Notes to Consolidated Financial Statements

Fiscal year. Intel Corporation ("Intel" or "the Company") has a fiscal year that ends the last Saturday in December. Fiscal years 1996 and 1995, each 52-week years, ended on December 28 and 30, respectively. Fiscal 1994 was a 53-week year and ended on December 31, 1994. The next 53-week year will end on December 30, 2000.

Basis of presentation. The consolidated financial statements include the accounts of Intel and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Accounts denominated in foreign currencies have been remeasured into the functional currency in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," using the U.S. dollar as the functional currency.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Investments. Highly liquid investments with insignificant interest rate risk and with original maturities of three months or less are classified as cash and cash equivalents. Investments with maturities greater than three months and less than one year are classified as short-term investments. Investments with maturities greater than one year are classified as long-term investments.

The Company accounts for investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's policy is to protect the value of its investment portfolio and to minimize principal risk by earning returns based on current interest rates. A substantial majority of the Company's marketable investments are classified as available-for-sale as of the balance sheet date and are reported at fair value, with unrealized gains and losses, net of tax, recorded in stockholders' equity. The cost of securities sold is based on the specific identification method. Realized gains or losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are reported in other income or expense. Investments in non-marketable instruments are recorded at the lower of cost or market and included in other assets.

Trading assets. During 1996, the Company purchased securities classified as trading assets. The Company maintains its trading asset portfolio to generate returns that offset changes in certain liabilities related to deferred compensation arrangements. The trading assets consist of marketable equity securities and are stated at fair value. Both realized and unrealized gains and losses are included in other income or expense and generally offset the change in the deferred compensation liability, which is also included in other income or expense.

Fair values of financial instruments. Fair values of cash and cash equivalents approximate cost due to the short period of time to maturity. Fair values of long-term investments, long-term debt, short-term investments, short-term debt, trading assets, non-marketable instruments, swaps, currency forward contracts, currency options, options hedging marketable instruments and options hedging non-marketable instruments are based on quoted market prices or pricing models using current market rates. No consideration is given to liquidity issues in valuing debt.

Derivative financial instruments. The Company utilizes derivative financial instruments to reduce financial market risks. These instruments are used to hedge foreign currency, equity and interest rate market exposures of underlying assets, liabilities and other obligations. The Company does not use derivative financial instruments for speculative or trading purposes. The Company's accounting policies for these instruments are based on the Company's designation of such instruments as hedging transactions. The criteria the Company uses for designating an instrument as a hedge include the instrument's effectiveness in risk reduction and one-to-one matching of derivative instruments to underlying transactions. Gains and losses on currency forward contracts, and options that are designated and effective as hedges of anticipated transactions, for which a firm commitment has been attained, are deferred and recognized in income in the same period that the underlying transactions are settled. Gains and losses on currency forward contracts, options and swaps that are designated and effective as hedges of existing transactions are recognized in income in the same period as losses and gains on the underlying transactions are recognized and generally offset. Gains and losses on any instruments not meeting the above criteria would be recognized in income in the current period. Income or expense on swaps is accrued as an adjustment to the yield of the related investments or debt they hedge.

Inventories. Inventories are stated at the lower of cost or market. Cost is computed on a currently adjusted standard basis (which approximates actual cost on a current average or first-in, first-out basis). Inventories at fiscal year-ends were as follows:

(In millions) 1996 1995

Materials and purchased parts $ 280 $ 674

Work in process 672 707

Finished goods 341 623

Total $ 1,293 $ 2,004

Property, plant and equipment. Property, plant and equipment are stated at cost. Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 2-4 years; land and buildings, 4-45 years.

The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," effective as of the beginning of fiscal 1995. This adoption had no material effect on the Company's financial statements.

Deferred income on shipments to distributors. Certain of the Company's sales are made to distributors under agreements allowing price protection and/or right of return on merchandise unsold by the distributors. Because of frequent sales price reductions and rapid technological obsolescence in the industry, Intel defers recognition of such sales until the merchandise is sold by the distributors.

Advertising. Cooperative advertising obligations are accrued and the costs expensed at the same time the related revenue is recognized. All other advertising costs are expensed as incurred. The Company does not incur any direct-response advertising costs. Advertising expense was $974 million, $654 million and $459 million in 1996, 1995 and 1994, respectively.

Interest. Interest as well as gains and losses related to contractual agreements to hedge certain investment positions and debt (see "Derivative financial instruments") are recorded as net interest income or expense on a monthly basis. Interest expense capitalized as a component of construction costs was $33 million, $46 million and $27 million for 1996, 1995 and 1994, respectively.

Earnings per common and common equivalent share. Earnings per common and common equivalent share are computed using the weighted average number of common and dilutive common equivalent shares outstanding. Fully diluted earnings per share have not been presented as part of the consolidated statements of income because the differences are insignificant.

Stock distributions. On June 16, 1995, the Company effected a two-for-one stock split in the form of a special stock distribution to stockholders of record as of May 19, 1995. Share, per share, Common Stock, capital in excess of par value, stock option and warrant amounts herein have been restated to reflect the effect of this split.

On January 13, 1997, the Board of Directors of the Company approved a two-for-one stock split (the "1997 stock split") to be effected as a special stock distribution of one share of Common Stock for each share of the Company's Common Stock outstanding, subject to stockholder approval of an increase in authorized shares at the Company's Annual Meeting on May 21, 1997. Because the 1997 stock split cannot be effected until there is an increase in authorized shares, none of the share, per share, Common Stock, capital in excess of par value, stock option or warrant amounts herein has been restated to reflect the effect of the 1997 stock split.

1998 Step-Up Warrants. In 1993, the Company issued 40 million 1998 Step-Up Warrants to purchase 40 million shares of Common Stock. This transaction resulted in an increase of $287 million in Common Stock and capital in excess of par value, representing net proceeds from the offering. The Warrants became exercisable in May 1993 at an effective price of $35.75 per share of Common Stock, subject to annual increases to a maximum price of $41.75 per share effective in March 1997. As of December 28, 1996, approximately 40 million Warrants were exercisable at a price of $40.25 and expire on March 14, 1998 if not previously exercised. For 1996 and 1995, the Warrants had a dilutive effect on earnings per share and represented approximately 19 million and 11 million common equivalent shares, respectively. The Warrants did not have a dilutive effect on earnings per share in 1994.

Stock repurchase program. The Company has an authorization from the Board of Directors to repurchase up to 110 million shares of Intel's Common Stock in open market or negotiated transactions. During 1996 the company repurchased 16.8 million shares at a cost of $1.3 billion, including $108 million for exercised put warrants. As of December 28, 1996, the Company had repurchased and retired approximately 84.9 million shares at a cost of $3.5 billion since the program began in 1990. As of December 28, 1996, after reserving 4.5 million shares to cover outstanding put warrants, 20.6 million shares remained available under the repurchase authorization.

In a series of private placements from 1991 through 1996, the Company sold put warrants that entitle the holder of each warrant to sell one share of Common Stock to the Company at a specified price. Activity during the past three years is summarized as follows:

Put warrants
outstanding

(In millions) Cumulative
premium
received Number of
warrants Potential
obligation

December 25, 1993 $ 118 29.6 $ 688

Sales 76 25.0 744

Exercises - (2.0) (65)

Expirations - (27.6) (623)

December 31, 1994 194 25.0 744

Sales 85 17.5 925

Repurchases - (5.5) (201)

Expirations - (25.0) (743)

December 30, 1995 279 12.0 725

Sales 56 9.0 603

Exercises - (1.8) (108)

Expirations - (14.7) (945)

December 28, 1996 $ 335 4.5 $ 275

The amount related to Intel's potential repurchase obligation has been reclassified from stockholders' equity to put warrants. The 4.5 million put warrants outstanding at December 28, 1996 expire on various dates between February 1997 and April 1997 and have exercise prices ranging from $56 to $69 per share, with an average exercise price of $61 per share. There is no significant dilutive effect on earnings per share for the periods presented.

Short-term debt. Short-term debt and weighted average interest rates at fiscal year-ends were as follows:

1996 1995

(In millions) Balance Weighted average interest rate Balance Weighted average interest rate

Borrowed under
lines of credit $ 30 N/A $ 57 3.2%

Reverse repurchase

agreements payable in
non-U.S. currencies 263 6.4% 124 9.2%

Notes payable 3 0.7% 2 4.7%

Drafts payable 93 N/A 163 N/A

Total $ 389 $ 346

At December 28, 1996, the Company had established foreign and domestic lines of credit of approximately $1.1 billion, a portion of which is uncommitted. The Company generally renegotiates these lines annually. Compensating balance requirements are not material.

The Company also borrows under commercial paper programs. Maximum borrowings reached $306 million during 1996 and $700 million during 1995. This debt is rated A1+ by Standard and Poor's and P1 by Moody's. Proceeds are used to fund short-term working capital needs.

Long-term debt. Long-term debt at fiscal year-ends was as follows:

(In millions) 1996 1995

Payable in U.S. dollars:

AFICA Bonds due 2013 at 4% $ 110 $ 110

Reverse repurchase arrangement due 2001 300 -

Other U.S. dollar debt 4 4

Payable in other currencies:

Irish punt due 2008-2024 at 6%-12% 268 240

Greek drachma due 2001 46 46

Total $ 728 $ 400

The Company has guaranteed repayment of principal and interest on the AFICA Bonds issued by the Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities Financing Authority (AFICA). The bonds are adjustable and redeemable at the option of either the Company or the bondholder every five years through 2013 and are next adjustable and redeemable in 1998. The Irish punt borrowings were made in connection with the financing of a factory in Ireland, and Intel has invested the proceeds in Irish punt denominated instruments of similar maturity to hedge foreign currency and interest rate exposures. The Greek drachma borrowings were made under a tax incentive program in Ireland, and the proceeds and cash flows have been swapped to U.S. dollars. The $300 million reverse repurchase arrangement payable in 2001 has a current borrowing rate of 5.9%. The funds received under this arrangement are available for general corporate purposes. This debt may be redeemed or repaid under certain circumstances at the option of either the lender or Intel.

Under shelf registration statements filed with the Securities and Exchange Commission (SEC), Intel has the authority to issue up to $3.3 billion in the aggregate of Common Stock, Preferred Stock, depositary shares, debt securities and warrants to purchase the Company's or other issuers' Common Stock, Preferred Stock and debt securities, and, subject to certain limits, stock index warrants and foreign currency exchange units. In 1993, Intel completed an offering of Step-Up Warrants (see "1998 Step-Up Warrants"). The Company may issue up to $1.4 billion in additional securities under effective registration statements.

As of December 28, 1996, aggregate debt maturities were as follows: 1997-none; 1998-$110 million; 1999-none; 2000-none; 2001-$346 million; and thereafter-$272 million.

The stated returns on a majority of the Company's marketable investments in long-term fixed rate debt and equity securities are swapped to U.S. dollar LIBOR-based returns. The currency risks of investments denominated in foreign currencies are hedged with foreign currency borrowings, currency forward contracts or currency interest rate swaps (see "Derivative financial instruments" under "Accounting policies").

Investments with maturities of greater than six months consist primarily of A and A2 or better rated financial instruments and counterparties. Investments with maturities of up to six months consist primarily of A1 and P1 or better rated financial instruments and counterparties. Foreign government regulations imposed upon investment alternatives of foreign subsidiaries, or the absence of A and A2 rated counterparties in certain countries, result in some minor exceptions. Intel's practice is to obtain and secure available collateral from counterparties against obligations whenever Intel deems appropriate. At December 28, 1996, investments were placed with approximately 200 different counterparties.

Investments at December 28, 1996 were as follows:

(In millions) Cost Gross
unrealized
gains Gross
unrealized
losses Estimated
fair
value

Commercial paper $ 2,386 $ - $ (1) $ 2,385

Bank deposits 1,846 - (2) 1,844

Repurchase agreements 931 - (1) 930

Loan participations 691 - - 691

Corporate bonds 657 10 (6) 661

Floating rate notes 366 - - 366

Securities of foreign

governments 265 14 (2) 277

Fixed rate notes 262 - - 262

Other debt securities 284 - (2) 282

Total debt securities 7,688 24 (14) 7,698

Hedged equity 891 71 (15) 947

Preferred stock and

other equity 270 174 (3) 441

Total equity securities 1,161 245 (18) 1,388

Swaps hedging

investments in

debt securities - 5 (17) (12)

Swaps hedging

investments in

equity securities - 15 (42) (27)

Options hedging

investments in

equity securities (9) - (16) (25)

Currency forward

contracts hedging

investments in

debt securities - 5 - 5

Total available-for-sale

securities 8,840 294 (107) 9,027

Less amounts classified

as cash equivalents (3,932) - - (3,932)

Total investments $ 4,908 $ 294 $ (107) $ 5,095

Investments at December 30, 1995 were as follows:

(In millions) Cost Gross
unrealized
gains Gross
unrealized
losses Estimated
fair
value

Commercial paper $ 576 $ - $ - $ 576

Repurchase agreements 474 - - 474

Securities of foreign

governments 456 1 (1) 456

Corporate bonds 375 5 - 380

Bank time deposits 360 - - 360

Loan participations 278 - - 278

Floating rate notes 224 - - 224

Fixed rate notes 159 1 (1) 159

Collateralized mortgage

obligations 129 - (1) 128

Other debt securities 119 - (1) 118

Total debt securities 3,150 7 (4) 3,153

Hedged equity 431 45 - 476

Preferred stock and

other equity 309 91 (11) 389

Total equity securities 740 136 (11) 865

Swaps hedging investments

in debt securities - 2 (9) (7)

Swaps hedging investments

in equity securities - 5 (47) (42)

Currency forward contracts

hedging investments

in debt securities - 3 - 3

Total available-for-sale

securities 3,890 153 (71) 3,972

Less amounts classified

as cash equivalents (1,324) - - (1,324)

Total investments $ 2,566 $ 153 $ (71) $ 2,648

In 1996 and 1995, debt and marketable securities with a fair value at the date of sale of $225 million and $114 million, respectively, were sold. The gross realized gains on such sales totaled $7 million and $60 million, respectively. There were no material proceeds, gross realized gains or gross realized losses from sales of securities in 1994.

The amortized cost and estimated fair value of investments in debt securities at December 28, 1996, by contractual maturity, were as follows:

(In millions) Cost Estimated
fair
value

Due in 1 year or less $ 7,005 $ 7,007

Due in 1-2 years 320 327

Due in 2-5 years 86 88

Due after 5 years 277 276

Total investments in debt securities $ 7,688 $ 7,698

Outstanding notional amounts for derivative financial instruments at fiscal year-ends were as follows:

(In millions) 1996 1995

Swaps hedging investments in debt securities $ 900 $ 824

Swaps hedging investments in equity securities $ 918 $ 567

Swaps hedging debt $ 456 $ 156

Currency forward contracts $ 1,499 $ 1,310

Currency options $ 94 $ 28

Options hedging investments

in marketable equity securities $ 82 $ -

Options hedging investments in

non-marketable instruments $ - $ 82

While the contract or notional amounts provide one measure of the volume of these transactions, they do not represent the amount of the Company's exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties' obligations exceed the obligations of the Company. The Company controls credit risk through credit approvals, limits and monitoring procedures. Credit rating criteria for off-balance-sheet transactions are similar to those for investments.

Swap agreements. The Company utilizes swap agreements to exchange the foreign currency, equity and interest rate returns of its investment and debt portfolios for a floating U.S. dollar interest rate based return. The floating rates on swaps are based primarily on U.S. dollar LIBOR and reset on a monthly, quarterly or semiannual basis. Income or expense on swaps is accrued as an adjustment to the yield of the related investments or debt they hedge.

Pay rates on swaps hedging investments in debt securities match the yields on the underlying investments they hedge. Payments on swaps hedging investments in equity securities match the equity returns on the underlying investments they hedge. Receive rates on swaps hedging debt match the expense on the underlying debt they hedge. Maturity dates of swaps match those of the underlying investment or the debt they hedge. There is approximately a one-to-one matching of swaps to investments and debt. Swap agreements remain in effect until expiration. If a contract remains outstanding after the termination of a hedged relationship, subsequent changes in the market value of the contract would be recognized in earnings.

Weighted average pay and receive rates, average maturities and range of maturities on swaps at December 28, 1996 were as follows:

Weighted
average
pay rate Weighted
average
receive
rate Weighted
average
maturity Range of
maturities

Swaps hedging

investments in U.S.

dollar debt securities 6.3% 5.7% .7 years 0-2 years

Swaps hedging

investments in foreign

currency debt securities 8.7% 7.4% .8 years 0-3 years

Swaps hedging

investments in

equity securities N/A 5.6% .4 years 0-1 years

Swaps hedging debt 5.6% 6.9% 3.9 years 2-5 years

Note: Pay and receive rates are based on the reset rates that were in effect at December 28, 1996.

Other foreign currency instruments. Intel transacts business in various foreign currencies, primarily Japanese yen and certain European currencies. The Company has established revenue and balance sheet hedging programs to protect against reductions in value and volatility of future cash flows caused by changes in foreign exchange rates. The Company utilizes currency forward contracts and currency options in these hedging programs. The maturities on these instruments are less than 12 months. Deferred gains or losses attributable to foreign currency instruments are not material.

The estimated fair values of financial instruments outstanding at fiscal year-ends were as follows:

1996
1995

(In millions) Carrying
amount Estimated
fair
value Carrying
amount Estimated
fair
value

Cash and cash equivalents $ 4,165 $ 4,165 $ 1,463 $ 1,463

Short-term investments $ 3,736 $ 3,736 $ 995 $ 995

Trading assets $ 87 $ 87 $ - $ -

Long-term investments $ 1,418 $ 1,418 $ 1,699 $ 1,699

Non-marketable

instruments $ 119 $ 194 $ 239 $ 259

Swaps hedging invest-

ments in debt securities $ (12) $ (12) $ (7) $ (7)

Swaps hedging

investments in

equity securities $ (27) $ (27) $ (42) $ (42)

Options hedging invest-

ments in marketable

equity securities $ (25) $ (25) $ - $ -

Options hedging

investments in non-

marketable instruments $ - $ - $ (9) $ (13)

Short-term debt $ (389) $ (389) $ (346) $ (346)

Long-term debt $ (728) $ (731) $ (400) $ (399)

Swaps hedging debt $ - $ 13 $ - $ (1)

Currency forward

contracts $ 5 $ 18 $ 3 $ 4

Currency options $ - $ - $ - $ -

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and trade receivables. Intel places its investments with high-credit-quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty. A substantial majority of the Company's trade receivables are derived from sales to manufacturers of microcomputer systems, with the remainder spread across various other industries.

During 1995, the Company experienced an increase in its concentration of credit risk due to increasing trade receivables from sales to manufacturers of microcomputer systems. Although the financial exposure to individual customers increased in 1996, the concentration of credit among the largest customers decreased slightly during the year. The Company's five largest customers accounted for approximately 30% of net revenues for 1996. At December 28, 1996, these customers' accounted for approximately 25% of net accounts receivable.

The Company endeavors to keep pace with the evolving computer industry and has adopted credit policies and standards intended to accommodate industry growth and inherent risk. Management believes that credit risks are moderated by the diversity of its end customers and geographic sales areas. Intel performs ongoing credit evaluations of its customers' financial condition and requires collateral as deemed necessary.

(In millions) 1996 1995 1994

Interest income $ 364 $ 272 $ 235

Foreign currency gains 26 29 15

Other income 16 114 23

Total $ 406 $ 415 $ 273

Other income for 1995 included approximately $58 million from the settlement of ongoing litigation and $60 million from sales of a portion of the Company's investment in marketable equity securities. Other income for 1994 included non-recurring gains from the settlement of various insurance claims.

The provision for taxes consisted of the following:

(In millions) 1996 1995 1994

Income before taxes:

U.S. $ 5,515 $ 3,427 $ 2,460

Foreign 2,419 2,211 1,143

Total income before taxes $ 7,934 $ 5,638 $ 3,603

Provision for taxes:

Federal:

Current $ 2,046 $ 1,169 $ 1,169

Deferred 8 307 (178)

2,054 1,476 991

State:

Current 286 203 162

Foreign:

Current 266 354 134

Deferred 171 39 28

437 393 162

Total provision for taxes $ 2,777 $ 2,072 $ 1,315

Effective tax rate 35.0% 36.8% 36.5%

The tax benefit associated with dispositions from employee stock plans reduced taxes currently payable for 1996 by $196 million ($116 million and $61 million for 1995 and 1994, respectively).

The provision for taxes reconciles to the amount computed by applying the statutory federal rate of 35% to income before taxes as follows:

(In millions) 1996 1995 1994

Computed expected tax $ 2,777 $ 1,973 $ 1,261

State taxes, net of federal benefits 186 132 105

Other (186) (33) (51)

Provision for taxes $ 2,777 $ 2,072 $ 1,315

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company's deferred tax assets and liabilities at fiscal year-ends were as follows:

(In millions) 1996 1995

Deferred tax assets

Accrued compensation and benefits $ 71 $ 61

Deferred income 147 127

Inventory valuation and related reserves 187 104

Interest and taxes 54 61

Other, net 111 55

570 408

Deferred tax liabilities

Depreciation (573) (475)

Unremitted earnings of certain subsidiaries (359) (116)

Other, net (65) (29)

(997) (620)

Net deferred tax (liability) $ (427) $ (212)

U.S. income taxes were not provided for on a cumulative total of approximately $992 million of undistributed earnings for certain non-U.S. subsidiaries. The Company intends to reinvest these earnings indefinitely in operations outside the United States.

During 1996, Intel reached resolution on all outstanding issues related to income tax returns for the years 1978-1987. Final adjustments were also received from the Internal Revenue Service (IRS) for the years 1988-1990. Neither event had a material effect on the Company's 1996 financial statements.

The Company's U.S. income tax returns for the years 1991-1993 are presently under examination by the IRS. Final proposed adjustments have not yet been received for these years. Management believes that adequate amounts of tax and related interest and penalties, if any, have been provided for any adjustments that may result for the years under examination.

Stock option plans. Intel has a stock option plan (hereafter referred to as the EOP Plan) under which officers, key employees and non-employee directors may be granted options to purchase shares of the Company's authorized but unissued Common Stock. The Company also has an Executive Long-Term Stock Option Plan (ELTSOP) under which certain employees, including officers, may be granted options to purchase shares of the Company's authorized but unissued Common Stock. In January 1997 the Board of Directors approved the 1997 Stock Option Plan, which made an additional 65 million shares available for employees other than officers and directors. Under all plans, the option purchase price is equal to fair market value at the date of grant.

Options currently expire no later than ten years from the grant date and generally vest after five years. Proceeds received by the Company from exercises are credited to Common Stock and capital in excess of par value. Additional information with respect to the EOP and the ELTSOP activity was as follows:

Outstanding options

(In millions) Shares
available
for options Number
of shares Weighted
average
exercise
price

December 25, 1993 64.8 83.6 $ 11.90

Grants (12.0) 12.0 $ 33.08

Exercises - (8.8) $ 6.59

Cancellations 1.6 (1.6) $ 20.63

December 31, 1994 54.4 85.2 $ 15.28

Grants (14.0) 14.0 $ 48.22

Exercises - (10.7) $ 8.14

Cancellations 3.0 (3.0) $ 25.66

December 30, 1995 43.4 85.5 $ 21.20

Grants (13.3) 13.3 $ 69.12

Exercises - (11.9) $ 9.86

Cancellations 2.5 (2.5) $ 34.10

December 28, 1996 32.6 84.4 $ 29.96

Options exercisable at:

December 31, 1994 28.8 $ 7.54

December 30, 1995 29.1 $ 9.10

December 28, 1996 28.6 $ 11.44

The range of exercise prices for options outstanding at December 28, 1996 was $4.79 to $131.19. The range of exercise prices for options is wide due primarily to the increasing price of the Company's stock over the period of the grants.

The following tables summarize information about options outstanding at December 28, 1996:

Outstanding options

Range of exercise prices Number of
shares (in
millions) Weighted
average
contract-
ual life
(in years) Weighted
average
exercise
price

$4.79 - $13.41 34.0 3.7 $ 10.26

$13.63 - $36.13 25.3 6.7 $ 27.29

$38.91 - $131.19 25.1 8.9 $ 59.12

Total 84.4 6.1 $ 29.96

Exercisable options

Range of exercise prices Number of
shares (in
millions) Weighted
average
exercise
price

$4.79-$13.41 25.6 $ 9.34

$13.63-$36.13 2.6 $ 24.92

$38.91-$131.19 .4 $ 55.21

Total 28.6 $ 11.44

These options will expire if not exercised at specific dates ranging from January 1997 to December 2006. Prices for options exercised during the three-year period ended December 28, 1996 ranged from $3.04 to $69.43.

Stock Participation Plan. Under this plan, eligible employees may purchase shares of Intel's Common Stock at 85% of fair market value at specific, predetermined dates. Of the 118 million shares authorized to be issued under the plan, 23.8 million shares were available for issuance at December 28, 1996. Employees purchased 3.5 million shares in 1996 (3.5 million and 4.0 million in 1995 and 1994, respectively) for $140 million ($110 million and $94 million in 1995 and 1994, respectively).

Pro forma information. The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Company's financial statements.

Pro forma information regarding net income and earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Stock Participation Plan, collectively called "options") granted subsequent to December 31, 1994 under the fair value method of that statement. The fair value of options granted in 1995 and 1996 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

Employee
stock options Stock Participation
Plan shares

1996 1995 1996 1995

Expected life (in years) 6.5 6.5 .5 .5

Risk-free interest rate 6.5% 6.8% 5.3% 6.0%

Volatility .36 .36 .36 .36

Dividend yield .2% .3% .2% .3%

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average estimated fair value of employee stock options granted during 1996 and 1995 was $32.69 and $23.26 per share, respectively. The weighted average estimated fair value of shares granted under the Stock Participation Plan during 1996 and 1995 was $16.22 and $12.25, respectively.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in millions except for earnings per share information):

1996 1995

Pro forma net income $ 5,046 $ 3,506
Pro forma earnings per share $ 5.68 $ 3.96

The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994, the pro forma effect will not be fully reflected until 1999.

Retirement plans. The Company provides tax-qualified profit-sharing retirement plans (the "Qualified Plans") for the benefit of eligible employees in the U.S. and Puerto Rico and certain foreign countries. The plans are designed to provide employees with an accumulation of funds for retirement on a tax-deferred basis and provide for annual discretionary contributions to trust funds.

The Company also provides a non-qualified profit-sharing retirement plan (the "Non-Qualified Plan") for the benefit of eligible employees in the U.S. This plan is designed to permit certain discretionary employer contributions in excess of the tax limits applicable to the Qualified Plans and to permit employee deferrals in excess of certain tax limits. This plan is unfunded.

The Company accrued $209 million for the Qualified Plans and the Non-Qualified Plan in 1996 ($188 million in 1995 and $152 million in 1994). Of the $209 million accrued in 1996, the Company expects to fund approximately $181 million for the 1996 contribution to the Qualified Plans and to allocate approximately $10 million for the Non-Qualified Plan. The remainder, plus approximately $177 million carried forward from prior years, is expected to be contributed to these plans when allowable under IRS regulations and plan rules.

Contributions made by the Company vest based on the employee's years of service. Vesting begins after three years of service in 20% annual increments until the employee is 100% vested after seven years.

The Company provides tax-qualified defined-benefit pension plans for the benefit of eligible employees in the U.S. and Puerto Rico. Each plan provides for minimum pension benefits that are determined by a participant's years of service, final average compensation (taking into account the participant's social security wage base) and the value of the Company's contributions, plus earnings, in the Qualified Plan. If the participant's balance in the Qualified Plan exceeds the pension guarantee, the participant will receive benefits from the Qualified Plan only. Intel's funding policy is consistent with the funding requirements of federal laws and regulations.

Pension expense for 1996, 1995 and 1994 for the U.S. and Puerto Rico plans was less than $1 million per year, and no component of expense exceeded $3 million.

The funded status of these plans as of December 28, 1996 and December 30, 1995 was as follows:

(In millions) 1996 1995

Vested benefit obligation $ (3) $ (3)

Accumulated benefit obligation $ (4) $ (4)

Projected benefit obligation $ (5) $ (6)

Fair market value of plan assets 11 8

Projected benefit obligation less than plan assets 6 2

Unrecognized net (gain) (15) (12)

Unrecognized prior service cost 3 3

Accrued pension costs $ (6) $ (7)

At fiscal year-ends, the weighted average discount rates and long-term rates for compensation increases used for estimating the benefit obligations and the expected return on plan assets were as follows:

1996 1995 1994

Discount rate 7.0% 7.0% 8.5%

Rate of increase in compensation levels 5.0% 5.0% 5.5%

Expected long-term return on assets 8.5% 8.5% 8.5%

Plan assets of the U.S. and Puerto Rico plans consist primarily of listed stocks and bonds, repurchase agreements, money market securities, U.S. government securities and stock index derivatives.

The Company provides defined-benefit pension plans in certain foreign countries where required by statute. The Company's funding policy for foreign defined-benefit plans is consistent with the local requirements in each country.

Pension expense for 1996, 1995 and 1994 for the foreign plans included the following:

(In millions) 1996 1995 1994

Service cost-benefits earned during the year $ 10 $ 9 $ 5

Interest cost of projected benefit obligation 7 6 5

Actual investment (return) on plan assets (14) (4) (8)

Net amortization and deferral 14 (2) 3

Net pension expense $ 17 $ 9 $ 5

The funded status of the foreign defined-benefit plans as of December 28, 1996 and December 30, 1995 is summarized below:

1996
(In millions) Assets
exceed
accumulated
benefits Accumulated
benefits
exceed
assets

Vested benefit obligation $ (43) $ (9)

Accumulated benefit obligation $ (46) $ (15)

Projected benefit obligation $ (62) $ (23)

Fair market value of plan assets 68 3

Projected benefit obligation less than

(in excess of) plan assets 6 (20)

Unrecognized net loss 3 3

Unrecognized net transition obligation 2 1

Prepaid (accrued) pension costs $ 11 $ (16)

1995
(In millions) Assets
exceed
accumulated
benefits Accumulated
benefits
exceed
assets

Vested benefit obligation $ (44) $ (8)

Accumulated benefit obligation $ (46) $ (14)

Projected benefit obligation $ (62) $ (22)

Fair market value of plan assets 67 4

Projected benefit obligation less than

(in excess of) plan assets 5 (18)

Unrecognized net loss 4 5

Unrecognized net transition obligation 2 -

Prepaid (accrued) pension costs $ 11 $ (13)

1996 1995 1994

Discount rate 5.5%-14% 5.5%-14% 5.5%-14%

Rate of increase in

compensation levels 4.5%-11% 4.5%-11% 4.5%-11%

Expected long-term return on assets 5.5%-14% 5.5%-14% 5.5%-14%

Plan assets of the foreign plans consist primarily of listed stocks, bonds and cash surrender value life insurance policies.

Other postemployment benefits. The Company has adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment Benefits." There was no material impact on the Company's financial statements for the periods presented.

The Company leases a portion of its capital equipment and certain of its facilities under operating leases that expire at various dates through 2011. Rental expense was $57 million in 1996, $38 million in 1995 and $38 million in 1994. Minimum rental commitments under all non-cancelable leases with an initial term in excess of one year are payable as follows: 1997-$23 million; 1998-$18 million; 1999-$14 million; 2000-$11 million; 2001-$9 million; 2002 and beyond-$25 million. Commitments for construction or purchase of property, plant and equipment approximated $1.6 billion at December 28, 1996. In connection with certain manufacturing arrangements, Intel had minimum purchase commitments of approximately $333 million at December 28, 1996 for flash memories and other memory components and for production capacity of board-level products.

In March 1995, EMI Group, N.A. (formerly known as Thorn EMI North America Inc.) brought suit in Federal Court in Delaware against Intel, alleging that certain Intel manufacturing processes infringe a U.S. patent. In May 1996, the Court granted Intel's motion for summary judgment on some of the processes in issue. In November 1996, the Court granted Intel's motion for summary judgment on the remaining processes in issue and entered judgment in favor of Intel and against EMI on the claims in EMI's complaint. EMI has filed a Notice of Appeal with respect to the Court's decision. Although the ultimate outcome of this lawsuit cannot be determined at this time, management, including internal counsel, does not believe that the outcome of this litigation will have a material adverse effect on the Company's financial position or overall trends in results of operations.

Intel has been named to the California and U.S. Superfund lists for three of its sites and has completed, along with two other companies, a Remedial Investigation/Feasibility study with the U.S. Environmental Protection Agency (EPA) to evaluate the groundwater in areas adjacent to one of its former sites. The EPA has issued a Record of Decision with respect to a groundwater cleanup plan at that site, including expected costs to complete. Under the California and U.S. Superfund statutes, liability for cleanup of this site and the adjacent area is joint and several. The Company, however, has reached agreement with those same two companies which significantly limits the Company's liabilities under the proposed cleanup plan. Also, the Company has completed extensive studies at its other sites and is engaged in cleanup at several of these sites. In the opinion of management, including internal counsel, the potential losses to the Company in excess of amounts already accrued arising out of these matters will not have a material adverse effect on the Company's financial position or overall trends in results of operations, even if joint and several liability were to be assessed.

The Company is party to various other legal proceedings. In the opinion of management, including internal counsel, these proceedings will not have a material adverse effect on the financial position or overall trends in results of operations of the Company.

The estimate of the potential impact on the Company's financial position or overall results of operations for the above legal proceedings could change in the future.

Intel operates predominantly in one industry segment. The Company designs, develops, manufactures and markets microcomputer components and related products at various levels of integration. The Company sells its products directly to original equipment manufacturers (OEMs) and also to a network of industrial and retail distributors throughout the world. The Company's principal markets are in the United States, Europe, Asia-Pacific and Japan, with the U.S. and Europe being the largest based on revenues. The Company's major products include microprocessors and related board-level products, chipsets, embedded processors and microcontrollers, flash memory chips, and network and communications products. Microprocessors and related board-level products account for a substantial majority of the Company's net revenues. No customer exceeded 10% of revenues in 1996, 1995 or 1994. Summary balance sheet information for operations outside the United States at fiscal year-ends is as follows:

(In millions) 1996 1995

Assets $ 4,784 $ 4,404

Total liabilities $ 1,694 $ 1,661

Net property, plant and equipment $ 1,615 $ 1,414

Geographic information for the three years ended December 28, 1996 is presented in the following tables. Transfers between geographic areas are accounted for at amounts that are generally above cost and consistent with rules and regulations of governing tax authorities. Such transfers are eliminated in the consolidated financial statements. Operating income by geographic segment does not include an allocation of general corporate expenses. Identifiable assets are those that can be directly associated with a particular geographic area. Corporate assets include cash and cash equivalents, short-term investments, trading assets, deferred tax assets, long-term investments and certain other assets.

(In millions)
1996 Sales to
unaffiliated
customers Transfers
between
geographic
areas Net
revenues Operating
income Indenti-
fiable
assets

United States $ 8,668 $ 9,846 $ 18,514 $ 5,255 $ 12,982

Europe 5,876 917 6,793 1,118 2,405

Japan 2,459 20 2,479 340 659

Asia-Pacific 3,844 2,004 5,848 509 1,361

Other - 865 865 529 359

Eliminations - (13,652) (13,652) 453 (3,439)

Corporate - - - (651) 9,408

Consolidated $ 20,847 $- $ 20,847 $ 7,553 $ 23,735

1995

United States $ 7,922 $ 6,339 $ 14,261 $ 3,315 $ 12,603

Europe 4,560 1,190 5,750 1,383 2,517

Japan 1,737 28 1,765 353 665

Asia-Pacific 1,983 1,566 3,549 271 893

Other - 684 684 410 329

Eliminations - (9,807) (9,807) 124 (3,651)

Corporate - - - (604) 4,148

Consolidated $ 16,202 $- $ 16,202 $ 5,252 $ 17,504

1994

United States $ 5,826 $ 4,561 $ 10,387 $ 2,742 $ 7,771

Europe 3,158 380 3,538 418 1,733

Japan 944 61 1,005 125 343

Asia-Pacific 1,593 1,021 2,614 154 540

Other - 639 639 378 324

Eliminations - (6,662) (6,662) 179 (1,878)

Corporate - - - (609) 4,983

Consolidated $ 11,521 $- $ 11,521 $ 3,387 $ 13,816

Quarterly information for the two years ended December 28, 1996 is presented in Financial information by quarter.

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Content published April 8, 1997.