**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

**FORM 10-Q**

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended October 1, 2006**

**OR**

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transitionperiod from             to            **

**Commission filenumber:  001-13279**

**INTERMEC,INC.**

(Exact name of registrant as specified in its charter)

| **Delaware**                                    |   | **95-4647021**       |
|-------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                |   | (I.R.S. Employer     |
| incorporation or  organization)                 |   | Identification  No.) |
|                                            |   |                 |
| **6001 36****th Avenue West, Everett, Wa** |   | **98203-1264**       |
| (Address of  principal executive offices)       |   | (Zip Code)           |

 

**(425) 265-2400**

(Registrant’s telephone number, including area code)

**[None]**

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

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x    No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large acceleratedfiler x            Acceleratedfiler  o            Non-acceleratedfiler  o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).Yes o      No x

Indicatethe number of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

| **Class**                               |   | **Outstanding at October 27, 2006** |
|-----------------------------------------|--------|-------------------------------------|
| Common Stock, $0.01 par value per share |   | 62,193,729 shares                   |

 

 

----

**INTERMEC, INC.TABLE OF CONTENTSREPORT ON FORM 10-QFOR THE QUARTER ENDED OCTOBER 1, 2006**
| **PART I. FINANCIAL  INFORMATION** |                                                                                                                        |
|------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                        |   |
| **ITEM 1.**                        | Financial Statements                                                                                                        |   |
|                               |                                                                                                                        |   |
|                               | Consolidated  Statements of Operations (unaudited)  Three and Nine Month Periods Ended October 1, 2006, and October 2, 2005 |   |
|                               |                                                                                                                        |   |
|                               | Consolidated  Balance Sheets (unaudited)  October 1, 2006, and December 31, 2005                                            |   |
|                               |                                                                                                                        |   |
|                               | Consolidated  Statements of Cash Flows (unaudited)  For the Nine Months Ended October 1, 2006, and October 2, 2005          |   |
|                               |                                                                                                                        |   |
|                               | Notes to  Consolidated Financial Statements (unaudited)                                                                     |   |
|                               |                                                                                                                        |   |
| **ITEM 2.**                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 |   |
|                               |                                                                                                                        |   |
| **ITEM 3.**                        | Quantitative  and Qualitative Disclosures about Market Risk                                                                 |   |
|                               |                                                                                                                        |   |
| **ITEM 4.**                        | Controls and  Procedures                                                                                                    |   |
|                               |                                                                                                                        |   |
| **PART II. OTHER  INFORMATION**    |                                                                                                                        |
|                               |                                                                                                                        |   |
| **ITEM  1.**                       | Legal  Proceedings                                                                                                          |   |
|                               |                                                                                                                        |   |
| **ITEM 1A.**                       | Risk  Factors                                                                                                               |   |
|                               |                                                                                                                        |   |
| **ITEM 2.**                        | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                |   |
|                               |                                                                                                                        |   |
| **ITEM 6.**                        | Exhibits                                                                                                                    |   |
|                               |                                                                                                                        |   |
| Signature                          |                                                                                                                        |   |

 

2

----

**PARTI. FINANCIAL INFORMATION**

# **INTERMEC, INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

# **(amounts in thousands, except per share amounts)**

# **(unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **October 1,**              | ** ** | **October 2,**             | ** ** | **October 1,** | ** ** | **October 1,** | ** ** |
| ** **                                                  | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                   |       |                             |       |                            |       |   |   |   |   |
| Product                                                     |       | $                                | 156,951    |                            | $          | 179,640 |   | $ | 515,741 |   | $ | 522,590 |   |
| Service                                                     |       | 38,996                           |       | 40,174                          |       | 115,474 |   | 111,178 |   |
| Intellectual  property settlement                           |       | —                           |       | —                          |       | 23,000 |   | — |   |
| Total Revenues                                              |       | 195,947                          |       | 219,814                         |       | 654,215 |   | 633,768 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Costs and expenses:                                         |       |                             |       |                            |       |   |   |   |   |
| Cost of product  revenues                                   |       | 98,807                           |       | 107,054                         |       | 315,811 |   | 301,755 |   |
| Cost of service  revenues                                   |       | 21,026                           |       | 25,083                          |       | 65,311 |   | 67,053 |   |
| Cost of  intellectual property settlement                   |       | —                           |       | —                          |       | 6,462 |   | — |   |
| Selling, general  and administrative                        |       | 70,573                           |       | 74,143                          |       | 226,862 |   | 222,691 |   |
| Restructuring charge                                        |       | 1,758                            |       | —                          |       | 4,000 |   | — |   |
| Total costs and  expenses                                   |       | 192,164                          |       | 206,280                         |       | 618,446 |   | 591,499 |   |
| Operating profit from  continuing operations                |       | 3,783                            |       | 13,534                          |       | 35,769 |   | 42,269 |   |
| Gain on sale of  investments                                |       | —                           |       | —                          |       | 2,305 |   | — |   |
| Interest income  (expense), net                             |       | 1,705                            |       | (665                            | )          | 4,615 |   | (3,911 | ) |
| Earnings from  continuing operations before income taxes    |       | 5,488                            |       | 12,869                          |       | 42,689 |   | 38,358 |   |
| Provision for income  taxes                                 |       | 2,043                            |       | 1,601                           |       | 12,878 |   | 9,823 |   |
| Earnings before  discontinued operations                    |       | 3,445                            |       | 11,268                          |       | 29,811 |   | 28,535 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Earnings (loss) from  discontinued operations, net of tax   |       | 1,352                            |       | (6,697                          | )          | (667 | ) | (8,416 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Net earnings                                                |       | $                                | 4,797      |                            | $          | 4,571 |   | $ | 29,144 |   | $ | 20,119 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Basic earnings (loss)  per share                            |       |                             |       |                            |       |   |   |   |   |
| Continuing  operations                                      |       | $                                | 0.05       |                            | $          | 0.18 |   | $ | 0.47 |   | $ | 0.46 |   |
| Discontinued  operations                                    |       | 0.02                             |       | (0.11                           | )          | (0.01 | ) | (0.13 | ) |
| Net earnings per  share                                     |       | $                                | 0.07       |                            | $          | 0.07 |   | $ | 0.46 |   | $ | 0.33 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Diluted earnings (loss)  per share                          |       |                             |       |                            |       |   |   |   |   |
| Continuing  operations                                      |       | $                                | 0.05       |                            | $          | 0.18 |   | $ | 0.46 |   | $ | 0.45 |   |
| Discontinued  operations                                    |       | 0.02                             |       | (0.11                           | )          | (0.01 | ) | (0.13 | ) |
| Net earnings per  share                                     |       | $                                | 0.07       |                            | $          | 0.07 |   | $ | 0.45 |   | $ | 0.32 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Shares used in  computing basic earnings (loss) per share   |       | 62,749                           |       | 62,077                          |       | 63,009 |   | 61,509 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Shares used in computing  diluted earnings (loss) per share |       | 64,061                           |       | 63,635                          |       | 64,428 |   | 63,071 |   |

 

See accompanying notes to consolidated financialstatements.

3

----

# **INTERMEC, INC.CONSOLIDATED BALANCE SHEETS**

# **(amounts in thousands)**

# **(unaudited)**

 
| ** **                                                                                           | ** ** | **October 1.** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2006**            | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                           |       |                |       |                  |       |
|                                                                                                 |       |                |       |                  |       |
| Current assets:                                                                                      |       |                |       |                  |       |
| Cash and cash  equivalents                                                                           |       | $                   | 218,614    |                  | $          | 256,782 |   |
| Short-term  investments                                                                              |       | 19,130              |       | —                |       |
|                                                                                                 |       |                |       |                  |       |
| Accounts  receivable, net of allowance for doubtful accounts and sales returns of  $7,728 and $8,157 |       | 158,161             |       | 180,985               |       |
| Inventories                                                                                          |       | 138,071             |       | 82,088                |       |
| Net current  deferred tax assets                                                                     |       | 47,857              |       | 100,656               |       |
| Assets held for  sale                                                                                |       | 8,529               |       | 8,517                 |       |
| Other current  assets                                                                                |       | 14,177              |       | 29,468                |       |
| Total current  assets                                                                                |       | 604,539             |       | 658,496               |       |
|                                                                                                 |       |                |       |                  |       |
| Property, plant  and equipment, net of accumulated depreciation of $105,790 and $99,032              |       | 41,918              |       | 30,820                |       |
| Intangibles, net                                                                                     |       | 5,976               |       | 6,871                 |       |
| Net deferred tax  assets                                                                             |       | 185,373             |       | 137,578               |       |
| Other assets                                                                                         |       | 61,822              |       | 68,955                |       |
| Total assets                                                                                         |       | $                   | 899,628    |                  | $          | 902,720 |   |
|                                                                                                 |       |                |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ INVESTMENT**                                                    |       |                |       |                  |       |
|                                                                                                 |       |                |       |                  |       |
| Current  liabilities:                                                                                |       |                |       |                  |       |
| Accounts payable  and accrued expenses                                                               |       | $                   | 143,173    |                  | $          | 148,731 |   |
| Payroll and  related expenses                                                                        |       | 26,727              |       | 31,011                |       |
| Deferred revenue                                                                                     |       | 46,183              |       | 38,369                |       |
| Total current  liabilities                                                                           |       | 216,083             |       | 218,111               |       |
|                                                                                                 |       |                |       |                  |       |
| Long-term deferred  revenue                                                                          |       | 18,845              |       | 20,095                |       |
| Long-term debt                                                                                       |       | 100,000             |       | 100,000               |       |
| Other long-term  liabilities                                                                         |       | 86,679              |       | 88,711                |       |
|                                                                                                 |       |                |       |                  |       |
| Shareholders’  investment:                                                                      |       |                |       |                  |       |
| Common stock                                                                                         |       | 634                 |       | 627                   |       |
| Additional  paid-in capital                                                                          |       | 703,316             |       | 736,224               |       |
| Accumulated  deficit                                                                                 |       | (215,760            | )          | (244,903              | )          |
| Accumulated  other comprehensive loss                                                                |       | (10,169             | )          | (16,145               | )          |
| Total  shareholders’ investment                                                                 |       | 478,021             |       | 475,803               |       |
| Total liabilities and  shareholders’ investment                                                 |       | $                   | 899,628    |                  | $          | 902,720 |   |

 

See accompanying notes to consolidated financialstatements.

4

----

# **INTERMEC, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

# **(amounts in thousands)**

# **(unaudited)**

| ** **                                                                                     | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                     | ** ** | **October 1,**             | ** ** | **October 2,** | ** ** |
| ** **                                                                                     | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|                                                                                           |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                              |       | $                               | 256,782    |   | $ | 217,899 |   |
|                                                                                           |       |                            |       |   |   |
| Cash flows from  operating activities of continuing operations:                                |       |                            |       |   |   |
| Net earnings from continuing operations                                                        |       | 29,811                          |       | 28,535 |   |
| Adjustments to reconcile net earnings to net cash provided  by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                                  |       | 7,818                           |       | 7,504 |   |
| Change in prepaid pension costs, net                                                           |       | 3,458                           |       | 7,667 |   |
| Deferred taxes                                                                                 |       | 7,085                           |       | 7,120 |   |
| Stock-based compensation and other                                                             |       | 5,147                           |       | 888 |   |
| Excess tax benefits from stock-based payment  arrangements                                     |       | (4,183                          | )          | — |   |
| Changes in operating assets and liabilities:                                                   |       |                            |       |   |   |
| Accounts receivable                                                                            |       | 22,824                          |       | (9,787 | ) |
| Inventories                                                                                    |       | (55,983                         | )          | (21,604 | ) |
| Other current assets                                                                           |       | 10,825                          |       | 180 |   |
| Accounts payable and accrued expenses                                                          |       | 2,410                           |       | 5,998 |   |
| Payroll and related expenses                                                                   |       | (3,892                          | )          | (5,002 | ) |
| Other long-term liabilities                                                                    |       | 2,236                           |       | 18,128 |   |
| Other operating activities                                                                     |       | 2,415                           |       | (971 | ) |
|                                                                                           |       |                            |       |   |   |
| Net cash provided by operating activities of  continuing operations                            |       | 29,971                          |       | 38,656 |   |
|                                                                                           |       |                            |       |   |   |
| Cash flows from  investing activities of continuing operations:                                |       |                            |       |   |   |
| Capital expenditures                                                                           |       | (17,276                         | )          | (7,159 | ) |
| Purchases of investments                                                                       |       | (19,695                         | )          | — |   |
| Decrease in restricted cash                                                                    |       | —                          |       | 50,000 |   |
| Proceeds from sales of investments                                                             |       | 565                             |       | — |   |
| Capitalization of patent legal fees                                                            |       | (408                            | )          | — |   |
| Proceeds from sale of property, plant and equipment                                            |       | —                          |       | 6,050 |   |
| Other investing activities                                                                     |       | (128                            | )          | 593 |   |
|                                                                                           |       |                            |       |   |   |
| Net cash (used in) provided by investing activities  of continuing operations                  |       | (36,942                         | )          | 49,484 |   |
|                                                                                           |       |                            |       |   |   |
| Cash flows from  financing activities of continuing operations:                                |       |                            |       |   |   |
| Repayment of long-term obligations                                                             |       | —                          |       | (108,500 | ) |
| Excess tax benefits from stock-based payment  arrangements                                     |       | 4,183                           |       | — |   |
| Proceeds from stock options exercised                                                          |       | 5,819                           |       | 16,373 |   |
| Stock repurchase                                                                               |       | (49,948                         | )          | — |   |
| Other financing activities                                                                     |       | 2,187                           |       | 1,118 |   |
|                                                                                           |       |                            |       |   |   |
| Net cash used in financing activities of continuing  operations                                |       | (37,759                         | )          | (91,009 | ) |
|                                                                                           |       |                            |       |   |   |
| Net cash used in  continuing operations                                                        |       | (44,730                         | )          | (2,869 | ) |
| Net cash used in  operating activities of discontinued operations                              |       | —                          |       | (34,662 | ) |
| Net cash  provided by (used in) investing activities of discontinued operations                |       | 6,562                           |       | (806 | ) |
|                                                                                           |       |                            |       |   |   |
| Resulting  decrease in cash and cash equivalents                                               |       | (38,168                         | )          | (38,337 | ) |
|                                                                                           |       |                            |       |   |   |
| Cash and cash  equivalents at end of period                                                    |       | $                               | 218,614    |   | $ | 179,562 |   |

 

See accompanying notes to consolidated financialstatements.

5

----

**INTERMEC,INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)**

**1.****                          Descriptionof the Business**

Effective January 1, 2006, we changed our name from UNOVA, Inc. toIntermec, Inc. (“Intermec”). We design, develop, manufacture, integrate, sell,resell and service wired and wireless automated identification and datacollection (“AIDC”) products and systems, mobile computing products andsystems, wired and wireless bar code printers, label media and radio frequencyidentification (“RFID”) products and systems. Our products and services areused by customers within and outside of the United States to improve theproductivity, quality and responsiveness of their business operations includingsupply chain management, enterprise resource planning and field sales andservice. We grant licenses to use portions of our intellectual propertyportfolio, including certain patent rights essential to and/or useful in RFIDand AIDC products, and receive license fees as well as ongoing royalties basedon sales by licensees. Customers for our products and services operate inmarket segments that include manufacturing, warehousing, direct store delivery,retail, consumer packaged goods, field service, government, and transportationand logistics.

In 2005, we divested our Industrial Automation Systems (“IAS”)businesses, which comprised the Cincinnati Lamb and Landis Grinding Systemsdivisions. The IAS businesses are classified as discontinued operations foraccounting purposes in our consolidated financial statements and related notes.

**2.****                          Basis ofPresentation**

Our interim financial periods are based on athirteen-week retail calendar. In the opinion of management, the accompanyingbalance sheets and interim statements of operations, and statements of cashflows include all adjustments, consisting only of normal recurring items,necessary for their fair presentation in conformity with accounting principlesgenerally accepted in the United States of America (“U.S. GAAP”). The financialstatements include the accounts of Intermec and its subsidiaries. Intercompanytransactions and balances have been eliminated. Equity investments in which weexercise significant influence but do not exercise control and are not theprimary beneficiary are accounted for using the equity method. Investments inwhich we are not able to exercise significant influence over the investee areaccounted for under the cost method. Preparing financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenue, and expenses, and financial data included inthe accompanying notes to the financial statements. Actual results and outcomesmay differ from management’s estimates and assumptions.

Interim results are not necessarily indicative ofresults for a full year. The information included in this Form 10-Q shouldbe read in conjunction with Management’s Discussion and Analysis and the auditedfinancial statements and notes thereto included in our December 31, 2005 Form10-K.

Certain amounts in ourprior-period consolidated financial statements and notes have been reclassifiedto conform to the current-period presentation. The consolidated statement ofcash flows for the nine months ended October 2, 2005, reflects thereclassification of $50 million in restricted cash from financingactivities to investing activities and $3.9 million of cash used inoperating activities of discontinued operations was reclassified from operatingactivities of continuing operations.

**3.****                          Stock-BasedCompensation**

We adopted Statement of Financial Accounting Standards(“SFAS”) 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using themodified prospective transition method beginning January 1, 2006. SFAS123(R) eliminates the ability to account for share-based compensationtransactions, as we formerly did, using the intrinsic value method asprescribed by Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and generally requires that such transactions beaccounted for using a fair-value-based method and recognized as expenses in ourconsolidated statements of operations.

Our consolidated financial statements for the threeand nine months ended October 1, 2006, reflect the impact of adoptingSFAS 123(R). In accordance with the modified prospective method, theconsolidated financial statements for prior periods have 

6

----

stock-based compensation expense recognized in theconsolidated statement of operations during the third quarter of 2006, includedcompensation expense for stock-based payment awards granted prior to, but notyet vested, as of December 31, 2005, based on the grant date fair valueestimated in accordance with the pro forma provisions of SFAS 148“Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”)and compensation expense for the stock-based payment awards granted subsequentto December 31, 2005, based on the grant date fair value estimated inaccordance with SFAS 123(R). 

Stock-based compensationexpenserecognized in the consolidated statement of operations for the three and ninemonths ended October 1, 2006, is based on options ultimately expected to vest. Theexpense has been reduced for estimated forfeitures. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. In thepro forma information required under SFAS 148 for the periods prior toJanuary 1, 2006, we accounted for forfeitures as they occurred.

Accordingly, during the three and nine month periodsended October 1, 2006, we recorded stock-based compensation expense for awardsgranted prior to, but not yet vested as of, January 1, 2006, as if thefair value method required for pro forma disclosure under SFAS 123 were ineffect for expense recognition purposes, adjusted for estimatedforfeitures.  For stock-based awardsgranted after January 1, 2006, we have recognized compensation expensebased on the estimated grant date fair value method using the Black-Scholesvaluation model. For these awards, we have recognized compensation expenseusing a straight-line amortization method. Because SFAS 123(R) requiresthat stock-based compensation expense be based on awards that are ultimatelyexpected to vest, stock-based compensation for the three and nine month periodsended October 1, 2006, has been reduced for estimated forfeitures. Whenestimating forfeitures, we consider voluntary termination behaviors as well astrends of actual option forfeitures. The impact on our results of operations ofrecording stock-based compensation for the three and nine month periods endedOctober 1, 2006 was as follows (in thousands):
|                                                    | ** ** | **Three Months**               | ** ** | **Nine Months**                | ** ** |
|----------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                         | ** ** | **Ended**                           | ** ** | **Ended**                           | ** ** |
| ** **                                         | ** ** | **October 1,  2006** | ** ** | **October 1,  2006** | ** ** |
| Cost of revenues                         |       | $                                   | 74         |                                | $          | 184 |   |
| Selling, general and administrative |       | 762                                 |       | 3,573                               |       |
|                                               |       | $                                   | 836        |                                | $          | 3,757 |   |

 

Prior to adopting SFAS 123(R), we presented alltax benefits resulting from the exercise of stock options as operating cashflows in the Statement of Cash Flows. SFAS 123(R) requires cash flowsresulting from excess tax benefits to be classified as a part of cash flowsfrom financing activities. Excess tax benefits are realized tax benefits fromtax deductions for exercised options in excess of the deferred tax assetattributable to stock compensation costs for such options. As a result ofadopting SFAS 123(R) $4.2 million of excess tax benefits for the ninemonths ended October 1, 2006, has been classified as a source of cash fromfinancing activities. Cash received from option exercises under all share-basedpayment arrangements for the nine month periods ended October 1, 2006 andOctober 2, 2005, was $5.8 million and $16.4 million, respectively. Thetotal income tax benefit recognized in the statement of operations for stock-basedcompensation costs was $0.3 million, and $1.4 million for the threeand nine month periods ended October 1, 2006, and $0.4 million and $1.0 millionfor the three and nine month periods ended October 2, 2005, respectively.

We calculated the fair value of each option award onthe date of grant using the Black-Scholes option pricing model. The followingassumptions were used for each respective period:
|                            | ** ** | **October 1,  2006** | ** ** | **October 2,  2005** | ** ** |
|----------------------------|------------|---------------------------|------------|---------------------------|------------|
| Risk-free  interest rates  |       | 4.82                      | %          | 4.09                      | %          |
| Expected lives  (in years) |       | 4.80                      |       | 5.00                      |       |
| Expected  dividend yield   |       | 0.00                      | %          | 0.00                      | %          |
| Expected volatility        |       | 40.15                     | %          | 52.94                     | %          |

 

Our computation of expected volatility for the thirdquarter of 2006 is based on a combination of historical and market-basedimplied volatility from traded options on a group of peer stocks. Prior to2006, our computation of expected volatility was based on historicalvolatility. Our computation of expected life in 2006, was determined based on historicalexperience of similar awards, giving consideration to the contractual terms ofthe stock-based awards, vesting schedules and expectations of future employeebehavior. The interest rate for periods within the contractual life of theaward is based on the U.S. Treasury yield curve in effect at the time ofgrant.

7

----

The fair value of the options granted based on theabove assumptions are $11.46 and $12.80 for the three and nine month periodsended October 1, 2006 and $14.71 and $10.72 for the three and nine monthperiods ended October 2, 2005, respectively. All grants of our options under all plans must be approved or authorizedby the Compensation Committee of the Board of Directors, which consistsentirely of outside directors.

The following table summarizes the pro forma effect ofstock-based compensation as if the fair value method of accounting for stockcompensation had been applied in periods prior to January 1, 2006.
|                                                                                                      | ** ** | **Three Months**     | ** ** | **Nine Months**      | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                                           | ** ** | **Ended**                 | ** ** | **Ended**                 | ** ** |
| ** **                                                                                           | ** ** | **October 2,  2005** | ** ** | **October 2,  2005** | ** ** |
| Net earnings as  reported                                                                            |       | $                         | 4,571      |                      | $          | 20,119 |   |
| Add: stock  compensation expense recorded under the intrinsic value method, net of tax  effect       |       | 593                       |       | 1,661                     |       |
| Less: pro forma  stock compensation expense computed under the fair value method, net of tax  effect |       | (1,485                    | )          | (4,077                    | )          |
|                                                                                                 |       |                      |       |                      |       |
| Pro forma net  earnings                                                                              |       | $                         | 3,679      |                      | $          | 17,703 |   |
|                                                                                                 |       |                      |       |                      |       |
| Net earnings per  share as reported:                                                                 |       |                      |       |                      |       |
| Basic                                                                                                |       | $                         | 0.07       |                      | $          | 0.33 |   |
| Diluted                                                                                              |       | $                         | 0.07       |                      | $          | 0.32 |   |
|                                                                                                 |       |                      |       |                      |       |
| Pro forma net  earnings per share:                                                                   |       |                      |       |                      |       |
| Basic                                                                                                |       | $                         | 0.06       |                      | $          | 0.29 |   |
| Diluted                                                                                              |       | $                         | 0.06       |                      | $          | 0.28 |   |

 

Our 2001, 1999 and 1997 Stock Incentive Plans and our2004 Omnibus Incentive Compensation Plan (the “Stock Incentive Plans,”collectively) provide for the grant of incentive awards to officers and otherkey employees. The numbers of shares authorized for grant under the 2004, 2001and 1999 Plans are 3,000,000, 1,000,000, and 4,500,000, respectively. Noadditional shares are authorized for grant under the 1997 Plan, which wasfrozen subsequent to the approval of the 1999 Stock Incentive Plan. As ofOctober 1, 2006, there were 536,294 options outstanding that were granted underthe 1997 Plan before it was frozen.

Incentive awards may be granted in the form of stockoptions with or without related stock appreciation rights, restricted stock,restricted stock units and performance units. Under the Stock Incentive Plans,stock options may not be granted at an exercise price less than the marketvalue of our common stock on the date of grant. The Stock Incentive Plans’options generally vest in equal increments over five years and expire in tenyears.

The 2002 Director Stock Option and Fee Plan (“2002DSOP”) and the 1997 Director Stock Option Plan (“1997 DSOP”, collectively“DSOPs”) provide for the grant of stock options to our non-employee directors.The numbers of shares authorized for grant under the 2002 DSOP is 745,000. Noadditional shares are authorized under the 1997 DSOP. Subsequent to the grantof 255,000 options under the 1997 DSOP, it was frozen upon the approval of the2002 DSOP. Under the 2002 DSOP, stock options are granted annually at anexercise price equal to the fair market value of our common stock on the dateof grant. The number of options granted annually to each director is fixed bythe Director Plan. Prior to 2006, such options became fully exercisable on thefirst anniversary of their date of grant. Pursuant to an amendment, the grant madeto the directors in January, 2006, vested immediately. Therefore, thecorresponding expense was recorded in the quarter ended April 2, 2006.

As of October 1, 2006, there were 2,548,326 sharesavailable for grant under our Stock Incentive Plans and DSOPs. The followingtable summarizes changes in options outstanding and exercisable under our stockaward plans:

8

----

 
|                                              | ** ** | ** **         | ** ** | **Average**             | ** ** | ** **          | ** ** | ** **             | ** ** |
|----------------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **Number**         | ** ** | **Exercise Price** | ** ** | **Remaining**       | ** ** | **Intrinsic**          | ** ** |
| ** **                                   | ** ** | **of Shares** | ** ** | **Per Share**      | ** ** | **Term**            | ** ** | **Value**              | ** ** |
| ** **                                   | ** ** | ** **         | ** ** | ** **              | ** ** | **(in years)** | ** ** | **(in millions)** | ** ** |
| **Stock  Options:**                          | ** ** | ** **         | ** ** | ** **              | ** ** | ** **          | ** ** | ** **             | ** ** |
| Nonvested  balance at December 31, 2005      |       | 3,218,926          |       | $                       | 13.35      |                |       |                   |       |   |
| Granted                                      |       | 604,250            |       | 28.26                   |       |                |       |                   |       |
| Exercised                                    |       | (516,750           | )          | 14.41                   |       |                |       |                   |       |
| Forfeited                                    |       | (84,671            | )          | 21.17                   |       |                |       |                   |       |
| Canceled                                     |       | (7,000             | )          | 14.71                   |       |                |       |                   |       |
| Outstanding  balance at October 1, 2006 |       | 3,214,755          |       | 16.28                   |       | 6.22                |       | $                      | 84.7       |   |
| Exercisable at October  1, 2006              |       | 1,925,483          |       | 13.59                   |       | 4.73                |       | 50.8                   |       |
|                                              |            |                    |            |                         |            |                     |            |                        |            |  |  |

 

As of October 1, 2006, there was $9.3 million oftotal unrecognized compensation cost related to non-vested options. That costis expected to be recognized over a weighted average period of 3 years and 4months.
|                                        | ** ** | ** **         | ** ** | **Weighted-**       | ** ** |
|----------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                             | ** ** | **Number**         | ** ** | **Grant Date** | ** ** |
| ** **                             | ** ** | **of Shares** | ** ** | **Fair Value** | ** ** |
| **Restricted  stock awards:**          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Nonvested balance at December 31, 2005 |       | 86,070             |       | $                   | 11.52      |   |
| Granted                                |       | 109,088            |       | 27.29               |       |
| Vested                                 |       | (66,802            | )          | 9.14                |       |
| Forfeited                              |       | (6,977             | )          | 21.94               |       |
| Nonvested balance at  October 1, 2006  |       | 121,379            |       | 26.40               |       |
|                                        |            |                    |            |                     |            |  |

 

The fair value of each restricted stock award (“RSA”)is the market price of our stock on the date of grant. The total fair value ofRSA’s vested during the three and nine months ended October 1, 2006, andOctober 2, 2005, was $0 and $ 1.8 million, and$ 0.5 and $ 3.1 million, respectively. As of October 1,2006, there was $1.8 million of total unrecognized compensation costrelated to non-vested RSA’s. That cost is expected to be recognized over aweighted average period of 2 years.

Shared Performance Stock Awards are a form of stockaward in which the number of shares ultimately received depends on ourperformance against specified performance targets. The performance period isJanuary 1 through December 31 and covers a period of 3 fiscal years. At the endof the performance period, the number of shares of stock and stock awardsissued will be determined by adjusting upward or downward from the target in arange between 0% and 200%. The final performance percentage on which the payoutwill be based, considering performance metrics established for the performanceperiod, will be determined by the Board of Directors or a committee of theboard in its sole discretion. Shares of stock will be issued following the endof the performance period. Shared Performance Stock Awards are amortized overthe vesting period (generally 32 months) using the straight line method.  Total compensation expense related to performancestock awards was $ (1.3) million and $ 0.2 million, for the threeand nine month periods ended October 1, 2006 and $0.6 million and $1.2 millionfor the three and nine month periods ended October 2, 2005, respectively.  The $ (1.3) million credit included incompensation expense for the three months ended October 1, 2006, related to achange in estimate for our performance against our performance targets.

We administer the Employee Stock Purchase Plan (“ESPP”)under which five million shares are reserved for issuance. Employees withthree months of continuous service prior to an offering period are eligible toparticipate in the Plan. Eligible employees may elect to become participants inthe Plan and may contribute up to $21,250 per year through payroll deductionsto purchase stock purchase rights. Participants may, at any time and for anyreason, cancel their payroll deduction authorizations and have the balance intheir stock purchase right account applied to the purchase of shares or havethe amount refunded. The offering period begins on the first day of the quarterand ends on the last day of the quarter. The stock purchase rights are used topurchase the common stock of Intermec at 85 percent of the fair market value ofa share as of the grant date applicable to the participant. We treat thisexpense as compensation. The compensation expense related to ESPP was $139,000for the three months, and $457,000 for the nine months ended October 1,2006.

9

----

 

**4.****                          Inventories**

Inventories comprise the following (in thousands ofdollars):
|                 | ** ** | **October 1,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|---------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**            | ** ** | **2005**              | ** ** |
| Raw materials   |       | $                   | 82,310     |                  | $          | 50,505 |   |
| Work in process |       | 595                 |       | 705                   |       |
| Finished goods  |       | 55,166              |       | 30,878                |       |
|            |       |                |       |                  |       |
| Inventories     |       | $                   | 138,071    |                  | $          | 82,088 |   |

 

**5.****                          NotesReceivable**

Inconnection with the sale of Cincinnati Lamb, we received a $12.5 millionlong-term note receivable secured by the assets sold, bearing interest at anannual rate of LIBOR plus three percent (8.32% as of September 29, 2006) withinterest payable quarterly. Principal payments on the note are due beginningApril 2007, in six semiannual installments of $1.5 million,$2.0 million, $2.0 million, $2.5 million, $2.0 million and$2.5 million. As of October 1, 2006, the estimated fair value of the note is$11.1 million, based on the estimated cash flows from the note and arisk-adjusted discount rate equal to LIBOR plus three percent. Our consolidatedbalance sheet as of October 1, 2006, classifies the $11.1 million notereceivable as other current assets and other assets.

Aspart of the sale of Landis Grinding Systems, we received a $10 milliontwo-year note at an interest rate of five percent per annum guaranteed by thebuyer’s parent company. As of October 1, 2006, the estimated fair value of thenote is $9.6 million, based on the estimated cash flows from the note anda risk-adjusted discount rate equal to LIBOR plus 2.25% (7.55% as of September29, 2006). This long-term note receivable is included in other assets on ourbalance sheet.

**6.****                          Long-termDebt and Interest, net**

Wehave a secured long-term revolving credit facility (the “Revolving Facility”)with a maximum amount available under the Revolving Facility of$50.0 million. Net of outstanding letters of credit and limitations onavailability, we had borrowing capacity at October 1, 2006, of $18.1 millionunder the Revolving Facility. We made no borrowings under the Revolving Facilityduring 2006, and as of October 1, 2006, no borrowings were outstanding underthis facility. As of October 1, 2006, we were in compliance with all financialcovenants under the Revolving Facility.

Wehave $100.0 million of ten-year senior unsecured debt outstanding as ofOctober 1, 2006. Interest payments at 7.0% are due semi-annually in March andSeptember. Including underwriting fees, discounts and other issuance costs, theeffective interest rate is 7.175%. In March 2005, we retired the$100.0 million of seven-year notes, which were issued March 1998.

Interestincome (expense) comprises the following (in thousands of dollars):
|                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **October 1,**              | ** ** | **October 2,**             | ** ** | **October 1,** | ** ** | **October 2,** | ** ** |
| ** **                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income                |       | $                                | 4,178      |                            | $          | 1,592 |   | $ | 11,517 |   | $ | 4,745 |   |
| Interest expense               |       | (2,473                           | )          | (2,257                          | )          | (6,902 | ) | (8,656 | ) |
| Net interest income  (expense) |       | $                                | 1,705      |                            | $          | (665 | ) | $ | 4,615 |   | $ | (3,911 | ) |

 

Wealso have letter-of-credit reimbursement agreements totaling $9.2 millionat October 1, 2006, compared to $25.8 million at December 31, 2005. As ofOctober 1, 2006, $7.9 million of the agreements related to performance oncontracts with current customers and vendors, and $0.2 million of theagreements related to customer contracts assumed by the purchaser of theCincinnati Lamb operations that were sold and $1.1 million of theagreements related to customer contracts assumed by the purchaser of the Landisoperations that were sold. We are indemnified by the purchaser of theCincinnati Lamb operations on the $0.2 million of letter-of-credit agreementsrelated to Cincinnati Lamb.

Webelieve it is not practicable to estimate fair values of these instruments andconsider the risk of non-performance on the

10

----

contractsto be remote. We are indemnified by the purchaser of the Landis operations onthe $1.1 million letter-of-credit agreement to Landis.

**7.****                          DiscontinuedOperations**

During 2005, we completed our divestiture of the IASbusinesses with the sale of the Cincinnati Lamb business in the first quarterof 2005 and the sale of the Landis Grinding Systems business in the fourthquarter of 2005. The earnings from discontinued operations for the three monthperiod ended October 1, 2006, and the loss from discontinued operations for thenine month period ended October 1, 2006, includes period expenses related tofinalizing the sale of the Landis Grinding Systems and changes to the estimatedpurchase price adjustment, net of tax benefits. Also included in the earnings from discontinued operations for the threemonth period ended October 1, 2006, is a $1.4 million benefit related to our trueup of the tax provision.

The loss from discontinued operations for the threeand nine month periods ended October 2, 2005, includes the operating results ofthe Cincinnati Lamb and Landis Grinding Systems businesses as well as the losson the sale of Cincinnati Lamb, net of related tax benefits.

**8.****                          RestructuringCosts**

In March 2006, we announced our plan to close ourdesign centers in Goteborg and Lund, Sweden. The activities currently assignedto the design centers in Sweden will be reassigned to other parts of ourbusiness or moved to third-party vendors to improve efficiencies and benefitfrom reduced cost. In addition to the anticipated cost savings, thisrealignment of resources is expected to increase new product developmentcapacity. The total cost of closing the design centers in Sweden and theelimination of 65 positions in Sweden is estimated to be $4.5 million. Theestimated restructuring costs include $2.9 million of employee terminationexpense, facility closure costs of $1.3 million non-cash and other relatedcosts of $0.3 million. During the three and nine months ended October 1,2006, we have recorded restructuring charges of $1.8 million and $4.0 million,respectiviely.  The recordedrestructuring charges primarily relate to employee termination costs andfacility closure costs, in accordance with SFAS 146, “Accounting for CostsAssociated with Exit or Disposal Activities” (“SFAS 146”), and we anticipatethat the remaining unrecognized restructuring costs will be recognized duringthe fourth quarter of 2006.

**9.****                          IntellectualProperty Settlement**

During the first quarter of 2006, we receivedcompensation in relation to a settlement of a patent dispute regarding certainof our intellectual property (“IP”). Our patents involved smart batterymanagement technology in which a portable computer incorporates a rechargeablebattery that uses a processor chip to communicate data to the portable computerso that the computer can monitor and regulate battery use. The effective dateof this settlement was February 27, 2006, and the terms are confidential. Theoperating profit from this settlement, net of attorneys’ fees and costs, is $16.5 millionfor the first quarter of 2006. IP settlement compensation of $23.0 millionis classified as revenue and $6.5 million of related legal costs areclassified as cost of intellectual property settlement in our consolidatedstatements of operations.

**10.****                   Provision forIncome Taxes**

The tax provision for the three and nine month periodsended October 1, 2006, reflects an effective tax rate for continuing operationsof 37.2% and 30.2%, respectively, compared to a U.S. statutory rate of 35%.  The effective tax rate for the three monthsended October 1, 2006, reflects the U.S. statutory rate and state income taximplications.  The tax provision for thenine months ended October 1, 2006, was reduced by $2.1 million, primarilydue to the favorable conclusion of a Canadian tax audit during the firstquarter of 2006.  

The tax provision for the three and nine month periodsended October 2, 2005, reflects an effective tax rate for continuing operationsof 12.4% and 25.6% compared to a U.S. statutory rate of 35%. The reduction inthe effective tax rate is primarily due to a $3.7 million reduction in theforeign tax contingency accrual as a result of the resolution of a German taxaudit.

11

----

**11.****                   Shares Used inComputing Earnings per Share**

Basic earnings per share is calculated using theweighted average number of common shares outstanding and issuable for theapplicable period. Diluted earnings per share is computed using basic weightedaverage shares plus the dilutive effect of unvested restricted stock, unvestedperformance stock awards and outstanding stock options using the “treasurystock” method.
|                                                                  | ** ** | **Three months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                                       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Weighted average  common shares — Basic                     |       | 62,748,714                       |       | 62,076,898 |   |
| Dilutive effect  of unvested restricted shares and stock options |       | 1,312,122                        |       | 1,557,960 |   |
| Weighted average shares  — Diluted                          |       | 64,060,836                       |       | 63,634,858 |   |

 
|                                                                  | ** ** | **Nine months Ended** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **October 1,**             | ** ** | **October 2,** | ** ** |
| ** **                                                       | ** ** | **2006**                        | ** ** | **2005** | ** ** |
|  Weighted average common shares — Basic                |       | 63,008,778                      |       | 61,509,047 |   |
| Dilutive effect  of unvested restricted shares and stock options |       | 1,418,883                       |       | 1,561,772 |   |
| Weighted average shares  — Diluted                          |       | 64,427,661                      |       | 63,070,819 |   |

 

Our employees and directors held options to purchase599,901 and 426,484 shares of our common stock for the three and nine monthsended October 1, 2006, and 81,140 for the nine month period ended October 2,2005, respectively, that were not included in weighted average shares dilutedbecause they were antidilutive to the diluted earnings per share computation.  These options could become dilutive in futureperiods if the average market price of our common stock exceeds the exerciseprice of the outstanding options and we report net earnings.  There were no antidilutive options held forthe three month period ended October 2, 2005. 

An authorization from our Board of Directors allows usto repurchase up to $100 million in shares of our common stock.  On August 7, 2006, we entered into a sharerepurchase agreement under Rule 10b5-1 of the Securities Exchange Act of 1934to facilitate the repurchase of up to $50 million of our common stock pursuantto the previously announced share repurchase authorization by our Board ofDirectors.  For the nine months ended October1, 2006, we have repurchased $49.9 million in shares of our common stock.  On November 3, 2006, we entered into a sharerepurchase agreement under Rule 10b5-1 of the Securities Exchange Act of 1934to facilitate the repurchase of up to $50 million of our common stock pursuantto the same, previously announced share repurchase authorization.

**12.****                   Pension andOther Postretirement Benefit Plans**

The information in this note represents the netperiodic pension and post-retirement benefit costs and related components inaccordance with SFAS 132(R). The components of net pension and postretirementperiodic benefit cost (credit) for the three and nine month periods endedOctober 1, 2006, and October 2, 2005, are as follows (in thousands of dollars):
|                                                                  | ** ** | **U.S.**               | ** ** | **Non-U.S.**           | ** ** | **Other**              | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | **Defined**            | ** ** | **Defined**            | ** ** | **Postretirement**     | ** ** |
| **Three Months Ended October 1, 2006,** | ** ** | **Benefit Plans** | ** ** | **Benefit Plans** | ** ** | **Benefit Plans** | ** ** |
| **and October 2, 2005:**                          | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2006**               | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service Cost                                                     |       | $                      | 1,741      |                   | $          | 1,701                  |       | $ | 281 |   | $ | 827 |   | $ | 4 |   | $ | 33 |   |
| Interest Cost                                                    |       | 2,988                  |       | 2,407                  |       | 567                    |       | 1,126 |   | 66 |   | 166 |   |
| Expected return  on plan assets                                  |       | (2,508                 | )          | (2,537                 | )          | (777                   | )          | (1,006 | ) | — |   | — |   |
| Amortization and  deferrals:                                     |       |                   |       |                   |       |                   |       |   |   |   |   |   |   |
| Transition asset                                                 |       | —                 |       | —                 |       | (40                    | )          | (82 | ) | — |   | — |   |
| Actuarial loss                                                   |       | 1,241                  |       | 765                    |       | 115                    |       | 239 |   | 27 |   | 17 |   |
| Prior service cost (benefit)                                     |       | 177                    |       | 161                    |       | —                 |       | — |   | — |   | — |   |
| Curtailment loss  (gain)                                         |       | (2,146                 | )          | —                 |       | —                 |       | — |   | — |   | — |   |
| Settlement gain                                                  |       | —                 |       | —                 |       | —                 |       | — |   | — |   | — |   |
| Special  termination benefits                                    |       | —                 |       | —                 |       | —                 |       | — |   | — |   | — |   |
| Net pension and  postretirement periodic benefit cost            |       | $                      | 1,493      |                   | $          | 2,497                  |       | $ | 146 |   | $ | 1,104 |   | $ | 97 |   | $ | 216 |   |

 

12

----

 
|                                                                 | ** ** | ** **             | ** ** | **Non-U.S.**           | ** ** | **Other**              | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **U.S. Defined**       | ** ** | **Defined**            | ** ** | **Postretirement**     | ** ** |
| **Nine Months Ended October 1, 2006,** | ** ** | **Benefit Plans** | ** ** | **Benefit Plans** | ** ** | **Benefit Plans** | ** ** |
| **and October 2, 2005:**                         | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2006**               | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service Cost                                                    |       | $                      | 5,223      |                   | $          | 6,511                  |       | $ | 817 |   | $ | 2,946 |   | $ | 12 |   | $ | 100 |   |
| Interest Cost                                                   |       | 8,964                  |       | 7,447                  |       | 1,650                  |       | 4,831 |   | 198 |   | 1,395 |   |
| Expected return  on plan assets                                 |       | (7,524                 | )          | (7,549                 | )          | (2,260                 | )          | (4,686 | ) | — |   | — |   |
| Amortization and  deferrals:                                    |       |                   |       |                   |       |                   |       |   |   |   |   |   |   |
| Transition asset                                                |       | —                 |       | —                 |       | (117                   | )          | (254 | ) | — |   | — |   |
| Actuarial loss                                                  |       | 3,721                  |       | 2,465                  |       | 335                    |       | 1,000 |   | 82 |   | 357 |   |
| Prior service cost (benefit)                                    |       | 531                    |       | 519                    |       | —                 |       | — |   | — |   | (598 | ) |
| Curtailment loss  (gain)                                        |       | (2,146                 | )          | 57                     |       | —                 |       | (5,396 | ) | — |   | (12,274 | ) |
| Settlement gain                                                 |       | —                 |       | —                 |       | —                 |       | (332 | ) | — |   | (21,090 | ) |
| Special termination  benefits                                   |       | 1,350                  |       | 264                    |       | —                 |       | — |   | — |   | — |   |
| Net pension and  postretirement periodic benefit cost           |       | $                      | 10,119     |                   | $          | 9,714                  |       | $ | 425 |   | $ | (1,891 | ) | $ | 292 |   | $ | (32,110 | ) |

 

Effective June 30, 2006, we amendedour Financial Security and Savings Program, Pension Plan, Restoration Plan andSupplemental Executive Retirement Plan (collectively, the “U.S. Defined BenefitPlans”). The effect of these amendments was to “freeze” benefit accruals underthe U.S. Defined Benefit Plans and to fully vest benefits under the U.S.Defined Benefit Plans, except for the Nonqualified SERP, as of June 30,2006, for most participants. In accordance with SFAS No. 88, “Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits” (“SFAS 88”), the effects of these amendmentsrequire a new measurement date. The impact of the related curtailmentsreflected in the third quarter of 2006 was $2.1 million as a result of thethree month lag period utilized by us for measuring pension obligations.

Our pre-tax losson the sale of Cincinnati Lamb in the first six months of 2005 takes intoconsideration the curtailment and settlement gains totaling $39.1 million,comprising $33.4 million relating to the postretirement benefit plans, and$5.7 millionrelating to the Non-U.S. Defined Benefit Plans. These curtailment andsettlement gains comprise the pension and post-retirement obligations assumedby the buyer. In addition, the pre-tax loss on the sale of Cincinnati Lambincludes a loss of $12.9 million representing the cumulative adjustment torecognize the minimum pension liability of our Non-U.S. defined benefit plans,which prior to the sale, had been deferred in the other comprehensive losscomponent of shareholders’ investment in our consolidated balance sheets.

During the nine months ended October 1, 2006, wecontributed approximately $4.9 million to our pension and otherpostretirement benefit plans, comprising $1.9 million in benefits paidpertaining to unfunded U.S. defined benefit plans, $1.9 million inmatching contributions to our 401(k) plan, $1.0 million in contributionsto our foreign pension plans, and $0.1 million in benefits paid pertainingto our other postretirement benefits plans. We expect to contribute anadditional $2.8 million to these plans during the remainder of 2006, ofwhich $ 1.2 million relates to benefit payments on our unfunded U.S.defined benefit plans, $0.7 million in matching contributions to our401(k) plan, $0.4 million in contributions to our foreign pension plansand $0.5 million in benefit payments pertaining to our otherpostretirement benefit plans.

**13.****                   ComprehensiveEarnings**

Our comprehensive earnings comprise the following (inthousands of dollars):
|                                                                   | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                        | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                                        | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net earnings                                                      |       | $                                | 4,797      |   | $ | 4,571 |   |
| Change in equity  due to foreign currency translation adjustments |       | 434                              |       | (668 | ) |
| Change in equity  due to minimum pension liability adjustment     |       | 1,727                            |       | — |   |
| Unrealized loss  on cash flow hedges                              |       | —                           |       | (34 | ) |
| Comprehensive earnings                                            |       | $                                | 6,958      |   | $ | 3,869 |   |

 

13

----

 
|                                                                   | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **October 1,**             | ** ** | **October 2,** | ** ** |
| ** **                                                        | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Net earnings                                                      |       | $                               | 29,144     |   | $ | 20,119 |   |
| Change in equity  due to foreign currency translation adjustments |       | 4,248                           |       | (23,044 | ) |
| Change in equity  due to minimum pension liability adjustment     |       | 1,727                           |       | 9,144 |   |
| Unrealized gain  on cash flow hedges                              |       | —                          |       | 45 |   |
| Comprehensive earnings                                            |       | $                               | 35,119     |   | $ | 6,264 |   |

 

Foreign currency translation adjustments for the ninemonths ended October 2, 2005, in the above table, include a credit balancecumulative translation adjustment of $8.3 million which was reclassifiedfrom OCI to net earnings as a result of the Cincinnati Lamb sale.

**14.****                   SegmentReporting**

During the first quarter of 2006, we integrated thecorporate expense into our Products and Service segments. Intrasegmenttransactions have been eliminated and there are no material intersegmenttransactions. It is not practicable to segregate operating profit, capitalexpenditures, depreciation and amortization expense or total assets into ourProduct and Service segments,  therefore,in aggregate this information is available in our consolidated financialstatements. The following table sets forth our operations by reportablesegments (in thousands of dollars):
|                                                    | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **October 1,**              | ** ** | **October 2,** | ** ** |
| ** **                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Revenues**                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Product                                            |       | $                                | 156,951    |   | $ | 179,640 |   |
| Service                                            |       | 38,996                           |       | 40,174 |   |
| Total revenues                                     |       | $                                | 195,947    |   | $ | 219,814 |   |
| **Gross  profit**                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Product                                            |       | $                                | 58,144     |   | $ | 72,586 |   |
| Service                                            |       | 17,970                           |       | 15,091 |   |
| Total gross profit                                 |       | $                                | 76,114     |   | $ | 87,677 |   |
|                                               |       |                             |       |   |   |
| **Operating  profit from continuing operations**   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Total operating profit  from continuing operations |       | $                                | 3,783      |   | $ | 13,534 |   |

 
|                                                    | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **October 1,**             | ** ** | **October 2,** | ** ** |
| ** **                                         | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| **Revenues**                                       | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Product                                            |       | $                               | 538,741    |   | $ | 522,590 |   |
| Service                                            |       | 115,474                         |       | 111,178 |   |
| Total revenues                                     |       | $                               | 654,215    |   | $ | 633,768 |   |
|                                               |       |                            |       |   |   |
| **Gross  profit**                                  | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Product                                            |       | $                               | 216,468    |   | $ | 220,835 |   |
| Service                                            |       | 50,163                          |       | 44,125 |   |
| Total gross profit                                 |       | $                               | 266,631    |   | $ | 264,960 |   |
|                                               |       |                            |       |   |   |
| **Operating  profit from continuing operations**   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Total operating profit  from continuing operations |       | $                               | 35,769     |   | $ | 42,269 |   |

 

**15.****                   Related PartyTransactions**

Unitrin, Inc. and its subsidiaries (“Unitrin”) is asignificant shareholder of Intermec, owning approximately 20% of ouroutstanding shares. In January 2005, Unitrin’s Life and Health Insurancesegment agreed to contract with our subsidiary, Intermec Technology, to developthe software for the next generation of Life and Health Insurance’s handheldcomputers. For the three and nine month periods ended October 1, 2006, we didnot recognize any revenues from this arrangement.  For the three and nine month periods endedOctober 2, 2005, we recognized $2.0 million and $2.2 million inrevenues from Unitrin, respectively.  Wealso recorded $0.3 million of deferred service revenue from Unitrin duringthe three and nine months ended October 2, 2005.  We believe that the prices of goods andservices sold to Unitrin are comparable to those received from unaffiliatedthird parties.

14

----

**16.****                   Commitments andContingencies**

Provisions for estimated expenses related to productwarranties are made at the time products are sold. These estimates areestablished using historical information on the nature, frequency, and averagecost of warranty claims. Management actively studies trends of warranty claimsand takes action to improve product quality and minimize warranty claims. Thefollowing table indicates the change in our warranty accrual included incurrent liabilities (in thousands of dollars):
| Beginning balance January 1,  2006             |   | $      | 5,542  |   |
|------------------------------------------------|--------|--------|--------|--------|
| Payments                                       |   | (5,727 | )      |
| Increase in  liability (new warranties issued) |   | 6,425  |   |
| Ending Balance October  1, 2006                |   | $      | 6,240  |   |

 

We have entered into a variety of agreements withthird parties that include indemnification clauses, both in the ordinary courseof business and in connection with our divestitures of certain product lines.These clauses require us to compensate these third parties for certainliabilities and damages incurred by them.

Financial Accounting Standards Board (“FASB”)Interpretation No. 45, “Guarantors’ Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others” requiresthat we estimate and record the fair value of guarantees as a liability. We donot believe we have any significant exposure related to such guarantees andtherefore have not recorded a liability as of October 1, 2006, or December 31,2005. We have not made any significant indemnification payments as a result ofthese clauses, nor do we believe the fair value of any of these guarantees hasa material effecton our financial position or resultsof operations.

We currently, and from time to time, are subject toclaims and lawsuits arising in the ordinary course of business. The ultimateresolution of currently pending proceedings is not expected to have a materialadverse effect on our business, financial condition, results of operations orliquidity. Nevertheless, it is possible that cash flows or results ofoperations could be materially affected in any particular period by the unfavorableresolution of one or more of these contingencies or by the creation ofsignificant legal or other expenses related to such matters.

**17.****                   RecentAccounting Pronouncements**

The Securities andExchange Commission (“SEC”) released Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements (“SAB 108”), in September2006. SAB 108 provides guidance on how the effects of the carryover or reversalof prior year financial statement misstatements should be considered inquantifying a current year misstatement. Prior practice allowed the evaluationof materiality on the basis of (1) the error quantified as the amount by whichthe current year income statement was misstated (“rollover method”) or (2) thecumulative error quantified as the cumulative amount by which the current yearbalance sheet was misstated (“iron curtain method”). Reliance on either methodin prior years could have resulted in misstatement of the financial statements.The guidance provided in SAB 108 requires both methods to be used in evaluatingmateriality. Immaterial prior year errors may be corrected with the firstfiling of prior year financial statements after adoption. The cumulative effectof the correction would be reflected in the opening balance sheet withappropriate disclosure of the nature and amount of each individual errorcorrected in the cumulative adjustment, as well as a disclosure of the cause ofthe error and that the error had been deemed to be immaterial in the past. SAB108 is effective for fiscal year 2007. We are currently evaluating the impact this Bulletin might have on ourfinancial position or results of operations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 157, “Fair ValueMeasurements.” SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair value measurements.This Statement is effective for fiscal years beginning after November 15,2007. We are currently in the process of determining the impact of thisStatement on our consolidated financial statements. 

15

----

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans–an amendment of FASB StatementsNo. 87, 88, 106, and 132(R).” The Statement requires employers torecognize in their balance sheet the overfunded or underfunded status ofdefined benefit post-retirement plans, measured as the difference between thefair value of plan assets and the benefit obligation (the projected benefitobligation for pension plans and the accumulated postretirement benefitobligation for other post-retirement plans). Employers must also recognize thechange in the funded status of the plan in the year in which the change occursthrough comprehensive income. This Statement also requires plan assets andobligations to be measured as of the employer’s balance sheet date. Therecognition provisions of this Statement are effective for fiscal years endingafter December 15, 2006, however, early application is encouraged. Themeasurement provision of this Statement will be effective for fiscal yearsbeginning after December 15, 2008. Again, early application is encouraged.We are in the process of determining the impact of this Statement on ourconsolidated financial statements. 

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(“FIN 48”). FIN 48 prescribes a more likely than not threshold for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition of income tax assets and liabilities, classification of currentand deferred income tax assets and liabilities, accounting for interest andpenalties associated with tax positions, accounting for income taxes in interimperiods, and income tax disclosures. This Interpretation is effective as ofJanuary 1, 2007. We are currently evaluating the impact of FIN 48 on ourfinancial statements.

 

In November 2005,the FASB issued Staff Position (“FSP”) FAS123(R)-3, Transition Election toAccounting for the Tax Effects of Share-Based Payment Awards. This FSP requiresan entity to follow either the transition guidance for theadditional-paid-in-capital pool as prescribed in SFAS No. 123(R),Share-Based Payment, or the alternative transition method as described in theFSP. An entity that adopts SFAS No. 123(R) using the modified prospectiveapplication may make a one-time election to adopt the transition methoddescribed in this FSP. An entity may take up to one year from the later of itsinitial adoption of SFAS No. 123(R) or the effective date of this FSP toevaluate its available transition alternatives and make its one-time election.This FSP became effective in November 2005. We continue to evaluate the impactthat the adoption of this FSP could have on our financial statements.

 

16

----

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

**Special Note AboutForward-Looking Statements**

**Forward-LookingStatements and Risk Factors**

Forward-looking statements contained in this filingare subject to the safe harbor created by the Private Securities LitigationReform Act of 1995 (alternatively: Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934) and are dependent upona variety of important factors that could cause actual results to differmaterially from those reflected in such forward-looking statements. Thesefactors include but are not limited to our ability to maintain or to improvethe revenues and profits of our continuing operations, maintain or reduceexpenses, maintain or improve operational efficiency, use our investment inresearch and development to generate future revenue, maintain or improveyear-over-year growth in the revenues and profits of our continuing operationsand the other factors described in Part I, Item 2 and Part II, Item 1A of thisfiling. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents, changed circumstances or any other reason after the date of thisquarterly report.

Such forward-looking statements involve and aredependent upon certain risks and uncertainties. When used in this document andin documents it references, the words “anticipate,” “believe,” “will,”“intend,” “project” and “expect” and similar expressions as they relate toIntermec or its management are intended to identify such forward-lookingstatements.

Forward-looking statements are not guarantees offuture performance. A number of factors can impact our business and determinewhether we can or will achieve any forward-looking statement made in thisreport. Any one of these factors could cause our actual results to differmaterially from those discussed in a forward-looking statement. We outline theserisk factors in reports that we file with the SEC, in press releases and on ourwebsite, www.intermec.com.

Readers of this report are encouraged to review theRisk Factors portion of Part II, Item 1A of this filing which discusses therisk factors associated with our business.

**Overview**

Continuing Operations

Effective January 1,2006, we changed our name from UNOVA, Inc. to Intermec, Inc. (“Intermec”). Wedesign, develop, manufacture, integrate, sell, resell and service wired andwireless automated identification and data collection (“AIDC”) products andsystems, mobile computing products and systems, wired and wireless bar codeprinters, label media and radio frequency identification (“RFID”) products andsystems. Our products and services are used by customers within and outside ofthe United States to improve the productivity, quality and responsiveness oftheir business operations including supply chain management, enterpriseresource planning and field sales and service. We grant licenses to use portionsof our intellectual property portfolio, including certain patent rightsessential to and/or useful in RFID and AIDC products, and receive license feesas well as ongoing royalties based on sales by licensees. Customers for ourproducts and services operate in market segments that include manufacturing,warehousing, direct store delivery, retail, consumer packaged goods, fieldservice, government, and transportation and logistics.

Our strategy consists of: technology leadership in theAIDC industry; expanding, strengthening and leveraging our AIDC intellectualproperty portfolio; expanding and strengthening our AIDC product portfolio;providing integrated AIDC solutions; partnering with global industry leaders;achieving economies of scale and scope; profitably increasing market share; andincreasing the scale of the business.

Our strategy is focused on customers in certainvertical markets, including: retailers; consumer goods manufacturers;industrial goods manufacturers; transportation and logistics providers; andgovernment agencies.

Our strategy is also focused on certain applicationmarkets, including: warehouse and distribution center operations; retail storeoperations; retail store management; in-transit visibility; field service;manufacturing operations; direct store delivery; and RFID supply chain.

17

----

Discontinued Operations

In 2005, we divested our Industrial Automation Systems(IAS) businesses, which comprised the Cincinnati Lamb and Landis GrindingSystems divisions. The IAS businesses are classified as discontinued operationsfor accounting purposes in our consolidated financial statements and relatednotes. 

**Results ofOperations**

The following discussion compares our results of operationsfor the three and nine month periods ended October 1, 2006, and October 2,2005. Results from continuing operations include the operations of IntermecTechnology and Corporate expenses. The operating results of the IAS businessare classified as discontinued operations. Results of operations were asfollows (in millions of dollars):

|                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **October 1,**              | ** ** | **October 2,**             | ** ** | **October 1,** | ** ** | **October 2,** | ** ** |
| ** **                                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                 |       |                             |       |                            |       |   |   |   |   |
| Product and Service Revenues              |       | $                                | 195.9      |                            | $          | 219.8 |   | $ | 631.2 |   | $ | 633.8 |   |
| Intellectual property settlements         |       | —                           |       | —                          |       | 23.0 |   | — |   |
| Total Revenues                            |       | 195.9                            |       | 219.8                           |       | 654.2 |   | 633.8 |   |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Costs and  Expenses:                      |       |                             |       |                            |       |   |   |   |   |
| Cost of product and service revenues      |       | 119.8                            |       | 132.1                           |       | 381.1 |   | 368.8 |   |
| Cost of intellectual property settlements |       | —                           |       | —                          |       | 6.5 |   | — |   |
| Selling, general and administrative       |       | 70.5                             |       | 74.1                            |       | 226.8 |   | 222.7 |   |
| Restructuring charge                      |       | 1.8                              |       | —                          |       | 4.0 |   | — |   |
| Total Costs and Expenses                  |       | 192.1                            |       | 206.2                           |       | 618.4 |   | 591.5 |   |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Operating Profit  from                    |       |                             |       |                            |       |   |   |   |   |
| Continuing Operations                     |       | 3.8                              |       | 13.6                            |       | 35.8 |   | 42.3 |   |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Gain on sale of  investments              |       | —                           |       | —                          |       | 2.3 |   | — |   |
| Interest, net                             |       | 1.7                              |       | (.7                             | )          | 4.6 |   | (4.0 | ) |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Earnings from  Continuing                 |       |                             |       |                            |       |   |   |   |   |
| Operations before Income Taxes            |       | 5.5                              |       | 12.9                            |       | 42.7 |   | 38.3 |   |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Provision for  Income Taxes               |       | 2.1                              |       | 1.6                             |       | 12.9 |   | 9.8 |   |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Earnings from  Continuing                 |       |                             |       |                            |       |   |   |   |   |
| Operations, net of tax                    |       | 3.4                              |       | 11.3                            |       | 29.8 |   | 28.5 |   |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Earnings (Loss)  from Discontinued        |       |                             |       |                            |       |   |   |   |   |
| Operations, net of tax                    |       | 1.4                              |       | (6.7                            | )          | (0.7 | ) | (8.4 | ) |
|                                      |       |                             |       |                            |       |   |   |   |   |
| Net Earnings                              |       | $                                | 4.8        |                            | $          | 4.6 |   | $ | 29.1 |   | $ | 20.1 |   |

 

18

----

*Revenues*

Revenues by category and geographic category and as apercentage of related revenues from continuing operations for the three andnine month periods ended October 1, 2006, and October 2, 2005, were as follows (inmillions of dollars):

|                        | ** ** | **Three Months Ended** | ** ** | ** **                    | ** ** | ** ** | ** ** |
|------------------------|------------|----------------------------------|------------|-------------------------------|------------|------------|------------|
| ** **             | ** ** | **October 1, 2006**    | ** ** | **October 2, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **                       | ** ** | **Percent of**           | ** ** | ** ** | ** ** | **Percent of** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **             | ** ** | **Amount**                       | ** ** | **Revenues**                  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues by  Category: |       |                             |       |                          |       |       |       |   |   |   |   |   |   |
| Product                |       | $                                | 156.9      |                          | 80.1       | %          | $          | 179.6 |   | 81.7 | % | (22.7 | ) | (12.6 | )% |
| Service                |       | 39.0                             |       | 19.9                          | %          | 40.2       |       | 18.3 | % | (1.2 | ) | (2.9 | )% |
| Total Revenues         |       | $                                | 195.9      |                          | 100        | %          | $          | 219.8 |   | 100 | % | (23.9 | ) | (10.9 | )% |

 

|                                       | ** ** | **Three Months Ended** | ** ** | ** **                    | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|------------|------------|
| ** **                            | ** ** | **October 1, 2006**    | ** ** | **October 2, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                       | ** ** | **Percent of**           | ** ** | ** ** | ** ** | **Percent of** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                            | ** ** | **Amount**                       | ** ** | **Revenues**                  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues by  Geographic Region:       |       |                             |       |                          |       |       |       |   |   |   |   |   |   |
| North America                         |       | $                                | 113.2      |                          | 57.8       | %          | $          | 131.7 |   | 60.0 | % | (18.5 | ) | (14.1 | )% |
| Europe, Middle East and Africa (EMEA) |       | 51.5                             |       | 26.3                          | %          | 61.9       |       | 28.2 | % | (10.4 | ) | (16.8 | )% |
| All Others                            |       | 31.2                             |       | 15.9                          | %          | 26.2       |       | 11.8 | % | 5.0 |   | 19.1 | % |
| Total Revenues                        |       | $                                | 195.9      |                          | 100        | %          | $          | 219.8 |   | 100 | % | (23.9 | ) | (10.9 | )% |

 

The decrease in quarterly revenue of $23.9 million, or10.9%, compared to the corresponding prior year period is primarilyattributable to a 19.8% decrease in Systems and Solutions product revenuepartially offset by 5.6% growth in Printer/Media product revenue. Our analysis of the causal factors forthe revenue decline suggest that the most significant factor was ourannouncement and availability of several new products. Three major new productswere introduced at our annual customer conference in September 2006. Earlymarket assessment would suggest that these products are expected to be wellreceived.  We believe certain customersdelayed orders to await the availability of the new products. The second factornegatively impacting revenue is the Directive on the Restriction of the Use ofCertain Hazardous Substances in Electrical and Electronic Equipment (the “RoHSDirective”) which became effective July 1, 2006,  within the European Union (“EU”). The thirdfactor which contributed to the revenue decline is the increase in competitiveintensity relative to product and service programs and pricing. The 2.9% decreasein service revenue is due to a more than 50% reduction in US government servicerevenue as a result of program timing, partially offset by  increases in all other service revenue.

Geographically, products and service revenue in NorthAmerica decreased 14.1% compared to the corresponding prior-year periodprimarily due to significant decreases in Systems and Solutions and Servicerevenue. Europe, Middle East and Africa (“EMEA”) revenue decreased 16.8% due tothe decrease in Systems and Solutions product revenue. Revenue for the rest ofthe world increased 19.1% primarily due to a Direct Store Delivery rollout inLatin America.

For the three months ended October 1, 2006,product revenue includes sales to a significant customer representing 10.2% oftotal revenue.

|                                  | ** ** | **Nine Months Ended** | ** ** | ** **                    | ** ** | ** ** | ** ** |
|----------------------------------|------------|---------------------------------|------------|-------------------------------|------------|------------|------------|
| ** **                       | ** ** | **October 1, 2006**   | ** ** | **October 2, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **                      | ** ** | **Percent of**           | ** ** | ** ** | ** ** | **Percent of** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                       | ** ** | **Amount**                      | ** ** | **Revenues**                  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues by  Category:           |       |                            |       |                          |       |       |       |   |   |   |   |   |   |
| Product                          |       | $                               | 515.7      |                          | 78.8       | %          | $          | 522.6 |   | 82.5 | % | (6.9 | ) | (1.3 | )% |
| Service                          |       | 115.5                           |       | 17.7                          | %          | 111.2      |       | 17.5 | % | 4.3 |   | 3.9 | % |
| Intellectual Property Settlement |       | 23.0                            |       | 3.5                           | %          | —     |       | — |   | 23.0 |   |   |   |
| Total Revenues                   |       | $                               | 654.2      |                          | 100        | %          | $          | 633.8 |   | 100 | % | 20.4 |   | 3.2 | % |

 

19

----

 

|                                       | ** ** | **Nine Months Ended** | ** ** | ** **                    | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|------------|------------|
| ** **                            | ** ** | **October 1, 2006**   | ** ** | **October 2, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                      | ** ** | **Percent of**           | ** ** | ** ** | ** ** | **Percent of** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                            | ** ** | **Amount**                      | ** ** | **Revenues**                  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues by  Geographic Region:       |       |                            |       |                          |       |       |       |   |   |   |   |   |   |
| North America                         |       | $                               | 401.4      |                          | 61.4       | %          | $          | 367.0 |   | 57.9 | % | 34.4 |   | 9.4 | % |
| Europe, Middle East and Africa (EMEA) |       | 173.8                           |       | 26.6                          | %          | 193.0      |       | 30.5 | % | (19.2 | ) | (9.9 | )% |
| All Others                            |       | 79.0                            |       | 12.0                          | %          | 73.8       |       | 11.6 | % | 5.2 |   | 7.0 | % |
| Total Revenues                        |       | $                               | 654.2      |                          | 100        | %          | $          | 633.8 |   | 100 | % | 20.4 |   | 3.2 | % |

 

Revenue growth of 3.2% for the nine months endedOctober 1, 2006 compared to the prior year period is primarily attributable to the intellectual propertysettlement revenue of $23.0 million partially offset by a 9.9% decrease inEMEA revenue. Product revenues for the nine months ended October 1, 2006,decreased 1.3% compared with the corresponding prior-year period as a result ofthe decline in EMEA revenue partially offset by growth of 9.4% and 7.0% inNorth America and the rest of world, respectively. Systems and Solutionsrevenue is down 2.4% compared to the prior year period as a result of relatedEMEA revenue decreasing 14.2%. Service revenue increased 3.9% over thecorresponding prior-year period principally due to a 5.5% increase in NorthAmerican service revenue. 

For the nine months ended October 1, 2006,product revenue includes sales to a significant customer representing 10.6% oftotal revenue.

Our operating results for the nine months endedOctober 1, 2006, include $23.0 million of revenue and $16.5 millionof operating profit from compensation related to a settlement regarding certainof the our intellectual property (“IP Settlement”). This represents the last ofthe laptop computer manufacturers to settle with us regarding batterypower-management patents.

*Gross Profit*

Gross profit and gross margin by revenue category forthe three and nine month periods ended October 1, 2006, and October 2, 2005,were as follows (in millions of dollars):

|                                      | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **October 1, 2006**    | ** ** | **October 2, 2005** | ** ** |
| ** **                           | ** ** | **Gross**                        | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Gross** | ** ** |
| ** **                           | ** ** | **Profit**                       | ** ** | **Margin** | ** ** | **Profit** | ** ** | **Margin** | ** ** |
| Product                              |       | $                                | 58.1       |   | 37.0 | % | $ | 72.6 |   | 40.4 | % |
| Service                              |       | 18.0                             |       | 46.1 | % | 15.1 |   | 37.6 | % |
| Total Gross  Profit and Gross Margin |       | $                                | 76.1       |   | 38.8 | % | $ | 87.7 |   | 39.9 | % |

 

The total gross profit for the three months endedOctober 1, 2006 decreased $11.6 million compared to the correspondingprior-year period.  Product gross marginfor the quarter ended October 1, 2006 decreased 3.4 percentage points. Thereduction in product gross margin is due to lower average selling prices, whichrepresents more than half of the decline, with lower absorption on lowervolumes, and lower margins in printer/media accounting for the other half.  The lower margins in printer/media weredriven by a change in printer mix to more portable printers, higher freightcosts and an increase in media raw materials.

For the quarter ended October 1, 2006, service grossmargin increased 8.5 percentage points. The increase in service gross margin is primarily due to lower operatingexpenses, a lower mix of US government service revenue which typically havelower margins, the recording of previously expensed service parts, a higher mixof European service sales which typically have higher margins, and improvedmargins in Latin America due to a higher mix of professional service sales.

 

|                                      | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **October 1, 2006**        | ** ** | **October 2, 2005** | ** ** |
| ** **                           | ** ** | **Gross**                       | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Gross** | ** ** |
| ** **                           | ** ** | **Profit**                      | ** ** | **Margin** | ** ** | **Profit** | ** ** | **Margin** | ** ** |
| Product                              |       | $                               | 199.9      |   | 38.8 | % | $ | 220.8 |   | 42.3 | % |
| Service                              |       | 50.2                            |       | 43.4 | % | 44.1 |   | 39.7 | % |
| Intellectual Property  Settlement    |       | 16.5                            |       | 71.9 | % | — |   | — |   |
| Total Gross  Profit and Gross Margin |       | $                               | 266.6      |   | 40.8 | % | $ | 264.9 |   | 41.8 | % |

 

20

----

Gross profit for the nine months ended October 1,2006, includes $16.5 million from compensation related to the IPsettlement.  The total gross profit forthe nine months ended October 1, 2006, increased $1.7 million compared tothe corresponding prior-year period. The increase in gross profit primarilyresults from the $16.5 million in gross profit from the intellectualproperty settlement partially offset by the reduction in product related grossprofit. Product gross margin for the nine months ended October 1, 2006,decreased by 3.5 percentage points. The reduction in product gross margin isdue to the an increase in mix of lower margin enterprise business, the mix inthe various sales regions, and lower margins in printer/media.  The lower margins in printer/media weredriven by a change in printer mix to more portable printers, higher freightcosts and an increase in media raw materials.

For the nine months ended October 1, 2006, servicegross margin increased 3.7 percentage points. The increase in service gross margin is primarily due to the increase inrevenue, lower operating expenses, a lower mix of US government service revenuewhich typically have lower margins, the recording of previously expensedservice parts, a higher mix of European service sales which typically havehigher margins, and improved margins in Latin America due to a higher mix ofprofessional service sales. 

*Selling, General and Administrative*

The total selling, general and administrative(“SG&A”) expenses were $70.6 million and $226.9 million for thethree and nine months ended October 1, 2006, respectively, compared withSG&A expenses of $74.1 million and $222.7 million for thecorresponding prior-year period.  The$3.6 million decrease in our SG&A expense for the third quarter 2006compared to the prior year period is primarily attributable to a $2.6 millionincrease in sales and marketing expense, $1.6 million of incremental investmentin research and development (“R&D”) expense and $0.8 million in stockoption expense recognized as a result of the adoption SFAS 123(R) offset by a $5.3million reduction of legal costs, a $2.1 million curtailment gain from thechanges to our US pension and post-retirement plans, and the recapture of $2.4million of performance based compensation expense.  Our R&D expense as a percentage of productand service revenues was 8.8% for the quarter ended October 1, 2006, comparedwith 7.1% for the corresponding prior-year period.

The $4.2 million increase in SG&A for thenine months ended October 1, 2006, compared to the prior year period, reflectsincremental R&D investment of $5.8 million , $3.6 million ofincremental expense related to stock options and the employee stock purchaseplan related to the adoption of SFAS No. 123(R), Share-Based Payment, partiallyoffset by a $6.8 million decrease in legal expense.

*Restructuring Charge*

In March 2006, we announced our plan to close designcenters in Goteborg and Lund, Sweden. The activities currently assigned to thedesign centers in Sweden will be reassigned to other parts of Intermec or movedto third-party vendors to improve efficiencies and benefit from reduced cost.In addition to anticipated cost savings, this realignment of resources isexpected to result in a significant increase in new product developmentcapacity. The total cost of closing the design centers in Sweden and the eliminationof approximately 65 positions in Sweden is estimated to be approximately$4.5 million. Estimated restructuring costs include employee severance,facility closure and other exit costs. We recorded a restructuring charge of $1.8 millionand $4.0 million for the three and nine months ended October 1, 2006. Weanticipate the remaining restructuring costs will be recognized over theremainder of 2006. We estimate that the savings from these restructuringactivities will begin in the fourth quarter of 2006, and reach its estimatedannual pre-tax savings of $8 million in 2007.

We are in the process of developing a plan torestructure our operations and support functions.  We expect to complete the plan during the fourthquarter of 2006.

*Operating Profit*

Our operating profit from continuing operations forthe three months ended October 1, 2006 decreased $9.8 million compared to thecorresponding prior year period. The decrease in operating profit fromcontinuing operations is primarily attributable to the $11.6 million decreasein total gross profits, and the increase in restructuring charges of $1.8million related to the closure of the Swedish design centers, partially offsetby the $3.6 million decrease in SG&A expenses.

Operating profit from continuing operations for thenine months ended October 1, 2006 decreased $6.5 million compared with the correspondingprior-year period. The decrease in operating profit from continuing operationsis primarily attributable to the $16.5 million of operating profit fromthe IP settlement in the first quarter of 2006, more than offset by thedecrease in product and service gross profits of $14.8 million, the $4.2 millionincrease in SG&A expense and the $4.0 million of restructuring chargesrelated to the closure of the Swedish design centers.

21

----

*Interest, Net*

Net interest income was $1.7 million and$4.6 million for the three and nine months ended October 1, 2006,respectively, compared to interest expense of $.7 million and $3.9 millionfor the corresponding prior-year period. The improvement in net interestreflects the reduction in the outstanding debt balance, as well as higherinvestment returns.

*Provisionfor Income Taxes*

The tax provision for the three and nine month periodsended October 1, 2006, reflects an effective tax rate for continuing operationsof 37.2% and 30.2% respectively, compared to a U.S. statutory rate of 35%.  The effective tax rate for the three monthsended October 1, 2006, reflects the U.S. statutory rate and state income tax implications.  The tax provision for the nine months endedOctober 1, 2006, was reduced by $2.1 million, primarily due to thefavorable conclusion of a Canadian tax audit during the first quarter of 2006.  

The tax provision for the three and nine month periodsended October 2, 2005, reflects an effective tax rate for continuing operationsof 12.4% and 25.6% compared to a U.S. statutory rate of 35%. The reduction inthe effective tax rate is primarily due to a $3.7 million reduction in theforeign tax contingency accrual as a result of the resolution of a German taxaudit.

*Loss fromDiscontinued Operations*

During 2005, we completed our divestiture of the IASbusinesses with the sale of the Cincinnati Lamb business in the first quarterof 2005, and the sale of the Landis Grinding Systems business in the fourthquarter of 2005. The earnings from discontinued operations for the three monthsended and the loss from discontinued operations for the nine months endedOctober 1, 2006, include period expenses related to finalizing the sale of theLandis Grinding Systems and changes to the closing balance sheets and estimatedpurchase price adjustments, net of tax benefits. Also included in earnings fromdiscontinued operations for the three month period ended October 1, 2006,is a $1.4 million benefit related to our true up of the tax provision.

The operating loss from discontinued operations forthe three and nine months ended October 2, 2005, includes the operating resultsof the Cincinnati Lamb and Landis Grinding Systems businesses as well as theloss on the sale of Cincinnati Lamb, net of related tax benefits.

*Liquidity and Capital Resources*

Our cash and cash equivalents as of October 1, 2006,totaled $218.6 million. Operating activities of continuing operations forthe first nine months of 2006 provided $30.0 million of cash flow, primarilydue to the $29.8 million from net earnings from continuing operations,which includes the IP Settlement in March 2006. Also included in cash flows from operating activities of continuingoperations was  $22.8 million providedfrom the net reduction of the accounts receivable balance and $56.0 million usedfor the purchase of inventories.  Theincrease in inventory reflects a build up of additional inventory to supportnew products and the transition to RoHS Directive compliant products.  We expect inventory to decline by $20 to $25million in the fourth quarter of 2006.

Investing activities of continuing operations for thefirst nine months of 2006 used $36.9 million, primarily for the purchaseof short-term investments totaling $19.7 million and $17.3 million ofcapital expenditures. 

Financing activities of continuing operations reflectthe use of $49.9 million for the repurchase of common stock, $5.8 millionof proceeds provided from the exercise of stock options and $4.2 million of excesstax benefit provided from stock-based payment arrangements during the firstnine months of 2006.

For the nine months ended October 1, 2006, cash andcash equivalents decreased by $38.2 million. In total, net cash used in continuing operations was $44.7 million.  Discontinued operations provided net cash of$6.5 million, which related to a partial receipt of a receivable, offset by periodexpenses related to finalizing the sale of the Landis Grinding Systems.

An authorization from our Board of Directors allows usto repurchase up to $100 million in shares of our common stock.  On August 7, 2006, we entered into ashare repurchase agreement under Rule 10b5-1 of the Securities ExchangeAct of 1934 to facilitate the repurchase of up to $50 million of our commonstock pursuant to the previously announced share repurchase authorization byour Board of Directors.  For the ninemonths ended October 1, 2006, we have repurchased $49.9 million in sharesof our common stock.  On November 3,2006, we entered into a share repurchase agreement under Rule 10b5-1 ofthe Securities Exchange Act of 1934 to facilitate the repurchase of up to $50million of our common stock pursuant to the same, previously announced sharerepurchase authorization.

Effective June 30, 2006, we amended our FinancialSecurity and Savings Program, Pension Plan, Restoration Plan and SupplementalExecutive Retirement Plan (collectively, the “U.S. Defined Benefit Plans”). Theeffect of these amendments was to “freeze” benefit accruals under the U.S.Defined Benefit Plans and to fully vest benefits under the U.S. Defined BenefitPlans, except for the Nonqualified SERP, as of June 30, 2006, for mostparticipants. This resulted in a net curtailment benefit of $2.1 million forour U.S. Defined Benefit Plans.  Weanticipate that the expense of the U.S. Defined Benefit Plans will

22

----

significantly decline. Weestimate the net annual reduction in retirement benefit expense to approximate$7 million. In an effort to align our compensation structure, benefit plans andprograms with trends typical of our industry, we have implemented newcompensation programs which offset a portion of the expected reduction inretirement benefit expense for the fourth quarter of 2006 and offset aproportionately smaller portion of such expense reduction in 2007.

Net of outstandingletters of credit and limitations on minimum availability, we had borrowingcapacity at October 1, 2006, of $18.1 million under the RevolvingFacility. We made no borrowings under the Revolving Facility during the firstnine months of 2006, and as of October 1, 2006, no borrowings were outstandingunder the Revolving Facility. As of October 1, 2006, we were in compliance withthe financial covenants of each of the Revolving Facility. The key terms of theRevolving Facility are as follows:

·        Our obligation under theRevolving Facility are secured by substantially all the U.S. assets of Intermecand our U.S. subsidiaries and a pledge of 65% of the stock of certain of ourforeign subsidiaries.

·        Borrowings under the RevolvingFacility bear interest at a variable rate equal to (at our option) (i) LIBORplus an applicable margin ranging from 1.5% to 2.5% based on consolidatedleverage, or (ii) the greater of the federal funds rate plus 0.50% or theBank’s prime rate, plus an applicable margin ranging from 0.5% to 1.5% based onconsolidated leverage.

·        The Revolving Facility placescertain restrictions on the ability of Intermec and our subsidiaries toconsolidate or merge, make acquisitions, create liens, incur additionalindebtedness or dispose of assets.

·        Financial covenants include aConsolidated Leverage test, a Consolidated Interest Coverage test and aConsolidated Net Worth test, each as defined in the agreement.

We have$100.0 million of ten-year senior unsecured debt outstanding as of October1, 2006. Interest payments at 7.0% are due semi-annually in March and Septemberwith the principal balance due March 2008. Including underwriting fees,discounts and other issuance costs, the effective interest rate is 7.175%.

Managementbelieves that cash and cash equivalents on hand, combined with projected cash flowfrom operations, assets held for sale and available borrowings under ourRevolving Facility will be sufficient to fund our operations, research an developmentefforts, anticipated capital expenditures, liabilities, commitments, and othercapital requirements, for at least the next twelve months.

**Contractual Obligations**

Ourcontractual commitments as of October 1, 2006, have not changed materially fromthose disclosed in Item 7 of our annual report on Form 10-K for the year endedDecember 31, 2005.

**Critical Accounting Policies**

Our consolidated financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities, and thereported amounts of revenues and expenses. Actual amounts could differ fromthose estimates under different assumptions or conditions. Significantestimates and assumptions were used to determine the provisions foruncollectible accounts receivable, excess and obsolete inventory, tax valuationallowances, recoverability of intangible assets, warranty costs, retireemedical and pension obligations, estimated net realizable value of assets heldfor sale and litigation loss contingencies. Despite these inherent limitations,management believes that Management’s Discussion and Analysis of FinancialCondition and Results of Operations (“MD&A”) and the financial statementsand related footnotes provide a meaningful and fair perspective of Intermec.Management’s beliefs regarding significant accounting policies have not changedsignificantly from those disclosed in Item 7 of our annual report on Form 10-Kfor the year ended December 31, 2005.

23

----

**New Accounting Pronouncements**

The Securities and Exchange Commission (“SEC”)released Staff Accounting Bulletin No. 108, Considering the Effects of PriorYear Misstatements When Quantifying Misstatements in Current Year FinancialStatements (“SAB 108”), in September 2006. SAB 108 provides guidance on how theeffects of the carryover or reversal of prior year financial statementmisstatements should be considered in quantifying a current year misstatement.Prior practice allowed the evaluation of materiality on the basis of (1) theerror quantified as the amount by which the current year income statement wasmisstated (“rollover method”) or (2) the cumulative error quantified as thecumulative amount by which the current year balance sheet was misstated (“ironcurtain method”). Reliance on either method in prior years could have resultedin misstatement of the financial statements. The guidance provided in SAB 108requires both methods to be used in evaluating materiality. Immaterial prioryear errors may be corrected with the first filing of prior year financialstatements after adoption. The cumulative effect of the correction would bereflected in the opening balance sheet with appropriate disclosure of thenature and amount of each individual error corrected in the cumulativeadjustment, as well as a disclosure of the cause of the error and that theerror had been deemed to be immaterial in the past. SAB 108 is effective for fiscalyear 2007.  We are currently evaluatingthe impact this Bulletin might have on our financial position or results ofoperations.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 157, “Fair ValueMeasurements.” SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair value measurements.This Statement is effective for fiscal years beginning after November 15,2007. We are currently in the process of determining the impact of thisStatement on our consolidated financial statements. 

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans–an amendment of FASB Statements No. 87, 88, 106, and 132(R).” TheStatement requires employers to recognize in their balance sheet the overfundedor underfunded status of defined benefit post-retirement plans, measured as thedifference between the fair value of plan assets and the benefit obligation(the projected benefit obligation for pension plans and the accumulatedpostretirement benefit obligation for other post-retirement plans). Employersmust also recognize the change in the funded status of the plan in the year inwhich the change occurs through comprehensive income. This Statement alsorequires plan assets and obligations to be measured as of the employer’sbalance sheet date. The recognition provisions of this Statement are effectivefor fiscal years ending after December 15, 2006, however, earlyapplication is encouraged. The measurement provision of this Statement will beeffective for fiscal years beginning after December 15, 2008. Again, earlyapplication is encouraged. We are in the process of determining the impact ofthis Statement on our consolidated financial statements. 

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(“FIN 48”). FIN 48 prescribes a more likely than not threshold for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition of income tax assets and liabilities, classification of currentand deferred income tax assets and liabilities, accounting for interest andpenalties associated with tax positions, accounting for income taxes in interimperiods, and income tax disclosures. This Interpretation is effective as ofJanuary 1, 2007. We are currently evaluating the impact of FIN 48 on ourfinancial statements.

 

In November 2005, theFASB issued Staff Position (“FSP”) FAS123(R)-3, Transition Election toAccounting for the Tax Effects of Share-Based Payment Awards. This FSP requiresan entity to follow either the transition guidance for theadditional-paid-in-capital pool as prescribed in SFAS No. 123(R),Share-Based Payment, or the alternative transition method as described in theFSP. An entity that adopts SFAS No. 123(R) using the modified prospectiveapplication may make a one-time election to adopt the transition methoddescribed in this FSP. An entity may take up to one year from the later of itsinitial adoption of SFAS No. 123(R) or the effective date of this FSP toevaluate its available transition alternatives and make its one-time election.This FSP became effective in November 2005. We continue to evaluate the impactthat the adoption of this FSP could have on our financial statements.

 

24

----

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

We areexposed to interest rate risk primarily from its short-term and long-termborrowings and to foreign exchange rate risk with respect to our foreignoperations and from foreign currency transactions.

Due toour global operations, our cash flows and earnings are exposed to foreignexchange rate fluctuations. When appropriate, we may attempt to limit ourexposure to changing foreign exchange rates by entering into short-term foreigncurrency exchange contracts. As of October 1, 2006, we held short-termcontracts for the purpose of hedging foreign currency cash flows with anaggregate notional amount of $147.3 million.

Exceptas noted in the preceding paragraph, as of October 1, 2006, there have been nomaterial changes in information provided in Item 7A of our annual report onForm 10-K for the year ended December 31, 2005, which contains a completediscussionof our material exposures to interest rate and foreignexchange rate risks.

**ITEM 4. CONTROLS AND PROCEDURES**

Wemaintain disclosure controls and procedures, which are designed to ensure thatinformation required to be disclosed in the reports we file or submit under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including the Chief Executive Officer, or CEO,and Chief Financial Officer, or CFO, as appropriate to allow timely decisionsregarding required disclosure.

Underthe supervision and with the participation our management, including the CEOand CFO, an evaluation was performed on the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of the periodcovered by this quarterly report. Based on that evaluation, our management,including the CEO and CFO, concluded that our disclosure controls andprocedures were effective as of October 1, 2006.

Anevaluation was also performed under the supervision and with the participationof our management, including the CEO and CFO, of any change in our internalcontrols over financial reporting that occurred during the last nine months andthat has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting. That evaluation did not identifyany change in our internal controls over financial reporting that occurredduring the latest fiscal quarter and that has materially affected, or isreasonably likely to materially affect, our internal controls over financialreporting.

25

----

**PARTII. OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS**

We currently, and from time to time, are subject toclaims and lawsuits arising in the ordinary course of business.  The ultimate resolution of currently pendingproceedings is not expected to have a material adverse effect on our business,financial condition, results of operations or liquidity.  Nevertheless, it is possible that cash flowsor results of operations could be materially affected in any particular periodby the unfavorable resolution of one or more of these contingencies or by thecreation of significant legal or other expenses related to such matters.

**ITEM 1A. RISKFACTORS**

Readers of this Report are encouraged to review thediscussion of Forward Looking Statements and Risk Factors appearing in thisreport at Part I, “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

In addition to the other information set forth in thisReport, you should carefully consider the factors discussed in Part II, “Item1A. Risk Factors” in our Reports on Form 10-Q for the period ended April 2,2006, and in our Report on Form 10-Q for the period ended July 2, 2006, whichcould materially affect our business, financial condition or operating results.The risks described in our Report on Form 10-Q for the period ended April 2,2006, and our Report on Form 10-Q for the period ended July 2, 2006, are notthe only risks facing our Company. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition or operatingresults.

The risk factor included in the Report on Form 10-Qfor the period ended April 2, 2006, under the caption *“If Intermecis unable to increase sales to large enterprise customers while increasingsales to medium and small businesses, its growth and results of operations maybe adversely affected”**** *is restated in its entirety asfollows.

·  ***If we are unable toincrease sales to large enterprise customers while increasing sales to mediumand small businesses, our growth and results of operations may be adverselyaffected.*** One element ofour strategy is to increase sales to large enterprises, because they are highvolume consumers of supply chain products and systems and because theirpurchase decisions influence the purchase decisions of medium and smallbusinesses. Another element is to concurrently increase sales to medium andsmall businesses. This is because large enterprise sales tend to have lowergross profit margins than sales to medium and small businesses. There is noassurance that we will be able to successfully implement our sales strategy.Our revenue, revenue growth, gross profit margins and results of operationscould be materially and adversely affected if we do not achieve our objectivesin both elements of our sales strategy.

The risk factor included in the Report on Form 10-Qfor the period ended April 2, 2006, under the caption *“Unfavorableresults in pending patent lawsuits could have a material adverse impact onIntermec’s business”**** *is restated in its entirety asfollows.

·  ***Unfavorable results inpending or future patent lawsuits could have a material adverse impact on ourbusiness.* **We areperiodically involved in patent infringement lawsuits in which we chargeanother firm with infringing our patents or they charge us with infringingtheir patents or both.  There is noassurance that we will prevail in such lawsuits or that we will prevail on anyof the claims or defenses we assert in those cases. An unfavorable result inone or more of these lawsuits or on one or more of our claims or defenses inactions in which we are defending against infringement claims could prevent usfrom selling one or more of our products, product lines or systems.  Such an unfavorable result could alsoincrease the cost of those products, product lines and systems by forcing us topay a royalty to the other party or by causing us to invest in acquiring ordeveloping alternative technology.  Anunfavorable result in one or more of the lawsuits or on one or more of ourclaims or defenses in cases in which we are claiming patent infringement mightgive the other party the right to compete with us using technology that is thesame as or similar to our patented technology. It might also deprive us of royalty revenue from third parties that areusing such technology.  Any of theseevents could have a material adverse effect on our revenues, revenue growth,gross profit margin and results of operations.

The risk factor included in the Report on Form 10-Qfor the period ended April 2, 2006, under the caption *“Since someof Intermec’s competitors are substantially larger or more profitable thanIntermec, they are a significant competitive threat”*****is restated in its entirety as follows.

26

----

·      ***Since some of ourcompetitors are substantially larger or are more profitable, they are asignificant competitive threat.*** Some of our competitors aresubstantially larger in terms of revenue or profit than we are. The scaleadvantage of these firms may allow them to invest more in R&D, systems andhuman resources than we can.  Theseadvantages may enable our larger competitors to weather market downturns longeror adapt more quickly to market trends or price declines than we can.  Those competitors may also be able toprecipitate such market changes. There is no assurance that the strategies weuse to counteract our competitors’ advantages will successfully eliminate allor a substantial portion of this scale imbalance. If we are unable to offsetall or a significant portion of this imbalance, our revenues, revenue growthand results of operations may be materially and adversely affected.

The risk factor included in the Report on Form 10-Qfor the period ended July 2, 2006, under the caption *“Patentlitigation costs may materially impact or increase the volatility of ourfinancial results”**** *is restated in its entirety asfollows.

·      ***Patent litigation costsand revenues from such litigation may materially impact or increase thevolatility of our financial results.*** We are periodicallyinvolved in patent litigation.  Sincepatent litigation involves complex technical and economic issues, these casescan be expensive to prosecute or defend, and it is difficult to predict theamount or the timing of costs associated with such litigation. Whenappropriate, we include such costs in Selling, General and Administrative(SG&A) expense and record those expenses as they are incurred. In someperiods, patent litigation expense could be a significant percentage ofSG&A expense and could result in large fluctuations from prior periods,increasing the volatility of our SG&A expense and potentially impacting ourearnings per share. In appropriate circumstances, we capitalize patentlitigation costs as intangible assets. In those situations, the expenses are capitalized currently andamortized in future periods, affecting future reported earnings.  Cash payments of such costs would adverselyaffect our cash flow and cash positions in periods when the payments are made.There is no assurance that patent litigation will generate royalty revenue forus, but when it does, we generally amortize that revenue over the useful lifeof the patents, affecting current and future reported earnings.  Since it is difficult to predict the amountor the timing of revenues associated with such litigation, this revenue couldcause large fluctuations in our total revenues as compared with prior periods,increasing the volatility of our total revenues and potentially impacting ourearnings per share.

You should carefullyconsider the following additional risk factors.

·      ***Business combinations,private equity transactions and similar events have altered the structure ofour industry and could intensify competition within the industry.***  Motorola’s recently announced acquisition ofSymbol Technologies, Inc., Metrologics’ recently announced private equitytransaction and similar events have altered the structure of our industry andmay spawn more transactions and additional structural changes. Separately ortogether, any of these events could intensify competition within our industryby expanding the presence in our industry of firms that have not traditionallyparticipated extensively in this line of business, by enhancing the businessand financial resources of some of the largest firms in our industry and byincreasing the financial resources available to some of the smaller firms.  There is no assurance that any of thestrategies we employ to react to the structural changes in our industry will besuccessful.  Failure of our strategiescould result in material adverse impacts to our revenues, revenue growth andresults of operations.

·      ***Our business could beadversely impacted if competitors offer deep discounts on products or unusuallyfavorable service packages.***  From time to time, our competitors offer deep discounts on theirproducts or unusually favorable service packages to customers.  These favorable pricing arrangements may beshort-lived or may be available on a longer-term or even a permanentbasis.  If we do not respond to thesecompetitive initiatives with equally attractive offers or initiatives,

27

----

we could experience a material decline in sales,revenues, revenue growth and results of operations.

·  ***Changes in the demand for ourproducts or our introduction of enhanced or new products could result insubstantial charges against the carrying value of our inventory.***  To satisfy anticipated demand for ourproducts and to fulfill our warranty, maintenance and service obligations, wemaintain significant inventories of our products and related parts. Our failureto successfully implement our sales strategy, counteract our competitors’strategies, or adapt to the changing structure of our industry could reducedemand for our products.  Ourintroduction of new or improved products could also reduce demand for olderproduct lines or make them obsolete.  Insuch situations, we may have excess or obsolete inventory, which we might haveto sell at substantially lower prices than originally planned.  Under certain circumstances, we could also berequired to write off the carrying value of all or a portion of the excess orobsolete inventory.   Any suchwrite-downs or write-offs could materially and adversely impact our revenues,revenue growth, gross profit margins and results of operations.

28

----

**ITEM2.**                    UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)               Issuer Purchases ofEquity Securities
|                               | ** ** | ** **         | ** ** | ** **           | ** ** | **(c) Total Number of** | ** ** | **(d) Maximum Number of**  | ** ** |
|-------------------------------|------------|--------------------|------------|----------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **(a) Total** | ** ** | ** **           | ** ** | **Shares Purchased as**      | ** ** | **Shares (or Approximate**      | ** ** |
| ** **                    | ** ** | **Number of** | ** ** | **(b) Average** | ** ** | **Part of Publicly**         | ** ** | **Dollar Value) that May** | ** ** |
| ** **                    | ** ** | **Shares**         | ** ** | **Price Paid**  | ** ** | **Announced Plans or**       | ** ** | **Yet Be Purchased Under** | ** ** |
| ** **                    | ** ** | **Purchased**      | ** ** | **per Share**   | ** ** | **Programs**                           | ** ** | **the Plans or Programs**  | ** ** |
| July 3 to July  30, 2006      |       | —             |       | —               |       | —                                 |       | —                                    |       |
| July 31 to August 27, 2006    |       | 764,170            |       | $                    | 28.98      |                                   | 764,170    |                                      | $          | 77,856,124 |   |
| August 28 to  October 1, 2006 |       | 972,175            |       | 28.60                |       | 972,175                                |       | 50,000,000                                |       |
| Total                         |       | 1,736,345          |       | $                    | 28.77      |                                   | 1,736,345  |                                      | $          | 50,000,000 |   |

 

An authorization from our Board of Directors allows usto repurchase up to $100 million in shares of our common stock.  On August 7, 2006, we entered into ashare repurchase agreement under Rule 10b5-1 of the Securities ExchangeAct of 1934 to facilitate the repurchase of up to $50 million of our commonstock pursuant to the previously announced share repurchase authorization byour Board of Directors.  For the ninemonths ended October 1, 2006, we have repurchased $49.9 million in sharesof our common stock.  On November 3,2006, we entered into a share repurchase agreement under Rule 10b5-1 ofthe Securities Exchange Act of 1934 to facilitate the repurchase of up to $50million of our common stock pursuant to the same, previously announced sharerepurchase authorization.

29

----

**ITEM 6.****EXHIBITS**
| 3(II)  |   | Amended and Restated Bylaws                                                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                |
| 10.1   |   | Summary Sheet — Employment Arrangement with  Lanny H. Michael                                                             |
|   |   |                                                                                                                                |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, dated as of  November 9, 2006. |
|   |   |                                                                                                                                |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, dated as of  November 9, 2006. |
|   |   |                                                                                                                                |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated as of  November 9, 2006. |
|   |   |                                                                                                                                |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated as of  November 9, 2006. |

 

** **

30

----

## **SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|        | Intermec, Inc. |
|--------|----------------|
|   | (Registrant)   |
|   |           |   |
|   |           |   |
|   | By             | /s/ Lanny H. Michael |   |
|   |           |   |
|   |           | Lanny H. Michael |
|   | * *       | *  Senior Vice President and Chief Financial  Officer* |
|   | * *       |   |
|   |           |   |
|   |           | November 9, 2006 |

 

31

----