; however, for non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators that we use to identify those events or circumstances include (a) the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects, (b) the technological feasibility of the investee’s products and technologies, (c) the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes, (d) 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 (e) the investee’s receipt of additional funding at a lower valuation.

Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case we write the investment down to its impaired value. When an investee is not considered viable from a financial or technological point of view, we write down the entire investment since we consider the estimated fair market value to be nominal. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new funding does not appear imminent, we presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise. Impairments of investments in our portfolio, primarily impairments of non-marketable equity securities, were approximately $15 million in the first quarter of 2005 (approximately $11 million in the first quarter of 2004).

Inventory.  The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally six months or less. The estimates of future demand that we use in the valuation of inventory are the basis for our published revenue forecasts, which are also consistent with our short-term manufacturing plans. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to write down additional inventory, which would have a negative impact on our gross margin.

Long-Lived Assets.  We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying amount of the asset grouping to our estimate of the related total future net cash flows. If an asset grouping’s carrying value is not recoverable through the related cash flows, the asset grouping is considered to be impaired. The impairment is measured by the difference between the asset grouping’s carrying amount and its fair value, based on the best information available, including market prices or discounted cash flow analysis.

Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows. Due to our asset usage model and the interchangeable nature of our semiconductor manufacturing capacity, we must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In addition, as we make manufacturing process conversions and other factory planning decisions, we must make subjective judgments regarding the remaining useful lives of assets, primarily process-specific semiconductor manufacturing tools and building improvements. When we determine that the useful lives of assets are shorter than we had originally estimated, and there are sufficient cash flows to support the carrying value of the assets, we accelerate the rate of depreciation charges in order to fully depreciate the assets over their new shorter useful lives.

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

Income Taxes.  We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions such as the tax benefit for export sales and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that a substantial majority of the deferred tax assets recorded on our balance sheet will ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not likely.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States (U.S.) and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax payments are probable. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

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

Results of Operations – First Quarter of 2005 Compared to First Quarter of 2004

Overview

Our first quarter 2005 results provided a solid start to the year. We had double-digit growth in revenue, operating income and net income compared to a year ago. We saw good revenue growth in microprocessors designed for mobile computers, in flash memory and in chipsets. The first quarter of 2005 included 14 weeks in contrast to our typical 13 weeks. The additional week likely contributed to an increase in both revenue and expenses, although it is impossible to estimate with precision by how much. During the quarter we announced a reorganization to align our business groups across our major platform initiatives. The discussion of our financial results below is consistent with these new business groups. From a product perspective, we continue to be largely dependent on the sales of our microprocessors, and this quarter these products accounted for approximately 73% of our consolidated net revenue. Our cash position remains strong, and we were able to repurchase $2.5 billion of our stock and pay approximately $500 million in dividends.

Although it is too early to predict the outcome for the remainder of the year, and it is always appropriate to be cautious about the economic outlook, we believe we can continue to grow both annual revenue and gross margin dollars, with higher unit sales of microprocessors. We believe the continued growth in our business is dependent on two significant trends: the continued growth in the notebook market segment and the continued growth in emerging economies. Our business model not only addresses the expanding array of uses and users of computing and communications products, but also these significant industry trends. As we start the second quarter 2005, we believe we are positioned well, with our microprocessor and chipset factories running at near optimal levels, with progress toward increasing our inventory levels to meet customer demands, and with our 65 nanometer process technology successfully meeting internal milestones. Further, with the introduction of our first dual-core desktop processor, we are continuing to deliver leading edge performance products to meet user demands.

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

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

Our net revenue for Q1 2005 was $9.4 billion, an increase of 17% compared to Q1 2004. This increase was primarily due to revenue growth within the Mobility Group. The first quarter of 2005 included 14 weeks in contrast to our typical 13 weeks.

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

Our Asia-Pacific region’s revenue comprised the largest portion of our total revenue in Q1 2005 and increased 34% compared to Q1 2004, reflecting the movement of more of the production of our customers’ PC supply chain to Asia. This movement in the supply chain has negatively affected the Americas region, which decreased 9% compared to Q1 2004. Japan revenue increased 34% and Europe increased 9% in Q1 2005 compared to Q1 2004. We continued to see solid growth in emerging markets within the Asia-Pacific region, the Americas region and Europe.

Our overall gross margin dollars were $5.6 billion in Q1 2005, an increase of 15% compared to $4.9 billion in Q1 2004. Our overall gross margin percentage decreased to 59.3% in Q1 2005, down from 60.2% in Q1 2004. The gross margin percentage for the Digital Enterprise Group was lower, and the gross margin percentage for the Mobility Group was higher, in Q1 2005 compared to Q1 2004. See “Business Outlook” for a discussion of gross margin expectations.

Digital Enterprise Group

The revenue and operating income for the Digital Enterprise Group operating segment for the first quarter of 2005 and 2004 were as follows:

Net revenue for the Digital Enterprise operating segment increased $130 million, or 2%, in Q1 2005 compared to Q1 2004. The increase in revenue was primarily due to higher revenue from chipsets and motherboards. Unit sales and average selling prices of microprocessors were approximately flat. Microprocessors within the Digital Enterprise Group include microprocessors designed for the desktop and enterprise computing market segments, previously included within the former Intel Architecture business operating segment, as well as embedded microprocessors. Revenue from network processors, which are based on our Intel XScale technology, is included in other revenue above.

Operating income decreased $88 million, or 4%, in Q1 2005 compared to Q1 2004. The decrease was primarily due to approximately $180 million of higher start-up costs in Q1 2005 related to our 65-nanometer process technology. Q1 2004 results included a charge related to a settlement agreement with Intergraph Corporation.

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

Mobility Group

The revenue and operating income for the Mobility Group operating segment for the first quarter of 2005 and 2004 were as follows:

Net revenue for the Mobility Group operating segment increased by $1.2 billion, or 65%, in Q1 2005 compared to Q1 2004. This increase was primarily due to significantly higher revenue from sales of microprocessors, which increased $755 million, or 65%, in Q1 2005 compared to Q1 2004, reflecting the continued growth in the notebook market segment. The higher revenue from sales of microprocessors was due to significantly higher unit sales, partially offset by lower average selling prices. Revenue from sales of chipsets also increased significantly in Q1 2005 compared to Q1 2004. Revenue from sales of wireless connectivity products for our Intel Centrino mobile technology and revenue from sales of application processors were also higher. Revenue from applications processors, which are based on our Intel XScale technology, is included in other revenue above. Unit sales of flash memory products were higher, with flash memory revenue increasing 39% in Q1 2005 compared to Q1 2004.

Operating income increased to $1.1 billion in Q1 2005, from $405 million in Q1 2004. The significant increase in operating income was primarily due to higher revenue from sales of microprocessors. In addition, operating expenses for the Mobility Group did not increase as fast as revenue, which also contributed to the improvement in operating income. The increase in operating income was partially offset by higher start-up costs in Q1 2005, primarily related to our 65-nanometer process technology.

Operating Expenses

Operating expenses for the first quarter of 2005 and 2004 were as follows:

Research and development spending increased $71 million, or 6%, in Q1 2005 compared to Q1 2004. This increase was primarily due to the extra week in Q1 2005, along with higher headcount and higher profit dependent related expenses, partially offset by lower expenses related to development for our next-generation 65-nanometer manufacturing process technology. Marketing, general and administrative expenses were up $121 million, or 11%, compared to Q1 2004, also primarily due to the extra week in Q1 2005, along with higher headcount and higher profit dependent related expenses. Research and development along with marketing, general and administrative expenses were 27% of net revenue in Q1 2005 and 29% of net revenue in Q1 2004.

Amortization of acquisition-related intangibles and costs was $38 million in Q1 2005 compared to $58 million in Q1 2004, as a portion of the intangibles related to prior acquisitions became fully amortized.

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

Gains on Equity Securities, Interest and Other and Taxes

Gains on equity securities, net, interest and other, net and taxes for the first quarter of 2005 and 2004 were as follows:

Gains on equity securities and certain equity derivatives for Q1 2005 were $4 million compared to $19 million for Q1 2004. The decrease in Q1 2005 was primarily due to lower gains on equity transactions. The lower net gain in Q1 2005 was also a result of higher impairment charges on investments, particularly of non-marketable equity securities (approximately $15 million in Q1 2005 and $11 million in Q1 2004).

Interest and other, net increased to $115 million in Q1 2005 compared to $49 million in Q1 2004, reflecting higher interest income as a result of higher interest rates.

Subsequent to our earnings release on April 19, 2005, we recorded a tax adjustment that reduced the tax provision by $24 million. As a result of this adjustment, diluted earnings per common share rounded to $0.35. Our effective income tax rate was 30.9% for Q1 2005, compared to 32.0% for Q1 2004.

Financial Condition

Our financial condition remains strong. At April 2, 2005, cash, short-term investments and fixed income debt instruments included in trading assets totaled $15.8 billion, down from $16.8 billion at December 25, 2004. At April 2, 2005, total short-term and long-term debt was $686 million and represented approximately 2% of stockholders’ equity. At December 25, 2004, total debt was $904 million and also represented approximately 2% of stockholders’ equity.

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. For the first quarter of 2005, cash provided by operating activities was $3.8 billion, compared to $1.8 billion for the first quarter of 2004. For the first quarter of 2005, the largest contribution to the increase in cash provided by operating activities was from an increase in income taxes payable. The increase in income taxes payable compared to December 2004 was primarily due to a lack of significant estimated tax payments made in the first quarter of 2005. Additional working capital sources of cash included a decrease in trading assets, primarily due to maturities in excess of purchases. Accrued compensation and benefits decreased, primarily due to payout of 2004 year-end employee bonuses. Accounts receivable increased compared to December 2004, primarily due to higher days sales outstanding (from 34 to 37 days in the first quarter of 2005) as the fourth quarter of 2004 included higher cash receipts. For the first quarter of 2005, our three largest customers accounted for approximately 39% of net revenue, with one of these customers accounting for approximately 18% of revenue and another customer accounting for approximately 15%. For the first quarter of 2004, our three largest customers accounted for approximately 40% of net revenue. Additionally, these three largest customers accounted for approximately 42% of net accounts receivable at April 2, 2005 (approximately 45% at December 25, 2004). Inventories increased compared to December 2004 levels, primarily due to increases in chipset, wireless connectivity and flash memory products.

Investing cash flows consist primarily of capital expenditures and the proceeds of investments sold and payment for investments acquired. We used $331 million in net cash for investing activities for the first quarter of 2005, compared to $929 million during the first quarter of 2004. The lower cash used in investing activities in the first quarter of 2005 resulted from higher net maturities of available-for-sale investments due to a shift in our portfolio of investments in debt securities to shorter-term maturities. Capital expenditures increased to $1.8 billion in the first quarter of 2005 from $680 million in the first quarter of 2004, reflecting a higher investment in capital equipment, primarily driven by investments in 300mm, 65-nanometer production equipment.

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

Financing cash flows consist primarily of repurchases and retirement of common stock and payment of dividends to stockholders. We used $2.6 billion in net cash for financing activities in the first quarter of 2005 compared to $1.3 billion in the first quarter of 2004. The major financing use of cash was for the repurchase of shares as we purchased 107.9 million shares of common stock for $2.5 billion (49.2 million shares for $1.5 billion in the first quarter of 2004). At April 2, 2005, approximately 506 million shares remained available for repurchase under existing repurchase authorizations. Our dividend payments were $497 million in the first quarter of 2005, higher than the $259 million paid in the same period of the prior year, due to an increase from $0.04 to $0.08 in cash dividends per common share effective for the first quarter of 2005. Financing sources of cash for the first quarter of 2005 were primarily $410 million in proceeds from the sale of shares pursuant to employee equity incentive plans ($386 million during the first quarter of 2004).

Another potential source of liquidity is authorized borrowings, including commercial paper, of $3.0 billion. Maximum borrowings under our commercial paper program during the first quarter of 2005 were approximately $150 million, although no commercial paper was outstanding at the end of the period. We also maintain the ability to issue an aggregate of approximately $1.4 billion in debt, equity and other securities under U.S. Securities and Exchange Commission (SEC) shelf registration statements.

We believe that we have the financial resources needed to meet business requirements for the next 12 months, including capital expenditures for the expansion or upgrading of worldwide manufacturing and assembly and test capacity, working capital requirements, the dividend program, potential stock repurchases and potential future acquisitions or strategic investments.

Employee Equity Incentive Plans

Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. Under the 2004 Equity Incentive Plan (the 2004 Plan), 240 million shares of common stock were made available for issuance during the two year period ending June 30, 2006. We presently expect to request stockholder approval at our May 2005 Annual Stockholders’ Meeting to extend the term of the 2004 Plan by one year, to June 30, 2007, and make an additional 130 million common shares available for issuance as equity awards to employees and non-employee directors during this period.

We have a goal to keep the potential incremental dilution related to our equity incentive programs to a long-term average of less than 2% annually. The dilution percentage is calculated using the new option grants for the year, net of options cancelled due to employees leaving the company and options expired, divided by the total outstanding shares at the beginning of the year.

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

Options granted to employees, including officers, and non-employee directors from 2001 through the first quarter of 2005 are summarized as follows: