building a

www.intel.com www.intc.com connected world

1998 annual report Facts and figures

26.3 25.1 25 2.5 75

20.8

20 1.93 2.0 60

1.73 16.2

15 1.45 1.5 45 INTELCORPORATION1998

11.5

1.01 10 1.0 30 8.8

0.65 0.65 High 5.8 4.8 5 0.5 15 3.9 Close 3.1 0.31 0.24 0.20 0.13 Low

0 0 0 89 90 91 92 93 94 95 96 97 98 89 90 91 92 93 94 95 96 97 98 89 90 91 92 93 94 95 96 97 98

Net revenues Diluted earnings per share Stock price trading ranges (Dollars in billions) (Dollars, adjusted for stock splits) by fiscal year (Dollars, adjusted for stock splits) 1998: challenges and

2,674

50 2,500 5,000 2,347 4,501

4,032 38.4 40 2,000 4,000

35.5 35.6 1,808 3,550 33.3

3,024 28.4 30 1,500 3,000 27.3 1,296 2,441 1,111 21.2 21.6 20.4 20 970 1,000 1,9 33 2,000 16.9 780 Machinery & equipment 618 1,2 28 517 10 500 948 1,000 365 680 422 Land, buildings & improvements

0 0 0 89 90 91 92 93 94 95 96 97 98 89 90 91 92 93 94 95 96 97 98 89 90 91 92 93 94 95 96 97 98

Return on average Research and development Capital additions to property, stockholders’ equity (Dollars in millions) plant and equipment † (Percent) (Dollars in millions)

Past performance does not guarantee future results. Share and per share amounts shown have been adjusted for stock splits through April 1999, including the stock split declared in January 1999. † Capital additions for 1998 included assets acquired from Digital Equipment Corporation. To our stockholders 1

We faced extraordinary business conditions in 1998. Competition in INTELCORPORATION1998

the value PC market segment, inventory corrections among some of

our large customers in the first half of the year and an economic slow-

down in some parts of the world all took their toll. As a consequence,

our financial results in the first half of the year were not as strong as we would have liked. Revenues for the year were up

5%, with net income down 13% to $6.1 billion. At the same time, beneath these choppy waters, we were undergoing a

fundamental sea change in how we see our business. The Internet is transforming the nature of the computing industry.

As a leading provider of key computing and communications building blocks, we play a central role in this revolution.

We are confident that our actions have helped us ride out the turbulence of 1998, and we are excited about our strategic

plans to help drive the development of an increasingly connected computing world.

New products for all levels. With hindsight, it’s clear that we were caught off guard by the increase in demand for low-

cost PCs. We were late in recognizing the emergence of this value PC market segment—and the competition took advantage

of our delay. While our global position remains strong, we lost market share in the U.S. retail segment of the market (which is

about 10% of the worldwide PC market). We have redoubled our efforts to regain that share, with focused product development.

In response to the evolving computing marketplace, it was clear that we had to drive our business in a new way.

We developed a broad game plan that would enable us to participate in every level of the newly segmented computing

market. We revamped our microprocessor lineup with new products created specifically for each computing segment: an exciting sea change Our Intel® CeleronTM microprocessor, introduced in April and followed in August by an enhanced version, offers

entry-level PC buyers good value and reliable Intel technology. By the end of 1998, it was the second-highest volume

PC microprocessor in the world, second only to the Pentium® II microprocessor.

Our Pentium II microprocessor remains the heart of our business. Ideal for the performance desktop and entry-level

servers and workstations, this powerful processor makes up the majority of units we sold worldwide in 1998.

The powerhouse Pentium® II XeonTM microprocessor, introduced in August, is specifically designed for mid- and

high-range servers and workstations. Manufacturers can benefit by designing systems to harness the power of multiple

high-performance processors. Demand for servers and workstations is increasing, and within both of these segments,

sales of systems based on Intel architecture are growing much faster than the overall segment.

Our segmentation strategy is designed to allow us to participate profitably in various segments of the computing market

and to pursue new growth opportunities in the high-end server and workstation market segments. Japan 7% Supported by our strong branding program, which conveys the benefits of Intel technology and

Asia-Pacific the attributes of the products at each level, our segmentation strategy is working as intended. 20% North America 45% Adjusting to a cost-competitive environment. 1998 found us operating in a more cost com- Europe petitive marketplace. We responded by setting aggressive new targets in cost management and 28%

manufacturing efficiency. With belt tightening in discretionary spending and some headcount 1998 Geographic break- reductions, we adjusted to an environment that demands leaner operations. We ended the year down of revenues (Percent) 2 with headcount down 2% (excluding acquisitions) and our human resources employed in the areas of maximum return.

We also made great strides in manufacturing efficiency through a successful and rapid ramp to our new 0.25-micron

process technology. With each new generation of our manufacturing process, the dimensions shrink on the finished chip,

giving higher product yields as well as more powerful products.

In 1998, we also developed an innovative new packaging technology for our microprocessors, the Organic LAN Grid

Array, that provides higher performance and versatility at lower cost for the final product. We are the only major chip

maker using this packaging. We continue to invest in the state-of-the-art manufacturing facilities and R&D programs that

make such innovations possible, spending $4 billion for capital additions and $2.7 billion for R&D in 1998. INTELCORPORATION1998

The Internet drives an industry shift. Throughout the turbulence of the first half of the year, we were also adapting to a

more fundamental shift in our business. Ten years ago, people bought PCs for personal productivity needs—spreadsheets,

word processing and the like. Today, the number one reason people buy PCs is to get on the Internet. As the computing

universe becomes connected, the demands on PCs and the entire computing infrastructure are expanding.

On a networked PC, every click of the mouse sets in motion a series of invisible and demanding tasks: compression

and decompression of bulky downloads, encryption, virus scans and security checks, among others. These tasks have to

be executed quickly and accurately behind the scenes, and they require powerful PCs. At the same time, behind the con-

nected PCs is a large number of powerful servers, delivering data to the desktop and performing some of those compute-

intensive functions. The number of servers is increasing as the Internet expands, providing a growing market segment for

our products. We consider this opportunity so significant that more than half of Intel’s microprocessor R&D investment is

now committed to workstations and servers.

We also have a rapidly growing network products business, with software and hardware products designed to make

it easier to connect and manage networked PCs for small businesses, large enterprises and home users. As part of our

commitment to networking, we acquired Case Technology and Dayna Communications Inc. in 1997, and have entered into

an agreement to acquire Shiva Corporation. These companies provide key technologies for improving Internet performance.

In addition to providing the powerful processors that are the key building blocks of the Internet and network products,

we are engaging with other industry leaders in initiatives to expand Internet capabilities and product offerings. In 1998,

our Corporate Business Development group made more than 100 new equity investments to help spur development of

computer and Internet capabilities.

The Internet has stimulated the most intensely competitive cycle and development boom in the history of the computing

industry. Being connected is now at the center of people’s computing experience. The resulting opportunities have made

our direction clear: to help drive the growth of the connected world. In 1999 and beyond, we will pursue our strategic

intent to be a major force behind the Internet revolution.

Gordon E. Moore Andrew S. Grove Craig R. Barrett Chairman Emeritus Chairman President and CEO

At the time of the Annual Meeting of Stockholders in May 1998, Craig Barrett was elected Chief Executive Officer of Intel Corporation, and Andy Grove was elected Chairman of the Board. Gordon Moore is now Chairman Emeritus. This is the latest phase of a management transition that has been under way for years and reflects our dedication to continuity in the executive office. 3 INTELCORPORATION1998

Our vision: getting to a billion

connected computers worldwide.

The Internet boom is transforming the world. Here’s what it means for Intel. 4 INTELCORPORATION1998 conne h Internet: the tspeople it’s and servers PCs, it’s networks. e ic anhn u niesriei July. Web in sincelaunching ouronlineservice billionpermonth inbusinessover the nearly $1 1998, Intelreached uals alike.Bytheend of as thetelephone—for businesses andindivid- as essentialacommunications infrastructure allaroundtheworld.It’s becoming inesses, businesses topeopleand tobus- of connectedPCs. andthe vastmajority ofWeb servers 60% chips runmorethan our opportunity forIntel: Internet skyrocketed,presentingabooming 1998, thenumberofuserson In PCs. surf theWeb; peoplepluginvianetworked and holdthecontentthatusersseewhenthey managetheconnections Theservers servers. The Internetisaglobalwebofnetworksand The Internetconnectspeopletopeople, 5 INTELCORPORATION1998 cting INTELCORPORATION1998 6 innov h Internet: the eas n e is Intel aigi fast, it making y n cool. and We are helping to expand the capabilities of the PC platform and 7 the Internet, attracting new users to the connected world: Intel networking products help eliminate roadblocks on the way INTELCORPORATION1998 to the Web. Intel is a leading supplier of fast Ethernet connections and a range of easy-to-use hub and switch products that can get a small business connected and on the Internet the same day. We are working with other industry leaders to make using PCs easier than ever. Intel-led initiatives are designed to take PCs from deep sleep to full power in five seconds and let users connect dozens of peripherals—from joysticks to speakers—through a single port. From advanced 3D graphics and full-screen desktop video to compute-intensive compression and encryption that happen behind the scenes, powerful Intel chips deliver an exciting and satisfying vatincomputing experience. g 8

the Internet:

INTELCORPORATION1998 making the products that make it work. delivIntel is e 9 INTELCORPORATION1998

eGettingrin to a billion PCs connected around the world will require a whole lot of silicon.To meet the demand and remain competitive, we are increasing pro- ductivity and shortening manufacturing generations. With each advance in manufacturing, we squeeze more chips on every wafer and bring new products to market faster. We’ve also developed new packaging technology that makes it easier to customize our chips for each computing market segment. With 1998 capital additions of $4 billion and R&D of $2.7 billion, we are committed to delivering the chips that power the boxes that build a connected world. 10 INTELCORPORATION1998

Intel powers

Intel is at the heart of the fastest booming providing the building blocks of the Internet we plan to deliver for PC users, customers 11 INTELCORPORATION1998

the Internet

communications medium in world history.By and spurring efforts to make it more useful, and stockholders well into the next century. 12 Index to financial information

Financial summary 13

Consolidated statements of income 14

Consolidated balance sheets 15 INTELCORPORATION1998 Consolidated statements of cash flows 16 Consolidated statements of stockholders’ equity 17 Notes to consolidated financial statements 18 Report of Ernst & Young LLP, independent auditors 29 Management’s discussion and analysis of financial condition and results of operations 30

Financial information by quarter 37 INTELCORPORATION1998 13 † average Weighted oration. January 1999. Net investment Additions 64.563.7 $11,60948.5 $10,666 $31,47141.6 $ $28,880 $ 8,487 90332.6 $ $ 7,471 $23,735 2,489 $23,37729.5 $ 5,367 $17,504 $ $19,295 1,003 $25.8 $ 4,032 3,996 $13,816 $ $ 1,125 $16,872 4,501 24.6 $ 2,816 $11,344 $ 1,136 $12,140 $23.9 3,024 $ 2,163 $ $ 8,089 1,114 $ $ 9,26721.7 3,550 $ 1,658 $ 6,292 $ $ 7,500 $ $ 2,441 1,284 $ 622 5,376 $ $ 1,933 $ 503 $ 3,994 $ 5,445 345 $ $ 4,418 $ 1,228 412 $ 3,592 $ $ 948 2,549 $ 680 $ 422 Employees in property, Long-term Stock- to property, at year-end & plant Total debt & put holders’ plant & ...... $26,273 $12,144 $ 2,674 $ 8,379 $ 6,068 $ 1.82 $ 1.73 $ .050 $ .065 3,517

......

Additions to property, plant and equipment inAdditions to property, from Digital Equipment Corp included $475 million for capital assets acquired 1998 Share and per share amounts shown have been adjusted for stock splits through April 1999, including the stock split declared in Share and per share amounts shown have been adjusted for stock splits through April 1999, including amounts) revenues sales opment income income per share per share per share per share outstanding (In millions—except employees)(In millions—except (in thousands) equipment assets warrants equity equipment Ten Years Ended December 26,1998 Ended Years Ten Financial summary (In millions— exceptper share Net Cost of & devel- Operating Research Net earnings earnings declared paid Basic shares Diluted Dividends Dividends diluted 1997 1996 1995 1994 1993 1992 1991 1990 19971996 $25,0701995 $20,847 $ 9,9451994 $16,202 $ 9,164 $1993 2,347 $11,521 $ 7,811 $1992 1,808 $ 9,887 $ $ 8,782 5,576 $1991 1,296 $ 7,553 $ $ 6,945 5,844 $ $1990 3,252 1,111 $ 5,252 $ $ 5,157 $ 4,779 $1989 2,557 $ $ 2.12 3,387 $ $ 3,566 $ 3,921 $ 970 2,316 $ 1.57 $ $ $ 2,288 $ 3,127 $ 780 $ 1.93 1,930 $ 3,392 1.08 $ $ $ 618 $ 1.45 $ 1,721 $ 1,490 $ $ 2,295 .058 .69 517 $ 1.01 $ $ 1,080 $ 1,067 $ .048 $ $ 365 $ $ $ .055 .69 $ .65 .038 $ 858 $ 819 .045 .32 $ $ $ 557 $ 3,590 $ .029 .035 .65 650 $ $ 3,551 .25 $ .31 $ 391 $ .028 3,536 $ .025 .21 $ $ .24 .013 $ .13 $ 3,496 .025 $ .20 $ .006 3,528 — .13 3,436 — — — — 3,344 — 3,247 3,020 1998 1998 1989 † 14 INTELCORPORATION1998 See accompanyingnotes. Weighted average commonshares outstanding,assumingdilution per commonshareDiluted earnings per commonshareBasic earnings Net income Provision fortaxes Interest incomeandother, net Operating costsandexpenses Purchased in-process research anddevelopment Net revenues (In millions—exceptpershare amounts) 1998 Three yearsendedDecember26, income of statements Consolidated Research anddevelopment Income before taxes Weighted average commonshares outstanding Cost ofsales Dilutive effect of: Interest expense Marketing, generalandadministrative Operating income 1998 Step-UpWarrants Employee stockoptions ...... 1.73 $ 1.82 $ 6,068 $ $26,273 17,894 12,144 3,069 9,137 8,379 3,076 2,509 3,517 3,336 1998 792 165 159 (34) 22 .3$1.45 $ 1.57 1.93 $ $ 2.12 5,157 $ $ 6,945 $ $20,847 $25,070 0697,934 10,659 51313,294 15,183 ,4 9,164 9,945 ,1 2,777 3,714 7,553 9,887 2,322 1,808 2,891 2,347 ,9 3,551 3,590 3,290 3,271 1 74 115 9 406 799 0 187 204 971996 1997 2)(25) (27) —— INTELCORPORATION1998 15 — 58 195 1997 516 500 448 676 129 110 508 842 1,839 1,407 1,268 1,165 2,041 6,020 1,076 3,311 5,630 3,438 1,697 2,437 7,461 5,113 18,127 15,926 19,295 15,867 10,577 10,666 $28,880 $4,102 $28,880 $ 212 — — 603 606 458 958 702 201 316 618 122 1998 4,822 5,365 1,022 1,244 1,285 1,094 5,804 1,387 5,272 3,527 1,582 6,297 1,622 9,459 21,068 17,952 23,377 11,609 13,475 13,149 $31,471 $31,471 $159 $ 2,038 ......

(3,256 in 1997) and capital in excess of par value (3,256 in 1997) Preferred Stock, $.001 par value, 50 shares authorized; none issued authorized; Stock, $.001 par value, 50 shares Preferred Common Stock, $.001 par value, 4,500 shares authorized; 3,315 issued and outstanding authorized; 3,315 issued Common Stock, $.001 par value, 4,500 shares Accrued advertising Other accrued liabilities Cash and cash equivalents Short-term debt Total liabilities and stockholders’ equity Total Accumulated other comprehensive income Accumulated other comprehensive Income taxes payable Total assets Total Less accumulated depreciation Construction in progress Other current assets Other current Accounts payable Retained earnings Land and buildings Trading assets Trading Inventories assets tax Deferred Accounts receivable, net of allowance for doubtful accounts of $62 ($65 in 1997) net of allowance for doubtful accounts Accounts receivable, Short-term investments one year within Long-term debt redeemable Accrued compensation and benefits distributors income on shipments to Deferred

Machinery and equipment Consolidated balance sheets Deferred tax liabilities Deferred Commitments and contingencies Stockholders’ equity: Long-term debt See accompanying notes. Total stockholders’ equity Total Total current liabilities current Total Other assets Property, plant and equipment, net plant and equipment, Property, Total current assets current Total December 26,December December 27, and 1998 1997 amounts) per share (In millions—except Assets assets: Current Liabilities and stockholders’ equity liabilities: Current Put warrants Property, plant and equipment: plant and Property, Long-term investments 16 INTELCORPORATION1998 See accompanyingnotes. Cash andcashequivalents,endofyear Net (decrease) increase incashandequivalents Net cash(usedfor)financingactivities Net cash(usedfor)investingactivities Net cashprovided byoperatingactivities Cash andcashequivalents,beginningofyear (In millions) 1998 Three yearsendedDecember26, flows cash of statements Consolidated Cash paidduringtheyearfor: Supplemental disclosures ofcash flow information: Net income Cash flowsprovided by(usedfor)operatingactivities: Cash flowsprovided by(usedfor)investingactivities: Adjustments toreconcile netincometocashprovided by(usedfor)operatingactivities: Cash flowsprovided by(usedfor)financingactivities: Proceeds from salesofshares through employeestockplansandother Changes inassetsandliabilities: Payment ofdividendstostockholders Maturities andotherchangesinavailable-for-sale investments Sales ofavailable-for-sale investments Purchase ofChipsandTechnologies, Inc.,netofcashacquired Proceeds from salesofputwarrants Purchased in-process research anddevelopment Repurchase andretirement ofCommonStock Deferred taxes Proceeds from exercise of1998 Step-UpWarrants Retirement oflong-termdebt Interest Income taxes Additions tolong-termdebt Purchases ofavailable-for-sale investments Purchase ofDigitalEquipmentCorporationsemiconductoroperations Additions toproperty, plantandequipment Net lossonretirements ofproperty, plantandequipment Depreciation (Decrease) increase inshort-termdebt,net Accounts payable Accounts receivable Accrued compensationandbenefits Income taxespayable Other assetsandliabilities Inventories Tax benefitfrom employeestockplans Total adjustments ...... 4,102 $ 2,784 $ $40 2,038 $ (10,925) (6,785) (3,557) (2,064) (4,749) (6,506) 3,123 2,807 6,068 1,620 8,681 9,191 (378) (211) (217) (585) (321) (180) 1998 415 167 165 282 507 169 201 (38) (83) 17 77 40 — ,6 1,463 $ 4,165 $ ,0 2,217 $ 3,305 $ $37$51 $4,102 $4,165 0088,743 10,008 451 (3,024) (4,501) 924 (4,683) (9,224) 322 (773) (3,212) (5,268) (6,859) 332 (1,302) (3,372) ,6 3,586 3,063 5,157 6,945 ,1 2,214 6,713 ,9 1,888 2,192 30 — (300) 44 711 (404) 17 43 (177) 17 439 (127) 10 (148) (180) 971996 1997 3 105 438 4 370 140 8 56 288 2 196 224 120 130 1 257 317 317 172 225 153 8 (607) 285 7 185 179 6)2,702 (63) 04 40 —— —— —— 179 6 INTELCORPORATION1998 17 5,227 6,881 6,613 income Total other com- Accumulated —— 288— (144) (1,622) — ——— — (188) — — (1,766) — 288 — 6,068—40——40 — — (188) —— 545 53 6,068 — 545 588 (168) — — 641 (168) —— — ——56——56 5,157— —— — 70 70 5,157 —— 272— 70 (156) — — — — 6,945 342 — (156) — (64) 6,945 (64) 61 581 (1) — 580 66922——922 65 457 — — 457 (88) (311) (3,061) — (3,372) (68) (269) (925) — (1,194) 155 1,620 — — 1,620 (162) (1,124) (4,462) — (5,586) 3,256 3,311 15,926 58 19,295 3,315 $ 4,822 $17,952 $ 603 $23,377 3,286 $ 2,583 $ 9,505 $ 52 $12,140 3,283 2,897 13,853 122 16,872 olders’ equity Number Retained prehensive in excess of par value in excess of Common Stock andCommon Stock capital ......

—except per share amounts) share —except per of shares Amount earnings

Total comprehensive income comprehensive Total Total comprehensive income comprehensive Total Total comprehensive income comprehensive Total Change in unrealized gain on available-for-sale investments gain on available-for-sale Change in unrealized Change in unrealized gain on available-for-sale investments gain on available-for-sale Change in unrealized Change in unrealized gain on available-for-sale investments gain on available-for-sale Change in unrealized tax benefit of $196 and other tax benefit of $196 tax benefit of $224 and other Net income Net income Net income

tax benefit of $415 and other tax benefit of $415 Consolidated statements of stockh See accompanying notes. Cash dividends declared ($.050 per share) Cash dividends declared Balance at December 26, 1998 Cash dividends declared ($.058 per share) ($.058 Cash dividends declared Cash dividends declared ($.048 per share) Cash dividends declared Three years ended December 26, years ended December Three 1998 (In millions December 30,Balance at 1995 Reclassification of put warrant obligation, net Reclassification of put warrant obligation, of Common Stock and retirement Repurchase Balance at December 27,1997 Reclassification of put warrant obligation, net of Common Stock and retirement Repurchase Reclassification of put warrant obligation, net Reclassification of put Stock of Common and retirement Repurchase Balance at December 28, 1996 Proceeds from sales of shares through employee stock plans, through sales of shares from Proceeds employee stock plans, through shares sales of from Proceeds Components of comprehensive income: Components of comprehensive Components of comprehensive income: Components of comprehensive income: Components of comprehensive Proceeds from sales of put warrants sales of from Proceeds Proceeds from sales of put warrants sales of from Proceeds Step-Up Warrants of 1998 exercise from Proceeds Proceeds from sales of put warrants from Proceeds Proceeds from sales of shares through employee stock plans, through shares sales of from Proceeds 18 Notes to consolidated financial statements

Accounting policies and generally offset the change in the deferred compensation Fiscal year. Intel Corporation (“Intel” or “the Company”) liability, which is also included in other income or expense. has a fiscal year that ends the last Saturday in December. Net gains on the trading asset portfolio were $66 million, $37 Fiscal years 1998, 1997 and 1996, each 52-week years, million and $12 million in 1998, 1997 and 1996, respectively. ended on December 26, 27 and 28, respectively. Periodically Fair values of financial instruments. Fair values of cash there will be a 53-week year. The next 53-week year will and cash equivalents approximate cost due to the short end on December 30, 2000. period of time to maturity. Fair values of long-term invest- Basis of presentation. The consolidated financial state- ments, long-term debt, short-term investments, short-term ments include the accounts of Intel and its wholly owned debt, long-term debt redeemable within one year, trading INTELCORPORATION1998 subsidiaries. Significant intercompany accounts and trans- assets, non-marketable instruments, swaps, currency forward actions have been eliminated. Accounts denominated in contracts, currency options and options hedging marketable foreign currencies have been remeasured using the U.S. instruments are based on quoted market prices or pricing dollar as the functional currency. models using current market rates. No consideration is The preparation of financial statements in conformity with given to liquidity issues in valuing debt. generally accepted accounting principles requires manage- Derivative financial instruments. The Company utilizes ment to make estimates and assumptions that affect the derivative financial instruments to reduce financial market amounts reported in the financial statements and accompa- risks. These instruments are used to hedge foreign currency, nying notes. Actual results could differ from those estimates. equity and interest rate market exposures of underlying Investments. Highly liquid investments with insignificant assets, liabilities and other obligations.The Company also interest rate risk and with original maturities of three months uses derivatives to create synthetic instruments, for exam- or less are classified as cash and cash equivalents. Invest- ple, buying and selling put and call options on the same ments with maturities greater than three months and less underlying security, to generate money market like returns than one year are classified as short-term investments. with a similar level of risk.The Company does not use Investments with maturities greater than one year are derivative financial instruments for speculative or trading classified as long-term investments. purposes. The Company’s accounting policies for these The Company’s policy is to protect the value of its invest- instruments are based on whether they meet the Company’s ment portfolio and to minimize principal risk by earning criteria for designation as hedging transactions.The criteria returns based on current interest rates. The Company enters the Company uses for designating an instrument as a hedge into certain equity investments for the promotion of busi- include the instrument’s effectiveness in risk reduction and ness and strategic objectives, and typically does not at- one-to-one matching of derivative instruments to underly- tempt to reduce or eliminate the inherent market risks on ing transactions. Gains and losses on currency forward these investments. A substantial majority of the Company’s contracts, and options that are designated and effective marketable investments are classified as available-for-sale as hedges of anticipated transactions, for which a firm com- as of the balance sheet date and are reported at fair value, mitment has been attained, are deferred and recognized in with unrealized gains and losses, net of tax, recorded in income in the same period that the underlying transactions stockholders’ equity. The cost of securities sold is based on are settled. Gains and losses on currency forward contracts, the specific identification method. Realized gains or losses options and swaps that are designated and effective as and declines in value, if any, judged to be other than tempo- hedges of existing transactions are recognized in income rary on available-for-sale securities are reported in other in the same period as losses and gains on the underlying income or expense. Investments in non-marketable instru- transactions are recognized and generally offset. Gains and ments are recorded at the lower of cost or market and losses on any instruments not meeting the above criteria are included in other assets. recognized in income in the current period. If an underlying Trading assets. The Company maintains its trading asset hedged transaction is terminated earlier than initially antici- portfolio to generate returns that offset changes in certain pated, the offsetting gain or loss on the related derivative liabilities related to deferred compensation arrangements. instrument would be recognized in income in the same per- The trading assets consist of marketable equity securities iod. Subsequent gains or losses on the related derivative and are stated at fair value. Both realized and unrealized instrument would be recognized in income in each period gains and losses are included in other income or expense until the instrument matures, is terminated or is sold. Income or expense on swaps is accrued as an adjustment to the yield of the related investments or debt they hedge. Notes to consolidated financial statements 19

Inventories. Inventories are stated at the lower of cost or Reclassifications. Certain amounts reported in previous INTELCORPORATION1998 market. Cost is computed on a currently adjusted standard years have been reclassified to conform to the 1998 pre- basis (which approximates actual cost on a current average sentation. or first-in, first-out basis). Inventories at fiscal year-ends Recent accounting pronouncements. The Company were as follows: intends to adopt Statement of Financial Accounting Standards (“SFAS”) No.133,“Accounting for Derivative Instruments (In millions) 1998 1997 and Hedging Activities,”as of the beginning of its fiscal year Raw materials $ 206 $ 255 2000. The Standard will require the Company to recognize Work in process 795 928 all derivatives on the balance sheet at fair value. Derivatives Finished goods 581 514 that are not hedges must be adjusted to fair value through Total $ 1,582 $ 1,697 income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives Property, plant and equipment. Property, plant and equip- will either be offset against the change in fair value of the ment are stated at cost. Depreciation is computed for finan- hedged assets, liabilities or firm commitments through earn- cial reporting purposes principally using the straight-line ings, or recognized in other comprehensive income until the method over the following estimated useful lives: machinery hedged item is recognized in earnings. The change in a deriv- and equipment, 2–4 years; buildings, 4–40 years. ative’s fair value related to the ineffective portion of a hedge, Deferred income on shipments to distributors. Certain of if any, will be immediately recognized in earnings. The effect the Company’s sales are made to distributors under agree- of adopting the Standard is currently being evaluated but is ments allowing price protection and/or right of return on not expected to have a material effect on the Company’s merchandise unsold by the distributors. Because of frequent financial position or overall trends in results of operations. sales price reductions and rapid technological obsolescence Common Stock in the industry, Intel defers recognition of such sales until 1998 Step-Up Warrants. In 1993, the Company issued 160 the merchandise is sold by the distributors. million 1998 Step-Up Warrants to purchase 160 million shares Advertising. Cooperative advertising obligations are accrued of Common Stock. This transaction resulted in an increase and the costs expensed at the same time the related revenues of $287 million in Common Stock and capital in excess of are recognized. All other advertising costs are expensed as par value, representing net proceeds from the offering. The incurred. Advertising expense was $1.3 billion, $1.2 billion and Warrants became exercisable in May 1993 at an effective $974 million in 1998, 1997 and 1996, respectively. price of $8.9375 per share of Common Stock, subject to Interest. Interest as well as gains and losses related to annual increases to a maximum price of $10.4375 per share contractual agreements to hedge certain investment positions effective in March 1997. Between December 27,1997 and and debt (see “Derivative financial instruments”) are recorded March 14,1998, approximately 155 million Warrants were as net interest income or expense. Interest expense capital- exercised, and shares of Common Stock were issued for ized as a component of construction costs was $6 million, $9 proceeds of $1.6 billion. The expiration date of these War- million and $33 million for 1998, 1997 and 1996, respectively. rants was March 14,1998. Earnings per share. Basic earnings per common share are Stock repurchase program. The Company has an ongoing computed using the weighted average number of common authorization, as amended, from the Board of Directors to shares outstanding during the period. Diluted earnings per repurchase up to 760 million shares of Intel’s Common Stock common share incorporate the incremental shares issuable in open market or negotiated transactions. During 1998, the upon the assumed exercise of stock options and warrants. Company repurchased 161.7 million shares of Common For portions of 1998, certain of the Company’s stock options Stock at a cost of $6.8 billion. As of December 26,1998, were excluded from the calculation of diluted earnings per the Company had repurchased and retired approximately share because they were antidilutive, but these options 588.6 million shares at a cost of $13.6 billion since the pro- could be dilutive in the future. gram began in 1990. As of December 26,1998, after allowing Stock distribution. On January 27,1999, the Company for 5 million shares to cover outstanding put warrants,166.4 announced a two-for-one stock split in the form of a special million shares remained available under the repurchase stock distribution payable April 11,1999 to stockholders of authorization. record as of March 23,1999. On July 13,1997, the Company effected a two-for-one stock split in the form of a special stock distribution to stockholders of record as of June 10,1997. All share, per share, Common Stock, stock option and warrant amounts herein have been restated to reflect the effects of these splits. 20 Notes to consolidated financial statements

Put warrants Long-term debt. Long-term debt at fiscal year-ends was In a series of private placements from 1991 through 1998, as follows: the Company sold put warrants that entitle the holder of (In millions) 1998 1997 each warrant to sell to the Company, by physical delivery, one share of Common Stock at a specified price. Activity Payable in U.S. dollars: during the past three years is summarized as follows: AFICA Bonds due 2013 at 3.9%–4.25% $ 110 $110 Other U.S. dollar debt 5 6 Put warrants Payable in other currencies: outstanding Cumulative Irish punt due 2000–2027 at 5%–12% 541 396 net premium Number of Potential

INTELCORPORATION1998 (In millions) received warrants obligation Greek drachma due 2001 46 46

December 30, 1995 $ 279 48.0 $ 725 Subtotal 702 558 Sales 56 36.0 603 Less long-term debt redeemable within one year — (110) Exercises — (7.2) (108) Total $ 702 $ 448 Expirations — (58.8) (945) December 28, 1996 335 18.0 275 The Company has guaranteed repayment of principal Sales 288 92.6 3,525 and interest on the AFICA Bonds issued by the Puerto Rico Expirations — (58.0) (1,759) Industrial, Tourist, Educational, Medical and Environmental December 27, 1997 623 52.6 2,041 Control Facilities Financing Authority (“AFICA”). During 1998, Sales 40 15.0 588 the bonds were repriced and a portion remarketed, with Exercises — (30.0) (1,199) interest rates effective through 2003 of 4.25% on the $80 Expirations — (32.6) (1,229) million of Series A bonds and 3.90% on the $30 million of December 26, 1998 $ 663 5.0 $ 201 Series B bonds. The bonds are adjustable and redeemable at the option of either the Company or the bondholder The amount related to Intel’s potential repurchase obli- every five years through 2013 and are next adjustable and gation has been reclassified from stockholders’ equity to redeemable in 2003. The additional and the existing Irish put warrants. The 5 million put warrants outstanding at punt borrowings were made in connection with the financing December 26, 1998 expire on various dates in January and of manufacturing facilities in Ireland, and Intel has invested February 1999 and have exercise prices ranging from $40 the proceeds in Irish punt denominated instruments of to $41 per share, with an average exercise price of $40 per similar maturity to hedge foreign currency and interest rate share. There is no significant effect on diluted earnings per exposures.The Greek drachma borrowings were made share for the periods presented. under a tax incentive program in Ireland, and the proceeds and cash flows have been swapped to U.S. dollars. Borrowings Under shelf registration statements filed with the Securities Short-term debt. Non-interest-bearing short-term debt at and Exchange Commission, Intel had the authority to issue fiscal year-ends was as follows: up to $3.3 billion in the aggregate of Common Stock, Pre- (In millions) 1998 1997 ferred Stock, depositary shares, debt securities and warrants to purchase the Company’s or other issuers’Common Stock, Borrowed under lines of credit $10$32 Preferred Stock and debt securities, and, subject to certain Drafts payable 149 180 limits, stock index warrants and foreign currency exchange Total $ 159 $ 212 units. In 1993, Intel completed an offering of Step-Up Warrants (see “1998 Step-Up Warrants”) under these registration The Company also borrows under commercial paper statements. The Company may issue up to $1.4 billion in programs. Maximum borrowings under commercial paper additional securities under effective registration statements. programs reached $325 million during 1998 and $175 million As of December 26,1998, aggregate debt maturities were during 1997.This debt is rated A-1+ by Standard and Poor’s as follows: 2000–$9 million; 2001–$57 million; 2002–$22 and P-1 by Moody’s. Proceeds are used to fund short-term million; 2003–$130 million; and thereafter–$484 million. working capital needs. Investments The returns on a majority of the Company’s marketable investments in long-term fixed rate debt and certain equity securities are swapped to U.S. dollar LIBOR-based returns. The currency risks of investments denominated in foreign Notes to consolidated financial statements 21 currencies are hedged with foreign currency borrowings, cur- Investments at December 27,1997 were as follows: INTELCORPORATION1998 rency forward contracts or currency interest rate swaps (see Gross Gross Estimated “Derivative financial instruments” under “Accounting policies”). unrealized unrealized fair Investments with maturities of greater than six months (In millions) Cost gains losses value consist primarily of A and A2 or better rated financial instru- Commercial paper $ 3,572 $ 1 $ (9) $ 3,564 ments and counterparties. Investments with maturities of Bank time deposits 2,369 — (2) 2,367 up to six months consist primarily of A-1 and P-1 or better Corporate bonds 1,788 12 (73) 1,727 rated financial instruments and counterparties. Foreign gov- Floating rate notes 843 1 (2) 842 ernment regulations imposed upon investment alternatives Loan participations 743 — — 743 of foreign subsidiaries, or the absence of A and A2 rated Repurchase agreements 515 — — 515 counterparties in certain countries, result in some minor Securities of foreign exceptions. Intel’s practice is to obtain and secure available governments 75 — (6) 69 collateral from counterparties against obligations whenever Fixed rate notes 32 — — 32 Other debt securities 294 — (1) 293 Intel deems appropriate. At December 26,1998, investments were placed with approximately 185 different counterparties. Total debt securities 10,231 14 (93) 10,152 Investments at December 26,1998 were as follows: Hedged equity 504 9 (17) 496 Marketable strategic Gross Gross Estimated equity securities 279 130 (34) 375 unrealized unrealized fair (In millions) Cost gains losses value Preferred stock and other equity 341 1 (7) 335 U.S. government securities $ 2,824 $ — $ (11) $ 2,813 Total equity securities 1,124 140 (58) 1,206 Commercial paper 2,694 5 (2) 2,697 Swaps hedging investments Floating rate notes 1,273 2 (2) 1,273 in debt securities — 76 (12) 64 Corporate bonds 1,153 51 (17) 1,187 Swaps hedging investments Bank time deposits 1,135 1 (1) 1,135 in equity securities — 17 (9) 8 Loan participations 625 — — 625 Currency forward contracts Repurchase agreements 124 — — 124 hedging investments in debt securities — 16 (1) 15 Securities of foreign governments 36 1 (1) 36 Total available-for-sale Other debt securities 160 — — 160 securities 11,355 263 (173) 11,445 Less amounts classified Total debt securities 10,024 60 (34) 10,050 as cash equivalents (3,976) — — (3,976) Hedged equity 100 — (2) 98 Total investments $ 7,379 $ 263 $ (173) $ 7,469 Marketable strategic equity securities 822 979 (44) 1,757 Available-for-sale securities with a fair value at the date of Preferred stock and other equity 140 1 — 141 sale of $227 million, $153 million and $225 million were sold Total equity securities 1,062 980 (46) 1,996 in 1998, 1997 and 1996, respectively.The gross realized gains on these sales totaled $185 million, $106 million and $7 Options creating synthetic money market instruments 474 — — 474 million, respectively. Swaps hedging investments The amortized cost and estimated fair value of investments in debt securities — 19 (52) (33) in debt securities at December 26,1998, by contractual Swaps hedging investments maturity, were as follows: in equity securities —2—2 Currency forward contracts Estimated hedging investments in (In millions) Cost fair value debt securities —2(4)(2) Due in 1 year or less $ 6,412 $ 6,436 Total available-for-sale Due in 1–2 years 3,097 3,099 securities 11,560 1,063 (136) 12,487 Due in 2–5 years 65 65 Less amounts classified as cash equivalents (1,850) — — (1,850) Due after 5 years 450 450 Total investments $ 9,710 $ 1,063 $ (136) $10,637 Total investments in debt securities $10,024 $10,050 22 Notes to consolidated financial statements

Derivative financial instruments Weighted Weighted average Weighted Outstanding notional amounts for derivative financial average receive average Range of instruments at fiscal year-ends were as follows: pay rate rate maturity maturities

(In millions) 1998 1997 Swaps hedging investments in U.S. dollar debt securities 5.4% 5.1% 0.5 years 0–2 years Swaps hedging investments in debt securities $ 2,526 $ 2,017 Swaps hedging investments Swaps hedging investments in equity securities $ 100 $ 604 in foreign currency debt securities 5.5% 5.5% 0.7 years 0–2 years Swaps hedging debt $ 156 $ 156 Swaps hedging investments Currency forward contracts $ 830 $ 1,724 in equity securities N/A 5.8% 1.0 years 0–1 years

INTELCORPORATION1998 Currency options $—$55 Swaps hedging debt 5.6% 5.7% 4.1 years 2–5 years Options creating synthetic money market instruments $ 2,086 $ — Note: Pay and receive rates are based on the reset rates that were in effect at December 26,1998. While the contract or notional amounts provide one measure of the volume of these transactions, they do not Other foreign currency instruments. Intel transacts busi- represent the amount of the Company’s exposure to credit ness in various foreign currencies, primarily Japanese yen and risk. The amounts potentially subject to credit risk (arising certain other Asian and European currencies. The Company from the possible inability of counterparties to meet the has established revenue and balance sheet hedging pro- terms of their contracts) are generally limited to the amounts, grams to protect against reductions in value and volatility of if any, by which the counterparties’ obligations exceed the future cash flows caused by changes in foreign exchange rates. The Company utilizes currency forward contracts obligations of the Company. The Company controls credit and currency options in these hedging programs. The risk through credit approvals, limits and monitoring proce- maturities on these instruments are less than 12 months. dures. Credit rating criteria for derivative financial instruments are similar to those for investments. Fair values of financial instruments Swap agreements. The Company utilizes swap agreements The estimated fair values of financial instruments outstand- to exchange the foreign currency, equity and interest rate ing at fiscal year-ends were as follows:

returns of its investment and debt portfolios for floating 1998 1997 U.S. dollar interest rate based returns. The floating rates Carrying Estimated Carrying Estimated on swaps are based primarily on U.S. dollar LIBOR and are (In millions) amount fair value amount fair value

reset on a monthly, quarterly or semiannual basis. Cash and cash equivalents $ 2,038 $ 2,038 $ 4,102 $ 4,102 Pay rates on swaps hedging investments in debt securities Short-term investments $ 4,821 $ 4,821 $ 5,561 $ 5,561 match the yields on the underlying investments they hedge. Trading assets $ 316 $ 316 $ 195 $ 195 Payments on swaps hedging investments in equity securi- Long-term investments $ 5,375 $ 5,375 $ 1,821 $ 1,821 ties match the equity returns on the underlying investments Non-marketable instruments $ 571 $ 716 $ 387 $ 497 they hedge. Receive rates on swaps hedging debt match Options creating synthetic the expense on the underlying debt they hedge. Maturity money market instruments $ 474 $ 474 $—$— dates of swaps match those of the underlying investment or Swaps hedging investments in debt securities $ (33) $ (33) $64$64 the debt they hedge. There is approximately a one-to-one Swaps hedging investments matching of swaps to investments and debt. Swap agree- in equity securities $2$2$8$8 ments generally remain in effect until expiration. Short-term debt $ (159) $ (159) $ (212) $ (212) Weighted average pay and receive rates, average maturities Long-term debt redeemable and range of maturities on swaps at December 26,1998 within one year $—$—$ (110) $ (109) were as follows: Long-term debt $ (702) $ (696) $ (448) $ (448) Swaps hedging debt $—$1$—$(1) Currency forward contracts $(1)$(1)$26$28 Currency options $—$—$1$1 Notes to consolidated financial statements 23

Concentrations of credit risk The components of other comprehensive income and INTELCORPORATION1998 Financial instruments that potentially subject the Company related tax effects were as follows: to concentrations of credit risk consist principally of invest- (In millions) 1998 1997 1996 ments and trade receivables. Intel places its investments with high-credit-quality counterparties and, by policy, limits Gains on investments during the year, net of tax of $(357), $(4) and $(37) in the amount of credit exposure to any one counterparty 1998, 1997 and 1996, respectively $ 665 $5$75 based on Intel’s analysis of that counterparty’s relative credit Less: adjustment for gains included in net standing. A majority of the Company’s trade receivables are income, net of tax of $65, $37 and $2 derived from sales to manufacturers of computer systems, in 1998, 1997 and 1996, respectively (120) (69) (5) with the remainder spread across various other industries. Other comprehensive income $ 545 $ (64) $ 70 The Company’s five largest customers accounted for approxi- mately 42% of net revenues for 1998. At December 26,1998, Accumulated other comprehensive income presented in these customers accounted for approximately 39% of net the accompanying consolidated balance sheets consists of accounts receivable. the accumulated net unrealized gain on available-for-sale The Company endeavors to keep pace with the evolving investments. computing industry and has adopted credit policies and Provision for taxes standards intended to accommodate industry growth and Income before taxes and the provision for taxes consisted inherent risk. Management believes that credit risks are mod- of the following: erated by the diversity of the Company’s end customers and geographic sales areas. Intel performs ongoing credit (In millions) 1998 1997 1996 evaluations of its customers’ financial condition and requires Income before taxes: collateral as deemed necessary. U.S. $ 6,677 $ 8,033 $ 5,515 Foreign 2,460 2,626 2,419 Interest income and other Total income before taxes $ 9,137 $10,659 $ 7,934 (In millions) 1998 1997 1996 Provision for taxes: Interest income $ 593 $ 562 $ 364 Federal: Foreign currency gains 11 63 26 Current $ 2,321 $ 2,930 $ 2,046 Other income, net 188 174 16 Deferred 145 30 8 Total $ 792 $ 799 $ 406 2,466 2,960 2,054 State: Other income for 1998 and 1997 included approximately Current 320 384 286 $185 and $106 million, respectively, from sales of a portion Foreign: of the Company’s investments in marketable strategic equity Current 351 394 266 securities. Deferred (68) (24) 171

Comprehensive income 283 370 437 The Company adopted SFAS No.130, “Reporting Total provision for taxes $ 3,069 $ 3,714 $ 2,777 Comprehensive Income,”at the beginning of fiscal 1998. Effective tax rate 33.6% 34.8% 35.0% The adoption had no impact on net income or total stock- holders’ equity. Comprehensive income consists of net The tax benefit associated with dispositions from employee income and other comprehensive income. stock plans reduced taxes currently payable for 1998 by $415 million ($224 million and $196 million for 1997 and 1996, respectively). 24 Notes to consolidated financial statements

The provision for taxes reconciles to the amount computed Employee benefit plans by applying the statutory federal rate of 35% to income Stock option plans. Intel has a stock option plan under before taxes as follows: which officers, key employees and non-employee directors may be granted options to purchase shares of the Company’s (In millions) 1998 1997 1996 authorized but unissued Common Stock. The Company also Computed expected tax $ 3,198 $ 3,731 $ 2,777 has a stock option plan under which stock options may be State taxes, net of federal benefits 208 249 186 granted to employees other than officers and directors.The Foreign income taxed at different rates (339) (111) (127) Company’s Executive Long-Term Stock Option Plan, under Other 2 (155) (59) which certain key employees, including officers, have been

INTELCORPORATION1998 Provision for taxes $ 3,069 $ 3,714 $ 2,777 granted stock options, terminated in September 1998. Although this termination will not affect options granted prior to this Deferred income taxes reflect the net tax effects of tem- date, no further grants may be made under this plan. Under porary differences between the carrying amount of assets all of the plans, the option exercise price is equal to the fair and liabilities for financial reporting purposes and the market value of Intel Common Stock at the date of grant. amounts used for income tax purposes. Options currently expire no later than 10 years from the Significant components of the Company’s deferred tax grant date, and generally vest within 5 years. Proceeds assets and liabilities at fiscal year-ends were as follows: received by the Company from exercises are credited to

(In millions) 1998 1997 Common Stock and capital in excess of par value. Addi- tional information with respect to stock option plan activity Deferred tax assets is as follows: Accrued compensation and benefits $ 117 $76 Deferred income 181 200 Outstanding options Inventory valuation and related reserves 106 163 Weighted Shares average Interest and taxes 52 49 available Number exercise (In millions) for options of shares price Other, net 162 188 618 676 December 30,1995 173.8 342.0 $ 5.30 Deferred tax liabilities Grants (53.4) 53.4 $ 17.28 Depreciation (911) (882) Exercises — (47.4) $ 2.47 Unremitted earnings of certain subsidiaries (152) (162) Cancellations 10.2 (10.2) $ 8.53 Unrealized gain on investments (324) (32) December 28, 1996 130.6 337.8 $ 7.49 (1,387) (1,076) Additional shares reserved 260.0 — — Net deferred tax (liability) $ (769) $ (400) Grants (63.0) 63.0 $ 36.23 Exercises — (47.2) $ 3.06 U.S. income taxes were not provided for on a cumulative Cancellations 8.8 (8.8) $ 16.38 total of approximately $2.2 billion of undistributed earnings December 27, 1997 336.4 344.8 $ 13.12 for certain non-U.S. subsidiaries. The Company intends to Grants (48.0) 48.0 $ 38.35 reinvest these earnings indefinitely in operations outside the Exercises — (63.0) $ 4.59 United States. Cancellations 17.3 (17.3) $ 23.64 During 1998, the Company settled all tax and related Lapsed under terminated plans (38.5) — — interest for years 1991 through 1996 with the Internal December 26, 1998 267.2 312.5 $ 18.13 Revenue Service (“IRS”). The settlement did not result in a Options exercisable at: material effect on the Company’s 1998 financial statements. December 28, 1996 114.5 $ 2.86 Years after 1996 are open to examination by the IRS. December 27, 1997 115.2 $ 3.66 Management believes that adequate amounts of tax and December 26, 1998 103.8 $ 6.11 related interest and penalties, if any, have been provided for any adjustments that may result for these years. The range of option exercise prices for options outstand- ing at December 26,1998 was $1.46 to $60.80. The range of exercise prices for options is wide, primarily due to the increasing price of the Company’s stock over the period in which the option grants were awarded. Notes to consolidated financial statements 25

The following tables summarize information about options Pro forma information regarding net income and earnings INTELCORPORATION1998 outstanding at December 26,1998: per share is required by SFAS No.123. This information is required to be determined as if the Company had accounted Outstanding options for its employee stock options (including shares issued under Weighted average Weighted the Stock Participation Plan, collectively called “options”) Number of contract- average shares (in ual life exercise granted subsequent to December 31,1994 under the fair value Range of exercise prices millions) (in years) price method of that statement.The fair value of options granted

$1.46 –$5.55 55.8 2.2 $ 2.83 in 1998,1997 and 1996 reported below has been estimated $5.62–$11.10 70.2 4.9 $ 7.18 at the date of grant using a Black-Scholes option pricing $11.42–$34.75 89.2 6.9 $ 15.16 model with the following weighted average assumptions: $34.85–$60.80 97.3 8.8 $ 37.51 Employee stock options 1998 1997 1996 Total 312.5 6.2 $ 18.13 Expected life (in years) 6.5 6.5 6.5 Risk-free interest rate 5.3% 6.6% 6.5% Exercisable options Volatility .36 .36 .36 Weighted Number of average Dividend yield .2% .1% .2% shares (in exercise Range of exercise prices millions) price Stock Participation Plan shares 1998 1997 1996 $1.46 –$5.55 55.8 $ 2.83 Expected life (in years) .5 .5 .5 $5.62–$11.10 37.6 $ 6.16 Risk-free interest rate 5.2% 5.3% 5.3% $11.42–$34.75 7.0 $ 16.82 Volatility .42 .40 .36 $34.85–$60.80 3.4 $ 37.53 Dividend yield .2% .1% .2% Total 103.8 $ 6.11 The Black-Scholes option valuation model was developed These options will expire if not exercised at specific dates for use in estimating the fair value of traded options that ranging from January 1999 to December 2008. Option exer- have no vesting restrictions and are fully transferable. In cise prices for options exercised during the three-year period addition, option valuation models require the input of highly ended December 26,1998 ranged from $0.78 to $48.97. subjective assumptions, including the expected stock price Stock Participation Plan. Under this plan, eligible employ- volatility. Because the Company’s options have characteris- ees may purchase shares of Intel’s Common Stock at tics significantly different from those of traded options, and 85% of fair market value at specific, predetermined dates. because changes in the subjective input assumptions can Of the 472 million shares authorized to be issued under the materially affect the fair value estimate, in the opinion of plan, 79.7 million shares remained available for issuance management, the existing models do not necessarily pro- at December 26, 1998. Employees purchased 6.3 million vide a reliable single measure of the fair value of its options. shares in 1998 (9 million in 1997 and 14 million in 1996) The weighted average estimated fair value of employee stock for $229 million ($191 million and $140 million in 1997 and options granted during 1998, 1997 and 1996 was $17.91, 1996, respectively). $17.67 and $8.17 per share, respectively. The weighted Pro forma information. The Company has elected to average estimated fair value of shares granted under the follow APB Opinion No. 25,“Accounting for Stock Issued to Stock Participation Plan during 1998, 1997 and 1996 was Employees,” in accounting for its employee stock options $10.92, $11.04 and $4.05, respectively. because, as discussed below, the alternative fair value For purposes of pro forma disclosures, the estimated fair accounting provided for under SFAS No.123, “Accounting value of the options is amortized to expense over the options’ for Stock-Based Compensation,” requires the use of option vesting periods.The Company’s pro forma information follows valuation models that were not developed for use in valuing (in millions except for earnings per share information): employee stock options. Under APB No. 25, because the exercise price of the Company’s employee stock options 1998 1997 1996 equals the market price of the underlying stock on the date Pro forma net income $ 5,755 $ 6,735 $ 5,046 of grant, no compensation expense is recognized in the Pro forma basic earnings per share $1.73 $ 2.06 $ 1.53 Company’s financial statements. Pro forma diluted earnings per share $ 1.66 $ 1.88 $ 1.42 26 Notes to consolidated financial statements

The effects on pro forma disclosures of applying SFAS The Company provides postemployment benefits for retired No.123 are not likely to be representative of the effects on employees in the U.S. Upon retirement, eligible employees pro forma disclosures of future years. Because SFAS No. are credited with a defined dollar amount based on years 123 is applicable only to options granted subsequent to of service. These credits can be used to pay all or a portion December 31,1994, the pro forma effect will not be fully of the cost to purchase coverage in an Intel-sponsored reflected until 1999. medical plan. These benefits had no material impact on the Retirement plans. The Company provides tax-qualified Company’s financial statements for the periods presented. profit-sharing retirement plans (the “Qualified Plans”) for the Acquisitions benefit of eligible employees in the U.S. and Puerto Rico In May 1998, the Company purchased the semiconductor INTELCORPORATION1998 and certain foreign countries. The plans are designed to operations of Digital Equipment Corporation, including man- provide employees with an accumulation of funds for ufacturing facilities in Massachusetts as well as development retirement on a tax-deferred basis and provide for annual operations in Israel and Texas. The original cash purchase discretionary employer contributions to trust funds. price of $625 million was adjusted to $585 million as a result The Company also provides a non-qualified profit-sharing of revisions to the valuations of certain capital assets as con- retirement plan (the “Non-Qualified Plan”) for the benefit of templated in the original purchase agreement.The purchase eligible employees in the U.S. This plan is designed to per- price remains subject to adjustment for asset valuation in mit certain discretionary employer contributions in excess accordance with the agreement. Assets acquired consisted of the tax limits applicable to the Qualified Plans and to primarily of property, plant and equipment. Following the permit employee deferrals in excess of certain tax limits. completion of the purchase, lawsuits between the compa- This plan is unfunded. nies that had been pending since 1997 were dismissed The Company accrued $291 million for the Qualified Plans with prejudice. and the Non-Qualified Plan in 1998 ($273 million in 1997 and In January 1998, the Company acquired the outstanding $209 million in 1996). The Company expects to fund approxi- shares of Chips and Technologies, Inc., a supplier of graphics mately $283 million for the 1998 contribution to the Qualified accelerator chips for mobile computing products. The pur- Plans and to allocate approximately $13 million for the Non- chase price was approximately $430 million ($321 million in Qualified Plan, including the utilization of amounts accrued net cash). The Company recorded a non-deductible charge in prior years. A remaining accrual of approximately $205 of $165 million for purchased in-process research and devel- million carried forward from prior years is expected to be opment, representing the appraised value of products still contributed to these plans when allowable under IRS reg- in the development stage that were not considered to have ulations and plan rules. reached technological feasibility. Contributions made by the Company vest based on the employee’s years of service. Vesting begins after three years Commitments of service in 20% annual increments until the employee is The Company leases a portion of its capital equipment 100% vested after seven years. and certain of its facilities under operating leases that expire The Company provides tax-qualified defined-benefit pen- at various dates through 2010. Rental expense was $64 sion plans for the benefit of eligible employees in the U.S. million in 1998, $69 million in 1997 and $57 million in 1996. and Puerto Rico. Each plan provides for minimum pension Minimum rental commitments under all non-cancelable leases benefits that are determined by a participant’s years of ser- with an initial term in excess of one year are payable as fol- vice, final average compensation (taking into account the lows: 1999–$35 million; 2000–$28 million; 2001–$22 million; participant’s social security wage base) and the value of the 2002–$20 million; 2003–$15 million; 2004 and beyond– Company’s contributions, plus earnings, in the Qualified Plan. $22 million. Commitments for construction or purchase of If the participant’s balance in the Qualified Plan exceeds the property, plant and equipment approximated $2.1 billion at pension guarantee, the participant will receive benefits from December 26,1998. In connection with certain manufactur- the Qualified Plan only. Intel’s funding policy is consistent ing arrangements, Intel had minimum purchase commit- with the funding requirements of federal laws and regulations. ments of approximately $83 million at December 26,1998 The Company also provides defined-benefit pension plans for flash memory. in certain foreign countries. The Company’s funding policy In October 1998, Intel announced that it had entered into for foreign defined-benefit pension plans is consistent with a definitive agreement to acquire Shiva Corporation (“Shiva”), the local requirements in each country. These defined-benefit whose products include remote access and virtual private pension plans had no material impact on the Company’s networking solutions for the small to medium enterprise financial statements for the periods presented. market segment and the remote access needs of campuses and branch offices. Intel expects that the total cash required to complete the transaction will be approximately $185 mil- lion, before consideration of any cash to be acquired. Notes to consolidated financial statements 27

Contingencies former sites. The EPA has issued a Record of Decision with INTELCORPORATION1998 In November 1997, Intergraph Corporation (“Intergraph”) respect to a groundwater cleanup plan at that site, including filed suit in Federal District Court in Alabama generally alleg- expected costs to complete. Under the California and U.S. ing that Intel attempted to coerce Intergraph into relinquish- Superfund statutes, liability for cleanup of this site and the ing certain patent rights. The suit initially alleged that Intel adjacent area is joint and several. The Company, however, infringes three Intergraph microprocessor-related patents has reached agreement with those same two companies and has been amended to add two other patents. The suit which significantly limits the Company’s liabilities under the also includes alleged violations of antitrust laws and various proposed cleanup plan. Also, the Company has completed state law claims. The suit seeks injunctive relief and unspec- extensive studies at its other sites and is engaged in cleanup ified damages. Intel has counterclaimed that the Intergraph at several of these sites. In the opinion of management, patents are invalid and alleges infringement of seven Intel including internal counsel, the potential losses to the patents, breach of contract and misappropriation of trade Company in excess of amounts already accrued arising out secrets. In April 1998, the Court ordered Intel to continue to of these matters would not have a material adverse effect deal with Intergraph on the same terms as it treats allegedly on the Company’s financial position or overall trends in similarly situated customers with respect to confidential results of operations, even if joint and several liability were information and product supply. Intel’s appeal of this order to be assessed. was heard in December 1998. In June 1998, Intel filed a The estimate of the potential impact on the Company’s motion for summary judgment on Intergraph’s patent claims financial position or overall results of operations for the on the grounds that Intel is licensed to use those patents. above legal proceedings could change in the future. In July 1998, the Company received a letter stating that Operating segment and geographic information Intergraph believes that the patent damages will be “several Intel adopted SFAS No.131,“Disclosures about Segments billion dollars by the time of trial.” In addition,Intergraph of an Enterprise and Related Information,” in 1998. SFAS alleges that Intel’s infringement is willful and that any dam- No. 131 establishes standards for reporting information ages awarded should be trebled. The letter also stated that about operating segments and related disclosures about Intergraph believes that antitrust, unfair competition and tort products, geographic information and major customers. and contract damages will be “hundreds of millions of dol- Operating segment information for 1997 and 1996 is also lars by the time of trial.”The Company disputes Intergraph’s presented in accordance with SFAS No.131. claims and intends to defend the lawsuit vigorously. Intel designs, develops, manufactures and markets The Company is currently party to various legal proceed- microcomputer components and related products at vari- ings, including that noted above. While management, ous levels of integration. The Company is organized into including internal counsel, currently believes that the ulti- four product line operating segments: Intel Architecture mate outcome of these proceedings, individually and in the Business Group, Computing Enhancement Group, Network aggregate, will not have a material adverse effect on the Communications Group and New Business Group. Each of Company’s financial position or overall trends in results of these groups has a vice president who reports directly to the operations, litigation is subject to inherent uncertainties. Chief Executive Officer (“CEO”). The CEO allocates resources Were an unfavorable ruling to occur, there exists the pos- to each of these groups using information on their revenues sibility of a material adverse impact on the net income of and operating profits before interest and taxes. The CEO the period in which the ruling occurs. has been identified as the Chief Operating Decision Maker Intel has been named to the California and U.S. Superfund as defined by SFAS No.131. lists for three of its sites and has completed, along with two The Intel Architecture Business Group’s products include other companies, a Remedial Investigation/Feasibility study the Pentium® family of microprocessors, and microprocessors with the U.S. Environmental Protection Agency (“EPA”) to and related board-level products based on the P6 micro- evaluate the groundwater in areas adjacent to one of its architecture (including the Pentium® II processor, the Intel® CeleronTM processor and the Pentium® II XeonTM processor). Sales of microprocessors and related board-level products based on the P6 microarchitecture represented a majority of the Company’s 1998 revenues and a substantial majority of its 1998 gross margin. The Computing Enhancement Group’s 28 Notes to consolidated financial statements

products include chipsets, embedded processors (including In 1998, one customer accounted for 13% of the Company’s embedded Pentium® processors), microcontrollers, flash revenues and another customer accounted for 11%. In 1997, memory products and graphics products. The Network one customer accounted for 12% of the Company’s revenues. Communications Group’s products include fast Ethernet In 1996, no customer exceeded 10% of the Company’s rev- connections, hubs, switches and routers.The New Business enues. A substantial majority of the sales to these customers Group’s products include systems management software, were Intel Architecture Business Group products, but these digital imaging products, and video and data conferencing customers also purchased Computing Enhancement Group products. Intel’s products in all operating groups are sold products. directly to original equipment manufacturers, retail and Enterprise-wide information is provided in accordance with INTELCORPORATION1998 industrial distributors, and resellers throughout the world. SFAS No.131. Geographic revenue information for the three In addition to the aforementioned operating segments, years ended December 26,1998 is based on the location of the sales and marketing, manufacturing, finance and the selling entity. Property, plant and equipment information administration groups also report to the CEO. Expenses is based on the physical location of the assets at the end of these groups are allocated to the operating segments of each of the fiscal years. and are included in the operating results reported below. Revenues from unaffiliated customers by geographic Certain corporate-level operating expenses (primarily profit- region were as follows: dependent bonus expenses) and reserves for deferred (In millions) 1998 1997 1996 income on shipments to distributors are not allocated to operating segments and are included in “all other” in the United States $ 11,663 $ 11,053 $ 8,668 reconciliation of operating profits reported below. Europe 7,452 6,774 5,876 Although the Company has four operating segments, Asia-Pacific 5,309 4,754 3,844 only the Intel Architecture Business Group and Computing Japan 1,849 2,489 2,459 Enhancement Group are reportable segments under the Total revenues $26,273 $25,070 $20,847 criteria of SFAS No.131. Intel does not identify or allocate assets or depreciation by operating segment, nor does Net property, plant and equipment by country was as follows: the CEO evaluate groups on these criteria. Operating seg- (In millions) 1998 1997 ments do not sell products to each other, and accordingly, United States $ 8,076 $ 8,022 there are no intersegment revenues to be reported. Intel Ireland 1,287 919 does not allocate interest and other income, interest expense Other foreign countries 2,246 1,725 or taxes to operating segments.The accounting policies for segment reporting are the same as for the Company Total property, plant and equipment, net $ 11,609 $10,666 as a whole (see “Accounting policies”). Supplemental information (unaudited) Information on reportable segments for the three years Quarterly information for the two years ended December 26, ended December 26, 1998 is as follows: 1998 is presented on page 37. (In millions) 1998 1997 1996

Intel Architecture Business Group Revenues $21,545 $20,782 $ 17,000 Operating profit $ 9,077 $10,659 $ 7,666 Computing Enhancement Group Revenues $ 4,047 $ 3,793 $ 3,622 Operating profit $ 358 $ 529 $ 940 All other Revenues $ 681 $ 495 $ 225 Operating (loss) $ (1,056) $ (1,301) $ (1,053) Total Revenues $26,273 $25,070 $20,847 Operating profit $ 8,379 $ 9,887 $ 7,553 Report of Ernst & Young LLP, independent auditors 29

The Board of Directors and assessing the accounting principles used and significant INTELCORPORATION1998 Stockholders, Intel Corporation estimates made by management, as well as evaluating the We have audited the accompanying consolidated balance overall financial statement presentation. We believe that our sheets of Intel Corporation as of December 26,1998 and audits provide a reasonable basis for our opinion. December 27,1997, and the related consolidated statements In our opinion, the consolidated financial statements of income, stockholders’ equity, and cash flows for each referred to above present fairly, in all material respects, of the three years in the period ended December 26,1998. the consolidated financial position of Intel Corporation at These financial statements are the responsibility of the December 26,1998 and December 27,1997, and the con- Company’s management. Our responsibility is to express an solidated results of its operations and its cash flows for each opinion on these financial statements based on our audits. of the three years in the period ended December 26,1998, We conducted our audits in accordance with generally in conformity with generally accepted accounting principles. accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assur- ance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- San Jose, California sures in the financial statements. An audit also includes January 11,1999 30 INTELCORPORATION1998 1997, marketing,generalandadministrativespendinggrew 97t 98 rmrl u oicesdsedn ndevel- primarilyduetoincreased spendingon 1998, 1997 to Pentium cartridgehousingthe (“SEC”) Contact for theSingleEdge additional costsassociatedwithpurchased components primarily duetomicroprocessor unitvolumegrowth and Computing EnhancementGroup. to alesserextentdueincreases inrevenues ofthe processors bytheIntelArchitecture BusinessGroup and were primarilyduetohigherrevenues from salesofmicro- Theincreases inbothperiods 1997. 1996 to 20% from 1997,consecutive year, increasing by5%from andby operations of Results ofoperations results and condition financial analysis of and discussion Management’s otiue otelwrtxrt n1998. contributed tothelowertaxrate in Foreign incometaxedatratesdifferent from U.S.rates 1996. and35.0% in 1997 1998 from 34.8%in to 33.6%in on salesofequityinvestments. to higheraverageinvestmentbalancesandgains and otherincomeincreased by$393million,primarilydue interest expensewasessentially unchanged,andinterest 1996, compared to 1997 lower foreign currency gains.For of equitysecuritiesandhigherinterest incomeoffset by unchanged forthesameperiod,withhighergainsonsales Interest andotherincomewasessentially est capitalization. due tohigheraverageborrowing balancesandlowerinter- Inside program andhigherprofit-dependent expenses. 25%, primarilyduetomerchandising spending,theIntel 1996 to by lowerprofit-dependent bonusexpenses.From tising program andmerchandising spending,partially offset on theP6microarchitecture theIntel (including umes ofmicroprocessors sold,particularly processors based 1998, primarilyduetohighervol- 1997 to increased 4%from n1998, primarilyduetotheIntelInside in nology development. processor product developmentandmanufacturing tech- due tosubstantiallyincreased investmentinbothmicro- 1997 1996 to development spendingincreased 30%from “Computing EnhancementGroup segment.”) Research and purchased in-process research anddevelopmentunder of ChipsandTechnologies, Inc.(Seethe discussionabout acquisition the developmentrelated to process research and opment ofmicroprocessor products andthechargeforin- “Outlook” foradiscussionofgross marginexpectations. 1996. See and56%in 1997 1998, compared to60%in in Thegross marginpercentage was54% increased volumes. uct mix,partiallyoffset byfactoryefficiencies duetothe processor manufacturingprocess rampandshiftsinprod- volume growth, costsrelated tothe0.25-micron micro- increased by8.5%primarilyduetomicroprocessor unit Intel Architecture BusinessGroup segment. 1998, 1997 to Cost ofsalesincreased by22%from 12th 1998, forthe Intel postedrecord netrevenues in The Company’s effective incometaxratedecreased 1998 1997 to Interest expenseincreased $7millionfrom aktn,gnrladamnsrtv pnigge 6% Marketing, generalandadministrativespendinggrew 14% from Research anddevelopmentspendinggrew by ® II rcso.Fo 96t 1997, 1996 to costofsales processor. From ® cooperative adver- ® Revenues Celeron , TM 20.8 98 primarilyduetotheincreased costsrelated tothe 1998, 1998, gross marginimproved compared tothefirsthalf ( and income Revenues Pentium 1997, 1996 to primarilyduetohighervolumesofthe 22% from Revenuesforthisoperatingsegmentincreased selling prices. The highervolumeswere partiallyoffset byloweraverage SEC cartridgeinthePentium 1997 to Group operatingsegment decreased 15% from enues andasubstantialmajorityofitsgross margin. 1996 were amajorityofitsrev- and gross margin,andin family processors were amajorityoftheCompany’s revenues 1997, salesofthePentiumenues andgross margin. During declining butstillsignificantportionoftheCompany’s rev- Pentium processors withMMXtechnology, were arapidly salesofPentium familyprocessors, including 1998, during Also 1997. of theCompany’s revenues andgross marginin of thesemicroprocessors firstbecameasignificantportion Sales enues andasubstantialmajorityofitsgross margin. comprised amajorityoftheCompany’s consolidatedrev- board-level products basedontheP6microarchitecture 1996. compared tothefirsthalfof 1997 of along withincreased averagesellingpricesinthefirsthalf processor, andtheintroduction ofthePentium Intel’s MMX Pentium was largelycomplete andtheSECcartridge hadnofurther of theyearas the transitiontoP6microarchitecture 1997.compared tothefirsthalfof Inthesecondhalfof 1998 average sellingpricesofprocessors inthefirsthalfof Dollars inbillions 96 5.2 Operating profit forthe IntelArchitecture Business 1998, salesofmicroprocessors andrelated During 25.1 ® 97 II 6.9 microprocessor family(includingprocessors with , Pentium TM ei nacmn ehooy andPentium Pro media enhancementtechnology) ) 26.3 98 6.1 ® income Net revenues Net 0 5 10 15 20 25 Pro andPentium II processor andthelower ® 64 96 ( expenses Costs and II Percent of revenues Xeon TM 97 61 II processors). processor, ) 68 98 sales of Cost R & D and G&A Marketing 0 15 30 45 60 75 INTELCORPORATION1998 3131 5 4 3 2 1 0 Long-term investments Short-term investments cash & Cash equivalents ) 5.4 98 5.3 2.0 1.8 97 5.6 Dollars in billions Cash and investments ( 4.1 750 600 450 300 150 0 Interest income & other Interest expense 34 98 ) 792 27 97 799 The Company’s financial condition remains very strong. very strong. financial condition remains The Company’s The Company used $6.5 billion in cash for investing The total value of in-process research and development and research The total value of in-process 25 96 Dollars in millions Financial condition At December 26, total cash, trading assets, and 1998, billion, up short- and long-term investments totaled $13 by Cash provided billion at December 27,1997. $11.8 from billion inoperating activities was $9.2 to compared 1998, billion in billion and $8.7 $10 and 1997 respectively. 1996, activities during 1998, to $6.9 billion during compared 1997 tax cash flow was for developed technology and 20% 15% to an estimated weight- compared technology, for in-process ed-average cost of capital for C&T of approximately 10%. million. Costs to $165 was estimated to be approximately estimated to be were projects complete all of the in-process 70%$30 million. Approximately of the estimated in-process was attributable to the embed- and development research that were ded memory technology and the 3D technology in products expected to be used together and separately first in a series of under development. Development of the using the embedded memory tech- mobile graphics products 80%nology was estimated to be approximately complete and was completed in August 1998. The 3D technology was at an earlier stage of development with a minimal amount of work completed at the time of the acquisition. Close to the time of the acquisition, Intel also began working with another company to license their 3D technology for a line of desktop graphics controllers. the acquisition, Subsequent to a decision was made that the mobile and desktop product and further lines should have compatible 3D technology, development of the C&T 3D technology was stopped. Other income and expense ( 406 Revenues

Computing Enhancement Group segment. Group Computing Enhancement Operating profits for the Computing Enhancement Group Operating profits In the first quarter of 1998, the purchased Company C&T Intel obtained an outside valuation of C&T, and values were

incremental impact on the gross margin percentage. In margin percentage. on the gross impact incremental the second half ofaddition, in segment this operating 1998, cost reduction Company’s see the benefit of the began to efforts. 39% increased for the segment Operating profit from to 1996 1997 unit in processor due to the increase average selling prices in the first half volumes and higher of 1997 processor ramp of the Pentium the arising from with MMX technology. Management’s discussion andof analysis financial condition and results of operations increased 7% fromincreased to 1997 and 5% from 1998 to 1996 1997. a majority of sales of chipsets represented Revenues from for this operating segment only inrevenues Chipset 1998. higher average selling primarily due to increased revenues prices in due to and primarily to compared 1998 1997, unit volumes fromincreased These increases to 1996 1997. in revenues in both periods by decreases partially offset were sales of flash memory and embedded processors. from operating segment declined 32% from to 1997 and 1998 44% from pres- primarily due to competitive to 1996 1997, by increased partially offset in flash memory products, sures of chipsets. Inprofitability also nega- were the results 1998, of Chips and Technologies, by the purchase tively affected million charge for $165 Inc. (“C&T”), including the related and development. research in-process purchased $430 million. C&T had a for a total price of approximately based on 2D and line of mobile graphics controllers product major development video graphics technologies, and their embedded memory activities included new technologies for included im- and 3D graphics. Other development projects to the existing 2D and video technologies, and provements lines, all of which were several other new business product individually insignificant. and research in-process assigned to developed technology, development, customer base and assembled workforce. The research valuations of developed technology and in-process established using an income-based and development were line under Revenue estimates for each product approach. based on discussions with management, development were devel- anticipated product family revenues, existing product sales cycles and estimated life opment schedules, product then of each of the technologies. Revenue estimates were to external on for reasonableness industry sources compared revenues of product Percentages expected market growth. designated as developed, in-process were for each project un- yet-to-be-defined. Revenues on the products and future estimated to begin inder development were and con- 1998 2006,tinue through related revenues with the majority of the and 2003. technology occurring between 2001 to in-process esti- Operating expenses, including cost of goods sold, were mated based primarily on historical experience. C&T’s The operating income was adjusted for a charge for the resulting use of contributory assets and income tax expense using tax rate.Intel’s The risk-adjusted discount rate applied to after- 32 INTELCORPORATION1998 2 frvne n19 andnocustomeraccountedfor 1997 12% ofrevenues in 14blini et qiyadohrscrte ne Securities and Exchange Commissionshelfregistration statements. under other securities and equity debt, $1.4 billionin tains theabilitytoissueanaggregate ofapproximately TheCompany alsomain- paper borrowings of$700 million. 1998. share asofDecember26, $41 pershare, with anaverageexercise priceof$40per The exercise priceofthese warrantsrangedfrom $40to million. of itsCommonStockatanaggregate priceof$201 with thepotentialobligationtobuyback5millionshares 1998, Company hadoutstandingputwarrantsattheendof million undertheprivatereverse repurchase arrangement. 1996 alsoincluded$300 1996). Financing sources in in and$4million 1997 1998 Step-UpWarrants ($40millionin 1996) and$1.6in billionproceeds from theexercise of 1997 and$257million employee stockplans($317 millionin in proceeds from thesaleofshares, primarilypursuantto 1998 million included$507 Financing sources ofcashduring underaprivatereverse repurchase arrangement. 1997 in respectively, aswellfora$300 millionrepayment warrants), (including$108 millionforexercised put billion and$1.3 billion 1996 were forstockrepurchases totaling$3.4 and 1997 in Themajorfinancingapplicationsofcash cised putwarrants). 1999, $1.2 for$6.8billion(including billionforexer- January of CommonStock,adjustedforthestocksplitdeclared in 161.7 millionshares 1998 were forrepurchase of cash in Themajorfinancingapplicationsof 1996, respectively. and 1997 1998, compared to$3.2billionand$773millionin in ofnetaccountsreceivable. 39% the fivelargestcustomersaccountedforapproximately 1998, 1996. AtDecember26, ofrevenues in 10% more than 1998. Onecustomeraccountedfor 11% in accounted for of revenues andanother 13% One customeraccountedfor 1998. ofnetrevenues for accounted forapproximately 42% TheCompany’s fivelargestcustomers level ofrevenues. 1998 wasmainlyduetothehigher in accountsreceivable in Theincrease set byanincrease infinishedgoodsinventory. in rawmaterialsandwork-in-process inventory, partiallyoff- Inc. Technology, equity interest inMicron acquire anon-voting to purchase C&Tand$500millionto 1998 theCompanyused$321 millionincash during addition, In 1999. a discussionofcapitalexpenditure expectationsin for “Outlook” 1998. See and equipmentasofDecember26, $2.1 billionforthepurchase orconstructionofproperty, plant TheCompanyhadcommittedapproximately capital assets. ment Corporationfor$585million,including$475millionin the semiconductormanufacturingoperationsofDigitalEquip- TheCompanyalsopurchased of manufacturingtechnology. microprocessor manufacturingcapacityandthetransition in property, plantandequipment,primarilyforadditional 1998, astheCompanycontinuedtoinvest $3.6 billionin operations Capitalexpenditures totaled 1996. of and $5.3billionduring results and condition financial analysis of and discussion Management’s Other sources ofliquidityincludeauthorizedcommercial As partofitsauthorizedstockrepurchase program, the The Companyused$4.7 billionforfinancingactivities 1998, withadecrease Inventory levelsintotaldecreased in put warrantobligationandthedividendprogram. turing capacity, workingcapitalrequirements, thepotential tures fortheexpansionorupgradingofworldwidemanufac- future, includingtheacquisitionofShiva,capitalexpendi- needed tomeetbusinessrequirements intheforeseeable million, before considerationofanycashtobeacquired. $185 quired tocompletethetransactionwillbeapproximately Corporation (“Shiva”).Intelexpectsthatthetotalcashre- nee noa entered into cies and10% inallothercurrencies) wouldresult inan in exchangerates(definedas 20%incertainAsiancurren- example,anadversechange For exchange ratemovements. not alwaysentirely eliminate,theimpactofforeign currency TheCompany’s hedgingprograms reduce, butdo grams. and currency optionsare utilizedinthesehedgingpro- ance sheethedgingprograms. Currency forward contracts the Companyhasestablishedrevenue, expenseandbal- cash flowscausedbychangesinforeign exchangerates, tect againstreductions in valueandthevolatilityoffuture To pro- and certainotherAsianEuropean currencies. actions inotherforeign currencies, primarilyJapaneseyen dollars. However, theCompanydoesenterintothesetrans- and capitalpurchasing activitiesare transactedinU.S. negligible netexposure totheCompany. and gainsontherelated hedginginstruments,resulting in ments wouldgenerallybeoffset bycorresponding losses swaps. Gainsandlossesontheseforeign currency invest- ings, currency forward contractsandcurrency interest rate inated inforeign currencies withforeign currency borrow- 1997). 1998 ($18 millionasoftheend of of theCompany’s available-for-sale securitiesasoftheend than0.3%) inthefairvalue mate $30milliondecrease (less point increase ininterest rateswouldresult inanapproxi- returns. Ahypothetical60basis U.S. dollarLIBOR-based ments entered intoforstrategicpurposes,are swapped to debt andcertainequitysecurities,excludinginvest- Company’s marketableinvestmentsinlong-term fixedrate this objective,thereturnsonasubstantialmajorityof To achieve mizing yields,withoutsignificantlyincreasing risk. ities istopreserve principalwhileatthesametimemaxi- and December27, 1997. Actualresults maydiffer materially. 1998on theCompany’s financialpositionsat December 26, noted beloware basedonsensitivityanalysesperformed speculative ortradingpurposes.Allofthepotentialchanges Company doesnotusederivativefinancialinstrumentsfor The the Companyutilizesderivativefinancialinstruments. To mitigatetheserisks, and marketableequitysecurityprices. changes ininterest rates,foreign currencying exchangerates Financial marketrisks The Companybelievesthatithasthefinancialresources nOtbr19,theCompanyannouncedthatithad 1998, In October A substantialmajorityoftheCompany’s revenue, expense denom- ofinvestments currency risks Companyhedges The The primaryobjectiveoftheCompany’s investmentactiv- includ- The Companyisexposedtofinancialmarketrisks, eiiieareetto agreement definitive cur Shiva acquire INTELCORPORATION1998 33 Xeon and II processor is packaged with purchased compo- is packaged with purchased processor II The Company’s gross margin varies depending on the gross The Company’s Intel’s current gross margin expectation for gross current is 57% Intel’s 1999 The Company has expanded semiconductor manufactur- Pentiumhigh-end for mid-range and III Xeon processors workstations.servers and cultivate Company plans to The continue to work with the computing new businesses and offer- Internetindustry to expand capabilities and product that applications compelling software ings and to develop of this higher performance, thus driving can take advantage in each computing mar- the newer products demand toward ket segment. Company may continue to take various The prices at such microprocessor steps, including reducing accep- to increase in order times as it deems appropriate, competitive and to remain tance of its latest technology market segment. within each relevant sold and the mix of mix of types and speeds of processors and purchased motherboards and related microprocessors family.components within a product The Company’s Pentium Pentium III processors for the performance desktop and entry- desktop for the performance III processors Pentium and workstations,level servers and the Pentium nents in the SEC cartridge, and the inclusion of purchased nents in the SEC cartridge, and the inclusion absolute margin dollars components has tended to increase the However, margin percentage. but to lower the gross packaging formats Company has also been developing new components.that use fewer purchased These new packag- costs on certain micro- expected to reduce ing formats are In addition, the Company expects to products. processor improve- costs due to continued productivity have reduced during 1999. ments on its existing manufacturing processes other factors—including unit volumes, yield issues Various at factories, ramp of new tech- associated with production variations in invento- nologies, excess or obsolete inventory, semiconductors— ry valuation and mix of shipments of other the amount of cost of sales and will also continue to affect quarters. in future margin percentages the variability of gross to 54% forplus or minus a few points compared 1998. primary goal is to get its advanced technology to the Intel’s marketplace, and the Company sometimes may implement margin dollars but lower margin strategies that increase percentages, for example, the in plans to grow Company’s that have the potential to expand areas non-microprocessor computing and communications capabilities. In addition, a range of time to time the Company may forecast from Actual for the coming quarter. margin percentages gross these estimates. from may differ results ing and assembly and test capacity over the last few years, and continues to plan capacity based on the assumed con- tinued success of its strategy and the acceptance of its in specific market segments.products The Company expects $3 bil- to approximately that capital spending will decrease lion in investment for of reduced primarily as a result 1999, utilization of equipment. If the new facilities and improved and move rapid- market demand does not continue to grow in the various market higher performance products ly toward the margin may be affected, and gross segments, revenues III, and ® II , Pentium II processors) and processors) TM III Xeon ® Xeon and Pentium II

Intel’s strategy is to introduce ever higher performance strategy is to introduce Intel’s This outlook section contains a number of forward-looking This outlook section contains a number using Intel expects that the total number of computers The Company is exposed to equity price risks on the mar- price risks on is exposed to equity The Company other semiconductor components sold worldwide will con- other semiconductor components sold intinue to grow 1999. are financial results The Company’s microprocessors substantially dependent on sales of these and other semi- Business Group by the Intel Architecture Enhance- conductor components sold by the Computing ment Group. also a function of the mix of Revenues are types and speeds sold as well as the mix microprocessor components and other purchased motherboards, of related semiconductor products, to fore- difficult all of which are cast. between types Because of the large price difference the average price Intel this mix affects of microprocessors, revenues. and has a large impact on Intel’s will realize The in the computing growth expectations regarding Company’s in dependent in part on the growth industry worldwide are usage of the Internet and the expansion of Internet product offerings. also subject to the impact of The expectations are includ- economic conditions in various geographic regions, in the Asian markets ing the ongoing financial difficulties and certain emerging markets in other regions. segments of the for the different tailored microprocessors branding ap- worldwide computing market, using a tiered the Company is seeking to In line with this strategy, proach. specifically for develop higher performance microprocessors each computing segment: the Intel Celeron for processor entry- in a value PC, the Pentium level PC buyers interested

Outlook expectations. based on current statements, all of which are materially. may differ Actual results statements do not These the potential impact of any mergers or acquisitions reflect that had not closed as of the end of 1998. P6 microarchitecture family processors, Pentium Intel’s Pentium (including Intel Celeron, processors Management’s discussion andof analysis financial condition and results of operations Pentium adverse impact on income before taxes of less than $20 taxes on income before adverse impact ofof the end of each million as and 1998 1997. portfolio included in its of equity securities ketable portion of business into for the promotion of investments entered and strategic objectives. generally These investments are many high-technology industry sector, in companies in the small capitalization stocks.of which are The typ- Company its market or eliminate to reduce ically does not attempt change in on these securities. A 20% adverse exposure $350 million in an approximate result equity prices would available-for- in the fair value of the Company’s decrease the end ofsale securities as of the million as of ($75 1998 end of 1997). to compared The increase the reflects 1997 marketable in the dollar value of the Company’s increase rep- portion of which strategic equity securities, a significant $825 Approximately market appreciation. unrealized resents as of the end million of the value of these equity securities Technology, in Micron consisted of the investment of 1998 condition.” Inc., described above under “Financial 34 INTELCORPORATION1998 1998. Mostofthisincrease wouldbeincludedincostof pnosi oda ihya 00ise.TheCompany sponsorship to dealwithyear2000issues. with dedicated program management and executive-level thefactthatyear2000isaleap year. as 9/9/99andii) programming assignsspecialmeaningtocertaindates, such somesystems’ lead toincorrect calculationsorfailures: i) TwoCompany’s otherrelated issuescouldalso operations. 1999, there couldbeanadverseimpactonthe the year correctly recognize andprocess dateinformationbeyond systemsdonot the year2000computerissue.Ifinternal of operations. the Company’s financialconditionoroverall trends inresults duction oftheEuro will have amaterialadverseimpacton information, managementdoesnotbelievethattheintro- the Euro introduction overtime,basedoncurrently available Company. While Intelwillcontinuetoevaluatetheimpactof ments, orwillresult inany materialincrease incoststothe hedging activities,ortheCompany’s use ofderivativeinstru- will materiallyaffect theCompany’s foreign exchangeand not presently expectthatintroduction anduseof theEuro TheCompanydoes changes are notexpectedtobematerial. the legacycurrencies inJuly2002,andthecostsofthese transition phaseinpreparation fortheultimatewithdrawalof systemschangeswillbemadeduringthethree-yearinternal capable withoutmaterialsystemmodificationcosts.Further by theinitialintroduction oftheEuro havebeen made Euro 2002.Intel’s systemsthatare internal affected 1, January 1,1999 andduringthetransitionperiodthrough on January by theintroduction oftheSingleEuropean Currency (“Euro”) current andissubjecttochange. estimateofearnings, Thisestimateisbasedoncurrent taxlawandthe 1999. for 1999. administrative expensesisalsoexpectedtoincrease in on current forecasts, spendingformarketing,general and ucts andtoincrease thevalueofitsproduct brands. Based The Companyintendstocontinuespendingpromote itsprod- 1999 isexpectedtoincrease toapproximately $3billion. in development program, spendingforresearch anddevelopment Intel considersitimperativetomaintainastrong research and Since new strategicproducts forspecificmarketsegments. the developmentandimplementationofnewprocesses and success isdependentontechnologicaladvances,including very shortproduct lifecycles,andtheCompany’s continued sales andresearch anddevelopmentspending. $3.4 billion,anincrease ofapproximately $600millionfrom 1999 isexpected tobeapproximately and amortizationfor ery timesofvariousmachineryandequipment.Depreciation upon expectationsregarding production efficiencies anddeliv- Thisspendingplanisdependent to meetmarketdemand. affected iftheCompanydoesnotaddcapacityfastenough ing maybeslowed.Revenuesandgross marginmayalsobe operations of capacity installedmightbeunder-utilized andcapitalspend- results and condition financial analysis of and discussion Management’s The Companyhasestablished acomprehensive program Like manyothercompanies,Intelissubjecttorisksfrom Intel hasestablishedateamtoaddress theissuesraised The Companycurrently expectsitstaxratetobe33.5% The industryinwhichInteloperatesischaracterizedby systems andtheexpectedtimeframes. project related totheCompany’s criticalandpriorityinternal 1999 asnecessary. will continueinto 1998 and integration testingbeganinthethird quarterof The sive program systems. ofintegrationtestinginternal TheCompanyhasplannedacomprehen- facturing systems. ofmanufacturingsystemsand84%non-manu- for 93% replacements, changesandupgradeshasbeencompleted been determinedandunittestingcompleted.Deploymentof ed (replacements, changes,upgradesorworkarounds) has mined tobealready year2000capable,orremediation need- ical andprioritynon-manufacturingsystems,were deter- ofcrit- critical andprioritymanufacturingsystems,85% facturing operations. systemsisintendedtopreventinternal disruptiontomanu- significant portionoftheCompany’s year2000efforts on ing, statisticalanalysisandautomatedmanufacturing.A and related software tocontrol scheduling,inventorytrack- embedded processors highly automated,incorporatingPCs, bly andtest(“manufacturing”)equipmentsystemsare and facilitiesare workingtoward thesameglobalmilestones. prioritizes functionsandsystemsworldwide,alldivisions TheCompany’s approach finance andhumanresources. infrastructure, manufacturing,facilitiesmanagement,sales, use bytheCompany, includingnetworkandcommunications intended toencompassallmajorcategoriesofsystemsin Theseactivitiesare systemsasappropriate. with itsinternal Company isalsotestingcustomerandsupplierinterfaces The sustained andsignificantdetrimentalfinancialimpact. of afactory, couldcausepersonalinjuryorwouldhavea failure wouldcauseanextendedshutdownofallorpart categorized as“critical”or“priority”thosesystemswhose is addressing systemsfirstandhas itsmostcriticalinternal and tobeprepared tocontinue functioningeffectively asa er istakingall appropriate stepstofixyear 2000problems ofcriticalsuppliers. 100% to itsinitialinquiriesfrom inquiries ofitsmajorsuppliers andhasreceived responses Mid-1999 (expected) TheCompanyhasmade ations withinashortperiodof time. 1997 Mid-1999 (expected) failure wouldshutdownmanufacturingorothercritical oper- Q31998 ing withcriticalsuppliers,definedbyIntelasthosewhose year 2000capability. Highestpriorityisbeingplacedonwork- Enddate year 2000capable,andtomonitortheirprogress toward operations andtheproducts andservicestheyprovide are and servicestodeterminetheextentwhichsuppliers’ Q31998 (actual) Startdate 1996 Integration testing Deployment Detailed assessment,remediation High-level assessmentofsystems Phases oftheproject n nttsig19 Q11999 (expected) 1996 and unittesting The followingtableindicatesthephasesofyear2000 oftheCompany’s 1998, approximately 99% As ofDecember The Company’s semiconductormanufacturingandassem- Follow-up activitiesseektodetermine whetherthesuppli- Intel isalsoactivelyworkingwithsuppliersofproducts INTELCORPORATION1998 35

The Company is not in a position to identify or to avoid The Company is not to assess the capa- The Company also has a program areAll Intel processors 2000 “Year Capable.” All Intel micro- site, Intel fully at the support Web As described more the capability to replace most third-party supplies with inter- supplies most third-party to replace the capability nal production. to work with critical suppliers to efforts Where been successful, con- capability have not year 2000 ensure of the identification generally emphasizes tingency planning certain situ- suppliers, and in substitute and second-source of inventory in the level increase ations includes a planned characterized by rapid technological carried. In an industry of raw materials and finished goods change, higher levels risk of inventory obsolescence inventories involve increased write-downs in the value of inventory. and the potential for is currently the Company however, all possible scenarios; and taking steps to mitigate the im- assessing scenarios to occur. if they were pacts of various scenarios This con- tingency will continue through planning as the Company 1999 and vulnerabilities of learns about the preparations more to the large year 2000 issues. Due parties regarding third cannot provide number of variables involved, the Company if any of these an estimate of the damage it might suffer to occur. scenarios were to handle the year 2000.bility of its products assist cus- To the Company tomers in evaluating their year 2000 issues, capability of Intel’s has developed a list that indicates the no longer being pro- and certain products products, current assigned to are duced, to handle the year 2000. Products Company:one of five categories as defined by the “Year not 2000 Capable” with update, “Year 2000 Capable,” not test. under evaluation and will 2000 Capable,” “Year 2000 support Year The list is located on the Company’s site and is periodically updated as analysis on addi- Web is completed. tional products 2000 “Year also are (embedded processors) controllers of two custom microcontroller with the exception Capable,” sold to a limited number of customers.products However, the assessment of whether a complete system will operate (BIOS) depends on firmware correctly capability and soft- design and integration, and for many end users this ware by companies provided and software will include firmware other than Intel. on certain 2000 Capable” Limited Warranty a “Year offers for Except as specifically provided products. of its current the Company does not believe it in the Limited Warranty, by customers relat- for costs incurred is legally responsible Nevertheless,ed to ensuring their year 2000 capability. the customer Company is incurring various costs to provide year support and customer satisfaction services regarding 2000 issues, and it is anticipated that these expenditures will continue through An Intel product, and thereafter. 1999 with its associated documentation, when used in accordance is 2000 “Year Capable” when, upon installation, it accurately data and/or receives provides displays, processes, stores, into and betweenfrom, and the 20th and and 2000, 1999 centuries, including leap-year calculations, provided 21st

The Company is also developing contingency plans to The Company is also likely worst-case Intel believes that its most reasonably is conducted production microprocessor The Company’s facilities that The Company does not generally maintain A worst-case scenario involving a critical supplier of mate- Management’s discussion andof analysis financial condition and results of operations supplier in accordance with Intel’s standards and require- standards with Intel’s accordance supplier in developed to address being plans are ments. Contingency be to not considered that are to suppliers issues related year 2000 capable. in becoming progress making sufficient patterns due possible changes in customer order address of As with suppliers, the readiness to year 2000 issues. their year 2000 issues may affect customers to deal with products. and pay for ability to order operations and their their customers about major direct Intel has surveyed its of their operations. in critical areas year 2000 readiness to be addressed identified certain key areas The results is also communicating information by the customers. Intel to customers and is conducting about its own readiness the methodologies and seminars to help communicate year 2000 programs. used in Intel’s processes with the sys- to problems year 2000 scenarios would relate internal parties rather than with the Company’s tems of third Because the Company has less systems or its products. the year 2000 prob- over assessing and remediating control parties, the Company believes the risks are lems of third (e.g., with infrastructure greatest electricity supply and water transportation sup- and sewer service), telecommunications, ply chains and critical suppliers of materials. facilities. Each location in a network of domestic and foreign on local private and governmental suppliers for elec- relies of an sewer and other needed supplies. Failure water, tricity, for example, power, electricity grid or an uneven supply of completely shut would be a worst-case scenario that would could also shut facilities. Electrical failure down the affected facilities. down airports and other transportation or water supply would allow it to generate its own electrical in lieu of that supplied by utilities. the extent possible, To suppliers for the Company is working with the infrastructure its manufacturing sites, major subcontractor sites and rele- continuity vant transportation hubs to seek to better ensure services. Contingency planning regarding of infrastructure generally emphasizes planned failure major infrastructure and the in inventory levels of specific products increases sites. By the end of to unaffected shift of production 1999, supply of finished Intel expects to have in place a buffer to locate inventory goods inventory and is evaluating where concerns.geographically in light of infrastructure In addition, multiple plants engage in similar tasks in the Intel system, can be expanded at some sites to partially and production Although over- make up for capacity unavailable elsewhere. it is not expected that the all capacity would be reduced, system would halt due to the unavailability production entire of one or two facilities. rials would be the partial or complete shutdown of the sup- critical supplies to the inability to provide plier and its resulting Company on a timely basis. The Company does not maintain 36 INTELCORPORATION1998 tutr rsple alr.TheCompany has adequate structure orsupplierfailure. gency plans,such ascostsincurred as aresult ofaninfra- claims, orpotentialamounts related toexecutingcontin- not includeanypotentialcosts related tocustomeror other total costsnotedabove.Inaddition, theestimatedcostsdo ments willbeapproximately $15 millioninadditiontothe expects thatcostsrelated toacceleratedsystemsreplace- TheCompany a solutiontoyear2000capabilityissues. normal courseofbusinessisbeingacceleratedtoalsoafford the installationscheduleofnewsoftware andhardware inthe due totheyear2000program efforts. Insomeinstances, 1999. ofthebudgetfor 10% ed tobelessthan 1998 andare alsoexpect- information technologybudgetfor ofthetotal 10% 1998 represented lessthan nal systemsin 2000 costsformanufacturingandnon-manufacturinginter- Year in costofsalesandthecalculationgross margin. a result, amajorityofthe costsare expectedtobeincluded and contingencyplanningformanufacturingsystems.As ing andremediating issueswithmanufacturingsystems total estimatedcostsare expectedtobeincurred inassess- upgrades, anddedicatedprogram offices. Amajority ofthe sonnel andthecostsofconsultants,software andhardware Costs includeestimatedpayroll costsforredeployed per- 1998. of whichapproximately $36millionwasincurred in mately $42millionhasbeenspentontheprograms todate, diation ontheremaining manufacturingsystems.Approxi- ing noremediation andlowerthanexpectedcostsofreme- than expectedpercentage ofmanufacturingsystemsrequir- would notexceed$250million,primarilyduetoahigher estimate islowerthantheprevious estimatethatcosts This redeployed resources, willnotexceed$175 million. these programs, includingbothincremental spending and scope andscheduleofIntel’s year2000 efforts. gaged anotherfirmtoperformanassessmentoftheoverall and en- systems, ning andtakingtheinventoryofinternal Companyengagedathird-party firmtoassistwithplan- The customers havealsoinvolvedtheirstaffs andconsultants. remediation orotherservices.Activitieswithsuppliersand sultants havebeenengagedtoprovide specificassessment, largely withitsexistingpersonnel.Insomeinstances,con- before thedateofenactmentAct. 1,1996 and of year2000disclosures madeafterJanuary tially provides addedprotection from liabilityforcertaintypes TheActalsopoten- readiness ofitsproducts andservices. anentity’scerning year2000readiness andtheyear2000 from liabilityforcertainpublicandprivatestatementscon- provides addedprotection Act The Disclosure Act. Readiness fined intherecently enactedYear 2000Informationand ed toconstitute“Year 2000ReadinessDisclosures” asde- itsproductsconcerning andyear2000programs are intend- product properly exchangesdatedatawithit. operations of that allothertechnologyusedincombinationwiththeIntel results and condition financial analysis of and discussion Management’s No significant internal systemsprojects areNo significantinternal beingdeferred The Companycurrently expectsthatthetotalcostof The Company’s year2000efforts havebeenundertaken Various oftheCompany’s disclosures andannouncements and channelinventory levelsandchangesdue toyear2000 in customerorder includingchanges incustomer patterns, changes in enduserdemandduetousage oftheInternet; actual results todiffer materiallyare thefollowing: changes discussed above,amongthe otherfactorsthatcouldcause number ofrisksanduncertainties. Inadditiontothefactors FTC investigationandpending legalproceedings—involve a rate, theconversiontoEuro, theyear2000issue, marketing andgeneraladministrativeexpenses,thetax depreciation andamortization, research anddevelopment, using Intelprocessors, costs,gross margin,capitalspending, particular thestatementsregarding thenumberofcomputers forward-looking statements containedinthisoutlook—in have amaterialimpactoncashandinvestmentsorliquidity. ments balances,thatevenanadversejudgmentwouldnot given theCompany’s current liquidityandcashinvest- results ofoperationsthatperiod.Managementbelieves, exists thepossibilityofamaterialadverseimpacton an unfavorablerulingtooccurinanyspecificperiod,there or overalltrends inresults ofoperations.However, were material adverseeffect ontheCompany’s financialposition the ultimateoutcomeoftheselegalproceedings willhavea notbelievethat does counsel, includinginternal management, ings. Althoughlitigationissubjecttoinherent uncertainties, results ofoperations. on theCompany’s financialpositionoroveralltrends in believe thattheoutcomewillhaveamaterialadverseeffect counsel,doesnot time, management,includinginternal the administrativeactioncannotbedeterminedatthis property lawsuitsagainstIntel.Althoughtheoutcomeof companies thathadfiledorthreatened tofileintellectual in theformofconfidentialproduct information,from three monopoly byimproperly withholdingitsintellectualproperty, that Intelisattemptingtofurtheritsallegedmicroprocessor Thecomplaintcharges an FTCAdministrativeLawJudge. the FTCfiledanadministrativecomplaintagainstIntelbefore 1998, June In gation oftheCompany’s businesspractices. hadbegunaninvesti- FTC staff notifiedIntelthatthe (“FTC”) tion oroveralltrends inresults ofoperations. a materialadverseeffect ontheCompany’s financialcondi- a supplier, customeroranotherthird partywouldnothave assurance thatthefailure toensure year2000capabilityby be affected bysuchmatters.Inaddition,there canbeno however, itisuncertaintowhatextenttheCompanymay financial conditionoroveralltrends inresults ofoperations; will haveamaterialadverseimpactontheCompany’s related systemsorproducts tointernal soldcustomers does notbelievethattheyear2000mattersdiscussedabove the programs progress. assessment oftheprograms andare subjecttochangeas expected costs.Allcostsare basedonthecurrent general corporatefundswithwhichtopayfortheprograms’ The Company’s future results ofoperationsandtheother The Companyiscurrently partytovariouslegalproceed- In September1997, theFederalTrade Commission Based oncurrently availableinformation,management INTELCORPORATION1998 37 Exchange. At December 26, rs considering two dividend The Nasdaq Stock Market, as condition. ted to the acquisition of Chips paid in each quarter of 1998. Intel paid in each quarter of 1998. and other newspapers. Intel’s 1998 Step-Up 1998 and other newspapers. Intel’s year 2000 remediation efforts; and efforts; remediation year 2000 Wall Street Journal Street Wall Intel believes that it has the product offerings, has the product Intel believes that it facilities, systems or systems of suppliers, infrastructure providers and providers infrastructure systems of suppliers, systems or 2000 problems; by year adversely affected parties other third to the allegedly related to year 2000 issues claims due productsCompany’s or consumer intellectual property, litigation involving anti-trust, and other issues. personnel, for con- competitive and financial resources and costs, mar- revenues, but future tinued business success, a number of factors, all influenced by are gins and profits inherently above, all of which are including those discussed forecast. to difficult $ 24.19 $ 24.78 $ 22.66 $ 22.53 $ $.39 3,176 $.35 $ $.36 $.46 2,064 $.33 $.62 $.44 $.59 $ 3,192$ $ 1,559$ — .020$ 62.50 $$ 3,027 39.22 $$ 1,172 $ $$ .035 $ — .015 45.72 $ $ — 2,749 35.59 $ 1,273 $ $ $ $ 42.41 $ .015 —$ $ — 6,507 32.97$ — $.61 2,691 $.50 $ $.55 $.48 1,743 $ $ $.46 $ 47.09 $.53 $ $.44 $ .015 $ .015 6,155 35.13 $.49 $ $ — 2,604$ .0150 $ — 1,574$ .0150 $$ 5,960 47.69 $ $$ 36.56 2,343 34.56 $ $ .0150 $$ 24.73 1,645 37.34 $ .0150 $ $ 6,448 50.25 $ $ 2,307 34.77 $ .0150 $ $ 1,983 39.94 $ .0125 $ 42.33 $ 32.63 $ .0125 $ 32.08 $ .0125 $ 41.19 $ 32.59 $ 31.31 $ 7,614 $ 6,731 $ 5,927 $ 6,001 December 27 September 27 June 28 29 March December 26 26 September June 27 28 March and is quoted in the * ...... Low Low Low Low High High High High (C) (C) (C) (C) ...... Paid Paid Declared Declared ...... (B) (B) ...... (A) ......

Warrants traded on The Nasdaq Stock Market prior to their March 1998 expiration. Intel’s Common Stock also trades on The Swiss Common Stock also trades on The Swiss expiration. Intel’s March 1998 traded on The Nasdaq Stock Market prior to their Warrants there were approximately 203,000 registered holders of Common Stock. All stock and warrant prices are closing prices per 1998, adjusted for stock splits. Net income Basic earnings per share Diluted earnings per share Dividends per share Market price range Common Stock Market price range Step-Up Warrants Cost of sales Net income Basic earnings per share Diluted earnings per share Dividends per share Market price range Common Stock Market price range Step-Up Warrants Cost of sales Net income for the first quarter of 1998 reflected a $165 million charge for purchased in-process research and development rela a $165 reflected Net income for the first quarter of 1998 1997 for quarter ended 1997 Net revenues Inc. and Technologies, the Company adopted a new dividend declaration schedule which results in the Board of Directo As of the second quarter of 1998, quarters. A dividend was declarations in the first and third quarters of the year and no declarations in the second and fourth and financial dividends are dependent on future earnings, capital requirements plans to continue its dividend program. However, Common Stock (symbol INTC) trades on The Nasdaq Stock Market Intel’s (In millions—except per share amounts) (In millions—except per share 1998 for quarter ended 1998 Net revenues (In millions—except per share amounts) (In millions—except per share Financial information by quarter (unaudited)

issues; competitive factors such as rival chip architectures factors such issues; competitive competing software-com- technologies, and manufacturing in products acceptance of new and patible microprocessors development pressures; segments; pricing specific market appli- of compelling software and timing of the introduction the manufacturing ramp, including the cations; execution of technology; the ability process transition to the 0.18-micron successfully integrate and oper- new businesses and to grow or other businesses; unanticipated costs ate any acquired and other prod- associated with processors adverse effects specifica- published (deviations from ucts containing errata business due to internal Company’s tions); impact on the Management’s discussion andof analysis financial condition and results of operations ) ) ) C B A ( ( ( 38 INTELCORPORATION1998 † 6 5 4 3 2 1 oprt directory Corporate at LosAngeles University ofCalifornia Chancellor Emeritus Charles E.Young Harvard BusinessSchool Business Administration Professor ofInternational Max andDorisStarr David B.Yoffie Development Corporate Business Director, Senior VicePresident Leslie L.Vadasz A privatecompany AeroGen, Inc. Chief ExecutiveOfficer Chairman and Jane E.Shaw A venturecapitalfirm and Company Principal ofArthurRock Arthur Rock A securitiesbrokeragefirm Corporation The CharlesSchwab Co-Chief ExecutiveOfficer President and David S.Pottruck A limitedpartnership Arbor Company Chairman D. JamesGuzy A privatefoundation Paramitas Foundation Chairman Winston H.Chen An integratedoilcompany BP Amocop.l.c. Group ChiefExecutive John P. Browne Chief ExecutiveOfficer President and Craig R.Barrett Chairman oftheBoard Andrew S.Grove of theBoard Chairman Emeritus Gordon E.Moore Board ofdirectors Committee Chairman Director Lead Independent Committee Member ofNominating Committee Member ofExecutive Governance Committee Member ofCorporate Committee Member ofCompensation Finance Committee Member ofAudit& 1† 23†4†56 1 2 2† 35 1 35† 1 2 4 1 35 4 4 1 35 Directors emeriti Information Technology Director, Vice President Louis J.Burns Platform LaunchOperation Director, Vice President Michael A.Aymar Products Group Microprocessor General Manager, PresidentSenior Vice Albert Y. C.Yu Content Group General Manager, PresidentSenior Vice Ronald J.Whittier Development Corporate Business Director, PresidentSenior Vice Leslie L.Vadasz Manufacturing Group Technology and General Manager, PresidentSenior Vice Michael R.Splinter Sales andMarketingGroup Director, PresidentSenior Vice Sean M.Maloney Chief FinancialOfficer PresidentSenior Vice Andy D.Bryant New BusinessGroup General Manager, PresidentExecutive Vice Gerhard H.Parker Business Group Intel Architecture General Manager, PresidentExecutive Vice Paul S.Otellini Chief ExecutiveOfficer President and Craig R.Barrett Chairman oftheBoard Andrew S.Grove of theBoard Chairman Emeritus Gordon E.Moore Corporate officers Industrialist Max Palevsky Private investor Sanford Kaplan Industrialist Richard Hodgson Development Corporate Business Director ofOperations, Vice President Stephen P. Nachtsheim Human Resources Director, Vice President Patricia Murray Enterprise ServerGroup General Manager, Vice President John H.F. Miner Business Development Director, Vice President Avram C.Miller Intel Architecture Labs Director, Vice President D. CraigKinnie Corporate Licensing Director, Vice President Robert T. Jenkins Flash Products Division General Manager, Vice President Hans G.Geyer Desktop Products Group General Manager, Vice President Patrick P. Gelsinger Education Director, Vice President Carlene M.Ellis Development New Business Director, Vice President Kirby A.Dyess Secretary General Counseland Vice President F. ThomasDunlap,Jr. Group Network Communications General Manager, Vice President Mark A.Christensen Manufacturing Group Technology and General Manager, Vice President Sunlin Chou Strategic Marketing Director, Vice President Dennis L.Carter Treasurer Vice President Arvind Sodhani Division IA-64 Processor General Manager, Vice President Stephen L.Smith Enhancement Group Computing General Manager, Vice President Ronald J.Smith New BusinessInvestments General Manager, New BusinessGroup Vice President Richard A.DeLateur Asia-Pacific Operations General Manager, Sales andMarketingGroup Vice President John E.Davies Materials Director, Manufacturing Group Technology and Vice President Leslie S.Culbertson Server ComponentsDivision General Manager, Enterprise ServerGroup Vice President David M.Cowan Planning andLogistics Director, Manufacturing Group Technology and Vice President Alan C.Baldwin Fab/Sort Manufacturing General Manager, Manufacturing Group Technology and Vice President Robert J.Baker Systems Manufacturing General Manager, Manufacturing Group Technology and Vice President Frank Alvarez and BusinessPlanning Microprocessor Marketing Director, Business Group Intel Architecture Vice President Karen L.Alter Appointed officers Planning andDevelopment Advanced Technology Director, Manufacturing Group Technology and Vice President William M.Holt Israel Operations General Manager, Products Group Microprocessor Vice President Dov Frohman Microcomputer Division Embedded General Manager, Enhancement Group Computing Vice President Thomas R.Franz Finance Vice President Shelley L.Floyd Microprocessor Division Performance General Manager, Products Group Microprocessor Vice President Michael J.Fister Development Logic Technology Director, Manufacturing Group Technology and Vice President Youssef A.El-Mansy Division Systems Management General Manager, New BusinessGroup Vice President Edward D.Ekstrom Africa Operations Europe, MiddleEast, General Manager, Sales andMarketingGroup Vice President Robert L.Eckelmann Operations Worldwide Marketing Director, Sales andMarketingGroup Vice President Jami K.Dover Assistant GeneralCounsel Legal Vice President Peter N.Detkin Japan Operations President, Sales andMarketingGroup Vice President Nobuyuki Denda INTELCORPORATION1998 39 Paul D. Madland Microprocessor Group Products Director, Technology Circuit Eugene S. Meieran and Technology Manufacturing Group Director, Manufacturing Strategic Support David B. Papworth Microprocessor Group Products Director, Product Microprocessor Development J. Pollack Frederick Microprocessor Group Products Director, Architecture Measurement, and Planning Justin R. Rattner Enterprise Server Group Director, Lab Server Architecture George E. Sery and Technology Manufacturing Group Director, Device Technology Optimization Carl J. Simonsen and Technology Manufacturing Group Director, Advanced Library Architecture and Design Integration Uri C. Weiser Microprocessor Group Products Director, Development Center Texas B. Wirt Richard Microprocessor Group Products Director, Labs Microcomputer Leo D. Yau and Technology Manufacturing Group Director, Innovative Technology Modules Ian A. Young and Technology Manufacturing Group Director, and Advanced Circuit Integration Technology Fellows Atwood E. Gregory and Technology Group Manufacturing Director, Flash Memory Architecture Bohr Mark T. and Technology Manufacturing Group Director, Architecture Process and Integration A. Borodovsky Yan and Technology Manufacturing Group Director, Advanced Lithography Kenneth C. Cadien and Technology Manufacturing Group Director, Innovative Technology Colwell Robert P. Microprocessor Group Products Director, IA-32 Architecture L. Coulson Richard Labs Intel Architecture Director, I/O Architecture John H. Crawford Microprocessor Group Products Director, Architecture Microprocessor Paolo A. Gargini and Technology Manufacturing Group Director, Strategy Technology Glenn J. Hinton Microprocessor Group Products Director, IA-32 Microarchitecture Development Kevin C. Kahn Labs Intel Architecture Director, Communications Architecture Ellen R. Konar Sales and Marketing Group Director, Corporate Strategic Marketing D. MacWilliams Peter Labs Intel Architecture Director, Platform Architecture Gidu K. Shroff Vice President and Technology Group Manufacturing Director, Materials Gadi Singer Vice President Microprocessor Group Products General Manager, IA-64 Processor Division William M. Siu Vice President and Technology Manufacturing Group Director, Assembly and Test Development Technology Slusser Jon F. Vice President and Technology Manufacturing Group Director, Corporate Quality Network So Y. Edward Vice President and Technology Manufacturing Group Director, California Technology and Manufacturing Frank E. Spindler Vice President Intel Architecture Business Group of Marketing, Director Mobile/Handheld Group Products William A. Swope Vice President Intel Architecture Business Group Director, Platform Planning, Integration and Communication Earl L. Whetstone Vice President Sales and Marketing Group General Manager, Middle East, Europe, Africa Operations Siew Hai Wong Vice President and Technology Manufacturing Group Site Manager, Malaysian Operations James H. Yasso Vice President Intel Architecture Business Group General Manager, Division Reseller Products Steven D. McGeady Vice President Content Group Director, Internet Health Initiative Sandra K. Morris Vice President Sales and Marketing Group Director, Internet Marketing and E-Commerce Jr. Robert M. Neumeister, Vice President Finance Director, Finance Boon Chye Ooi Vice President Group Desktop Products General Manager, OEM Platform Solutions Division Robert H. Perlman Vice President Finance Director, Customs and Licensing Tax, David Perlmutter Vice President Microprocessor Group Products General Manager, Basic Microprocessor Division William B. Pohlman Vice President Microprocessor Group Products Director, Development Efficiency Pamela L. Pollace Vice President Sales and Marketing Group Director, Relations Press Worldwide K. Saini Avtar Vice President Computing Enhancement Group General Manager, Platform Components Division Sheppard F. Willard Vice President and Technology Manufacturing Group Director, Corporate Services

/Bridges Division ® Corporate directory Thomas A. Lacey Vice President Sales and Marketing Group Director, Americas Sales and Marketing S. Lang Gregory Vice President Network Communications Group General Manager, Network Interface Division Claude M. Leglise Vice President Intel Architecture Business Group General Manager, Group Home Products Bruce H. Leising Vice President and Technology Manufacturing Group Assistant General Manager, Fab/Sort Manufacturing Michael C. Maibach Vice President Government Affairs David B. Marsing Vice President and Technology Manufacturing Group General Manager, Manufacturing Assembly/Test William O. Howe Vice President Group Home Products Director, Strategic Projects Jarrett James W. President Intel PRC Corporation Robert M. Jecmen Vice President Intel Architecture Business Group General Manager, Mobile/Handheld Group Products James B. Johnson Vice President New Business Group General Manager, Internet Operation Services William N. Johnson Vice President Computing Enhancement Group General Manager, StrongARM 40 INTELCORPORATION1998 1998. Overthepastfouryears,Companyhasreduced theOSHA-record- 3955 4555 (Hong Kong); (81) 298 478511 298 (Japan). 3955 4555(HongKong);(81) 1793 403000(Europe); (852) 360-5123 (worldwide);orcallIntelat(44) (312) 298-0146 (U.S.andCanada)or contact HarrisTrust &SavingsBankat(800) report at of fulfillmentandproductivity. Formore information,seeour challenged, acknowledgedand rewarded, leadingtoincreasingly higherlevels We strivetobeaworkplaceinwhichpeopleofdiverse backgrounds are valued, Workplace ofchoice (worldwide). 552-2771 (U.S. andCanada)or(480) www.intel.com/intel/other/ehs/index.htm 1991 hasrecognized Intelorganizationsthathaveexcellentperformance. worldwide EHSorganizationwasawarded theIntelQualityAward, which since The 1998. our goalofrecycling more than55%ofsolidandchemicalwastesin high environmental, health andsafety(“EHS”)expectations,weexceeded and improvements toour process forensuringthatoursuppliersadhere toour erations ofsemiconductormanufacturing.We developedanewcorporatepolicy and energyusereductions permanufacturingunitoneachofourlastfourgen- health nursingprograms. motion ofasafeandhealthyworkenvironment, andsupportofoccupational Nurses honored IntelwithitshighestBusinessRecognitionAward forourpro- TheAmericanAssociationofOccupationalHealth average of30%eachyear. able injuryrateanaverageof37%eachyearandthelost-daycase Intel employeesdramaticallyreduced workplaceinjuriesandillnessesagainin Environment, healthandsafety Young LLP, USA SanJose,California, & Ernst Independent auditors of Intelstock. 360-5123 (worldwide)withanyquestionsregarding transferofownership (312) 298-0146 (U.S.andCanada)or 60690-3504 USA.Stockholdersmaycall(800) Harris Trust IL &SavingsBank,311 West Monroe, P.O. BoxA3504,Chicago, Transfer agentandregistrar 360-5123 (worldwide). 298-0146 (U.S.andCanada)or(312) (800) Savings Bank,at Formore information,callIntel’s transfer agent,HarrisTrust & or monthlybasis. and contributeadditionalcashtopurchase IntelCommonStockonanoccasional Intel’s DividendReinvestmentProgram allowsstockholderstoreinvest dividends Dividend reinvestment program Intel’s CommonStocktradesonTheNasdaqMarket*underthesymbolINTC. Intel onNasdaq or anyotherfinancialliterature, pleaseseeourWeb siteat as wellotherusefulinformation. job listings,frequently askedquestionsandouranimatedonlineannualreport, contains background ontheCompanyanditsproducts, financialinformation, www.intc.com Investor materials information Investor Please seeourEnvironmental, HealthandSafetyPerformance Reportat Through ourDesignfortheEnvironment processes, wehaveachievedwater 10-Qs 10-Ks, For investorinformation,includingadditionalannualreports, www.intel.com/intel/oppty/why/workplace.htm —Intel’s Web InvestorRelationshomepageontheWorld Wide o rne oy al(0)316-5542 . Foraprintedcopy, call(800) . www.intc.com Workplace ofChoice or hn:(5 11 55052296 Phone: (55) Brazil CEP 04565-001 SaoPaulo-SP Rue Florida,1703-2 andCJ22 Intel Semicondutores doBrazil South America 298478522 Phone: (81) Japan Ibaraki-ken 305 5-6 Tokodai, Tsukuba-shi P.O. Box115 Tsukuba-gakuen Intel KabushikiKaisha Japan 28444555 (852) Phone: Hong Kong,SAR 88 Queensway, Central 32/F Two PacificPlace Intel SemiconductorLtd. Asia-Pacific 87055600 Sweden: (46) 102866111 Netherlands: (31) 25897111 Israel: (972) 2575441 Italy: (39) 14571 France: (33) 8999143 0 Germany: (49) 1793 403000 England: (44) Phone UK SN31RJ Wiltshire Swindon Pipers Way Intel Corporation(UK)Ltd. Europe 628-8686 Customer support:(800) 765-8080 General information:(408) Phone USA Santa Clara,CA95052-8119 P.O. Box58119 2200 MissionCollegeBoulevard Robert NoyceBuilding Intel Corporation Canada United Statesand Intel around theworld at Webvisit oursiteontheWorld Wide To more learn aboutIntelCorporation, For more information www.intel.com 7171 INTELCORPORATION1998 41 All other * shown in this report. We also We shown in this report. vision of Cable News Network l Corporation. All rights reserved. re registered trademarks and Celeron, registered re The Company was founded in founded was The Company III Xeon are trademarks of Intel Corporation. StrongARM is a registered trademark of ARM Ltd. is a registered StrongARM trademarks of Intel Corporation. III Xeon are ® of computer systems and peripherals. Xeon and Pentium II ® processor for mid- to high-end servers and workstations processor processor for performance in mobile PC systems processor are designed to perform specific functions in products such as automobile engine and designed to perform specific functions in products are , including makers of a wide range of industrial and telecommunications equipment. TM II processor for value PC desktop systems processor TM processor for entry-level servers and workstations and performance desktop PCs for entry-level servers and workstations and performance processor Xeon II II , also called central processing units (“CPUs”) or chips, are frequently described as the “brains” of frequently units (“CPUs”) or chips, are , also called central processing ® ® provides easily reprogrammable memory for computers, mobile phones and many other products. for computers, mobile phones and many other products. memory easily reprogrammable provides combine Intel microprocessors and chipsets to form the basic subsystem of a PC or server. and chipsets to form the basic subsystem of a PC or server. combine Intel microprocessors Celeron —including individuals, large and small businesses, and Internet service providers—who buy Intel’s PC buy Intel’s —including individuals, large and small businesses, and Internet providers—who service ® perform essential logic functions surrounding the CPU in computers based on Intel architecture processors. processors. based on Intel architecture the CPU in computers perform essential logic functions surrounding

Create & Share, MMX, Pentium & Share, Create Original equipment manufacturers The Pentium The Pentium The Intel The mobile Pentium The mobile Pentium Other manufacturers PC users

® Today, Intel supplies the computing industry with the chips, boards, computing industry with Intel supplies the Today, Printed on recycled paper. Intel, the Intel logo, Intel Inside, the Intel Inside logo, Pentium and the Pentium processor logo a Intel, the Intel logo, Intel Inside, the Intel Inside logo, Pentium and the Pentium processor paper. Printed on recycled enhancements, business communications products and networking products through reseller, retail and OEM channels. retail reseller, through and networking products enhancements, business communications products We want to thank Hewlett-Packard Company, IBM Corporation and LEGO Media International for use of their products and/or images IBM Corporation and LEGO Media International for use of their products Company, want to thank Hewlett-Packard We want to acknowledge the following companies for use of their Web site images: CNET: The Computer Network; CNN Interactive, a Di site images: CNET: want to acknowledge the following companies for use of their Web Inc. Media, Inc.; SportsLine USA, Inc.; and ThirdAge Inc.; Excite, Inc.; GeoCities; iVillage, LLP; eToys LP, Intel Intel’s major customers include: Intel’s Major customers Major Network communications products and original retail reseller, sold through enhance the capabilities of PC systems and networks, and are These products (“OEM”) channels. equipment manufacturer Embedded control chips Embedded control Flash memory Motherboards Computing enhancement products Chipsets Microprocessors Intel architecture platform products Intel architecture Management’s discussion and analysis analysis and discussion Management’s About Intel results of operations condition and of financial a computer, because they control the central processing of data in personal computers (“PCs”), servers, workstations the central processing because they control a computer, optimized for each segment of the computing market: microprocessors and other computers. Intel offers Flash memory has the advantage of retaining data when the unit’s power is turned off. power is turned off. data when the unit’s Flash memory has the advantage of retaining braking systems, hard disk drives, laser printers, input/output control modules, cellular phones and home appliances. disk drives, laser printers, input/output control braking systems, hard systems and software that are the “ingredients” that are software systems and of computer architec- ture. advanced to create by industry members used are These products systems.computing building preeminent mission is to be the Intel’s industry worldwide. to the connected computing block supplier 25 years since Intel introduced the world’s first microprocessor, making microprocessor, first world’s the introduced since Intel 25 years history.technological that this and Internet The computer revolution the world. enabled has changed technology products Principal brands and names are the property of their respective owners. Printed in the USA. 0399/2.75M/AL/MD/LS/HP. Copyright ©1999, Inte Copyright ©1999, owners. Printed in the USA. 0399/2.75M/AL/MD/LS/HP. of their respective the property brands and names are 1968 to build semiconductor memory products. memory semiconductor to build 1968 than has been more It 1998 marked Intel’s 30th anniversary. 30th Intel’s marked 1998 www.intc.com Visit Intel on the Internet any time for stock quotes, earnings and the latest news. just a click away With a simple mouse click, you are connected to our in-depth investor resources. Analysis and graphs. Historical financials. Handy links to other sites. It’s all here—for Intel investors. most recent earnings report Each quarter, we release our earnings results and broadcast management’s comments on the quarter live on our Web site. Come to www.intc.com to find earnings release schedules and hear the live broadcast. current quotes Intel’s stock quote, daily trading range and volume at your fingertips. the latest Intel news Want it now? Want it fast? Get all the Intel news you need at www.intc.com. You can even subscribe to our Custom News Page and have the information sent to you on e-mail.