**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

| **x**                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE**  |
|--------------------------------------------------|---------------------------------------------------------------|
| ** **                                       | **SECURITIES EXCHANGE ACT OF 1934**                           |
| ** **                                       |
| **For the  quarterly period ended July 2, 2006** |
| ** **                                       |
| **OR**                                           |
| ** **                                       |
| **o**                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |
| ** **                                       | **SECURITIES EXCHANGE ACT OF 1934**                           |

** **

**Forthe transition period from                     to**

**Commissionfile number:  001-13279**

**INTERMEC,INC.**

(Exact name of registrantas 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 telephonenumber, including area code)

**[None]**

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

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements 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 accelerated filer x |   | Accelerated filer  o |   | Non-accelerated filer  o |
|--------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o      No x

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

| **Class**                                |   | **Outstanding  at July 28, 2006** |
|------------------------------------------|--------|-----------------------------------|
| Common Stock,  $0.01 par value per share |   | 63,801,477  shares                |

 

 

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**INTERMEC, INC.INDEXREPORT ON FORM 10-QFOR THE QUARTER ENDED JULY 2, 2006**
|                                   | ** **   | ** **                                                                                                          | ** ** | **Page  Number** |
|-----------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------|------------|------------------|
| **PART I. FINANCIAL INFORMATION** |         | 2                                                                                                                   |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 1.**  | Financial Statements                                                                                                |       | 2                |
| ** **                        | ** **   |                                                                                                                |       |             |
|                              |         | Consolidated Statements of Operations (unaudited)  Three and Six Month Periods Ended July 2, 2006, and July 3, 2005 |       | 2                |
|                              |         |                                                                                                                |       |             |
|                              |         | Consolidated Balance Sheets (unaudited)  July 2, 2006, and December 31, 2005                                        |       | 3                |
|                              |         |                                                                                                                |       |             |
|                              |         | Consolidated Statements of Cash Flows (unaudited)  For the Six Months Ended July 2, 2006, and July 3, 2005          |       | 4                |
|                              |         |                                                                                                                |       |             |
|                              |         | Notes to Consolidated Financial Statements  (unaudited)                                                             |       | 5                |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 2.**  | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         |       | 16               |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 3.**  | Quantitative and Qualitative Disclosures about  Market Risk                                                         |       | 21               |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 4.**  | Controls and Procedures                                                                                             |       | 22               |
|                              |         |                                                                                                                |       |             |
| **PART II. OTHER INFORMATION**    |         | 23                                                                                                                  |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 1.**  | Legal Proceedings                                                                                                   |       | 23               |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 1A.** | Risk Factors                                                                                                        |       | 24               |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 2.**  | Unregistered Sales of Equity Securities and Use of  Proceeds                                                        |       | 24               |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 4.**  | Submission of Matters to a Vote of Security Holders                                                                 |       | 25               |
|                              |         |                                                                                                                |       |             |
| ** **                        | **ITEM 6.**  | Exhibits                                                                                                            |       | 25               |
|                              |         |                                                                                                                |
| Signature                         |         | 26                                                                                                                  |
|                                   |              |                                                                                                                     |            |                  |  |  |

 

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**PART I.  FINANCIAL INFORMATION**

**ITEM 1. FINANCIALSTATEMENTS**

**INTERMEC, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(amounts in thousands, except per share amounts)(unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **July 2,**                 | ** ** | **July 3,**               | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
| ** **                                                  | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                   |       |                             |       |                           |       |   |   |   |   |
| Product                                                     |       | $                                | 192,440    |                           | $          | 181,007 |   | $ | 358,790 |   | $ | 342,950 |   |
| Service                                                     |       | 38,997                           |       | 36,452                         |       | 76,478 |   | 71,004 |   |
| Intellectual property settlement                            |       | —                           |       | —                         |       | 23,000 |   | — |   |
| Total Revenues                                              |       | 231,437                          |       | 217,459                        |       | 458,268 |   | 413,954 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Costs and expenses:                                         |       |                             |       |                           |       |   |   |   |   |
| Cost of product revenues                                    |       | 116,401                          |       | 101,954                        |       | 217,015 |   | 194,701 |   |
| Cost of service revenues                                    |       | 21,413                           |       | 21,084                         |       | 44,274 |   | 41,970 |   |
| Cost of intellectual property settlement                    |       | —                           |       | —                         |       | 6,462 |   | — |   |
| Selling, general and administrative                         |       | 78,496                           |       | 75,777                         |       | 156,289 |   | 148,548 |   |
| Restructuring Charge                                        |       | 1,135                            |       | —                         |       | 2,242 |   | — |   |
| Total costs and expenses                                    |       | 217,445                          |       | 198,815                        |       | 426,282 |   | 385,219 |   |
| Operating profit  from continuing operations                |       | 13,992                           |       | 18,644                         |       | 31,986 |   | 28,735 |   |
| Gain on sale of  investments                                |       | 2,305                            |       | —                         |       | 2,305 |   | — |   |
| Interest income  (expense), net                             |       | 1,766                            |       | (1,120                         | )          | 2,910 |   | (3,246 | ) |
| Earnings from  continuing operations before income taxes    |       | 18,063                           |       | 17,524                         |       | 37,201 |   | 25,489 |   |
| Provision for  income taxes                                 |       | 6,767                            |       | 5,669                          |       | 10,835 |   | 8,222 |   |
| Earnings before  discontinued operations                    |       | 11,296                           |       | 11,855                         |       | 26,366 |   | 17,267 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Earnings (loss)  from discontinued operations, net of tax   |       | (940                             | )          | 213                            |       | (2,019 | ) | (1,719 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Net earnings                                                |       | $                                | 10,356     |                           | $          | 12,068 |   | $ | 24,347 |   | $ | 15,548 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Basic earnings (loss)  per share                            |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                       |       | $                                | 0.18       |                           | $          | 0.19 |   | $ | 0.42 |   | $ | 0.28 |   |
| Discontinued operations                                     |       | $                                | (0.02      | )                              | 0.01       |   | $ | (0.03 | ) | (0.03 | ) |
| Net earnings per share                                      |       | $                                | 0.16       |                           | $          | 0.20 |   | $ | 0.39 |   | $ | 0.25 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings (loss)  per share                          |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                       |       | $                                | 0.18       |                           | $          | 0.19 |   | $ | 0.41 |   | $ | 0.28 |   |
| Discontinued operations                                     |       | $                                | (0.02      | )                              | 0.00       |   | $ | (0.03 | ) | (0.03 | ) |
| Net earnings per share                                      |       | $                                | 0.16       |                           | $          | 0.19 |   | $ | 0.38 |   | $ | 0.25 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Shares used in  computing basic earnings (loss) per share   |       | 63,252                           |       | 61,361                         |       | 63,138 |   | 61,228 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Shares used in  computing diluted earnings (loss) per share |       | 64,529                           |       | 62,768                         |       | 64,565 |   | 62,792 |   |

 

See accompanying notes toconsolidated financial statements.

2

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**INTERMEC, INC.CONSOLIDATED BALANCE SHEETS(amounts in thousands)(unaudited)**

 
| ** **                                                                                          | ** ** | **July 2,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                          | ** ** | ** **       | ** ** | ** **            | ** ** |
|                                                                                                |       |             |       |                  |       |
| Current assets:                                                                                     |       |             |       |                  |       |
| Cash and cash equivalents                                                                           |       | $                | 303,683    |                  | $          | 256,782 |   |
| Short-term investments                                                                              |       | 19,130           |       | —                |       |
|                                                                                                |       |             |       |                  |       |
| Accounts receivable, net of allowance for doubtful  accounts and sales returns of $8,943 and $8,157 |       | 162,379          |       | 180,985               |       |
| Inventories                                                                                         |       | 104,628          |       | 82,088                |       |
| Net current deferred tax assets                                                                     |       | 51,554           |       | 100,656               |       |
| Assets held for sale                                                                                |       | 8,239            |       | 8,517                 |       |
| Other current assets                                                                                |       | 18,275           |       | 29,468                |       |
| Total Current Assets                                                                                |       | 667,888          |       | 658,496               |       |
|                                                                                                |       |             |       |                  |       |
| Property, plant  and equipment, net of accumulated depreciation of $105,146 and $99,032             |       | 38,778           |       | 30,820                |       |
| Intangibles, net                                                                                    |       | 6,794            |       | 6,871                 |       |
| Net deferred tax  assets                                                                            |       | 182,046          |       | 137,578               |       |
| Other assets                                                                                        |       | 63,424           |       | 68,955                |       |
| Total assets                                                                                        |       | $                | 958,930    |                  | $          | 902,720 |   |
|                                                                                                |       |             |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ INVESTMENT**                                                   | ** ** | ** **       | ** ** | ** **            | ** ** |
|                                                                                                |       |             |       |                  |       |
| Current Liabilities:                                                                                |       |             |       |                  |       |
| Accounts payable and accrued expenses                                                               |       | $                | 155,399    |                  | $          | 148,731 |   |
| Payroll and related expenses                                                                        |       | 30,639           |       | 31,011                |       |
| Deferred revenue                                                                                    |       | 44,861           |       | 38,369                |       |
| Total current liabilities                                                                           |       | 230,899          |       | 218,111               |       |
|                                                                                                |       |             |       |                  |       |
| Long-term  deferred revenue                                                                         |       | 19,479           |       | 20,095                |       |
| Long-term debt                                                                                      |       | 100,000          |       | 100,000               |       |
| Other long-term  liabilities                                                                        |       | 89,754           |       | 88,711                |       |
|                                                                                                |       |             |       |                  |       |
| Shareholders’  investment:                                                                     |       |             |       |                  |       |
| Common stock                                                                                        |       | 632              |       | 627                   |       |
| Additional paid-in capital                                                                          |       | 750,362          |       | 736,224               |       |
| Accumulated deficit                                                                                 |       | (220,557         | )          | (244,903              | )          |
| Accumulated other comprehensive loss                                                                |       | (11,639          | )          | (16,145               | )          |
| Total shareholders’ investment                                                                 |       | 518,798          |       | 475,803               |       |
| Total liabilities and  shareholders’ investment                                                |       | $                | 958,930    |                  | $          | 902,720 |   |

 

See accompanying notes toconsolidated financial statements.

3

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**INTERMEC, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands)(unaudited)**

 
| ** **                                                                           | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **July 2,**               | ** ** | **July 3,** | ** ** |
| ** **                                                                           | ** ** | **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                                              |       | 24,347                         |       | 17,267 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                        |       | 5,186                          |       | 4,992 |   |
| Change in prepaid pension costs, net                                                 |       | 3,392                          |       | 5,767 |   |
| Deferred taxes                                                                       |       | 10,097                         |       | 9,537 |   |
| Stock-based compensation and other                                                   |       | 5,125                          |       | 587 |   |
| Excess tax benefits from stock-based payment  arrangements                           |       | (3,076                         | )          | — |   |
| Changes in  operating assets and liabilities:                                        |       |                           |       |   |   |
| Accounts receivable                                                                  |       | 18,616                         |       | 5,137 |   |
| Inventories                                                                          |       | (22,540                        | )          | (22,929 | ) |
| Other current assets                                                                 |       | 3,524                          |       | (1,168 | ) |
| Accounts payable and accrued expenses                                                |       | 9,770                          |       | 3,951 |   |
| Payroll and related expenses                                                         |       | 94                             |       | (4,495 | ) |
| Other long-term liabilities                                                          |       | 2,294                          |       | 6,355 |   |
| Other operating activities                                                           |       | 5,557                          |       | (2,819 | ) |
| Net cash provided by operating activities of  continuing operations                  |       | 62,386                         |       | 22,182 |   |
|                                                                                 |       |                           |       |   |   |
| Cash flows from  investing activities of continuing operations:                      |       |                           |       |   |   |
| Capital expenditures                                                                 |       | (12,304                        | )          | (5,510 | ) |
| Purchases of investments                                                             |       | (19,695                        | )          | 6,051 |   |
| Decrease in restricted cash                                                          |       | —                         |       | 50,000 |   |
| Proceeds from sales of investments                                                   |       | 565                            |       | — |   |
| Other investing activities                                                           |       | 5                              |       | 190 |   |
| Net cash (used in) provided by investing activities  of continuing operations        |       | (31,429                        | )          | 50,731 |   |
|                                                                                 |       |                           |       |   |   |
| Cash flows from  financing activities of continuing operations:                      |       |                           |       |   |   |
| Repayment of long-term obligations                                                   |       | —                         |       | (100,000 | ) |
| Excess tax benefits from stock-based payment  arrangements                           |       | 3,076                          |       | — |   |
| Stock options exercised                                                              |       | 4,340                          |       | 7,644 |   |
| Other financing activities                                                           |       | 1,616                          |       | 1,258 |   |
| Net cash provided by (used in) financing activities  of continuing operations        |       | 9,032                          |       | (91,098 | ) |
|                                                                                 |       |                           |       |   |   |
| Net cash  provided by (used in) continuing operations                                |       | 39,989                         |       | (18,185 | ) |
| Net cash used in  operating activities of discontinued operations                    |       | —                         |       | (27,350 | ) |
| Net cash  provided by investing activities of discontinued operations                |       | 6,912                          |       | 405 |   |
|                                                                                 |       |                           |       |   |   |
| Resulting  increase (decrease) in cash and cash equivalents                          |       | 46,901                         |       | (45,130 | ) |
|                                                                                 |       |                           |       |   |   |
| Cash and cash  equivalents at end of period                                          |       | $                              | 303,683    |   | $ | 172,769 |   |

 

See accompanying notes to consolidated financialstatements.

4

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

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

Effective January 1, 2006, we changed our name fromUNOVA, Inc. to Intermec, Inc. (“Intermec”). We design, develop, manufacture,integrate, sell, resell and service wired and wireless automated identificationand data collection (“AIDC”) products and systems, mobile computing productsand systems, wired and wireless bar code printers, label media and radiofrequency identification (“RFID”) products and systems. Our products andservices are used by customers within and outside of the United States toimprove the productivity, quality and responsiveness of their businessoperations including supply chain management, enterprise resource planning andfield sales and service. We grant licenses to use portions of our intellectualproperty portfolio, including certain patent rights essential to and/or usefulin RFID and AIDC products, and receive license fees as well as ongoingroyalties based on sales by licensees. Customers for our products and servicesoperate in market segments that include manufacturing, warehousing, directstore delivery, retail, consumer packaged goods, field service, government, andtransportation and logistics.

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 Intermec’s consolidated financial statements andrelated notes.

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

Our interim financial periods are based on athirteen-week internal accounting calendar. In the opinion of management, theaccompanying balance sheets and interim statements of operations, andstatements of cash flows include all adjustments, consisting only of normalrecurring items, necessary for their fair presentation in conformity withaccounting principles generally accepted in the United States of America (“U.S.GAAP”). The financial statements include the accounts of Intermec and itssubsidiaries. Intercompany transactions and balances have been eliminated.Equity investments in which we exercise significant influence but do notexercise control and are not the primary beneficiary are accounted for usingthe equity method. Investments in which we are not able to exercise significantinfluence over the investee are accounted for under the cost method. Preparingfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue, and expenses, andfinancial data included in the accompanying notes to the financial statements.Actual results and outcomes may differ from management’s estimates andassumptions.

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 thefinancial 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 six months ended July 3, 2005, reflects the reclassification of $50 million in restrictedcash from financing activities to investing activities and $3.9 million ofcash used in operating activities of discontinued operations was reclassifiedfrom operating activities 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, or APB, Opinion No. 25, “Accountingfor Stock Issued to Employees,” and generally requires that such transactionsbe accounted for using a fair-value-based method and recognized as expenses inour consolidated statements of operations.

Our consolidated financial statements for the threeand six months ended July 2, 2006, reflect the impact of adoptingSFAS 123(R). In accordance with the modified prospective method, theconsolidated financial statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123(R).

Stock-based compensation expense recognized in theconsolidated statement of operations during the second 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 “Accountingfor Stock-Based Compensation—Transition and Disclosure” (SFAS 148) andcompensation expense for the stock-based payment awards granted subsequent toDecember 31, 2005, based on the grant date fair value estimated inaccordance with SFAS 123(R). Stock-based compensation

5

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expense recognized in the statement of operations forthe three and six months ended July 2, 2006, is based on options ultimatelyexpected to vest, the expense has been reduced for estimated forfeitures.SFAS 123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. In the pro forma information required under SFAS 148 forthe periods prior to January 1, 2006, we accounted for forfeitures as theyoccurred.

Accordingly, during the three and six month periodsended July 2, 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 six month periodsended July 2, 2006, has been reduced for estimated forfeitures. When estimatingforfeitures, we consider voluntary termination behaviors as well as trends ofactual option forfeitures. The impact on our results of operations of recordingstock-based compensation for the three and six month periods ended July 2, 2006was as follows (in thousands):
|                                                    | ** ** | **Three Months**      | ** ** | **Six Months**        | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                         | ** ** | **July 2, 2006** | ** ** | **July 2, 2006** | ** ** |
| Cost of revenues                         |       | $                          | 72         |                       | $          | 110 |   |
| Selling, general and administrative |       | 925                        |       | 2,811                      |       |
|                                               |       | $                          | 997        |                       | $          | 2,921 |   |

 

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), $3.1 million of excess tax benefits for the sixmonths ended July 2, 2006, has been classified as a source of cash fromfinancing activities. Cash received from option exercises under all share-basedpayment arrangements for the six month periods ended July 2, 2006 and July 3,2005, was $4.3 million and $7.7 million, respectively. The total incometax benefit recognized in the statement of operations for stock-basedcompensation costs was $0.4 million, and $1.1 million for the threeand six month periods ended July 2, 2006, and $0.3 and $0.6 for the three andsix month periods ended July 3, 2005.

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:
|                            | ** ** | **July 2, 2006** | ** ** | **July 3, 2005** | ** ** |
|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| Risk-free  interest rates  |       | 4.88                       | %          | 3.72                       | %          |
| Expected lives  (in years) |       | 4.8                        |       | 5.0                        |       |
| Expected  dividend yield   |       | 0.0                        | %          | 0.0                        | %          |
| Expected volatility        |       | 44.9                       | %          | 56.0                       | %          |

 

Our computation of expected volatility for the secondquarter 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 onhistorical experience of similar awards, giving consideration to thecontractual terms of the stock-based awards, vesting schedules and expectationsof future employee behavior. The interest rate for periods within thecontractual life of the award is based on the U.S. Treasury yield curve ineffect at the time of grant.

The fair value of the options granted based on theabove assumptions are $12.16 and $12.89 for the three and six month periodsended July 2, 2006 and $10.26 and $10.66 for the three and six month periods endedJuly 3, 2005, respectively.  All grantsof our options under all plans must be approved or authorized by theCompensation Committee of the Board of Directors, which consists entirely ofoutside 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, 2005.

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|                                                                                                      | ** ** | **Three Months**      | ** ** | **Six Months**        | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                           | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                                                                           | ** ** | **July 3, 2005** | ** ** | **July 3, 2005** | ** ** |
| Net earnings as  reported                                                                            |       | $                          | 12,068     |                       | $          | 15,548 |   |
| Add: stock  compensation expense recorded under the intrinsic value method, net of tax  effect       |       | 584                        |       | 1,068                      |       |
| Less: pro forma  stock compensation expense computed under the fair value method, net of tax  effect |       | (1,308                     | )          | (2,592                     | )          |
|                                                                                                 |       |                       |       |                       |       |
| Pro forma net  earnings                                                                              |       | $                          | 11,344     |                       | $          | 14,024 |   |
|                                                                                                 |       |                       |       |                       |       |
| Net earnings per  share as reported:                                                                 |       |                       |       |                       |       |
| Basic                                                                                                |       | $                          | 0.20       |                       | $          | 0.25 |   |
| Diluted                                                                                              |       | $                          | 0.19       |                       | $          | 0.25 |   |
|                                                                                                 |       |                       |       |                       |       |
| Pro forma net earnings  per share:                                                                   |       |                       |       |                       |       |
| Basic                                                                                                |       | $                          | 0.18       |                       | $          | 0.23 |   |
| Diluted                                                                                              |       | $                          | 0.18       |                       | $          | 0.22 |   |

 

 

Our 2001, 1999 and 1997 Stock Incentive Plans and theour 2004 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 of July2, 2006, there were 536,294 options outstanding that were granted under the1997 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 Intermec’s common stock on the date of grant. The Stock IncentivePlans options generally vest in equal increments over five years and expire inten years.

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 Intermec’s 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 Intermec’s common stock on thedate of grant. The number of options granted annually to each director is fixedby the Director Plan. Such options become fully exercisable on the firstanniversary of their date of grant. Additionally, there was a grant in January,2006 to the Director’s that vested immediately. Therefore, the correspondingexpense was recorded in the quarter ended April 2, 2006.

As of July 2, 2006 there were 2,470,355 sharesavailable for grant under our Stock Incentive Plans and DSOPs. The followingtable summarizes changes in options outstanding and exercisable under our stockaward plans:

7

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|                                           | ** ** | ** **         | ** ** | **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                                   |       | 568,250            |       | 28.31                   |       |                |       |                   |       |
| Exercised                                 |       | (404,125           | )          | 10.74                   |       |                |       |                   |       |
| Forfeited                                 |       | (26,966            | )          | 18.97                   |       |                |       |                   |       |
| Canceled                                  |       | (5,800             | )          | 15.19                   |       |                |       |                   |       |
| Outstanding  balance at July 2, 2006 |       | 3,350,285          |       | 16.14                   |       | 6.46                |       | $                      | 79.1       |   |
| Exercisable at July 2,  2006              |       | 2,023,157          |       | 13.54                   |       | 4.98                |       | 46.9                   |       |
|                                           |            |                    |            |                         |            |                     |            |                        |            |  |  |

 

As of July 2, 2006, there was $8.8 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 0months.
|                                         | ** ** | ** **         | ** ** | **Weighted-**       | ** ** |
|-----------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                              | ** ** | ** **         | ** ** | **Average**         | ** ** |
| ** **                              | ** ** | **Number**         | ** ** | **Grant Date** | ** ** |
| ** **                              | ** ** | **of Shares** | ** ** | **Fair Value** | ** ** |
| **Restricted  stock awards:**           |       |               |       |                |       |
| Nonvested balance at December 31, 2005  |       | 86,070             |       | 11.52               |       |
| Granted                                 |       | 89,088             |       | 27.25               |       |
| Vested                                  |       | (66,802            | )          | 9.14                |       |
| Forfeited                               |       | (3,387             | )          | 19.39               |       |
| Nonvested balance at  July 2, 2006 |       | 104,969            |       | 26.13               |       |

 

The fair value of each restricted stock award (RSA) isthe market price of our stock on the date of grant. The total intrinsic valueof RSA’s vested during the three and six months ended July 2, 2006, and July 3,2005, was $1.2 and $ 1.8 million, and $ 1.2 and $ 2.6 million,respectively. As of July 2, 2006, there was $ 2.7 million of totalunrecognized compensation cost related to non-vested RSA’s. That cost isexpected to be recognized over a weighted average period of 1 year and 1 month.

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 the boardin its sole discretion. Shares of stock will be issued following the end of theperformance period. Shared Performance Stock Awards are amortized over thevesting period (generally 32 months) using the straight line method.  Total compensation expense related toperformance stock awards was $ 0.8 and $ 1.5, for the three andsix month periods ended July 2, 2006 and $0.3 and $0.6 for the three and sixmonth periods ended July 3, 2005, respectively.

We administer the Employee Stock Purchase Plan underwhich 5.0 million shares are reserved for issuance. Employees with threemonths 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.

8

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** **

**4.****                          Inventories**

Inventories comprise the following (thousands ofdollars):
|                 | ** ** | **July 2,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Raw materials   |       | $                | 55,394     |                  | $          | 50,505 |   |
| Work in process |       | 739              |       | 705                   |       |
| Finished goods  |       | 48,495           |       | 30,878                |       |
|            |       |             |       |                  |       |
| Inventories     |       | $                | 104,628    |                  | $          | 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 (8.33% as of July 2, 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 July 2, 2006, the estimated fair value of the note is $10.9 million,based on the estimated cash flows from the note and a risk-adjusted discountrate equal to LIBOR plus eight percent. Our consolidated balance sheet as ofJuly 2, 2006, classifies the $10.9 million note receivable as othercurrent assets and other assets.

Aspart of the sale of Landis Grinding Systems we received a $10 million two-yearnote at an interest rate of five percent per annum guaranteed by the buyer’sparent company. As of July 2, 2006, the estimated fair value of the note is$9.6 million, based on the estimated cash flows from the note and arisk-adjusted discount rate equal to LIBOR plus 2.25% (7.94% as of July 2,2006). This long-term note receivable is included in other assets on ourbalance sheet.

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

Intermechas 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 on availability, Intermechad borrowing capacity at July 2, 2006, of $18.1 million under theRevolving Facility. We made no borrowings under the Revolving Facility during2006, and as of July 2, 2006, no borrowings were outstanding under thisfacility. As of July 2, 2006, we were in compliance with all financialcovenants of this agreement.

Wehave $100.0 million of ten-year senior unsecured debt outstanding as ofJuly 2, 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 millionof seven-year notes, which were entered into in March, 1998.

Interestincome (expense) comprises the following (thousands of dollars):
|                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **July 2,**                 | ** ** | **July 3,**               | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
| ** **                     | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income                |       | $                                | 3,979      |                           | $          | 1,351 |   | $ | 7,339 |   | $ | 3,153 |   |
| Interest expense               |       | 2,213                            |       | 2,471                          |       | 4,429 |   | 6,399 |   |
| Net interest income  (expense) |       | $                                | 1,766      |                           | $          | (1,120 | ) | $ | 2,910 |   | $ | (3,246 | ) |

 

Wealso have letter-of-credit reimbursement agreements totaling $13.2 millionat July 2, 2006, compared to $25.8 million at December 31, 2005. As ofJuly 2, 2006, $7.9 million of the agreements related to performance oncontracts with current customers and vendors, and $4.1 million of theagreements related to customer contracts assumed by the purchaser of theCincinnati Lamb operations that were sold and $1.4 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 $4.1 million of letter-of-creditagreements related to Cincinnati Lamb and the beneficiary of a backupletter-of-credit in the aggregate amount of $0.6 million issued pursuantto the terms of the sale.

 

9

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Webelieve it is not practicable to estimate fair values of these instruments andconsider the risk of non-performance on the contracts to be remote. We areindemnified by the purchaser of the Landis operations on the $1.3 million letter-of-creditagreement 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 loss from discontinued operations for the three and sixmonth periods ended July 2, 2006, include period expenses related to finalizingthe sale of the Landis Grinding Systems and changes to the estimated purchaseprice adjustment, net of tax benefits.

The loss from discontinued operations for the threeand six month periods ended July 3, 2005, includes the operating results of theCincinnati Lamb and Landis Grinding Systems businesses as well as the loss onthe 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 Intermecor moved to third-party vendors to improve efficiencies and benefit fromreduced cost. In addition to the anticipated cost savings, this realignment ofresources is expected to increase new product development capacity. The totalcost of closing the design centers in Sweden and the elimination of 65positions in Sweden is estimated to be $4.5 million. The estimatedrestructuring costs include $2.8 million of employee termination expense,facility closure costs of $1.4 million non-cash, asset impairment expenseof $0.1 million and other related costs of $0.2 million. During thesix months ended July 2, 2006, we have already recorded restructuring chargesof $2.3 million, mostly employee termination costs, in accordance withSFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”(SFAS 146), and anticipate that the majority of the remaining unrecognized restructuring costs will be recognized overthe last 2 quarters of 2006.

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

During the first quarter of 2006, we receivedcompensation in relation to a settlement of a patent dispute regarding certainof Intermec’s intellectual property (“IP”). Intermec’s patents involved itssmart battery management technology in which a portable computer incorporates arechargeable battery that uses a processor chip to communicate data to theportable computer so that the computer can monitor and regulate battery use.The effective date of this settlement was February 27, 2006, and the terms areconfidential. The operating profit from this settlement, net of attorneys feesand costs, is $16.5 million for the first quarter of 2006. IP settlementcompensation of  $23.0 million isclassified as revenue and $6.5 million of related legal costs are classified as cost of intellectual propertysettlement in our consolidated statements of operations.

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

The tax provision for the three and six month periodsended July 2, 2006, reflects an effective tax rate for continuing operations of37.4% and 29.1% respectively, compared to a U.S. statutory rate of 35%. The taxprovision was reduced by $2.2 million primarily due to the favorableconclusion of a Canadian tax audit during the first quarter of 2006.

The tax provision for the three and six month periodsended July 3, 2005 reflects an effective tax rate for continuing operations of32.4% and 32.3% compared to a U.S. statutory rate of 35%. The reduction in theeffective tax rate is primarily due to favorable foreign currency exchangevariance associated with foreign tax contingency accruals.

**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** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **July 2,**                 | ** ** | **July 3,** | ** ** |
| ** **                                                       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Weighted average  common shares — Basic                     |       | 63,252,443                       |       | 61,360,586 |   |
| Dilutive effect  of unvested restricted shares and stock options |       | 1,276,159                        |       | 1,407,696 |   |
| Weighted average shares  — Diluted                          |       | 64,528,602                       |       | 62,768,282 |   |

 

10

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|                                                                  | ** ** | **Six months Ended** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **July 2,**               | ** ** | **July 3,** | ** ** |
| ** **                                                       | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Weighted average  common shares — Basic                     |       | 63,138,099                     |       | 61,228,208 |   |
| Dilutive effect  of unvested restricted shares and stock options |       | 1,427,263                      |       | 1,563,680 |   |
| Weighted average shares  — Diluted                          |       | 64,565,362                     |       | 62,791,888 |   |

 

Our employees and directors held options to purchase586,401 and 339,776 shares of our common stock for the three and six monthsended July 2, 2006, and 136,920 and 121,710 for the three and six month periodsended July 3, 2005, respectively, that were not included in weighted averageshares diluted because they were antidilutive to the diluted earnings per sharecomputation. These options could become dilutive in future periods if theaverage market price of our common stock exceeds the exercise price of theoutstanding options and we report net earnings.

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

The information in thisnote represents the net periodic pension and post-retirement benefit costs andrelated components in accordance with SFAS 132(R). The components of netpension and postretirement periodic benefit cost (credit) for the three and sixmonth periods ended July 2, 2006, and July 3, 2005, are as follows (thousandsof dollars):
|                                                               | ** ** | **U.S.**               | ** ** | **Non-U.S.**           | ** ** | **Other**              | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **Defined**            | ** ** | **Defined**            | ** ** | **Postretirement**     | ** ** |
| **Three Months Ended July 2, 2006,** | ** ** | **Benefit Plans** | ** ** | **Benefit Plans** | ** ** | **Benefit Plans** | ** ** |
| **and July 3, 2005:**                          | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2006**               | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service Cost                                                  |       | $                      | 1,741      |                   | $          | 2,406                  |       | $ | 273 |   | $ | 850 |   | $ | 4 |   | $ | 33 |   |
| Interest Cost                                                 |       | 2,988                  |       | 2,520                  |       | 552                    |       | 1,157 |   | 66 |   | 166 |   |
| Expected return  on plan assets                               |       | (2,508                 | )          | (2,506                 | )          | (756                   | )          | (1,034 | ) | — |   | — |   |
| Amortization and  deferrals:                                  |       |                   |       |                   |       |                   |       |   |   |   |   |   |   |
| Transition asset                                              |       | —                 |       | —                 |       | (39                    | )          | (85 | ) | — |   | — |   |
| Actuarial loss                                                |       | 1,241                  |       | 850                    |       | 112                    |       | 246 |   | 28 |   | 16 |   |
| Prior service cost (benefit)                                  |       | 177                    |       | 179                    |       | —                 |       | — |   | — |   | — |   |
| Curtailment loss  (gain)                                      |       | —                 |       | —                 |       | —                 |       | — |   | — |   | — |   |
| Settlement gain                                               |       | —                 |       | —                 |       | —                 |       | — |   | — |   | — |   |
| Special  termination benefits                                 |       | 675                    |       | —                 |       | —                 |       | — |   | — |   | — |   |
| Net pension and  postretirement periodic benefit cost         |       | $                      | 4,314      |                   | $          | 3,449                  |       | $ | 142 |   | $ | 1,134 |   | $ | 98 |   | $ | 215 |   |

 
|                                                             | ** ** | ** **             | ** ** | ** **             | ** ** | **Non-U.S.**           | ** ** | **Other** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                                  | ** ** | **U.S. Defined**  | ** ** | **Defined**            | ** ** | **Postretirement**     | ** ** |
| **Six Months Ended July 2, 2006,** | ** ** | **Benefit Plans** | ** ** | **Benefit Plans** | ** ** | **Benefit Plans** | ** ** |
| **and July 3, 2005:**                        | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2006**               | ** ** | **2005**  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service Cost                                                |       | $                      | 3,482      |                   | $          | 4,810                  |       | $         | 536        |   | $ | 2,119 |   | $ | 8 |   | $ | 67 |   |
| Interest Cost                                               |       | 5,976                  |       | 5,040                  |       | 1,083                  |       | 3,705     |       | 132 |   | 1,229 |   |
| Expected return  on plan assets                             |       | (5,016                 | )          | (5,012                 | )          | (1,483                 | )          | (3,680    | )          | — |   | — |   |
| Amortization and  deferrals:                                |       |                   |       |                   |       |                   |       |      |       |   |   |   |   |
| Transition asset                                            |       | —                 |       | —                 |       | (77                    | )          | (172      | )          | — |   | — |   |
| Actuarial loss                                              |       | 2,480                  |       | 1,700                  |       | 220                    |       | 761       |       | 55 |   | 340 |   |
| Prior service cost (benefit)                                |       | 354                    |       | 358                    |       | —                 |       | —    |       | — |   | (598 | ) |
| Curtailment loss  (gain)                                    |       | —                 |       | 57                     |       | —                 |       | (5,396    | )          | — |   | (12,274 | ) |
| Settlement gain                                             |       | —                 |       | —                 |       | —                 |       | (332      | )          | — |   | (21,090 | ) |
| Special termination  benefits                               |       | 1,350                  |       | 264                    |       | —                 |       | —    |       | — |   | — |   |
| Net pension and  postretirement periodic benefit cost       |       | $                      | 8,626      |                   | $          | 7,217                  |       | $         | 279        |   | $ | (2,995 | ) | $ | 195 |   | $ | (32,326 | ) |

 

EffectiveJune 30, 2006, we amended our Financial Security and Savings Program,Pension Plan, Restoration Plan and Supplemental Executive Retirement Plan(collectively, the “U.S. Defined Benefit Plans”). The effect of theseamendments was to “freeze” benefit accruals under the U.S. Defined BenefitPlans and to fully vest benefits under the U.S. Defined Benefit Plans, exceptfor the Nonqualified SERP, as of June 30, 2006, for most participants. Inaccordance with SFAS No. 88, “Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits”(“SFAS 88”), the effects of these amendments require a new measurement date.The impact of the related curtailments will be reflected in our third quarter, asa result of the three month lag period utilized by us for measuring pensionobligations, and the change in our ongoing expense will be realized across thebalance of our measurement year.

Our pre-tax loss on thesale 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

11

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$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 six months ended July 2, 2006, wecontributed approximately $3.2 million to our pension and otherpostretirement benefit plans, comprising $1.2 million in benefits paidpertaining to unfunded U.S. defined benefit plans, $1.1 million inmatching contributions to our 401(k) plan, $0.8 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 $2.6 million to these plans during the remainder of 2006, ofwhich $ 0.9 million relates to benefit payments on our unfunded U.S.defined benefit plans, $0.6 million in matching contributions to our 401(k)plan, $0.6 million in contributions to our foreign pension plans and $0.5 millionin benefit payments pertaining to our other postretirement benefit plans.

**13.****                   ComprehensiveEarnings**

Our comprehensiveearnings comprise the following (thousands of dollars):
|                                                                   | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                        | ** ** | **July 2,**                 | ** ** | **July 3,** | ** ** |
| ** **                                                        | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Net earnings                                                      |       | $                                | 10,356     |   | $ | 12,068 |   |
| Change in equity  due to foreign currency translation adjustments |       | 2,722                            |       | (8,156 | ) |
| Change in equity  due to minimum pension liability adjustment     |       | —                           |       | — |   |
| Unrealized gain  on cash flow hedges                              |       | —                           |       | 79 |   |
| Comprehensive earnings                                            |       | $                                | 13,078     |   | $ | 3,991 |   |

 
|                                                                   | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **July 2,**               | ** ** | **July 3,** | ** ** |
| ** **                                                        | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Net earnings                                                      |       | $                              | 24,347     |   | $ | 15,548 |   |
| Change in equity  due to foreign currency translation adjustments |       | 3,814                          |       | (22,376 | ) |
| Change in equity  due to minimum pension liability adjustment     |       |                           |       | 9,144 |   |
| Unrealized gain  on cash flow hedges                              |       | —                         |       | 79 |   |
| Comprehensive earnings                                            |       | $                              | 28,161     |   | $ | 2,395 |   |

 

Foreign currency translationadjustments for the six months ended July 3, 2005, in the above table include acredit balance cumulative translation adjustment of $8.3 million which wasreclassified from OCI to net earnings as a result of the Cincinnati Lamb sale.

**14.****                   SegmentReporting**

During the first quarterof 2006, we integrated the corporate expense into our Products and Servicesegments. Intrasegment transactions have been eliminated and there are nomaterial intersegment transactions. It is not practicable to segregateoperating profit, capital expenditures, depreciation and amortization expenseor total assets into our Product and Service segments,  therefore in aggregate this information isavailable in our consolidated financial statements. The following table sets forthour operations by reportable segments (thousands of dollars):
|                                                    | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **July 2,**                 | ** ** | **July 3,** | ** ** |
| ** **                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Revenues**                                       |       |                             |       |   |   |
| Product                                            |       | $                                | 192,440    |   | $ | 181,007 |   |
| Service                                            |       | 38,997                           |       | 36,452 |   |
| Total revenues                                     |       | $                                | 231,437    |   | $ | 217,459 |   |
| **Gross profit**                                   |       |                             |       |   |   |
| Product                                            |       | $                                | 76,039     |   | $ | 79,053 |   |
| Service                                            |       | 17,584                           |       | 15,368 |   |
| Total gross profit                                 |       | $                                | 93,623     |   | $ | 94,421 |   |
|                                               |       |                             |       |   |   |
| **Operating  profit from continuing operations**   |       |                             |       |   |   |
| Total operating profit  from continuing operations |       | $                                | 13,992     |   | $ | 18,644 |   |

 

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|                                                    | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **July 2,**               | ** ** | **July 3,** | ** ** |
| ** **                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| **Revenues**                                       |       |                           |       |   |   |
| Product                                            |       | $                              | 381,790    |   | $ | 342,950 |   |
| Service                                            |       | 76,478                         |       | 71,004 |   |
| Total revenues                                     |       | $                              | 458,268    |   | $ | 413,954 |   |
|                                               |       |                           |       |   |   |
| **Gross  profit**                                  |       |                           |       |   |   |
| Product                                            |       | $                              | 158,313    |   | $ | 148,219 |   |
| Service                                            |       | 32,204                         |       | 29,034 |   |
| Total gross profit                                 |       | $                              | 190,517    |   | $ | 177,286 |   |
|                                               |       |                           |       |   |   |
| **Operating  profit from continuing operations**   |       |                           |       |   |   |
| Total operating profit  from continuing operations |       | $                              | 31,986     |   | $ | 28,735 |   |

 

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

Unitrin, Inc. and itssubsidiaries (“Unitrin”) is a significant shareholder of Intermec, owningapproximately 20% of our outstanding shares. In January 2005, Unitrin’s Lifeand Health Insurance segment agreed to contract with our subsidiary to developthe software for the next generation of Life and Health Insurance’s handheldcomputers. In the three and six month periods ended July 2, 2006, and July 3,2005, we did not recognize any revenues from this arrangement.

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

Provisions for estimatedexpenses related to product warranties are made at the time products are sold.These estimates are established using historical information on the nature,frequency, and average cost of warranty claims. Management actively studiestrends of warranty claims and takes action to improve product quality andminimize warranty claims. The following table indicates the change in ourwarranty accrual included in current liabilities (thousands of dollars):
| Beginning balance January 1,  2006             |   | $      | 5,514  |   |
|------------------------------------------------|--------|--------|--------|--------|
| Payments                                       |   | (1,830 | )      |
| Increase in  liability (new warranties issued) |   | 2,149  |   |
| Ending Balance July 2,  2006                   |   | $      | 5,833  |   |

 

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.

FASB Interpretation No. 45, “Guarantors’ Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” requires that Intermec estimate and record the fairvalue of guarantees as a liability. We do not believe we have any significantexposure related to such guarantees and therefore have not recorded a liabilityas of July 2, 2006, or December 31, 2005. We have not made any significantindemnification payments as a result of these clauses, nor do we believe the fairvalue of any of these guarantees has a material effect

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on our financial position or results of 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 theunfavorable resolution of one or more of these contingencies or by the creationof significant legal or other expenses related to such matters.

On March 10, 2005, Symbol Technologies, Inc. (“Symbol”)terminated its original equipment manufacturing (“OEM”) agreement with us tosupply laser scan engines and stopped shipping laser scan engines to us. OnMarch 10, 2005, Symbol also filed a lawsuit against us in the United StatesDistrict Court for the District of Delaware seeking a declaratory judgment thatits termination of the OEM agreement is lawful (the “Contract Case”). Webelieve that the termination of the OEM agreement by Symbol has not had amaterial adverse effect on our operations.

In addition, on March 11, 2005, Symbol announced thatit had filed a lawsuit against us on March 10, 2005, in the United StatesDistrict Court for the District of Delaware for infringement of certain ofSymbol’s wireless technology patents (the “Wireless Case”). On March 23, 2005,we filed an answer to Symbol’s complaint and filed counterclaims against Symbolfor infringing our wireless access, terminal and software patents. Wesimultaneously filed our answer to Symbol’s declaratory judgment action in theContract Case and filed counterclaims against Symbol for breach of the OEMagreement.

On July 28, 2005, Symbol announced that it had filed alawsuit against us in the United States District Court for the Western Districtof Wisconsin for infringing Symbol’s barcode decoding patents (the “Decoding Case”).On July 14, 2005, in response to a motion we filed, the Decoding Case wastransferred to the United States District Court for the District of Delaware.That case was consolidated for purposes of discovery with the Wireless Case. Wedenied liability in the Decoding Case, and pursuant to the standstill agreementdiscussed below, we retained the right to file counterclaims against Symbol inthe Decoding Case.

On June 30, 2005, we filed a complaint with the U.S.International Trade Commission (the “ITC”) alleging that Symbol was illegallyimporting products that infringe our patents that cover pocket-sized handheldcomputing devices, modular handheld computing devices and recharging and dataexchanging cradles (the “ITC Case”). On July 29, 2005, the ITC voted toinvestigate our allegations against Symbol. Pursuant to the standstillagreement, discussed below, we asked the ITC to dismiss and close theinvestigation. On September 26, 2005, in response to our request, theAdministrative Law Judge terminated the investigation. On October 12, 2005, theITC entered a Notice Not to Review the Order terminating the investigation.

On September 1, 2005, the parties agreed that theywould try to resolve their patent disputes through negotiation. To facilitatethat effort, the parties entered into a standstill agreement pursuant to whichthey sought the court’s permission to postpone litigation activity in the casespending in the U.S. District Court for the District of Delaware (the Contract,Wireless and Decoding Cases)  sought theITC’s permission to dismiss the ITC action and agreed to postpone filing anynew patent infringement law suits against each other.   The ITC agreed to dismiss the ITC case andthe United States District Court for the District of Delaware granted thescheduling changes required to effectuate the standstill agreement of theparties.

On July 18, 2006, we issued a joint press release withSymbol announcing the settlement of the parties’ remaining pending intellectualproperty disputes (the “2006 Settlement Agreement”).  Under the 2006 Settlement Agreement, we andSymbol have cross-licensed certain patents, have entered into four-yearcovenants not to sue with respect to remaining patents, and have releasedpatent infringement damage claims that may have existed on the settlement dateor may arise before the covenants expire. We also agreed to dismiss withoutprejudice all claims in the Wireless Case and the Decoding Case.  The specific terms of the 2006 SettlementAgreement are confidential.

Earlier, in September 2005, we and Symbol resolved theportion of the dispute that concerned radio frequency identification (RFID). Atthat time, Symbol joined our Rapid Start RFID intellectual property licensingprogram by entering into an RFID cross-license agreement. That 2005cross-license agreement, which is unchanged by the 2006 Settlement Agreement,gave Symbol access to our RFID IP and gave us access to Symbol’s RFID IP.

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

In March 2006, the Financial Accounting StandardsBoard (FASB) issued an exposure draft of a proposed standard that, if enactedin its current form, would make a significant change to existing rules byrequiring recognition in the balance sheet of the overfunded or underfundedpositions of defined benefit pension and other postretirement plans,

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along with a corresponding noncash, after-taxadjustment to stockholders’ equity. The proposed standard would be effective foryear ends starting after December 15, 2006, and would require adoption on aretrospective basis. The proposed standard has not yet completed the FASB’sprocess for review and enactment, and therefore the final provisions of thestandard and its effects on our financial statements, if and when it is issued,are not yet known.

In response to the public’s concern over the adequacyof pension plan funding, Congress has been drafting legislation to address theamount of annual contributions that companies are required to pay into theirpension funds. Both the Senate and the House of Representatives have passedtheir own versions of a pension funding bill and those bills are currently inconference. It is expected that the conference process will produce compromisesand changes in the Senate and House bills, and ultimate passage of a bill isuncertain. This uncertainty makes it difficult to quantify the potential impactto our pension funding.

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.

In June 2006, theFinancial Accounting Standards Board 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.

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

**Special Note AboutForward-Looking Statements**

**Forward-Looking Statements and Risk Factors**

Forward-looking statements contained in this filing are subject to the safeharbor created by the Private Securities Litigation Reform Act of 1995(alternatively: Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934) and are dependent upon a variety ofimportant factors that could cause actual results to differ materially fromthose reflected in such forward-looking statements. These factors include butare not limited to Intermec’s ability to maintain or to improve the revenuesand profits of its continuing operations, maintain or reduce expenses, maintainor improve operational efficiency, use its investment in research anddevelopment to generate future revenue, maintain or improve year-over-yeargrowth in the revenues and profits of its continuing operations and the otherfactors described in Part I, Item 2 and Part II, Item 1A of this filing.Intermec undertakes 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 are dependent upon certainrisks and uncertainties. When used in this document and in documents itreferences, the words “anticipate,” “believe,” “will,” “intend,” “project” and “expect”and similar expressions as they relate to Intermec or its management areintended to identify such forward-looking statements.

Forward-looking statements are not guarantees of future performance. Anumber of factors can impact our business and determine whether Intermec can orwill achieve any forward-looking statement made in this report. Any one ofthese factors could cause Intermec’s actual results to differ materially fromthose discussed in a forward-looking statement. We outline these risk factorsin reports that we file with the SEC, in press releases and on our website,www.intermec.com.

Readers of this report are encouraged to review the Risk Factorsportion of Part II, Item 1A of this filing which discusses the risk factorsassociated with our business.

**Overview**

Continuing Operations

Effective January 1, 2006, we changed our name fromUNOVA, Inc. to Intermec, Inc. (“Intermec”). We design, develop, manufacture,integrate, sell, resell and service wired and wireless automated identificationand data collection (“AIDC”) products and systems, mobile computing productsand systems, wired and wireless bar code printers, label media and radiofrequency identification (“RFID”) products and systems. Our products andservices are used by customers within and outside of the United States toimprove the productivity, quality and responsiveness of their businessoperations including supply chain management, enterprise resource planning andfield sales and service. We grant licenses to use portions of our intellectualproperty portfolio, including certain patent rights essential to and/or usefulin RFID and AIDC products, and receive license fees as well as ongoingroyalties based on sales by licensees. Customers for our products and servicesoperate in market segments that include manufacturing, warehousing, directstore delivery, retail, consumer packaged goods, field service, government, andtransportation and logistics.

Our strategy consists of: technology leadership in the AIDC industry;expanding, strengthening and leveraging our AIDC intellectual propertyportfolio; expanding and strengthening our AIDC product portfolio; providingintegrated AIDC solutions; partnering with global industry leaders; achievingeconomies of scale and scope; profitably increasing market share; andincreasing the scale of the business.

Our strategy is focused on customers in certain vertical markets,including: retailers; consumer goods manufacturers; industrial goodsmanufacturers; transportation and logistics providers; and government agencies.

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

Discontinued Operations

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 Intermec’s consolidated financial statements and relatednotes. The IAS businesses are producers of manufacturing products and services,including integrated manufacturing systems, machining systems, stand-alonemachine tools and precision grinding and abrasives operations primarily servingthe global aerospace, automotive, off-road vehicle and diesel engine industriesas well as the industrial components, heavy equipment and general job shopmarkets.

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#  

**Results ofOperations**

The following discussion compares our results of operations for thethree and six months periods ended July 2, 2006, and July 3, 2005. Results fromcontinuing operations include the operations of Intermec Technology andCorporate expenses. The operating results of the IAS business are classified asdiscontinued operations. Results of operations were as follows (millions ofdollars):

|                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **July 2,**                 | ** ** | **July 3,**               | ** ** | **July 2,** | ** ** | **July 3,** | ** ** |
| ** **                                | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                 |       |                             |       |                           |       |   |   |   |   |
| Product and Service Revenues              |       | $                                | 231.4      |                           | $          | 217.5 |   | $ | 435.3 |   | $ | 414.0 |   |
| Intellectual property settlements         |       | —                           |       | —                         |       | 23.0 |   | — |   |
| Total Revenues                            |       | 231.4                            |       | 217.5                          |       | 458.3 |   | 414.0 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Costs and  Expenses:                      |       |                             |       |                           |       |   |   |   |   |
| Cost of product and service revenues      |       | 137.8                            |       | 123.1                          |       | 261.3 |   | 236.7 |   |
| Cost of intellectual property settlements |       | —                           |       | —                         |       | 6.5 |   | — |   |
| Selling, general and administrative       |       | 78.5                             |       | 75.8                           |       | 156.3 |   | 148.6 |   |
| Restructuring charge                      |       | 1.1                              |       | —                         |       | 2.2 |   | — |   |
| Total Costs and Expenses                  |       | 217.4                            |       | 198.9                          |       | 426.3 |   | 385.3 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Operating Profit  from                    |       |                             |       |                           |       |   |   |   |   |
| Continuing Operations                     |       | 14.0                             |       | 18.6                           |       | 32.0 |   | 28.7 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Gain on sale of  investments              |       | 2.3                              |       | —                         |       | 2.3 |   | — |   |
| Interest, net                             |       | 1.8                              |       | (1.1                           | )          | 2.9 |   | (3.2 | ) |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Earnings from  Continuing                 |       |                             |       |                           |       |   |   |   |   |
| Operations before Income Taxes            |       | 18.1                             |       | 17.5                           |       | 37.2 |   | 25.5 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Provision for  Income Taxes               |       | 6.8                              |       | 5.6                            |       | 10.8 |   | 8.2 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Earnings from  Continuing                 |       |                             |       |                           |       |   |   |   |   |
| Operations, net of tax                    |       | 11.3                             |       | 11.9                           |       | 26.4 |   | 17.3 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Earnings (Loss)  from Discontinued        |       |                             |       |                           |       |   |   |   |   |
| Operations, net of tax                    |       | (0.9                             | )          | 0.2                            |       | (2.0 | ) | (1.7 | ) |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Net Earnings                              |       | $                                | 10.4       |                           | $          | 12.1 |   | $ | 24.4 |   | $ | 15.6 |   |

 

*Revenues*

Revenues by category and as a percentage ofrelated revenues from continuing operations for the three and six month periodsended July 2, 2006, and July 3, 2005, were as follows (millions of dollars):
| ** **                       | ** ** | **Three Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|----------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                       | ** ** | **July 2, 2006**       | ** ** | **July 3, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **                       | ** ** | **Percent of**        | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                       | ** ** | **Amount**                       | ** ** | **Revenues**               | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues:                        |       |                             |       |                       |       |       |       |   |   |   |   |   |   |
| Product                          |       | $                                | 192.4      |                       | 83.1       | %          | $          | 181.0 |   | 83.2 | % | $ | 11.4 |   | 6.3 | % |
| Service                          |       | 39.0                             |       | 16.9                       | %          | 36.5       |       | 16.8 | % | 2.5 |   | 7.0 | % |
| Intellectual Property Settlement |       | —                           |       | —                     | %          | —     |       | — | % | — |   |   |   |
| Total Revenues                   |       | $                                | 231.4      |                       | 100.0      | %          | $          | 217.5 |   | 100.0 | % | $ | 13.9 |   | 6.4 | % |

 

Quarterly revenue growth of 6.4% was primarily attributable to Systemsand Solutions revenue growth of 9.1% compared to the prior year period. Productrevenues for the three months ended July 2, 2006, increased 6.3% compared withthe

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corresponding prior-year period as a result of the strong Systems andSolutions revenue growth partially offset by the 2.8% decrease forPrinter/Media products. Service revenue increased 7.0% over the correspondingprior-year period principally from an increase in professional services and thetechnical engineering services for government contracts, as a result of AITIII. Geographically, products and service revenue in North America rose 7.8%over the corresponding prior-year period, Europe, Middle East and Africaincreased 3.2%, and the rest of the world increased 8.8%
| ** **                       | ** ** | **Six Months Ended** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                       | ** ** | **July 2, 2006**     | ** ** | **July 3, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **                     | ** ** | **Percent of**        | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                       | ** ** | **Amount**                     | ** ** | **Revenues**               | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Revenues:                        |       |                           |       |                       |       |       |       |   |   |   |   |   |   |
| Product                          |       | $                              | 358.8      |                       | 78.3       | %          | $          | 343.0 |   | 82.9 | % | $ | 15.8 |   | 4.6 | % |
| Service                          |       | 76.5                           |       | 16.7                       | %          | 71.0       |       | 17.1 | % | 5.5 |   | 7.7 | % |
| Intellectual Property Settlement |       | 23.0                           |       | 5.0                        | %          | —     |       | — | % | 23.0 |   | 100.0 | % |
| Total Revenues                   |       | $                              | 458.3      |                       | 100.0      | %          | $          | 414.0 |   | 100.0 | % | $ | 44.3 |   | 10.7 | % |

 

The six month revenue growth of 10.7% was primarily attributable to theintellectual property settlement of $23.0 million and Systems andSolutions revenue growth of 8.3% compared to the prior year period. Productrevenues for the six months ended July 2, 2006, increased 4.6% compared withthe corresponding prior-year period as a result of the strong Systems andSolutions revenue growth partially offset by the 6.3% decrease forPrinter/Media products. Service revenue increased 7.7% over the correspondingprior-year period principally from an increase in professional services and thetechnical engineering services for government contracts, as a result of AITIII. Geographically, products and service revenue in North America rose 12.9%over the corresponding prior-year period, offsetting decreases of 6.8% inEurope, Middle East and Africa, the rest of the world increased 0.1%.

Our operating results for the six months ended July 2, 2006, include$23.0 million of revenue and $16.5 million of operating profit fromcompensation related to a settlement regarding certain of the our intellectualproperty (“IP Settlement”). This represents the last of the laptop computermanufacturers to settle with us regarding battery power-management patents.

*Gross Profit*

Gross profit and gross margin by revenue category for the three and sixmonth periods ended July 2, 2006, and July 3, 2005, were as follows (millionsof dollars):

|                                      | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **July 2, 2006**       | ** ** | **July 3, 2005** | ** ** |
| ** **                           | ** ** | **Gross**                        | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Gross** | ** ** |
| ** **                           | ** ** | **Profit**                       | ** ** | **Margin** | ** ** | **Profit** | ** ** | **Margin** | ** ** |
| Product                              |       | $                                | 76.0       |   | 39.5 | % | $ | 79.0 |   | 43.6 | % |
| Service                              |       | 17.6                             |       | 45.1 | % | 15.4 |   | 42.2 | % |
| Intellectual  Property Settlement    |       | —                           |       | — | % | — |   | — |   |
| Total Gross  Profit and Gross Margin |       | $                                | 93.6       |   | 40.4 | % | $ | 94.4 |   | 43.4 | % |

 

The total gross profit for the three months ended July 2, 2006decreased $0.8 million compared to the corresponding prior-year period.  Product gross margin for the quarter endedJuly 2, 2006 decreased 4.1 percentage points. The reduction in product grossmargin is due to an increase in mix of lower margin enterprise business, themix in the 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.

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|                                      | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **July 2, 2006**     | ** ** | **July 3, 2005** | ** ** |
| ** **                           | ** ** | **Gross**                      | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Gross** | ** ** |
| ** **                           | ** ** | **Profit**                     | ** ** | **Margin** | ** ** | **Profit** | ** ** | **Margin** | ** ** |
| Product                              |       | $                              | 141.8      |   | 39.5 | % | $ | 148.3 |   | 43.2 | % |
| Service                              |       | 32.2                           |       | 42.1 | % | 29.0 |   | 40.8 | % |
| Intellectual Property  Settlement    |       | 16.5                           |       | 71.9 | % | — |   | — |   |
| Total Gross  Profit and Gross Margin |       | $                              | 190.5      |   | 41.6 | % | $ | 177.3 |   | 42.8 | % |

 

Gross profit for the six months ended July 2, 2006, includes $16.5 millionfrom compensation related to the IP settlement. The total gross profit for the six months ended July 2, 2006, increased$13.2 million, or 7.4% compared to the corresponding prior-year period.The increase in gross profit primarily results from the $16.5 million ingross profit from the intellectual property settlement partially offset by thereduction in product related gross profit. Product gross margin for the quarterended July 2, 2006, decreased by 3.7%. 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.

*Selling,General and Administrative*

The total selling, general and administrative (“SG&A”) expenseswere $78.5 million and $156.3 million for the three and six monthsended July 2, 2006, respectively, compared with SG&A expenses of $75.8 millionand $148.6 million for the corresponding prior-year period.  The $2.7 million increase in ourSG&A expense for the second quarter 2006 compared to the prior year periodis primarily attributable to $1.6 million of incremental investment inresearch and development activities and $0.9 million in stock optionexpense recognized as a result of the adoption SFAS 123(R). Our R&D expenseas a percentage of product and service revenues was 7.7% for the quarter endedJuly 2, 2006, compared with 7.4% for the corresponding prior-year period.

The $7.7 million increase in SG&A for the six months endedJuly 2, 2006, reflects incremental R&D investment of  $4.0 million and $2.8 million ofincremental expense related to stock options and the employee stock purchaseplan related to the adoption of SFAS No. 123(R), Share-Based Payment.

*Restructuring Charge*

In March 2006, we announced our plan to close design centers inGoteborg and Lund, Sweden. The activities currently assigned to the designcenters in Sweden will be reassigned to other parts of Intermec or moved tothird-party vendors to improve efficiencies and benefit from reduced cost. Inaddition to anticipated cost savings, this realignment of resources is expectedto result in a significant increase in new product development capacity. Thetotal cost of closing the design centers in Sweden and the elimination ofapproximately 65 positions in Sweden is estimated to be approximately $4.5 million.Estimated restructuring costs include employee severance, facility closure andother exit costs. We recorded a restructuring charge of $1.1 million and$2.3 million for employee termination costs for the three and six monthsended July 2, 2006. We anticipate the majority of the remaining restructuringcosts will be recognized over the remainder of 2006. Intermec estimates thatthe savings from these restructuring activities will begin in the fourthquarter of 2006, and reach its estimated annual pre-tax savings of $8 millionby the first quarter of 2007.

*Operating Profit*

Our operating profit from continuing operations for the three monthsended July 2, 2006 decreased $4.7 million compared to the correspondingprior year period. Gross profit from the increase in product and servicerevenue was offset by lower gross margins for related revenue.

Operating profit for the six months ended July 2, 2006 increased $3.3 million,or 11.3%, compared with the corresponding prior-year period. The $16.5 millionof operating profit from the IP settlement in the first quarter of 2006 waspartially offset by a $7.7 million increase in SG&A expense and the$2.3 million of restructuring charges related to the closure of theSwedish design centers.

*Interest, Net*

Net interest income was $1.8 million and $2.9 million for thethree and six months ended July 2, 2006, respectively, compared to interestexpense of $1.1 million and $3.2 million for the correspondingprior-year period. The improvement in net interest reflects the reduction inthe outstanding debt balance, the increase in average cash, cash equivalent andshort-term

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investment balances as well as higher investment returns.

*Provisionfor Income Taxes*

Thetax provision for the three and six month periods ended July 2, 2006, reflectsan effective tax rate for continuing operations of 37.4% and 29.1%,respectively, compared to a U.S. statutory rate of 35%. The tax provision wasprimarily reduced by $2.2 million due to the favorable conclusion of aCanadian tax audit in the first quarter of 2006.

Thetax provision for the three and six months ended July 3, 2005, reflects aneffective tax rate for continuing operations of 32.4% and 32.3%, respectivelycompared to a U.S. statutory rate of 35%. The reduction in the effective taxrate is primarily due to favorable foreign currency exchange varianceassociated with foreign tax contingency accruals.

*Loss fromDiscontinued Operations*

During2005, we completed our divestiture of the IAS businesses with the sale of theCincinnati Lamb business in the first quarter of 2005, and the sale of theLandis Grinding Systems business in the fourth quarter of 2005. The loss fromdiscontinued operations for the three and six months ended July 2, 2006,include period expenses related to finalizing the sale of the Landis GrindingSystems and changes to the closing balance sheets and estimated purchase priceadjustments, net of tax benefits.

Theoperating loss from discontinued operations for the three and six months endedJuly 3, 2005, includes the operating results of the Cincinnati Lamb and LandisGrinding Systems businesses as well as the loss on the sale of Cincinnati Lamb,net of related tax benefits.

Liquidity and Capital Resources

Our cash, cash equivalents and short-term investments as of July 2,2006, totaled $322.8 million. Operating activities of continuingoperations for the first six months of 2006 provided $62.4 million of cashflow, primarily due to the $24.3 million from net earnings, which includesthe IP Settlement, in March 2006, and $18.6 million from the net reductionof the accounts receivable balance. Investing activities of continuingoperations for the first six months of 2006 used $31.4 million primarilyfor the purchase of short-term investments totaling $19.7 million and $12.3 millionof capital expenditures. Financing activities of continuing operations reflectthe $4.3 million of proceeds from exercising stock option and of otherrelated stock awards during the first six months of 2006.

On August 7, 2006, weentered into a share repurchase agreement under Rule 10b5-1 of the SecuritiesExchange of 1934 to facilitate the repurchase of our common stock pursuant toour previously announced share repurchase authorization by our Board ofDirectors. The authorization from our Board of Directors allows us torepurchase up to $100 million in shares of our common stock which we initiatedon August 7, 2006.

Effective June 30,2006, we amended our Financial Security and Savings Program, Pension Plan,Restoration Plan and Supplemental Executive Retirement Plan (collectively, the“U.S. Defined Benefit Plans”). The effect of these amendments was to “freeze”benefit accruals under the U.S. Defined Benefit Plans and to fully vestbenefits under the U.S. Defined Benefit Plans, except for the NonqualifiedSERP, as of June 30, 2006, for most participants. We anticipate that theexpense of the U.S. Defined Benefit Plans will 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 significant portion of the expectedreduction in retirement benefit expense for the second half of 2006 and offseta proportionately smaller portion of such expense reduction in 2007. 

Net ofoutstanding letters of credit and limitations on minimum availability, we hadborrowing capacity at July 2, 2006, of $18.2 million under the RevolvingFacility. We made no borrowings under the Revolving Facility during the firstsix months of 2006, and as of July 2, 2006, no borrowings were outstandingunder the Revolving Facility. As of July 2, 2006, we were in compliance withthe financial covenants of each of these agreements.

Thekey terms of the Revolving Facility are as follows:

·                        Ourobligation under the Revolving Facility are secured by substantially all theU.S. assets of Intermec and our U.S. subsidiaries and a pledge of 65% of thestock of certain of our foreign subsidiaries.

·                        Borrowingsunder the Revolving Facility bear interest at a variable rate equal to (at ouroption) (i) LIBOR plus an applicable margin ranging from 1.5% to 2.5% based onconsolidated leverage, or (ii) the greater of the federal funds rate plus 0.50%or the Bank’s prime rate, plus an applicable margin ranging from 0.5% to 1.5%based on consolidated leverage.

·                        TheRevolving Facility places certain restrictions on the ability of Intermec andour subsidiaries to consolidate or merge, make acquisitions, create liens,incur additional indebtedness or dispose of assets.

·                        Financialcovenants include a Consolidated Leverage test, a Consolidated InterestCoverage test and a Consolidated Net Worth test, each as defined in theagreement.

Wehave $100.0 million of ten-year senior unsecured debt outstanding as ofJuly 2, 2006. Interest payments at 7.0% are due semi-annually in March andSeptember with the principal balance due March, 2008. Including underwritingfees, discounts and other issuance costs, the effective interest rate is7.175%.

Managementbelieves that cash and cash equivalents on hand, combined with projected cashflow from operations, assets held for sale and available borrowings under ourRevolving Facility will be sufficient to fund our  operations, research and

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developmentefforts, anticipated capital expenditures, liabilities, commitments, and othercapital requirements, for at least the next twelve months.

**Contractual Obligations**

Our contractual commitments as of July 2, 2006, have not changedmaterially from those disclosed in Item 7 of our annual report on Form 10-K forthe year ended December 31, 2005.

**Critical Accounting Policies**

“Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” discusses our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities, and the reported amounts of revenues and expenses.Actual amounts could differ from those estimates under different assumptions orconditions. Management’s beliefs regarding significant accounting policies havenot changed significantly from those disclosed in Item 7 of our annual reporton Form 10-K for the year ended December 31, 2005.

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.

**New Accounting Pronouncements**

In March 2006, the Financial Accounting StandardsBoard (FASB) issued an exposure draft of a proposed standard that, if enactedin its current form, would make a significant change to existing rules byrequiring recognition in the balance sheet of the overfunded or underfundedpositions of defined benefit pension and other postretirement plans, along witha corresponding noncash, after-tax adjustment to stockholders’ equity. Theproposed standard would be effective at year-end 2006 and would requireadoption on a retrospective basis. The proposed standard has not yet completedthe FASB’s process for review and enactment, and therefore the final provisionsof the standard and its effects on our financial statements, if and when it isissued, are not yet known.

In response to the public’s concern over the adequacyof pension plan funding, Congress has been drafting legislation to address theamount of annual contributions that companies are required to pay into theirpension funds. Both the Senate and the House of Representatives have passedtheir own versions of a pension funding bill and those bills are currently inconference. It is expected that the conference process will produce compromisesand changes in the Senate and House bills, and ultimate passage of a bill isuncertain. This uncertainty makes it difficult to quantify the potential impactto our pension funding. Generally, the Senate and House bills, as drafted,would accelerate the required amount of our annual pension plan contributions,which may have a material impact on our cash flows for a few years beginning in2008. Absent other changes, the subsequent annual funding requirements would beexpected to decline in recognition of the accelerated contributions.

InNovember 2005, the FASB issued Staff Position (“FSP”) FAS123(R)-3, TransitionElection to Accounting for the Tax Effects of Share-Based Payment Awards. ThisFSP requires an 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.

In June 2006, theFinancial Accounting Standards Board 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.

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

We are exposed to interest rate risk primarily from its short-term andlong-term borrowings and to foreign exchange rate risk with respect to itsforeign operations and from foreign currency transactions.

Due to our global operations, our cash flows and earnings are exposedto foreign exchange rate fluctuations. When appropriate, we may attempt tolimit our exposure to changing foreign exchange rates by entering intoshort-term foreign currency exchange contracts. As of July 2, 2006, we heldshort-term contracts for the purpose of hedging foreign currency cash flowswith an aggregate notional amount of $229.8 million.

Except as noted in the preceding paragraph, as of July 2, 2006, there havebeen no material changes in information provided in Item 7A of our annualreport on Form 10-K for the year ended December 31, 2005, which contains acomplete discussion

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of our material exposures to interest rate and foreign exchange raterisks.

**ITEM 4. CONTROLS AND PROCEDURES**

We maintain disclosure controls and procedures, which are designed toensure that information required to be disclosed in the reports we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that such informationis accumulated and communicated to our management, including the ChiefExecutive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriateto allow timely decisions regarding required disclosure.

Under the supervision and with the participation our management,including the CEO and CFO, an evaluation was performed on the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered by this quarterly report. Based on that evaluation,our management, including the CEO and CFO, concluded that our disclosurecontrols and procedures were effective as of July 2, 2006.

An evaluation was also performed under the supervision and with theparticipation of our management, including the CEO and CFO, of any change inour internal controls over financial reporting that occurred during the lastsix months and that has materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting. Thatevaluation did not identify any change in our internal controls over financialreporting that occurred during the latest fiscal quarter and that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrols over financial reporting.

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**PART II. OTHERINFORMATION**

**ITEM 1. LEGALPROCEEDINGS**

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 theunfavorable resolution of one or more of these contingencies or by the creationof significant legal or other expenses related to such matters.

On March 10, 2005, Symbol Technologies, Inc. (“Symbol”)terminated its original equipment manufacturing (“OEM”) agreement with us tosupply laser scan engines and stopped shipping laser scan engines to us. OnMarch 10, 2005, Symbol also filed a lawsuit against us in the United StatesDistrict Court for the District of Delaware seeking a declaratory judgment thatits termination of the OEM agreement is lawful (the “Contract Case”). Webelieve that the termination of the OEM agreement by Symbol has not had amaterial adverse effect on our operations.

In addition, on March 11, 2005, Symbol announced thatit had filed a lawsuit against us on March 10, 2005, in the United StatesDistrict Court for the District of Delaware for infringement of certain ofSymbol’s wireless technology patents (the “Wireless Case”). On March 23, 2005,we filed an answer to Symbol’s complaint and filed counterclaims against Symbolfor infringing our wireless access, terminal and software patents. Wesimultaneously filed our answer to Symbol’s declaratory judgment action in theContract Case and filed counterclaims against Symbol for breach of the OEMagreement.

On July 28, 2005, Symbol announced that it had filed alawsuit against us in the United States District Court for the Western Districtof Wisconsin for infringing Symbol’s barcode decoding patents (the “DecodingCase”). On July 14, 2005, in response to a motion we filed, the Decoding Casewas transferred to the United States District Court for the District ofDelaware. That case was consolidated for purposes of discovery with theWireless Case. We denied liability in the Decoding Case, and pursuant to thestandstill agreement discussed below, we retained the right to filecounterclaims against Symbol in the Decoding Case.

On June 30, 2005, we filed a complaint with the U.S.International Trade Commission (the “ITC”) alleging that Symbol was illegallyimporting products that infringe our patents that cover pocket-sized handheldcomputing devices, modular handheld computing devices and recharging and dataexchanging cradles (the “ITC Case”). On July 29, 2005, the ITC voted toinvestigate our allegations against Symbol. Pursuant to the standstillagreement, discussed below, we asked the ITC to dismiss and close theinvestigation. On September 26, 2005, in response to our request, theAdministrative Law Judge terminated the investigation. On October 12, 2005, theITC entered a Notice Not to Review the Order terminating the investigation.

On September 1, 2005, the parties agreed that theywould try to resolve their patent disputes through negotiation. To facilitatethat effort, the parties entered into a standstill agreement pursuant to whichthey sought the court’s permission to postpone litigation activity in the casespending in the U.S. District Court for the District of Delaware (the Contract,Wireless and Decoding Cases) until December 1, 2005, sought the ITC’spermission to dismiss the ITC action and agreed to postpone filing any newpatent infringement law suits against each other until March 1, 2006.

The standstill agreement’s only exception to theagreed ban on new lawsuits until March 1, 2006, allowed us to file counterclaimsagainst Symbol in the Decoding Case and to file a case in the United StatesDistrict Court for the District of Delaware alleging infringement by Symbol ofthe patents asserted by us in the ITC case. According to the standstillagreement these permitted counterclaims and new actions had to have been filedno sooner than December 1, 2005, and no later than December 9, 2005. Theparties also agreed not to pursue or seek temporary restraining orders,preliminary injunctions or ITC exclusion orders against each other for a periodof two years.

The ITC agreed to dismiss the ITC case and the UnitedStates District Court for the District of Delaware granted the schedulingchanges required to effectuate the standstill agreement of the parties.  Between December of 2005 and May 2006, theparties agreed to provide additional time for settlement discussions byextending the schedule set forth in the standstill agreement, with the approvalof the United States District Court for the District of Delaware.

With respect to the Contract Case, the parties agreedthat Symbol would dismiss without prejudice its declaratory judgment complaintand that we would dismiss without prejudice the breach of contract and patentinfringement counterclaims.  If the parties had been unable to reach thesettlement described below, each party would have had the right to refile thoseclaims and counterclaims in the same court.

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On July 18, 2006, weissued a joint press release with Symbol announcing the settlement of theparties’ remaining pending intellectual property disputes (the “2006 SettlementAgreement”).  Under the 2006 SettlementAgreement, we and Symbol have cross-licensed certain patents, have entered intofour-year covenants not to sue with respect to remaining patents, and have releasedpatent infringement damage claims that may have existed on the settlement dateor may arise before the covenants expire. We also agreed to dismiss withoutprejudice all claims in the Wireless Case and the Decoding Case.  The specific terms of the 2006 SettlementAgreement are confidential.

Earlier, in September2005, we and Symbol resolved the portion of the dispute that concerned radiofrequency identification (RFID). At that time, Symbol joined our Rapid StartRFID intellectual property licensing program by entering into an RFIDcross-license agreement. That 2005 cross-license agreement, which is unchangedby the 2006 Settlement Agreement, gave Symbol access to our RFID IP and gave usaccess to Symbol’s RFID IP.

**ITEM 1A. RISKFACTORS**

Readers of this Report are encouraged to review the discussionof Forward Looking Statements and Risk Factors appearing in this report at PartI, “Item 2. Management’s Discussion and Analysis of Financial Condition andResults 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 Report on Form 10-Q for the period endedApril 2, 2006, which could materially affect our business, financialcondition or future results. The risks described in our Report on Form 10-Q forthe period ended April 2, 2006 are not the only risks facing our Company.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

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 on ourbusiness”* is no longer applicable. The litigation described in that risk factor has been resolved asdescribed in this Report in Part II, “Item 1. Legal Proceedings.”

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

•                  ***Patent litigation costs may materially impact orincrease the volatility of our financial results.*** We currently,and from time to time, are involved in litigation regarding our patents andother intellectual property.  Sincelitigation over patents involves complex technical and economic issues, thesecases can be quite expensive to prosecute or defend and it is very difficult topredict the amount or the timing of costs associated with such litigation. Wegenerally include such costs in Selling, General and Administrative (SG&A)expense and record those expenses as they are incurred. In some periods, patentlitigation expense could be a significant percentage of SG&A expense andcould exhibit large fluctuations from prior periods, increasing the volatilityof our SG&A expense and potentially impacting our earnings per share. Inappropriate circumstances, we capitalize such costs as intangible assets.  In those situations, the expenses would becapitalized currently and amortized in future periods, affecting future reportedearnings.  Also, cash payments of suchcosts would adversely affect our cash flow and cash positions in periods whenthe payments are made. In any event, there is no assurance that patentlitigation will generate royalty revenue for us but, when it does, recognitionof that revenue and related current period legal expenses may materially impactour results of operations, positively or negatively, increasing the volatilityof our results of operations.

**ITEM 2.**                    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**  | ** ** |
| January 1 to  January 29, 2006    |       | —             |       | —               |       | —                                 |       | —                                    |       |
| January 30 to  February 26 , 2006 |       | 5,858              |       | $                    | 30.21      |                                   | —     |                                      | —     |   |
| February 27 to  April 2, 2006     |       | —             |       | —               |       | —                                 |       | —                                    |       |
| April 3 to April  30, 2006        |       | 411                |       | 26.71                |       | —                                 |       | —                                    |       |
| May 1 to May 28,  2006            |       | 10,415             |       | 25.75                |       | —                                 |       | —                                    |       |
| May 29 to July  2, 2006           |       | 411                |       | 23.17                |       | —                                 |       | —                                    |       |
| Total                             |       | 17,095             |       | $                    | 27.24      |                                   | —     |                                      | —     |   |

 

The purchased shares indicated in the above table were surrendered tous to pay the exercise price in connection with the exercise of employee stockoptions and to satisfy tax withholding obligations in connection with thevesting of restricted stock.

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**Item 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

The Company’s Annual Meetingof Stockholders was held on May 17, 2006.

At the Annual meeting,Gregory K. Hinckley, Steven B. Sample, Oren G. Shaffer and Larry D. Yost wereelected directors for three-year terms expiring on the date of the annualmeeting in 2009.  The voting results areset forth below.  The directors whoseterms continued after the Annual Meeting are Larry D. Brady, Stephen E. Frank,Claire W. Gargalli, Lydia H. Kennard, Allen J. Lauer, and Stephen P. Reynolds.  However, because Proposal 2 was approved bythe stockholders as described below, each director must stand for election atthe 2007 Annual Meeting, whether or not previously scheduled to do so.

| Nominee              | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
| Gregory K.  Hinckley |       | 55,326,406 |       | 640,976      |       |
| Steven B. Sample     |       | 55,350,460 |       | 616,922      |       |
| Oren G. Shaffer      |       | 55,290,588 |       | 676,794      |       |
| Larry D. Yost        |       | 55,679,750 |       | 287,632      |       |

 

Proposal 2, a management proposal to approveamendments to Article X of the Company’s Certificate of Incorporation which (a)end the present three-year staggered terms of directors and instead provide forthe annual election of directors, (b) eliminate the requirement thatstockholder removal of a director may only be for cause, and (c) eliminatesupermajority voting provisions for the removal of directors and for theamendment of these provisions, received the votes of more than 80% of Companyshares outstanding.

|                  | ** ** | **Number of Votes** | ** ** |
|------------------|------------|-------------------------------|------------|
| For              |       | 55,567,461                    |       |
| Against          |       | 352,869                       |       |
| Abstain          |       | 47,052                        |       |
| Broker non-votes |       | 0                             |       |

 

**ITEM 6.** EXHIBITS
| 10.1   |   | Amended and restated 2004 Omnibus Incentive  Compensation Plan                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                             |
| 10.2   |   | Amendment to the UNOVA, Inc. Restoration Plan                                                                                    |
|   |   |                                                                                                                             |
| 10.3   |   | Amendment to the UNOVA, Inc. Supplemental Executive  Retirement Plan                                                             |
|   |   |                                                                                                                             |
| 10.4   |   | Form of Intermec Deferred Compensation Plan                                                                                      |
|   |   |                                                                                                                             |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, dated as of August 9, 2006. |
|   |   |                                                                                                                             |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, dated as of August 9, 2006. |
|   |   |                                                                                                                             |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated as of August 9, 2006. |
|   |   |                                                                                                                             |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, dated as of August 9, 2006. |

 

**ITEMS 3and 5 are not applicable and have been omitted.**

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##  

**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/ Fredric B. Anderson |   |
|   |           |   |
|   |           | Fredric B. Anderson |
|   | * *       | *Vice President and Controller* |
|   | * *       | *(Acting Chief Financial Officer)* |
|   |           |   |
|   |           | August 9, 2006 |

 

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