Beginning in the first quarter of 2008, the assessment of fair value for our financial instruments was based on the provisions of SFAS No. 157. SFAS No. 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability. A financial instrument's categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Credit risk is factored into the valuation of financial instruments that we measure at fair value on a recurring basis. When fair value is determined using observable market prices, the credit risk is incorporated into the market price of the financial instrument. When fair value is determined using pricing models, such as a discounted cash flow model, the issuer's credit risk and/or Intel's credit risk is factored into the calculation of the fair value, as appropriate. During 2008, the valuation of our liabilities measured at fair value as well as our derivative instruments in a current or potential net liability position were not impacted by changes in our credit risk. The credit ratings of certain of our counterparties have deteriorated. However, the deterioration of these credit ratings did not have a significant impact on the valuation of either our marketable debt instruments or derivative instruments in a current or potential net asset position.

When values are determined using inputs that are both unobservable and significant to the values of the instruments being measured, we classify those instruments as Level 3 under the SFAS No. 157 hierarchy. As of December 27, 2008, our financial instruments measured at fair value on a recurring basis included $15.0 billion of assets, of which $1.7 billion (11%) were classified as Level 3. In addition, our financial instruments measured at fair value on a recurring basis included $421 million of liabilities, of which $147 million (35%) were classified as Level 3. During 2008, we transferred approximately $680 million of assets from Level 3 to Level 2. These assets primarily consisted of floating-rate notes that were transferred from Level 3 to Level 2 due to a greater availability of observable market data and/or non-binding market consensus prices to value or corroborate the value of our instruments. During 2008, we recognized an insignificant amount of losses on the assets that were transferred from Level 3 to Level 2.

During 2008, the Level 3 assets and liabilities that are measured at fair value on a recurring basis experienced net unrealized fair value declines totaling $160 million. Of these declines, $111 million was recognized in our consolidated statements of income. We believe that the remaining $49 million, included in other comprehensive income, represents a temporary decline in the fair value of available-for-sale investments. During 2008, we did not experience any significant realized gains (losses) related to the Level 3 assets or liabilities in our portfolio.