The price of Intel common stock, along with that of other semiconductor companies, has been significantly impacted by the worldwide economic downturn. As of December 26, 2008, Intel common stock closed at a market price of $14.18, resulting in more than 99% of our outstanding stock option grants being underwater (meaning the stock option exercise price exceeded the market price of Intel common stock). Over recent years, Intel has continued to invest in leading-edge technologies and growth initiatives in order to strengthen our competitive position and enter new market segments while focusing on our commitment to efficiency and controlling spending. We have reduced our headcount by nearly 20,000 from our highest levels during 2006, and we have engaged in a number of divestitures of non-strategic businesses. While these efforts have assisted us on the spending side, we face a rapidly changing marketplace in which demand is shifting among mobile, desktop, and server microprocessors, and the prices and margins of our products have been under pressure. We consider our employees an important component in our drive to enhance our competitive position and to prepare for future success. Many of our employees are engineers, scientists, and other specialists who are working on important multi-year research and development projects or have skills that they have developed over the years and would be difficult to replace.

Although we have sought to address the factors that we could control in recent years, the current worldwide economic downturn has dramatically affected our business. The pace of the revenue decline in the fourth quarter of 2008 resulted from reduced demand and inventory contraction across the supply chain. The 19% sequential decline in revenue from the third quarter of 2008 to the fourth quarter of 2008 was only the second time in the last 20 years that our fourth-quarter revenue fell below our third-quarter revenue. It is unclear when a turnaround may occur, and there remains a high degree of uncertainty around demand, which may continue to decline. Accordingly, subsequent to the end of 2008, management approved plans to restructure some of our manufacturing and assembly and test operations, and align our manufacturing and assembly and test capacity to current market conditions. Despite these significant actions taken by management, the financial sector crisis and other macro-economic factors have contributed to the price of our common stock declining significantly. Exercise prices for stock options outstanding as of December 26, 2008, excluding stock options assumed from acquisitions, ranged from $13.59 to $72.88, and the closing market price of our common stock was $14.18 on that date. As a result, the current situation provides a considerable challenge to maintaining employee motivation, as well as creating a serious threat to retention until a recovery commences. The Option Exchange would help to address both of these concerns and reinvigorate a culture based on employee stock ownership.

Further, successful execution of the Option Exchange would significantly reduce our "overhang" (equity awards outstanding but not exercised, plus equity awards available to be granted, divided by total common shares outstanding at the end of the year). Underwater stock option awards have little or no retentive value but remain in overhang until they are exercised, expire, or are cancelled. Our overhang on December 27, 2008 was 15.3% (679 million equity awards outstanding plus 174 million shares available for future grant divided by 5,562 million total common shares outstanding). Under the Option Exchange, we expect that a reduction in overhang will occur, because participating employees will receive fewer new stock options than the number of stock options being surrendered, and surrendered stock options will be cancelled and not be re-issued. The exchange ratios of old stock options for new stock options will be based on the fair value determined under applicable accounting rules shortly before we commence with the Option Exchange. The Option Exchange is intended to be a value-for-value exchange; in order to obtain a new in-the-money stock option, an employee will be required to surrender a higher number of underwater stock options that have value approximately equivalent to the new stock option. The total overhang reduction is difficult to estimate and will only be known when the actual exchange is complete. For example, if the fair values of stock options to be surrendered and received in the actual exchange, as determined using the Black-Scholes option pricing model, are similar to the fair values estimated as of fiscal year-end 2008, the Option Exchange could reduce the overhang by up to approximately 285 million shares if all eligible stock options are surrendered for new stock options.

Lastly, the Option Exchange will allow us to recapture expense already allocated to equity awards, to enhance employee motivation and retention rather than incur new, additional costs to achieve the same result. Generally, when stock options are granted to employees, the company bears an expense that reduces our net income. This expense (known as share-based compensation) is calculated at the time a stock option is granted based on the determined value of each stock option when granted. Intel is using a mathematical formula known as the Black-Scholes option pricing model to determine the value of each stock option. We started recognizing share-based compensation in 2006 as a result of the adoption of SFAS No. 123(R). As of December 27, 2008, there was $335 million in unrecognized compensation costs related to outstanding stock options to be expensed in 2009 and beyond; however, at current stock prices, these outstanding stock option awards are of limited benefit in motivating and retaining our employees. Through the Option Exchange, we believe that we can increase the significance of these stock option awards for our employees and provide a more meaningful incentive. We have designed the Option Exchange so that it is not expected to create additional share-based compensation expense; as noted above, this is known as a value-for-value exchange.