**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**
| **(Mark One)** |                                                                                                    |
|----------------|---------------------------------------------------------------------------------------------------------|
| **x**          | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**    |
|           | **For the fiscal year ended December 31, 2005**                                                    |
|           | **OR**                                                                                                  |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file 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  Identification No.) |
| incorporation or  organization)           |   |                                  |
|                                      |   |                                  |
| **6001 36****th**** Avenue West**    |   | **98203-1264**                        |
| **Everett,  Washington**                  |   | (Zip Code)                            |
| **www.intermec.com**                      |   |                                  |
| (Address of  principal executive offices) |   |                                  |

 

Registrant’stelephone number, including area code: **(425) 265-2400**

Securities registeredpursuant to Section 12(b) of the Act:

| Title of each class                      | ** ** | Name of each exchange  on which registered |
|------------------------------------------|------------|--------------------------------------------|
| Common  Stock, par value $0.01 per share |       | New  York Stock Exchange                   |
| Rights  to Purchase Series A Junior |       | New  York Stock Exchange                   |
| Participating  Preferred Stock           |       |                                       |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes x    No o* *

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15(d) of the Exchange Act. Yes o    No x**

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  Noo* *

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by check markwhether the registrant is large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer in Rule 12b-2 of the Exchange 

| Large Accelerated Filer x |   | Accelerated Filer o |   | Non-accelerated  filer o |
|---------------------------|--------|---------------------|--------|--------------------------|

 

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

As of July 1, 2005,which was the last business day of the registrant’s most recent second fiscalquarter, the aggregate market value of the registrant’s common stock held bynon-affiliates of the registrant was approximately $1.6 billion, based on theclosing sale price as reported on the New York Stock Exchange.

On February 28, 2006,there were 62,985,306 shares of Common Stock outstanding, exclusive of treasuryshares.

**Documents Incorporated byReference**

Certaininformation required to be reported in Part III of this Annual report onFrom 10-K is herein incorporated by reference from the registrant’sDefinitive Proxy Statement to be filed with the Securities and ExchangeCommission with respect to the registrant’s Annual Meeting of Shareholdersscheduled to be held on May 17, 2006.

 

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**INTERMEC, INC.**

**INDEX TO ANNUAL REPORT**

**ON FORM 10-K**
|                   | ** ** | ** **                                                                                                          | ** ** | **Page** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                                |       |     |
| Item 1:           |       | Business                                                                                                            |       | 1        |
| Item 1A:          |       | Risk Factors                                                                                                        |       | 12       |
| Item 1B:          |       | Unresolved Staff Comments                                                                                           |       | 17       |
| Item 2:           |       | Properties                                                                                                          |       | 17       |
| Item 3:           |       | Legal Proceedings                                                                                                   |       | 18       |
| Item 4:           |       | Submission of Matters to a Vote of Security Holders                                                                 |       | 19       |
| **PART II**  |       |                                                                                                                |       |     |
| Item 5:           |       | Market for the Registrant’s Common Equity and Related  Stockholder Matters                                     |       | 20       |
| Item 6:           |       | Selected  Financial Data                                                                                            |       | 21       |
| Item 7:           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                    |       | 22       |
| Item 7A:          |       | Quantitative and Qualitative Disclosures about Market  Risk                                                         |       | 38       |
| Item 8:           |       | Financial Statements and Supplementary Data                                                                         |       | 39       |
| Item 9:           |       | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure      |       | 39       |
| Item 9A:          |       | Controls and Procedures                                                                                             |       | 39       |
| Item 9B:          |       | Other Information                                                                                                   |       | 39       |
| **PART III** |       |                                                                                                                |       |     |
| Item 10:          |       | Directors and Executive Officers of the Registrant                                                                  |       | 40       |
| Item 11:          |       | Executive Compensation                                                                                              |       | 41       |
| Item 12:          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters      |       | 41       |
| Item 13:          |       | Certain Relationships and Related Transactions                                                                      |       | 41       |
| Item 14:          |       | Principal Accountant Fees and Services                                                                              |       | 41       |
| **PART IV**  |       |                                                                                                                |       |     |
| Item 15:          |       | Exhibits and Financial Statement Schedule                                                                           |       | 41       |
|              |       | Signatures                                                                                                          |       | 42       |

 

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**PART I**

**SAFE HARBOR**

Forward-looking statements contained in this filingare subject to the safe harbor created by the Private Securities LitigationReform Act of 1995 (alternatively:Section 27A of the Securities Act of 1933 and Section 21E of theSecurities 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, estimates offinancial impact of discontinued operations and the other factors described inItem 1A and Item 7 of this filing. Such forward-looking statements involve andare dependent upon certain risks and uncertainties. When used in this documentand in documents it references, the words “anticipate,” “believe,” “will,” “intend,”“project” and “expect” and similar expressions as they relate to Intermec orits management are intended to identify such forward-looking statements.

Forward-looking statementsare not guarantees of future performance. A number of factors can impact Intermec’sbusiness and determine whether Intermec can or will achieve any forward-lookingstatement made in this report. Any one of those factors could cause Intermec’sactual results to differ materially from those discussed in a forward-lookingstatement. Intermec outlines these risk factors in reports that it files withthe SEC, in press releases and on its website, *www.intermec.com.*Readers of this report are encouraged to review the Risk Factors portions ofItem 1A and Item 7 of this filing which discuss risk factors associated withthe Intermec’s business. Intermec undertakes no obligation to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events, changed circumstances or any other event orcircumstance occurring after the date of this annual report.

**ITEM 1.   BUSINESS**

**General**

Effective January 1,2006, Intermec changedits name from UNOVA, Inc. to Intermec, Inc. (“Intermec” or the“Company”). Intermec became an independent public company upon thedistribution of its common stock to the shareholders of Western Atlas Inc. on October 31,1997. Intermec is a Delaware corporation and its headquarters are located inEverett, Washington and its major offices and manufacturing facilities arelocated in the states of Washington, Iowa, and Ohio and internationally in theUnited Kingdom, the Netherlands, Sweden, France, Canada, Mexico and Singapore.

Information on Intermecmay be found at the Internet website *www.intermec.com*.Intermec’s annual reports on Form 10-K and certain of its otherfilings with the Securities and Exchange Commission (“SEC”) are available inPDF format through its Investor Relations website at *www.intermec.com/IntermecInc/investorinfo.asp*..Its annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports are alsoavailable on the SEC website at *www.sec.gov*.The contents of these websites are not incorporated by reference into thisreport or in any other report or document Intermec files and its references tothe addresses of these websites are intended to be inactive textual referencesonly. Shareholders may request a free copy of the annual reports on Form 10-Kand quarterly reports on Form 10-Q from:

**Intermec, Inc.Attention: Investor Relations6001 36th Avenue WestEverett, WA 98203-1264**

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**ITEM 1.**   BUSINESS (Continued)

*ContinuingOperations*

Intermec designs, develops, manufactures, integrates,sells, resells and services wired and wireless automated identification anddata collection (“AIDC”) products and systems, mobile computing products andsystems, wired and wireless bar code printers, label media and RFID (radiofrequency identification) products and systems. Intermec’s 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. Intermec’s products and services are sold to customerswithin and outside of the United States in market segments that includemanufacturing, warehousing, direct store delivery, retail, consumer packagedgoods, field service, government, and transportation and logistics.

Intermec has three primaryrevenue sources: (1) revenue from the design, development, manufacture,sale, resale and integration of wired and wireless AIDC products and systems,mobile computing products and systems, wired and wireless bar code printers,label media, RFID products and systems and license fees; (2) revenue fromcustomer support, product maintenance and other services related to theproducts and systems described above; and (3) revenue from settlementsrelated to enforcement of Intermec’s intellectual property rights and sales ofcertain patents in Intermec’s intellectual property portfolio. For the yearsended December 31, 2005, 2004 and 2003, Intermec reported $721.0 million,$654.9 million and $561.4 million of product revenues and $154.5 million,$136.8 million and $126.5 million of service revenues, respectively.Intellectual property settlement revenues were $19.6 million and $18.7million for the years ended December 31, 2004 and 2003, respectively.

*Discontinued Operations*

In2005, Intermec divested its IndustrialAutomation Systems (IAS) businesses, which comprised the Cincinnati Lamb andLandis Grinding Systems divisions. The IAS businesses are classified asdiscontinued operations for accounting purposes in Intermec’s consolidatedfinancial statements and related notes. The IAS businesses are producers ofmanufacturing products and services, including integrated manufacturingsystems, machining systems, stand-alone machine tools and precision grindingand 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.

**Products and Services**

Intermec products includewired and wireless AIDC products and systems: mobile computing products andsystems, wired and wireless barcode printers, label media, RFID products and systems and relatedservices. These products and services allow customers to identify, track andmanage their assets and other resources and improve the efficiency andeffectiveness of their business operations.

**Products**

*Bar Code Scannersand Systems*

Intermec’s bar code scanning products include wirelesshandheld computers and terminals, linear and area imagers incorporating activepixel technology, and badge and laser scanners and related systems. Theseproducts are able to read or collect data and move that data directly intostandard enterprise resource planning (ERP) systems, warehouse managementsystem (WMS), order fulfillment, transportation, logistics and other businessapplications. Intermec also manufactures industrial handheld computers for usein warehouses and industrial environments. These products are used primarily bynon-office workers such as warehouse, delivery, manufacturing and field serviceworkers, and other employees who operate outside the typical officeenvironment. Intermec’s bar code scanning products and systems are typically 

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**ITEM 1.**   BUSINESS (Continued)

used for workforceautomation: tracking of work-in-process and finished-goods inventory throughmanufacturing, distribution and other commercial operations, “total asset”visibility, and real-time monitoring of inventory levels and order status. AIDCproducts of the type sold by Intermec replace manual data collection systemsthat are more susceptible to errors or omissions due to inaccurate keystrokes,illegible handwriting or overlooked transactions.

*Enterprise WirelessNetworks Products and Services*

Intermec was one of the first companies to provide anetwork architecture that allows customers to use multiple radio technologieswithin one Local Area Network (LAN) system. Starting in the early 1980s, Intermecinstalled digital communication systems that linked mobile computers and hostservers within industrial workspaces such as warehouses, distribution centers,factories and large outdoor facilities. In 1998, the Institute for Electronicand Electrical Engineering (“IEEE”) promulgated a new standard for high-speednetwork communication via wireless radio signal. The 802.11b standard allowscustomers to purchase interoperable digital radios for client computingdevices.

In the years since the 802.11b standard wasestablished, several large network equipment vendors have begun selling 802.11band 802.11a/b and 802.11g wireless LAN systems, increasing penetration for thistechnology among office workers and in public spaces such as hotels,restaurants and airports. Intermec is a Solutions Technology Integrator partnerwith Cisco Systems Inc. and has extended its systems and devices to include Ciscotechnology and products. Intermec develops wireless LAN software and servicesthat enable its AIDC products to work seamlessly across a Cisco network. Intermec’sdevice management software allows centralized management of wireless Intermecproducts on the network.

Intermec’s wireless AIDCproducts include all major radio technologies, including synthesized UHF, 900MHz, 802.11b/g, 802.11a and Bluetooth. This radio independence allows Intermeccustomers to choose the most efficient radio technology for their facilities.

*Mobile ComputingProducts and Services*

Intermec’s mobile computing products include handheldand vehicle-mounted mobile computers and systems and related services thatfacilitate local-area and wide-area wireless and wired data communications.These products typically contain multiple wireless technologies (wide-area GPRSand CDMA, with 802.11 and Bluetooth) that can operate simultaneously in amobile computer. This allows customers to communicate remotely with their fieldemployees. Intermec also develops and sells handheld computer applicationsoftware for designated markets and applications, as well as communication andserver systems that can integrate the information into customers’ enterprisemanagement systems. 

Intermec has developed device management software thatcan interoperate with a customer’s existing system management software to allowcentralized management and control of remote devices such as mobile computers.Intermec’s mobile computing systems may also include AIDC devices, specializedperipherals and printer solutions. 

To assist its customers with the automation ofbusiness processes, Intermec provides professional services such asinstallation, maintenance, site security and systems integration. Intermec’sline of handheld and vehicle-mounted computers have Microsoft Windows®, Windows® CEand Windows Mobile for Pocket PC®,and embedded Windows XP, as well as scanning and Internet Protocol-based datacommunication capabilities. Intermec’s mobile computing product families rangefrom relatively low-cost, handheld batch and wireless data collection devicesto higher-cost pen-based computers with wired and wireless network capabilitiesand flexible vehicle-mount communication systems.

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**ITEM 1.**   BUSINESS (Continued)

Intermec’s mobilecomputing products and systems allow a customer’s remote workers to accesscentralized computer applications and databases, automatically collect data andsend and receive data on a real-time basis. Intermec and its partners offermobile computing application software for workforce automation, customer-levelsales ordering, pricing and forecasting, account settlement and other softwareproducts that manage workforce automation and order dispatching, “total fieldasset” visibility, real-time proof of delivery, and other customer information.

*Printer and Label Media Products and Services*

Intermec’s line of barcode printers range from relatively low-cost, light-duty models to higher-cost,heavy-duty, industrial models that accommodate a wide array of printing widths,materials and label configurations. Intermec printers can be wired or can bewirelessly attached to enterprise networks. Intermec’s specialty printersprovide custom capabilities, including color printing, a global languageenabler and high resolution (400 DPI) printing that ensures sharp fonts andprecise graphics even on extremely small labels such as those used by theelectronics industry. Intermec’s printer product line includes printers thatcan read and write to RFID tags.

Intermec’s media productsinclude pressure-sensitive bar code labels and thermal transfer ribbons, whichare sold to customers worldwide. In Intermec media products, Intermec emphasizesservice and value-added technologies, such as the design and manufacture ofspecialized labels to meet customer requirements for extreme environments suchas clean rooms, chemical baths and high humidity.

*Radio Frequency Identification (RFID) Products andServices*

RFID technology isrelatively new to the marketplace. RFID wirelessly communicates importantproduct information that exceeds the information available from barcode betweena tracking device, or reader, and tags comprising a computer chip and itsantenna, encased in a protective covering. RFID tags are programmed to containidentification, serial numbers, history and other attributes. Certain RFID tagscontain read/write memory to allow updates and tag reuse. Unlike laser-scannedbar codes, Intermec’s RFID tags do not require “line of sight” to be read. Customershave expressed interest in using RFID technology as a tool to track pallets,cartons, containers and individual items through their supply chains or as anaccess security application.

Intermec is focusing onpassive UHF RFID technology and is developing, manufacturing, selling andreselling RFID tags, readers, software and related equipment, systems andservices under the Intermec trade name. Intermec’s RFID products supportInternational Standards Organization (“ISO”) standards and the new EPCglobalGeneration 2 UHF standard (the “Gen 2 standard”), which are being adopted bycustomers worldwide. Intermec is working through alliances and directly withother companies to broaden customer access, support global standards andintegrate data from RFID collection systems into broader information systemsfrom Intermec.

Intermec has more than 150RFID patents. In 2005, Intermec offered a Rapid Start RFID licensing programthat provided licensees access to certain portions of Intermec’s RFID patents.Intermec selected 19 companies to participate, including industry leaders suchas Texas Instruments, Avery Dennison, Zebra Technologies, Inc. and SymbolTechnologies, Inc. Rapid Start licensees include multiple companies ineach RFID product category. Cisco also took a license under Intermec patentsrelating to the use of RFID technology with wireless equipment.

**Services**

With its customer support services, professionalservices and installation services, Intermec assists customers in designing,implementing and deploying automated identification and data capture (“AIDC”), 

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**ITEM 1.**   BUSINESS (Continued)

products, systems and solutions in their businesses.Intermec’s project management teams create strategic plans that clearlyidentify the customer’s operational goals and AIDC solutions that willaccomplish the business objectives. Intermec’s project management teams alsodefine the functional requirements for implementing AIDC products and systemsin the customer’s business. This includes the reason why they are needed, howthey will be used, and how they will impact business processes.

Intermec’s projectmanagement teams prepare an implementation plan and assist the customer indeploying AIDC products and systems in the customer’s business. Intermec helpscustomers integrate new AIDC solutions with their existing AIDC systems and evaluateAIDC products, systems and services. Since Intermec has relationships with manyvendors that provide complementary AIDC products, systems and services,Intermec can offer customers a “one-stop shopping” experience and comprehensiveAIDC solutions. Intermec also provides customers with:

·       A single point of contactfor project communications

·       Project planning, includingdefining the scope of work, preparing a statement of work, developing projectobjectives, developing schedules, identifying acceptance procedures, anddocumenting a project plan

·       Project implementation,including proper site preparation; tracking, site evaluation surveys andinstallation schedules; coordination of the activities of all resourcesinvolved in the implementation; project status reports; and implementation ofproject controls

·       Oversight and management ofthe overall installation process, including managing communications, trackingequipment shipment, managing change requests, and identifying problems andresolving them

·       Project completion andcloseout to the customer’s requirements and expectations

Intermec’s customersupport services deliver global repair and support capabilities through itsglobal network of service centers. These service centers provide maintenanceand repair services to Intermec customers. Intermec’s customer servicerepresentatives (CSR) are dispatched from more than 60 U.S. locations and fromcenters outside of the United States. Intermec’s Global Education Servicesprovides AIDC training services and solutions, including the design anddelivery of training programs and assistance in creating training programs tobe delivered by the customer’s employees.

**Technologies and Trends**

Intermec offers a line of data capture products, whichincludes linear imaging, area imaging, RFID and, most recently, a laserscanning engine based on micro-electro mechanical system (MEMS) technology.Intermec’s product suite provides customers with a range of automatedidentification and AIDC products and systems to meet their application and costrequirements.

Intermec hasbroadened its product offering by integrating new technologies into itsproducts. Recent examples include:

·       RuggedizedWindows CE and Windows Mobile-based computers

·       Short-rangeradio system networks using Bluetooth technology

·       MEMS-basedlaser scanning devices

·       Low-cost,miniature linear image scan engines

·       Devicesthat use the Internet to simplify the management of wireless networks

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**ITEM 1.**   BUSINESS (Continued)

·       Ergonomicintegrated terminals with modular designs and a variety of scan engines

Intermec develops RFID products for AIDC applicationsthat are compliant and/or compatible with standards established by theInternational Standards Organization (ISO), EPCglobal and otherstandards-setting or certification organizations. This includes RFID scanners,RFID printers and RFID source tags, shipping labels, pallet tags, containertags and item tags with embedded electronic memory chips that can bereprogrammed via low-power radio signals.

A prominent industry organization serving theautomotive sector has adopted a standard based upon certain of Intermec’scommunications protocols for RFID. The standard manages communications betweena host computer and an RFID tag. This global standard is expected to be used insystems that will allow tire manufacturers and auto companies to trackindividual tires as they are manufactured, distributed and installed on newcars and trucks manufactured in North America.

Intermec also developsRFID products and systems that can be integrated with a customer’s existingAIDC technology, such as bar code, mobile computing and other local area andwide area AIDC systems.

**Business Strategy**

Intermec’s strategyconsists of:

·       Technologyleadership in the AIDC industry

·       Expandingand leveraging Intermec’s intellectual property portfolio

·       Expandingand strengthening Intermec’s AIDC product portfolio

·       Providingintegrated AIDC solutions

·       Partneringwith global industry leaders

·       Achievingeconomies of scale and scope

·       Profitablyincreasing market share

·       Increasingthe scale of the business

Intermec’s strategyis focused on customers in certain vertical markets, including:

·       Retailers.The Retail vertical is a large, competitive and mature market. Customers inthis vertical include global Tier 1 companies with $3 billion or more in sales.Segments within the Retail vertical range from grocery, pharmaceutical andspecialty outlets to department and warehouse-style mega-stores.

·       ConsumerGoods manufacturers. The Consumer Goods vertical includes firms that makeproducts primarily delivered through retail establishments and those that selldirectly to the general public. Segments within the Consumer Goods verticalinclude food, beverage, consumer packaged goods, footwear/apparel,health/beauty, health/pharmacy, housewares/appliances, electronics, recreation,and media/publishing companies.

·       IndustrialGoods manufacturers. The Industrial Goods vertical includes firms primarilyinvolved in business-to-business commerce. They supply the raw materials,components and assemblies needed by Consumer Goods manufacturers and servicesproviders (e.g., aerospace, chemical, oil and gas, and electronics). TheIndustrial Goods vertical also includes firms that produce very large, durablegoods for businesses as well as consumers (e.g., automotive, computers andhousehold appliances).

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**ITEM 1.**   BUSINESS(Continued)

·       Transportationand Logistics (T&L) providers. The T&L vertical consists of firmsdirectly providing shipping and transportation services with their ownequipment, as well as non-asset-based logistics provider models. The mostcommon non-asset firms are third-party logistics and fourth-party logisticsproviders. Segments within the T&L vertical include motor freight, airtransport, railways, waterborne transportation and logistics service providers.

·       Governmentagencies. This vertical includes U.S. federal, state and local governmententities, although foreign government opportunities are growing at anincreasing rate. The U.S. Department of Defense is an early adopter ofautomated data capture (ADC) technologies and has been actively deployingautomated identification technology (AIT) logistics applications for more thantwo decades. Other departments of the federal government are beginning to adoptthese technologies to improve their operations. State and local governments arealso beginning to adopt these technologies particularly in the areas of publicsafety and service improvement.

Intermec’s strategyis focused on certain application markets, including:

·       Warehouseand distribution center operations. Warehouses and logistics operations rely onwireless networks and handheld and mobile computers to transmit inventory datato central host computers. When information is updated in real time, customershave greater visibility to their current business operations and are able toavoid inventory shortages and improve customer service by providing moreaccurate shipping and delivery information. As competition places more pressureon companies for faster operational performance, they typically upgrade theirsupply chain execution technologies to improve working capital efficiency andcustomer satisfaction standards, such as delivery speed, in-stock availabilityand order accuracy.

·       Retailstore operations. Retailers strive to reduce the number of out-of-stocks and toincrease the time and amount spent by each customer during each visit. Retailstore operations personnel need tools for managing the flow and tracking ofmerchandise in the store from receiving to stocking, ordering, pricing, pricechanging, checkout, returns and transfers. They use scanners, mobile computers,printers, RFID and other data capture devices as the primary technologies toassist them to accomplish these tasks.

·       Retailstore management. A recent trend gaining significant momentum is the desire ofretail executives to get the store manager out of the back office and onto thestore floor, where he or she can interact with customers and store personnel.To accomplish this, store managers require mobile computing tools that givethem access to corporate information, store operations metrics and clerkapplications and provide in-store merchandise scanning capabilities. Thiscreates demand for scanning, RFID and mobile computing solutions gearedspecifically for the store manager.

·       In-transitvisibility. Transportation customers are demanding to know where their shipmentis, who picked up a package or shipment, when it was delivered, what conditionit was in on delivery, and who signed for it. Whether the transporter is aprivate fleet or third party logistics provider using for-hire railway or oceancontainer operations, the increasing cost of assets, wages, fuel and insuranceand operating ratios that run around 90% requires maximum use of assets. Thismeans turning them faster, eliminating empty return runs, reducing non-drivingtime (trucking) and optimizing effective, efficient maintenance. All forms oftransportation use some form of carrier-specified numbering to identify theparcels, pallets or containers that make up a shipment for a particularcustomer. Mobile computing devices linked with bar code labels and/or RFID tagscan provide signature capture and critical item tracking capabilities.

·       Field service. Field servicemanagers focus on work order management and asset management. Work orders tiefield service technicians to specific jobs. Management must have informationfrom 

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**ITEM 1.**   BUSINESS (Continued)

the point where the work isbeing performed to optimize an entire range of operations including dispatch,routing and scheduling, status updates, service history, parts usage, call typeand resolution, schematics, diagnostics, billing information, invoicing,collections, including credit cards, parts ordering and availability, vehiclelocation and driving directions, as well as internal metrics such as time torepair, labor tracking and job costing. Automated data collection systemslinked with field service management software deliver the real-time informationrequired to improve efficiency and reduce costs while increasing customersatisfaction. Asset management is the utilization, movement, and storage of theresources and capital equipment used by or used to support field serviceemployees. This includes vehicles, parts inventory in transit or on the truck,and test and measurement equipment, as well as assets at remote or customerlocations, such as consigned inventory and leased equipment. Equipment taggingand access control to secure storage are growing areas for RFID solutions.

·       Manufacturingoperations. Manufactures use data collection and computing technology tocapture and monitor product flow during the production process, from rawmaterials or parts through to the finished goods stage. They also use thetechnology to track the activities and value-added content of labor and tocapture product genealogy, product location and lines, supplier information forwarranty and liability risk reduction and for regulatory compliance.

·       Directstore delivery (DSD). DSD is the delivery of consumer good products from asupplier/distributor directly to a retail store, bypassing a retailer’swarehouse. Activities typically include in-store inventory management,store-level authorized item management, store-level ordering/forecasting,product pricing, promotion, invoicing, the physical delivery and return ofmerchandise, the electronic exchange of delivery data with a retail store(DEX/UCS) and shelf merchandising. General wholesalers and distributors are notincluded in this category.

·       RFID supply chain. RFIDsupply chain includes RFID compliance, as well as all the applicationsmentioned above. The addition of RFID technology can enhance the optimizationand visibility of information all along a company’s value chain. RFIDcompliance involves the application of RFID tags onto cases and pallets and theuse of interrogators to read and write to those tags to meet the informationcollection and management requirements of manufactures, retailers andgovernment entities. This includes traveling bills-of-material, manufacturingproduction routers, product history (genealogy), repair and upgrade databases,and bill of lading and security devices.

**Markets and Customers**

Because AIDC systems can be used by a company of anysize, the AIDC market is large. Market growth is driven by the need fortechnologies and solutions that improve quality, productivity and costefficiency in business and government, particularly through logisticsautomation, supply chain execution, enterprise resource planning (ERP) ande-commerce solutions. Intermec covers the market through a combination of aglobally coordinated dedicated sales and service organization, two-tier distributors,resellers and independent hardware, software and service vendors. Distributors,resellers and independent vendors of complementary products and services extendIntermec’s reach in its target and application markets and allow Intermec tocost-effectively penetrate and grow market share with small, mid-sized andlarge businesses.

Intermec sells and services its products throughmultiple sales and distribution channels: (1) a direct field sales forcethat concentrates on large or complex systems sales; (2) premiervalue-added resellers (known as Honours Partners) that provide application-specificsolutions with major systems integrators; and enterprise computing companies;and (3) distributors that provide value-added services to smallerindependent software vendors and resellers. 

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**ITEM 1.**   BUSINESS (Continued)

Intermec’s direct sales organization serves customersfrom offices throughout the Americas, Europe, the Middle East, Africa and inselected Asia Pacific countries, including China and Australia. Indirect saleschannels include preferred and non-exclusive relationships with value-addeddistributors and master resellers. Sales of accessories, certain services andlow-cost transactional-based business can be transacted over the Internet.Intermec has a field-based business development function which identifies newmarket opportunities and supports the sales effort in those new areas.

The mobilecomputing systems market includes several applications, such asdirect-store-delivery, pick-up and delivery for package/parcel deliveryindustries, sales merchandising, in-transit asset visibility, parts managementand workforce automation applications. These applications are generally used inthe consumer products, food, beverage, wholesale, parcel delivery, freight,field service and home service industries.

Manufacturing applications include the collection andcommunication of information related to receipt of materials, work in process,finished goods inventory and other functions throughout the manufacturingprocess. Warehousing and distribution center applications involve thecollection and communication of information related to receiving materials tobe stored, storage locations, materials retrieval, order picking andconsolidation and shipping. Retail applications include the warehouse operationsdiscussed above, as well as automation of shelf label maintenance,merchandising, ordering and replenishment, price mark-downs, along withcustomer service and store management.

International sales opportunities exist in countrieswhere communications infrastructure, mobile computing practices and other systemsand applications are similar to or likely to become similar to those in theU.S. The extent of wireless systems opportunities in any particular country isbased on the level of industrialization, communication infrastructure, thestatus of bar code implementation, and the regulatory environment for wirelesscommunication technologies. The major markets for printers and media aremanufacturing, distribution, warehousing, transportation, health care,government and other services.

Intermec’s customer base consists of businesses ofmany sizes, government agencies and resellers. No single customer accounted for10% or more of revenues in fiscal 2005, 2004 or 2003.

Although the majority ofIntermec’s sales are made through indirect sales channels, no individual value-addeddistributor or reseller represents more than 10% of Intermec’s consolidatedrevenues. Intermec maintains direct contact with customers and prospectiveusers by having established user forums for automated data systems applicationsand technologies.

**Competition**

The market for AIDC products and systems isfragmented. Based on independent market surveys, management believes thatIntermec is one of the largest participants measured by revenues. SymbolTechnologies, Inc. is a major competitor supplying a range of barcode,RFID and mobile computing products and services. Intermec also faces strongcompetition in single AIDC product lines from suppliers such as Zebra Technologies Corporation, which supplies barcodeand RFID printers and Hand Held Products, which supplies barcode imagers.

The market for AIDC products, systems and relatedservices is highly competitive and rapidly changing. Some firms, includingFujitsu and Casio, manufacture and market hand held systems for field-basedordering and selling applications. In addition, a number of firms manufactureand market radio-linked data communication products, including Hand HeldProducts LXE, Symbol and Psion /Teklogix. Consumer personal digital assistantsfrom suppliers such as Palm, Hewlett Packard and Dell are potential competitorsfor certain non-mission-critical, light-duty enterprise computing applications.Companies such as Symbol and Entersys compete against Intermec and CiscoSystems Inc. in the wireless network business. 

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**ITEM 1.**   BUSINESS (Continued)

On the printer side, Intermec faces competition fromZebra, Datamax, SATO, Printronix and many others, depending on the geographicarea. In the label media area, Intermec faces competition from a large numberof large and small media producers including, among many others, Avery Denison.

Intermec competesprimarily on the basis of its technology and expertise in applications forspecific vertical markets (integrated solutions, open-systems architecture,networking and communications expertise, applications software), customerrelationships and value-added service. Other attributes, such as level of salesand support services, product functionality, performance, ruggedness andoverall product quality, are important for market success.

**Research and Development**

Research and developmentexpenditures related to Intermec’s continuing operations amounted to $66.5million, $65.9 million and $49.8 million, all of which was sponsored by Intermec,in the years ended December 31, 2005, 2004 and 2003, respectively.

**Intellectual Property**

Intermec strives to protect its investment intechnology and to secure competitive advantage by obtaining intellectualproperty protection within and outside of the United States. Over a period ofyears, the Company has secured over 570 patents and a number of trademarks,copyrights and trade secrets. When appropriate, Intermec has obtained licensesto use intellectual property controlled by other organizations. The combinationof Intermec’s intellectual property and licenses to use third-partyintellectual property has been of value in the growth of Intermec’s businessand is expected to be of value in the future. However, management believes thatIntermec’s business does not depend on any single patent in its portfolio or onany single trademark, copyright, trade secret or intellectual property licenseagreement and would not be materially affected by the expiration or terminationthereof.

Management believes that the duration of Intermec’spatents is adequate relative to the expected lives of its products andservices. Because of the fast pace of innovation and product development in theautomated identification and data capture (AIDC) industry, Intermec’s productsand services may be obsolete before the patents related to them expire, andsometimes are obsolete before the patents related to them are even granted. As Intermecexpands its product offerings, it seeks to obtain patents related to suchofferings and, when appropriate, it seeks licenses to use inventions patentedby third parties. Established competitors in existing and new industries, aswell as companies that purchase and enforce patents and other intellectualproperty, may already have patents covering similar products and services.There is no assurance that Intermec will be able to obtain patents covering itsown products and services or that it will be able to obtain licenses from otherorganizations on favorable terms or at all.

To distinguish Intermec products and services fromthose of its competitors, Intermec has obtained certain trademarks and tradenames and, as it expands its product and service offerings, it attempts toobtain trademarks and trade names to cover those new offerings. Establishedcompetitors in existing and new industries may attempt to secure the same orsimilar trademarks or trade names covering similar products and services. Thereis no assurance that Intermec will be able to obtain trademarks or trade namescovering its own products and services or that it will be able to obtainlicenses for desirable trademarks or trade names from other organizations onfavorable terms or at all.

Intermec protects certain details of its processes,products and strategies as trade secrets by restricting access to thatinformation. Intermec has ongoing programs designed to maintain theconfidentiality of such information but there is no assurance that theseprograms will prevent unauthorized disclosures of such confidentialinformation.

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**ITEM 1.**   BUSINESS (Continued)

From time to time, Intermec licenses its intellectualproperty to other organizations to generate revenue or to facilitate its effortto market and sell its products and services. While such licenses have been ofvalue in the growth of Intermec’s business and are expected to be of value inthe future, management believes that Intermec’s business is not dependent uponany single intellectual property license and would not be materially affectedby the expiration or termination thereof. Intermec may attempt to license moreof its intellectual property to other organizations in the future. There is noassurance that any of these efforts will be successful.

Intermec tries to protectits investment in technology and to secure competitive advantage by enforcingits intellectual property rights. The extent of the legal protection given todifferent types of intellectual property rights varies greatly from one countryto another. There is no assurance that Intermec’s effort to enforce itsintellectual property in any jurisdiction will be successful or will besuccessful enough to materially benefit its business.

**Seasonality and Backlog**

Intermec’s quarterly results reflect seasonality inthe sale of its products and services, as its revenues are typically highest inthe fourth fiscal quarter and the lowest in the first fiscal quarter. See “QuarterlyFinancial Information” on page Q-1 of this Form 10-K forquarterly revenues and expenses.

Sales backlog for Intermec’scontinuing operations was $64 million, $76 million and $61 million at December 31,2005, 2004 and 2003, respectively. The Intermec business typically operateswithout a significant backlog of firm orders and does not consider backlog tobe a significant measure for indicating future sales.

**Employees**

At December 31, 2005,Intermec had 2,497 full-time employees, of which 2,467 were engaged in itssubsidiary, Intermec Technologies Corporation, and 30 were engaged in corporateand shared services.

**Environmentaland Regulatory Matters**

In January 2003 the European Parliament andCouncil adopted Directive 2002/95/EC on the Restriction of the Use of CertainHazardous Substances in Electrical and Electronic Equipment (the “RoHSDirective”). The Directive goes into effect on July 1, 2006 and prohibits firmsfrom putting on the European Union (EU) market new electrical and electronicequipment that contains more than permitted levels of lead, cadmium, hexavalentchromium, polybrominated biphenyl (PBB) and polybrominated diphenyl ether(PBDE). The RoHS Directive does not apply to units of equipment already placedon the EU market prior to July 1, 2006. In addition, the RoHS Directivecontains exemptions for (a) certain types of equipment; (b) reuse ofequipment placed on the EU market prior to July 1, 2006; and (c) spareparts for the repair of equipment placed on the EU market prior to July 1,2006. 

The State of California also has adopted restrictionson the use of certain materials in electronic products that are intended toharmonize with the RoHS Directive. Those restrictions go into effect in 2007.Other U.S. states are considering similar legislation. Similarly, China haspromulgated use restrictions on the same substances as the RoHS Directive.China has not yet defined the scope of affected products or the effective dateof the regulation and it is unclear whether China’s use restrictions will beconsistent with the use restrictions set forth in the RoHS Directive. Othercountries outside of the EU may adopt RoHS-type regulations in the future.

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**ITEM 1.**   BUSINESS(Continued)

Intermec is redesigning some of its products to bringthem into compliance with the RoHS Directive and similar regulations in otherjurisdictions. In other cases, Intermec is replacing non-compliant productswith products that comply with these regulations. During 2005, Intermecincurred $3.0 million primarily related to redesigning products to comply withthese regulations. Intermec expects to incur additional costs in the future forcompliance with the RoHS Directive and similar regulations in otherjurisdictions. The amount and timing of such expenditures are uncertain due touncertainties about the effective date and final content of RoHS-typeregulations in various jurisdictions and the possibility that RoHS-typeregulations in one jurisdiction will not be consistent with RoHS-typeregulations in other jurisdictions.

Radio emissions are thesubject of governmental regulation in all countries in which Intermec currentlyconducts or expects to conduct business. In North America, both the Canadianand U.S. governments publish radio emission regulations and changes theretoafter public hearings. In other countries, regulatory changes can be introducedwith little or no grace period for implementation. Furthermore, there is littleconsistency among the regulations of various countries. Future regulatorychanges in North America and other jurisdictions are possible. These conditionsintroduce uncertainty into Intermec’s product-planning process and could havean adverse effect on Intermec’s ability to sell its wireless products in agiven country or adversely effect its cost of supplying wireless products in agiven country.

**Raw Materials**

Intermec uses a wide varietyof raw materials in the manufacture of its products and obtains such rawmaterials from a variety of suppliers. In general, raw materials used areavailable from numerous alternative sources. As is customary for its industry,Intermec at various times enters into certain single-source component partsupply agreements. Management believes these agreements will be renewed in theordinary course of business.

**ITEM 1A.**   RISK FACTORS

Intermec’s businessis subject to a number of risk factors that could negatively affect Intermec’sresults from business operations or cause actual results to differ materiallyfrom those projected or indicated in any forward looking statement. Such riskfactors include, but are not limited to, the following:

·       ***Rapid technological change might render Intermec’sproducts obsolete.***Customer requirements for automatedidentification and data capture (AIDC) products, systems and services arerapidly evolving. To keep up with new customer requirements and to distinguishitself from competitors, the Company must invest in research and development(R&D). Because of the fast pace of innovation and product development inthe AIDC industry, Intermec’s products and services are often obsolete beforethe patents related to them expire, and sometimes are obsolete before thepatents related to them are even granted. There is no assurance that Intermecwill be able to make sufficient investments in R&D to keep up withtechnological change in the AIDC industry or that such investments will resultin competitive products and systems. Intermec’s future growth and the resultsof its operations could be materially and adversely impacted if it does notadequately invest in R&D or if its R&D investments do not yieldmarketable technological improvements or if those improvements are notcompleted in time to meet the market window.

·  ***Technological convergence could intensifycompetition in some of Intermec’s target markets.***A number offirms have developed handheld mobile computing and communication devices suchas personal digital assistants and cellphones for light-duty consumer andbusiness applications. Improvements in the computing power, the communicationcapabilities or the ruggedness of these devices might make them attractivesubstitutes for some of the products that Intermec has developed for AIDCapplications. To respond to such technological convergence, Intermec mustimprove its AIDC 

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**ITEM 1A.**   RISK FACTORS (Continued)

products and systems byinvesting in R&D. There is no assurance that Intermec will be able to makesufficient investments in R&D to keep up with technological convergence orthat such investments will result in competitive products and systems. IfIntermec is not able to respond to such technological convergence withcompetitive improvements in its products and systems, its sales, profits,results of operations and future growth could be materially and adverselyaffected.

·  ***Rapid technological changeor technological convergence could hurt results of operations by renderingIntermec’s inventories obsolete.*** Rapid technological change ortechnological convergence could cause Intermec to have excess and/or obsoleteinventory. In such event, Intermec might have to sell all or a portion of theexcess and/or obsolete products or parts at substantially lower prices thanoriginally planned, or write off the carrying value of all or a portion of theexcess and/or obsolete inventory. This could materially and adversely impactIntermec’s revenues, gross profit margins and results of operations.

·  ***Intermec’s growth may beadversely affected if it is not successful in improving its business processesand systems or in attracting and retaining skilled managers and employees.***In order to increase sales and profits, Intermec must expand its operationsinto new product and geographic markets and deepen its penetration of themarkets it currently serves. To achieve and support this growth, Intermec needsto improve its business processes and its financial, information technology andenterprise resource planning systems. Successful completion of these projectswill require skillful managers and a skilled workforce. Intermec’s growth couldbe materially and adversely affected if it is unable to complete businessprocess improvements and system upgrades or if it is unable to attract andretain enough skilled managers and employees.

·  ***If Intermec is unable toincrease sales to large enterprise customers while increasing sales to mediumand small businesses, its growth and results of operations may be adverselyaffected.*** One element of Intermec’s strategy is to Increasesales to large enterprises because they are high volume consumers of supplychain products and systems of the type sold by Intermec and because theirpurchase decisions influence the purchase decisions of medium and smallbusinesses. Another element is to concurrently increase sales to medium andsmall businesses. This is because large enterprise sales tend to have lowergross profit margins than sales to medium and small businesses. There is noassurance that Intermec will be able to increase sales to large enterprisecustomers or that it will be able to do so while increasing sales to medium andsmall businesses. Intermec’s revenue, revenue growth, gross profit margins andresults of operations could be materially and adversely affected if it isunable to increase large enterprise sales or if growth in sales to medium andsmall businesses does not keep up with growth in sales to large enterprises.

·  ***Export controls, import controls and operatingconditions in markets outside of the U.S. could adversely affect Intermec’srevenues, gross profit margins and results of operations.***Intermec sells a significant percentage of its products and systems in marketsoutside of the U.S. and one element of Intermec’s strategy is to expand salesoutside of the U.S., particularly in developing countries. U.S. and foreigngovernment restrictions on the export or import of technology could preventIntermec from selling some or all of its products or systems in one or morecountries outside of the U.S. Intermec’s sales outside of the U.S. could alsobe materially and adversely affected by burdensome laws, regulations, tariffs,quotas, taxes, trade barriers or capital flow restrictions imposed by the U.S.or foreign governments. In addition, political and economic instability inforeign countries could reduce demand for Intermec’s products or impair oreliminate its ability to sell or deliver those products to customers in thosecountries or put its foreign assets at risk. There is no assurance thatIntermec will be able to continue or expand sales of its products or systems inany foreign market. Disruptions 

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**ITEM 1A.**   RISK FACTORS (Continued)

of such sales couldmaterially and adversely impact Intermec’s revenues, revenue growth, grossprofit margins and results of operations.

·  ***Changes or disruptions inIntermec’s international design, manufacture, production, delivery and serviceand support operations or in its international outsourcing arrangements couldhave an adverse effect on its operations and results of operations***.A significant percentage of Intermec’s products and systems and components forthose products and systems are designed, manufactured, produced, delivered,serviced or supported in countries outside of the U.S. and, from time to time,Intermec outsources one or more of these activities or portions thereof byarranging for companies outside of the U.S. to perform these tasks. Foroperational, legal or other reasons, Intermec may have to change the mix ofU.S. and international operations or move outsourced activities from oneoverseas vendor to another. In addition, U.S. or foreign government actions oreconomic or political instability may disrupt or require changes in Intermec’sinternational operations or international outsourcing arrangements. The processof implementing such changes and dealing with such disruptions is complex.There is no assurance that Intermec will be able to accomplish these tasks atall or in an efficient or cost-effective manner. If Intermec encountersdifficulties in making such transitions, its revenues, gross profit margins andresults of operations could be materially and adversely affected.

·  ***Fluctations in foreign exchange rates may adverselyimpact Intermec’s cash flows and earnings.*** Due to itsglobal operations, Intermec’s cash flow and earnings are exposed to foreignexchange rate fluctuations. When appropriate, Intermec may attempt to limit itsexposure to foreign exchange rate changes by entering into short-term foreigncurrency exchange contracts. There is no assurance that Intermec will hedge orwill be able to hedge such foreign currency exchange risk or that its hedgeswill be successful. Intermec’s foreign currency exchange gains or losses (netof hedges) may materially and adversely impact its cash flows and earnings.

·  ***Seasonal variations in demand could increase the volatilityof Intermec’s financial results*.**Intermec’s quarterlyresults reflect seasonality in the sale of its products and services, as itsrevenues are typically highest in the fourth fiscal quarter and the lowest inthe first fiscal quarter. These seasonal fluctuations could increase thevolatility of Intermec’s revenues, gross margins and results of operations fromone period to another.

·  ***Macroeconomic conditionsbeyond Intermec’s control could lead to deterioration in the quality of itsaccounts receivable.*** Intermec’s sales are typically made onunsecured credit terms that are generally consistent with the prevailingbusiness practices in the country in which the customer is located. Adeterioration of political or economic conditions in a given country couldreduce or eliminate Intermec’s ability to collect on accounts receivable inthat country. In that event, Intermec’s results of operations could bematerially and adversely affected.

·  ***Intermec’s growth andresults of operations could suffer if it is unable to expand its patent estate.***One element of Intermec’s strategy is to expand its AIDC patent estate andto use that estate to differentiate itself in the marketplace and/or generateroyalty revenue. The creation and maintenance of a patent estate is a complexactivity with uncertain outcomes. There is no assurance that Intermec can orwill obtain valuable AIDC patents in the jurisdictions where Intermec and itscompetitors operate. Intermec’s future growth and the results of its operationscould be materially and adversely impacted if it does not adequately invest inthe acquisition and maintenance of AIDC patents or if, despite such investment,it is unable to obtain AIDC patents covering products and services thatcustomers consider valuable enough to purchase.

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**ITEM 1A.**   RISK FACTORS (Continued)

·  ***Intermec’s growth andresults of operations could be adversely affected if its effort to enforce itspatents through litigation is not successful.*** Intermec tries touse its AIDC patents to ensure demand for its AIDC products by preventingcompetitors from selling infringing AIDC products or to collect royalties fromsuch sales or to deter competitors from enforcing their AIDC patents againstIntermec. As part of this effort, Intermec may be required to initiate patentinfringement lawsuits. Patent lawsuits are complex proceedings and the resultsare very difficult to predict. There is no assurance that Intermec will prevailin all or any of these cases. Adverse results in such patent lawsuits couldgive competitors the legal right to compete with Intermec using technology thatarguably infringes Intermec’s patents. In that event, demand for Intermec’sproducts, product revenues, royalty revenues and results of operations could bematerially and adversely affected.

·  ***Expansion in developingmarkets with weak intellectual property regimes could hurt Intermec’s growthand results of operations if it is unable to protect its technology in thosejurisdictions.***Intermec’s strategy includes expanding operationsin and into developing countries (e.g., China) where the institutionalstructures for creating and enforcing intellectual property rights are very newand where government agencies, courts and market participants have littleexperience with intellectual property rights. There is no assurance thatIntermec will be able to protect its technology in such countries because itmay not be able to obtain or enforce patents or other intellectual propertyrights in those jurisdictions and because alternative methods of protecting itstechnology may not be effective. If Intermec is unable to prevent competitorsin these developing markets from misappropriating its technology, that couldmaterially and adversely affect Intermec’s sales, revenues and results ofoperations in those developing markets and in markets supplied from thosedeveloping markets.

·  ***Patents controlled byIntermec’s competitors, potential competitors or others may prevent Intermecfrom selling or increase the cost of its products and systems.***Intermec’s competitors, potential competitors and companies that purchase andenforce patents, may have patents covering AIDC products and services similarto those marketed and sold by Intermec. These firms may try to use theirpatents to prevent Intermec from selling some of its AIDC products and systemsor to collect royalties from such sales or to deter Intermec from enforcing itspatents against them. As part of this effort, the patent-holders may initiatepatent infringement lawsuits against Intermec. As explained above, patent lawsuitsare complex proceedings with uncertain outcomes.There is no assurance thatIntermec will prevail in all or any patent lawsuits initiated by third partypatent-holders. If the results of such litigation are adverse to Intermec, itcould be enjoined from practicing an invention covered by the patent inquestion. In such a case, Intermec may not be able to sell a particular productor family of products and that could materially and adversely impact sales,revenues and results of operations. Even if third party patent-holders arewilling to license or sell their patents to Intermec, the cost could have amaterial and adverse effect on Intermec’s sales, revenues or results ofoperations.

·  ***Unfavorable results in pending patent lawsuitscould have a material adverse impact on Intermec’s business.***Intermecis currently involved in several patent infringement lawsuits, including patentinfringement lawsuits with a competitor, Symbol Technologies, Inc. (seeItem 3. Legal Proceedings). In each of these cases, Intermec is simultaneouslyprosecuting and defending infringement claims involving multiple patents. Thereis no assurance that Intermec will prevail in all or any of these patentlawsuits or that it will prevail on all or any of the claims or defenses assertedin those cases. An unfavorable result in one or more of these lawsuits or onone or more of the claims or defenses asserted in those cases could preventIntermec from selling one or more of its products or systems or increase thecost of those products and systems by forcing Intermec to pay a royalty to theother party. An unfavorable result in these cases might also give the otherparty the 

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**ITEM 1A.**   RISK FACTORS (Continued)

right to compete withIntermec using technology that arguably infringes Intermec’s patents and mightdeprive Intermec of royalty revenue. Any these events could have a materialadverse effect on Intermec’s revenues, revenue growth, gross profit margin andresults of operations.

·  ***Patent litigation expensemay materially impact or increase the volatility of Intermec’s financialresults.*** Since litigation over AIDC patents, products andservices involves complex technical and economic issues, these cases can bequite expensive to prosecute or defend and it is very difficult to predict theamount or the timing of costs associated with such litigation. Intermecgenerally includes such costs in Sales, General and Administrative (SG&A)expense and records those expenses as they are incurred. In some periods,patent litigation expense could be a significant percentage of SG&A expenseand could exhibit large fluctuations from prior periods, increasing thevolatility of Intermec’s SG&A expense and potentially impacting Intermec’searnings per share. There is no assurance that patent litigation will generateroyalty revenue for Intermec but, when it does, recognition of that revenue andrelated current period legal expenses may materially impact Intermec’s resultsof operations, positively or negatively, increasing the volatility of itsresults of operations.

·  ***Since some of Intermec’scompetitors are substantially larger or are more profitable than Intermec, theyare a significant competitive threat.*** Some of Intermec’scompetitors are substantially larger in terms of revenue or profit thanIntermec. The scale advantage of these firms may allow them to invest more inR&D, systems and human resources than Intermec and may allow them toweather market downturns longer than Intermec or adapt more quickly to markettrends or price declines. Intermec has various strategies for offsetting thisscale imbalance but there is no assurance that all or any of those strategieswill be successful or will be successful enough to eliminate all or asubstantial portion of that imbalance. If Intermec is unable to offset all or asignificant portion of the scale imbalance, its revenues, revenue growth andresults of operations may be materially and adversely affected.

·  ***U.S. and internationaltechnical and environmental standards and regulations may hurt Intermec’s salesand profits.***Intermec’s ability to sell AIDC products andsystems in a given country and the gross margins on products and systems soldin a given country could be affected by technical and environmental standardsand regulations that govern or influence the design, components or operation ofsuch products and systems. Changes in those standards and regulations arealways possible and, in some jurisdictions, changes may be introduced withlittle or no time to bring products and systems into compliance with therevised technical standard or regulation. These technical standards andregulations may prevent Intermec from selling one or more of its products orsystems in the relevant country. Alternatively, the standards and regulationsmay increase Intermec’s cost of supplying the products by forcing Intermec toredesign existing products or to use more expensive designs or components. Inthese cases, Intermec may experience unexpected disruptions in its ability to supplycustomers with its products and systems or may have to incur unexpected coststo bring its products and systems into compliance. This could have an adverseeffect on Intermec’s revenues, gross profit margins and results of operationsand increase the volatility of its financial results.

·  ***Intermec’s effective tax rate is impacted by anumber of factors that could have a material impact on Intermec’s financialresults and could increase the volatility of those results.***Intermec operates in a number of countries around the world and is thereforesubject to tax in a number of jurisdictions. Accordingly, Intermec files asignificant number of tax returns that are subject to audit by the relevant taxauthorities. Tax audits are often complex and may require several years toresolve. There is no assurance that all or any of these tax audits will beresolved in Intermec’s favor. 

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**ITEM 1A.**   RISK FACTORS (Continued)

Intermec’s financialresults may include favorable or unfavorable adjustments to its estimated taxliabilities in the periods when the tax assessments are made or resolved orwhen statutes of limitations on the tax assessments expire. The outcome ofthese tax assessments could have a material positive or negative impact onIntermec’s earnings and increase the volatility of its earnings relative toprior periods.

·  ***Changes or disruptions inIntermec’s outsourcing arrangements could have a material adverse impact on itsoperations and financial results.*** From time to time, Intermecoutsources the manufacture, production, delivery, installation or service ofits products or systems or outsources elements of its back-office operationssuch as order taking and order entry systems, customer service and support systems,information technology systems and financial systems. Changes in the mix ofIntermec’s internal and outsourced operations may be necessary or appropriatein the future and it is possible that outsourced operations may have to bemoved from one vendor to another with little or no advance notice. The processof implementing such changes and dealing with such disruptions is complex.There is no assurance that Intermec will be able to accomplish these tasks atall or in an efficient or cost-effective manner. If Intermec encountersdifficulties in making such transitions, its revenues, gross profit margins andresults of operations could be materially and adversely affected.

**ITEM 1B.**   UNRESOLVED STAFFCOMMENTS

Not Applicable.

**ITEM 2.**   PROPERTIES

Intermec’s executive offices are located at 6001 36thAvenue West, Everett, Washington. Its continuing operations have an aggregatefloor area of approximately 792,377 square feet, of which 592,253 square feet,or 75%, are located in the United States, and 200,124 square feet, or 25%, arelocated outside the United States, primarily in the Netherlands, Sweden, Spainand Canada.

Approximately 43,260 square feet, or 5%, of theprincipal plant, office and commercial floor area is owned by Intermec, and thebalance is held under lease.

TheU.S. plants and offices associated with Intermec’s continuing operations arelocated in the following states (in square feet):
| Washington   |   | 327,000 |   |
|--------------|--------|---------|--------|
| Ohio         |   | 97,483  |   |
| Iowa         |   | 96,688  |   |
| Other states |   | 71,082  |   |
| Total        |   | 592,253 |   |

 

The above-mentioned facilities are insatisfactory condition and suitable for the particular purposes for which theywere acquired, constructed or leased and are adequate for present operations.

The foregoinginformation excludes the following properties:

·       Plantsor offices that when added to all other of Intermec’s plants and offices in thesame city, have a total floor area of less than 10,000 square feet.

·       Facilitiesleased by Intermec and subleased to third parties, comprising 25,532 squarefeet in New Mexico and 48,093 square feet in California.

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**ITEM 2.**   PROPERTIES (Continued)

·       Propertiespreviously used in divested IAS businesses:

·        Variouscompany-owned properties totaling approximately 1.3 million square feet,located in Ohio, that are idle as of December 31, 2005. These propertiesare classified as assets held for sale on Intermec’s consolidated balance sheetas of December 31, 2005. (See Footnote D to Intermec’s ConsolidatedFinancial Statements.)

·        Approximately312,000 square feet, located in Michigan, held under lease.

·        Properties owned by Intermecand classified as other assets have an aggregate floor area of approximately746,473 square feet, of which 495,662 square feet, or 66% are located inPennsylvania and 250,811 square feet, or 34% are located in Illinois.

**ITEM 3.**   LEGALPROCEEDINGS

On March 10,2005, Symbol Technologies, Inc. (“Symbol”) terminated its originalequipment manufacturing (“OEM”) agreement with Intermec to supply laser scanengines and stopped shipping laser scan engines to Intermec. On March 10, 2005, Symbol filed a lawsuitin the United States District Court for the District of Delaware seeking adeclaratory judgment that its termination of the OEM agreement is lawful (the “ContractCase”). Intermec believes that thetermination of the OEM agreement by Symbol will not have a material adverseeffect on operations.

Alsoon March 11, 2005, Symbol announced that it had filed a lawsuit againstIntermec on March 10, 2005, in the United States District Court for theDistrict of Delaware for infringement of certain of Symbol’s wirelesstechnology patents (the “Wireless Case”). On March 23, 2005, Intermec filed its answer to Symbol’s complaint and filedcounterclaims against Symbol for infringing Intermec’s wireless access,terminal and software patents. Intermec simultaneously filed its answer to Symbol’s declaratory judgment actionin the contract case and filed counterclaims against Symbol for breach of theOEM agreement. Pursuant to the standstill agreement discussed below,Symbol and Intermec have dismissed without prejudice the claims asserted against each otherin the Wireless Case. Each party retains the right to refile those claims.

On April 28,2005, Symbol announced that it had filed a lawsuit against Intermec in theUnited States District Court for the Western District of Wisconsin forinfringing Symbol’s barcode decoding patents (the “Decoding Case”). On July 14,2005, in response to a motion by Intermec, the Decoding Case was transferred to the United States District Courtfor the District of Delaware. That case has now been consolidated for purposesof discovery with the Wireless Case. Intermec has denied liability in the Decoding Case. Pursuant to the standstillagreement discussed below, the parties have suspended activity in the DecodingCase. Intermec retains the right tofile counterclaims against Symbol in the Decoding Case.

Thecomplaints in the Wireless Case and Decoding Case do not contain sufficientdetails for Intermec to assess whatSymbol will claim regarding the relationship between its cited patents andIntermec’s products. However, based on Intermec’s analysis of the cited Symbol patents, Intermec believes it has substantial defenses to each ofthose patent infringement claims and Intermec intends to vigorously defend itself against the claims asserted bySymbol in the Wireless and Decoding Cases.

On June 30, 2005, Intermecfiled a complaint with the U.S. International Trade Commission (the “ITC”)alleging that Symbol is illegally importing products that infringe Intermecpatents that cover pocket-sized handheld computing devices, modular handheldcomputing devices and recharging and data exchanging cradles (the “ITC Case”).On July 29, 2005, the ITC voted to investigate Intermec’s allegationsagainst Symbol. Pursuant to the standstill agreement, discussed below, Intermec asked the ITC to dismiss and close theinvestigation. On September 26, 2005, in response to Intermec’s request, the Administrative Law Judgeterminated the investigation. On October 12, 2005, the ITC entered aNotice Not to Review the 

18

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**ITEM 3.**   LEGAL PROCEEDINGS (Continued)

Orderterminating the investigation. Pursuant to the standstill agreement discussedbelow, Intermec retains the right to refile the claims made in the ITC Case in the U.S.District Court for the District of Delaware.

On September 1,2005, the parties agreed that they would try to resolve their patent disputesthrough negotiation. To facilitate that effort, the parties entered into astandstill agreement pursuant to which they sought the court’s permission topostpone litigation activity in the cases pending in the U.S. District Courtfor the District of Delaware (the Contract, Wireless and Decoding Cases) until December 1,2005, and to postpone filing any new patent infringement law suits against eachother until March 1, 2006. The standstill agreement’s only exception tothe agreed ban on new lawsuits until March 1, 2006, allows Intermec to file counterclaims against Symbol in theDecoding Case and to file a case in the United States District Court for theDistrict of Delaware alleging infringement by Symbol of the patents asserted byIntermec in the ITC case. Accordingto the standstill agreement, these permitted counterclaims and the permittednew action had to have been filed no sooner than December 1, 2005, and nolater than December 9, 2005. The parties also agreed not to pursue or seektemporary restraining orders, preliminary injunctions or ITC exclusion ordersagainst each other for a period of two years. The United States District Courtfor the District of Delaware granted the scheduling changes required toeffectuate the standstill agreement of the parties.

Theparties agreed to provide additional time for settlement discussions byextending the schedule set forth in the standstill agreement by a minimum of120 days. The parties sought the approval of the United States District Courtfor the District of Delaware for the scheduling changes required to postponelitigation activity in the cases pending in that court for an additional 120days. The court has granted those scheduling changes with respect to theWireless and Decoding Cases. With respect to the Contract Case, the partiesagreed that Symbol would dismiss without prejudice its declaratory judgmentcomplaint and that Intermec woulddismiss without prejudice the breach of contract and patent infringementcounterclaims. If the parties are unable to reach a settlement, each party willhave the right to refile those claims and counterclaims in the same court.

Tower Automotive ProductsCo. v. Lamb Technicon Body and Assembly was a lawsuit filed on March 11,2002, in the Kent County Circuit Court in Michigan, generally alleging a breachof contract involving a frame assembly production line. No specific claim fordamages was made in the Complaint by Tower Automotive Products Co. (“Tower”). OnSeptember 15, 2005, the parties agreed to settle this lawsuit. Toweragreed to dismiss the complaint with prejudice and to release Intermec from anyand all claims it may have had against Intermec. Intermec agreed to dismiss itscounterclaim with prejudice and to release Tower from any and all claims it mayhave had against Tower. In accordance with the terms of the settlement, Intermecpaid $13.5 million to Tower on October 12, 2005. The settlement resultedin a charge of $9.5 million, classified as loss from discontinued operations onIntermec’s consolidated statements ofoperations for the year ended December 31, 2005.

Thesettlement agreement was subject to approval of the U.S. Bankruptcy Court forthe Southern District of New York (“the Bankruptcy Court”) in the casecaptioned in re: Tower Automotive, Inc., et al. The Bankruptcy Courtapproved the settlement agreement on September 27, 2005.

Intermec is currently, and is from time to time, subjectto claims and suits arising in the ordinary  course of its business. In the opinion of Intermec’s General Counsel, the ultimate resolution ofcurrently pending proceedings should not have a material adverse effect on Intermec’s financial condition and results of operations.

**ITEM4.**   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

No matters were submittedto a vote of security holders, through the solicitation of proxies orotherwise, during the fourth quarter of the fiscal year ended December 31,2005.

19

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**PART II**

**ITEM 5.**                MARKETFOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Thehigh and low sales prices of Intermec’s common stock, by quarter, in the yearsended December 31, 2005 and 2004, are as follows:
| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **     | ** ** | **High**                                   | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $                                          | 25.55      |   | $ | 19.84 |   | $ | 26.63 |   | $ | 19.50 |   |
| Second Quarter |       | 27.44                                      |       | 16.69 |   | 22.43 |   | 15.25 |   |
| Third Quarter  |       | 35.15                                      |       | 26.10 |   | 20.24 |   | 13.59 |   |
| Fourth Quarter |       | 37.04                                      |       | 25.12 |   | 25.59 |   | 13.90 |   |
|                |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

Intermec’s commonstock is traded on the New York Stock Exchange under the symbol IN. As of February 28,2006, there were approximately 12,100 record holders and 24,500 beneficialowners of Intermec’s common stock.No cash dividends were paid during 2004 or 2005. Intermec’s Revolving Facility places limits on thepayment of dividends. See discussion of the Revolving Facility under theheading “Liquidity and Capital Resources” in Item 7 of this annual report on Form 10-K.

Common stock repurchases in the fourth quarter of 2005were as follows:
| ** **                                  | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid  per Share** | ** ** | **(c) Total Number  of Shares  Purchased as Part   of Publicly  Announced Plans  or Programs** | ** ** | **(d) Maximum Number  of Shares (or  Approximate Dollar  Value) that May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 3 to  October 30, 2005    |       |                                                  | —     |                                                  |       |                                                                                                                                        | $          | —                                                                                                                                                                                     |       |   |   | — |   |   |   | — |   |   |
| October 31  to November 27, 2005  |       |                                                  | 411        |                                                  |       |                                                                                                                                        | 27.51      |                                                                                                                                                                                       |       |   | — |   |   |   | — |   |   |
| November 28  to December 31, 2005 |       |                                                  | 16,299     |                                                  |       |                                                                                                                                        | 33.32      |                                                                                                                                                                                       |       |   | — |   |   |   | — |   |   |
| Total                                       |       |                                                  | 16,710     |                                                  |       |                                                                                                                                        | $          | 33.18                                                                                                                                                                                      |       |   |   | — |   |   |   | — |   |   |
|                                             |            |                                                       |            |                                                       |            |                                                                                                                                             |            |                                                                                                                                                                                            |            |  |  |  |  |  |  |  |  |  |  |

 

The purchased shares indicatedin the above table were surrendered to Intermec to satisfy tax withholding obligations in connection with the vesting ofrestricted stock.

Seeinformation with respect to securities authorized for issuance under thecaption “Equity Compensation Plan Information” of Intermec’s 2006 Proxy Statement which is incorporatedherein by reference.

20

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**ITEM 6.**                SELECTEDFINANCIAL DATA

**Intermec, Inc.**

**(millionsof dollars, except per share data)**
| ** **                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Operating  Results:(A)**                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues(B)                                         |       | $                                          | 875.5      |   | $ | 811.3 |   | $ | 706.6 |   | $ | 744.4 |   | $ | 655.1 |   |
| Earnings (Loss) from Continuing Operations          |       | $                                          | 40.7       |   | $ | 52.2 |   | $ | 15.1 |   | $ | 37.6 |   | $ | (236.0 | ) |
| Earnings (Loss)  from Discontinued Operations       |       | 21.1                                       |       | (101.3 | ) | (34.4 | ) | (35.2 | ) | (56.2 | ) |
| Net Earnings  (Loss)                                |       | $                                          | 61.8       |   | $ | (49.1 | ) | $ | (19.3 | ) | $ | 2.4 |   | $ | (292.2 | ) |
| Basic Earnings (Loss) per Share                     |       |                                       |       |   |   |   |   |   |   |   |   |
| Continuing Operations                               |       | $                                          | 0.66       |   | $ | 0.86 |   | $ | 0.26 |   | $ | 0.65 |   | $ | (4.15 | ) |
| Discontinued Operations                             |       | 0.34                                       |       | (1.67 | ) | (0.59 | ) | (0.61 | ) | (0.99 | ) |
| Net earnings (loss) per share                       |       | $                                          | 1.00       |   | $ | (0.81 | ) | $ | (0.33 | ) | $ | 0.04 |   | $ | (5.14 | ) |
| Diluted Earnings (Loss) per Share                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Continuing Operations                               |       | $                                          | 0.64       |   | $ | 0.84 |   | $ | 0.25 |   | $ | 0.64 |   | $ | (4.15 | ) |
| Discontinued Operations                             |       | 0.34                                       |       | (1.63 | ) | (0.57 | ) | (0.60 | ) | (0.99 | ) |
| Net earnings (loss) per share                       |       | $                                          | 0.98       |   | $ | (0.79 | ) | $ | (0.32 | ) | $ | 0.04 |   | $ | (5.14 | ) |
| Shares used for Basic Earnings (Loss) per Share     |       | 61,785                                     |       | 60,502 |   | 58,828 |   | 57,821 |   | 56,851 |   |
| Shares used for  Diluted Earnings (Loss) per Share  |       | 63,350                                     |       | 62,154 |   | 60,234 |   | 58,614 |   | 56,851 |   |
| **Financial Position (at end of year):**            |       |                                       |       |   |   |   |   |   |   |   |   |
| Total Assets                                        |       | $                                          | 902.7      |   | $ | 1,072.7 |   | $ | 1,090.8 |   | $ | 1,124.8 |   | $ | 1,207.0 |   |
| Current Portion  of Long-term Debt                  |       | $                                          | —     |   | $ | 108.5 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term Debt                                      |       | $                                          | 100.0      |   | $ | 100.0 |   | $ | 208.5 |   | $ | 224.7 |   | $ | 281.5 |   |
| Working Capital                                     |       | $                                          | 440.4      |   | $ | 399.2 |   | $ | 440.4 |   | $ | 386.8 |   | $ | 350.1 |   |
| Current Ratio                                       |       | 3.0                                        |       | 1.9 |   | 2.4 |   | 2.1 |   | 1.9 |   |
| Total Debt as a Percentage  of Total Capitalization |       | 17                                         | %          | 34 | % | 33 | % | 35 | % | 41 | % |
|                                                     |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(A)       All periods reflect theclassification of IAS as discontinued operations.

(B)        Includesintellectual property sales and settlements of $19.7 million, $18.7 million,$112.4 million, and $30.0 million in 2004, 2003, 2002 and 2001, respectively.

21

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*Thefollowing discussion should be read in conjunction with the ConsolidatedFinancial Statements and the notes thereto that appear in Item 8 of this annualreport on Form 10-K.*

**Overview**

*ContinuingOperations*

Effective January 1, 2006, Intermec changed itsname from UNOVA, Inc. to Intermec, Inc. (“Intermec”). Intermecdesigns, develops, manufactures, integrates, sells, resells and services wiredand wireless automated identification and data collection (“AIDC”) products andsystems, mobile computing products and systems, wired and wireless bar codeprinters, label media and RFID (radio frequency identification) products andsystems. Intermec’s products and services are used by customers within andoutside of the United States to improve the productivity, quality andresponsiveness of their business operations including supply chain management,enterprise resource planning and field sales and service. Customers for Intermec’sproducts and services operate in market segments that include manufacturing,warehousing, direct store delivery, retail, consumer packaged goods, fieldservice, government, and transportation and logistics.

Intermec’s strategy consists of: technology leadershipin the AIDC industry; expanding, strengthening and leveraging Intermec’s AIDCintellectual property portfolio; expanding and strengthening Intermec’s AIDCproduct portfolio; providing integrated AIDC solutions; partnering with globalindustry leaders; achieving economies of scale and scope; profitably increasingmarket share; and increasing the scale of the business.

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

Intermec’s strategy isalso focused on certain application markets, including: warehouse anddistribution center operations; retail store operations; retail storemanagement; in-transit visibility; field service; manufacturing operations;direct store delivery; and RFID supply chain.

*DiscontinuedOperations*

In2005, Intermec divested its IndustrialAutomation Systems (IAS) businesses, which comprised the Cincinnati Lamb andLandis Grinding Systems divisions. The IAS businesses are classified asdiscontinued operations for accounting purposes in the Company’s consolidatedfinancial statements and related notes. The IAS businesses are producers ofmanufacturing products and services, including integrated manufacturingsystems, machining systems, stand-alone machine tools and precision grinding andabrasives operations primarily serving theglobal aerospace, automotive, off-road vehicle and diesel engine industries aswell as the industrial components, heavy equipment and general job shopmarkets.

22

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**ITEM 7.     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)**

**Results of Operations**

Thefollowing discussion compares Intermec’s historical results of operations forthe years ended December 31, 2005, 2004 and 2003. Results from continuingoperations in all years presented include the operations of the IntermecTechnologies and Corporate and Other segments. The operating results of the IASbusinesses are classified as discontinued operations. Results of operations andpercentage of revenues were as follows (millions of dollars):
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | ** **                  | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                                                         | ** ** | **Amounts**                 | ** ** | **Revenues** | ** ** | **Amounts** | ** ** | **Revenues** | ** ** | **Amounts** | ** ** | **Revenues** | ** ** |
| Revenues                                                           |       |                        | $          | 875.5 |   |   |   |   |   |   | $ | 811.3 |   |   |   |   |   |   | $ | 706.6 |   |   |   |   |   |   |
| Costs and  Expenses:                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                                   |       |                        | 512.6      |   |   |   | 58.6 | % |   | 465.4 |   |   | 57.3 | % |   |   | 416.6 |   |   |   | 59.0 | % |   |
| Selling, general and administrative                                |       |                        | 305.0      |   |   |   | 34.8 | % |   | 281.2 |   |   | 34.7 | % |   |   | 247.3 |   |   |   | 35.0 | % |   |
| Total Costs and Expenses                                           |       |                        | 817.6      |   |   |   | 93.4 | % |   | 746.6 |   |   | 92.0 | % |   |   | 663.9 |   |   |   | 94.0 | % |   |
| Operating Profit  from Continuing   Operations                     |       |                        | 57.9       |   |   |   | 6.6 | % |   | 64.7 |   |   | 8.0 | % |   |   | 42.7 |   |   |   | 6.0 | % |   |
| Interest, net                                                      |       |                        | (4.0       | ) |   |   | (0.5 | )% |   | (12.3 | ) |   | (1.6 | )% |   |   | (13.1 | ) |   |   | (1.9 | )% |   |
| Foreign currency  exchange, net                                    |       |                        | 0.7        |   |   |   | 0.1 | % |   | (1.7 | ) |   | (0.2 | )% |   |   | 1.2 |   |   |   | 0.2 | % |   |
| Earnings from  Continuing Operations before Income Taxes           |       |                        | 54.6       |   |   |   | 6.2 | % |   | 50.7 |   |   | 6.2 | % |   |   | 30.8 |   |   |   | 4.3 | % |   |
| Provision  (Benefit) for Income Taxes                              |       |                        | 13.9       |   |   |   | 1.6 | % |   | (1.5 | ) |   | (0.2 | )% |   |   | 15.7 |   |   |   | 2.2 | % |   |
| Earnings from  Continuing Operations, net of tax    |       |                        | 40.7       |   |   |   | 4.6 | % |   | 52.2 |   |   | 6.4 | % |   |   | 15.1 |   |   |   | 2.1 | % |   |
| Earnings (Loss)  from Discontinued Operations, net of tax          |       |                        | 21.1       |   |   |   | 2.4 | % |   | (101.3 | ) |   | (12.5 | )% |   |   | (34.4 | ) |   |   | (4.8 | )% |   |
| Net Earnings (Loss)                                                |       |                        | $          | 61.8 |   |   |   | 7.0 | % |   | $ | (49.1 | ) |   | (6.1 | )% |   |   | $ | (19.3 | ) |   |   | (2.7 | )% |   |
|                                                                    |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Revenues*

Revenuesby category and as a percentage of total revenues from continuing operationsfor the years ended December 31, 2005, 2004 and 2003, as well as theyear-over-year product and service revenue growth were as follows (millions ofdollars):
| ** **                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                  | ** ** | ** **                                 | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                                                  | ** ** | **Amount**                                 | ** ** | **Revenues** | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Amount** | ** ** | **Revenues** | ** ** |
| Revenues:                                                   |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product                                                     |       |                                       | $          | 721.0 |   |   |   | 82.4 | % |   |   | $ | 654.9 |   |   |   | 80.7 | % |   |   | $ | 561.4 |   |   |   | 79.5 | % |   |
| Service                                                     |       |                                       | 154.5      |   |   |   | 17.6 | % |   |   | 136.8 |   |   |   | 16.9 | % |   |   | 126.5 |   |   |   | 17.9 | % |   |
| Intellectual Property  Settlements                          |       |                                       | —     |   |   |   | 0.0 | % |   |   | 19.6 |   |   |   | 2.4 | % |   |   | 18.7 |   |   |   | 2.6 | % |   |
| Total Revenues                                              |       |                                       | $          | 875.5 |   |   |   | 100.0 | % |   |   | $ | 811.3 |   |   |   | 100.0 | % |   |   | $ | 706.6 |   |   |   | 100.0 | % |   |
| ** **                                                  | ** ** | **2005 v. 2004**                 | ** ** | **2004 v. 2003** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Product and Service Revenue Growth:** | ** ** | **Amount**                                 | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **             ** | ** ** | **             ** | ** ** |
| Product                                                     |       |                                       | $          | 66.1 |   |   |   | 10.1 | % |   |   | $ | 93.5 |   |   |   | 16.7 | % |   |             |   |             |   |
| Service                                                     |       |                                       | 17.7       |   |   |   | 12.9 | % |   |   | 10.3 |   |   |   | 8.1 | % |   |   |   |   |   |
| Total Product and  Service Revenues                         |       |                                       | $          | 83.8 |   |   |   | 10.6 | % |   |   | $ | 103.8 |   |   |   | 15.1 | % |   |   |   |   |   |
|                                                             |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

23

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)

Product revenues in 2005increased $66.1 million, or 10.1%, compared to 2004. The revenue growthresulted from an 8.6% increase from Intermec’s core systems and solutionsproducts and a 12.8% increase in Printer/media revenues. The growth in systemsand solutions was driven by strong, broad based product demand, including anincrease in large enterprise account rollouts across Intermec’s industry verticals,strong growth in the indirect sales channel and increasing penetration in theretail market. New computer terminals such as CK61, CN2 and CK31 contributed tothe strong customer demand. Also during 2005 the 700 series mobile computer hada significant technology upgrade, increasing performance and expanding marketcapabilities. The increase in printer/media revenue was primarily driven bystrong demand in North America as a result of new product introductions,including the PX4i and PX6i label printers and new PB42 receipt printer.

Product revenues in 2004increased $93.5 million, or 16.7%, compared to 2003, primarily due to a 20.8%increase from systems and solutions products. A significant amount of thegrowth acceleration in 2004 was attributable to agreements with a number of newlarge enterprise accounts across all regions, continuing to reflect highcustomer interest in Intermec’s broad-based solutions. These systems andsolutions comprise the popular Series 700 Mobile Computer, as well as therecently introduced CK30 handheld, and the CV60 vehicle mount terminal.

Service revenues in 2005increased $17.7 million, or 12.9%, compared to 2005. The 2005 growth in servicerevenue is driven by contract renewal rates improving from already high levels,resulting in a 17% increase in new service contracts during 2005, and anexpansion of professional services which has more than doubled in 2005 comparedto the prior year.

Service revenues in 2004increased $10.3 million, or 8.1%, compared to 2003. The growth in servicerevenue reflected the benefit from the product revenue growth rates and thehigh service attachment rates associated with the new large enterprise accountsfor systems and solutions.

Geographically, productand service revenue increased in all regions during 2005*,*with North America contributing 14.2% growth, Europe, Middle East and Africa (EMEA)contributing 2.6% growth and the Rest of the World (“ROW”) contributing 12.3%growth.

Intermec’s 2004 and 2003operating results include significant revenue and operating profit from  several settlements relating to license feesfor certain of its intellectual property (IP settlements). In aggregate,revenues from IP settlements were $19.6 million and $18.7 million in 2004 and2003, respectively. Operating profits from IP settlements were $15.6 millionand $12.5 million, respectively. 

Intermec’s 2005 operatingresults do not include revenue or operating profit related to IP settlements.In March, 2006, Intermec settled an intellectual property lawsuit relating toits battery power-management patents. For the first quarter of 2006, thesettlement will have a significant positive impact on revenue and Intermeccurrently estimates that the settlement, net of attorney’s fees and costs, willhave a favorable impact on its revenues and on operating profit from continuingoperations in the range of $14 - $18 million. The effect of this IP settlementwill be included in Intermec’s revenues and operating profit for the firstquarter of 2006 and for fiscal year 2006. IP settlements relating to thebattery power-management patents have been reached to date with companies that,in the aggregate, represent over ninety percent of U.S. laptop sales. Intermecis the plaintiff in various other patent infringement lawsuits which may resultin future revenue and operating profit. Management cannot predict the outcome,timing or amount of future settlements or judgments in intellectual propertylawsuits.

24

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

*Gross Profit*

Grossprofit and gross margin by revenue category for the years ended December 31,2005, 2004 and 2003, were as follows (millions of dollars):
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **Gross  Profit**                          | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** |
| Product                              |       | $ 300.3                               |       |   | 41.7 | % |   | $ 274.3 |   |   | 41.9 | % |   | $ 227.9 |   |   | 40.6 | % |   |
| Service                              |       | 62.6                                       |       |   | 40.5 | % |   | 56.0 |   |   | 40.9 | % |   | 49.6 |   |   | 39.2 | % |   |
| Intellectual  Property Settlements   |       | —                                     |       |   | — |   |   | 15.6 |   |   | 79.6 | % |   | 12.5 |   |   | 66.8 | % |   |
| Total Gross  Profit and Gross Margin |       | $ 362.9                               |       |   | 41.4 | % |   | $ 345.9 |   |   | 42.6 | % |   | $ 290.0 |   |   | 41.0 | % |   |

 

Product gross profitincreased $26.0 million, or 9.5%, in 2005 compared to 2004 due to the increasein revenue, slightly offset by a 0.2% decline in gross margin. The decline inproduct gross margin is primarily due to an increase in the mix of lower marginenterprise business. The high margin IP settlement in 2004 and absence of such IPsettlements in 2005 represents 0.9% of the total 1.1% margin decline in 2005.

Product and service grossprofit increased $52.8 million, or 19.0%, in 2004 compared to 2003, due torevenue growth and improved margins for both categories. The improvement inproduct gross margin in 2004 was primarily due to higher capacity utilizationrelated to the revenue growth; component cost reductions; and foreign exchangerate movements and related pricing adjustments. The increase in service grossmargin was primarily attributable to the operating leverage from the revenueincreases realized in 2004 compared to the respective prior year periods and achange in service mix from repair type to an increasing percentage ofprofessional services, primarily as a result of the new large enterpriseaccounts noted above.

The gross profit and grossmargins related to IP settlements in 2004 and 2003 vary based on the amount ofaggregate settlement revenue and related costs.

*Selling, General and Administrative Expense*

Selling, general andadministrative (“SG&A”) expenses were $305.0 million, $281.2 million and$247.3 million for the years ended December 31, 2005, 2004 and 2003,respectively. Intermec’s Technologies SG&A expense of $282.4 millionrepresents an increase of $26.2 million compared to 2004; however,SG&A decreased to 32.3% of product and service revenue in 2005 compared to32.4% in 2004. The reduction in SG&A as a percentage of product and servicerevenue was achieved primarily as a result of better operating leverage inselling, marketing and other general and administrative expense, partiallyoffset by approximately $11.1 million of incremental legal expense. Researchand development (“R&D”) expense decreased by $0.6 million, representing7.6% of product and service revenue in 2005 compared to 8.3% of related revenuein 2004.

Intermec’s Technologies SG&Aexpense of $256.2 million represents an increase of $32.0 million comparedto 2003; however, SG&A decreased to 32.4% of product and service revenue in2004 compared to 32.6% in 2003. The reduction in SG&A as a percentage ofproduct and service revenue was achieved primarily as a result of betteroperating leverage in selling, marketing and other general and administrativeexpense, partially offset by additional R&D expense. Intermec increased itsR&D expense by more than $16 million for specifically targeted investments,resulting in R&D expense representing 8.3% of product and service revenuein 2004 compared to 7.2% of related revenue in 2003.

25

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

Operating expenses forCorporate and Other, classified as SG&A, were $22.6 million, $23.7 millionand $21.4 million in 2005, 2004, and 2003, respectively. The decrease of $1.1million in 2005 compared to 2004 was due primarily to a $2.9 million decreasein operating expense partially offset by $1.8 million of expense related to certaintermination benefits. The increase of $2.3 million in 2004 compared to 2003 wasprimarily due to incremental spending on independent auditor and consultingfees relative to Intermec’s Sarbanes-Oxley section 404 compliance efforts,partially offset by cost reductions achieved as a result of relocating thecorporate headquarters to Everett, Washington in 2003.

*Interest, Net*

Net interest expense of$4.0 million in 2005 represents a decrease of $8.3 million compared to theprior year. The reduction in net interest expense is a result of lower averagedebt and higher cash and cash equivalent balances during 2005. The Companyretired its $100 million seven-year bonds in March 2005 and its $8.5million industrial revenue bond in July 2005. Net interest expensedecreased $0.8 million to $12.3 million for 2004 compared to the prior year asa result of lower average debt and higher cash and cash equivalent balancesduring 2004.

*Provision for Income Taxes*

The provision for incometaxes for the year ended December 31, 2005, reflects an effective tax ratefor continuing operations of 25.5% compared to a U.S. statutory provision rateof 35.0%. The reduction in the effective tax rate is primarily due toreductions in U.S. and foreign tax contingency accruals. The reduction in theU.S. tax contingency accrual relates to Credit for Increasing ResearchActivities, resulting from the resolution of a U.S. tax audit of a formerparent for the same issue. The reduction from the resolution of foreign taxcontingency accrual relates to the resolution of a German tax audit.

The tax benefit for theyear ended December 31, 2004, reflects an effective tax rate forcontinuing operations of 3.0% compared to a U.S. statutory provision rate of35.0%. The reduction in the effective tax rate is primarily due to a $13.5million tax benefit related to goodwill and intangible amortization of Intermec’sSwedish operations. Through the implementation of a tax restructuring plan, Intermecceased reinvesting permanently in its Swedish operations in the fourth quarterof 2004. The restructuring resulted in the recognition of a deferred taxbenefit related to goodwill and intangibles. In addition, as part of Intermec’soverall review of its business operations in 2004 and its commitment to a planto divest its IAS business, Intermec recognized additional deferred taxbenefits related to its U.S. and foreign jurisdictions.

The provision for incometaxes for the year ended December 31, 2003, reflects an effective tax ratefor continuing operations of 50.8%. The increase from the statutory rate of35.0% is primarily attributable to the provision for state taxes and theconversion of certain foreign tax credits to net operating tax loss carryforwardsdue to expected expiration of these tax credits.

*Gain (Loss) from Discontinued Operations*

During the fourth quarterof 2004, Intermec committed to a plan to dispose of its IAS businesses,comprising the Cincinnati Lamb and Landis Grinding Systems businesses and beganclassifying IAS as  discontinuedoperations in Intermec’s consolidated financial statements for all periodspresented.

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

The following table setsforth the components of earnings (loss) from discontinued operations, net oftax, for the years ended December 31, 2005, 2004 and 2003 (thousands ofdollars):
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Product and  service revenues                            |       | $ 223,460                             |       | $ 471,135 |   | $ 448,730 |   |
| Operating Loss                                           |       | (14,114                                    | )          | (109,410 | ) | (42,089 | ) |
| Loss on sale of  Cincinnati Lamb                         |       | (35,926                                    | )          | — |   | — |   |
| Gain on sale of  Landis                                  |       | 42,945                                     |       | — |   | — |   |
| Loss from  discontinued operations before tax            |       | (7,095                                     | )          | (109,410 | ) | (42,089 | ) |
| Benefit for  income taxes                                |       | 28,242                                     |       | 8,100 |   | 7,650 |   |
| Earnings (loss) from  discontinued operations net of tax |       | $ 21,147                              |       | $ (101,310 | ) | $ (34,439 | ) |

 

On December 9, 2005, Intermeccompleted the sale of the Landis Grinding Systems division (“Landis”). Theconsideration received for the Landis purchased assets comprised $69 million incash, a $10 million two-year note at an interest rate of five percent per annumguaranteed by the buyer’s parent, classifiedas other assets on the balance sheet, and the buyer’s assumption ofcertain liabilities, including certain pension and other post-retirementobligations. As of December 31, 2005, the estimated fair value of the noteis $9.4 million, based on the estimated cash flows from the note and arisk-adjusted discount rate equal to LIBOR plus 2.25%. Intermec additionallyhas recorded $10.6 million due from the buyer, classified as other currentassets on the balance sheet,resulting from the estimated purchase price adjustment based on the amount ofnet working assets at closing. The calculation of the estimated purchase priceadjustment is subject to possible adjustment based on final determination ofnet working assets at closing.

The net assets sold of theLandis business were recorded at $34.8 million as of the date of the sale.Long-term liabilities sold include domestic postretirement medical plan obligationsand foreign pension obligations that were assumed by the buyer. The gain on thesale of Landis was $42.9 million. The gain includes a $2.7 million gain relatedto cumulative translation adjustment, a $7.8 million charge for the write-offof goodwill, a $3.8 million accrual relating to the fair value ofbelow-market leases provided to buyer under the terms of the sale agreement,$3.8 million accrual relating to leases of retained buildings, and $14.3million in settlement and curtailment gains that includes $13.8 millionlong-term liabilities sold. Intermec also incurred $2.8 million oftransaction-related expense primarily for professional services.

On April 3, 2005, Intermeccompleted the sale of the Cincinnati Lamb business. Intermec recognized apre-tax loss on the sale of the Cincinnati Lamb business of $34.7 millionduring the quarter ended April 3, 2005. During the second quarter of 2005 Intermecrecognized an additional $1.2 million pre-tax loss on the sale of theCincinnati Lamb business. The net assets sold of the Cincinnati Lamb businesswere recorded at $36.7 million as of the date of the sale and comprised themajority of operating assets and liabilities of the business.

The loss on the saleincludes an $8.3 million gain related to cumulative translation adjustment anda $12.9 million charge related to the adjustment to recognize minimum pensionliability related to Cincinnati Lamb, which previously had been included in theaccumulated other comprehensive income component of shareholders’ investment (“OCI”).Intermec also incurred $5.3 million of transaction-related expense, primarilyfor severance and professional services.

The consideration received for the Cincinnati Lambbusiness included (i) $16 million, paid in cash on April 4, 2005, (ii) a$10.0 million long-term secured note receivable with an estimated fair value of$8.4 million and (iii) liabilities related to certain pension and otherpost-retirement obligations of $39.1 million assumed by the buyer. Intermec wasalso required to deliver to the buyer a guaranteed net working asset 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

balance. Accordingly,during the second quarter of 2005 Intermec reimbursed the buyer $12.6 millionfor accounts payable related to the Cincinnati Lamb business, satisfying thenet working asset adjustment.

In connection with the sale,during the second quarter of 2005 Intermec loaned to the buyer $1.5 million.This note receivable, the $10.0 million long-term secured note and anadditional $1.0 million of face value were combined into a single $12.5 millionlong-term note receivable secured by the assets sold, bearing interest at anannual rate of LIBOR plus three percent (7.4% as of December 31, 2005)with interest payable quarterly. Principal payments on the note are due in sixsemiannual installments beginning April 2007 of $1.5 million, $2.0million, $2.0 million, $2.5 million, $2.0 million and $2.5 million. As of December 31,2005, the estimated fair value of the note is $10.6 million, based on theestimated cash flows from the note and a risk-adjusted discount rate equal toLIBOR plus eight percent. Intermec’s consolidated balance sheet as of December 31,2005, classifies the $10.6 million long-term note receivable as other assets.

In conjunction with thedisposal plan, Intermec analyzed the net assets of IAS for impairment,resulting in a charge of $104.1 million in 2004 to write down the net assets ofCincinnati Lamb to their estimated net realizable value. The charge includedimpairments of $63.3 million for goodwill, $30.2 million for property, plantand equipment and other long-lived assets and $10.6 million for current assets.In computing the impairment loss, Intermec considered the $9.1 million creditbalance for the cumulative translation adjustment and the $9.1 millionunrealized minimum pension liability adjustment, net of tax, related toCincinnati Lamb, which was included in the accumulated other comprehensiveincome component of shareholders’ investment.

The loss from discontinuedoperations before tax in 2005 includes non-cash impairment charges of $2.0million and $9.9 million in charges relating to settlement of lawsuits (SeeNote K to the Consolidated Financial Statements). Loss from discontinuedoperations in 2004 and 2003 include impairment charges of $104.1 million and$4.1 million, respectively. In addition, as a result of merging the CincinnatiMachine, Lamb Machining Systems and Lamb Body and Assembly Systems (“LambB&A”) divisions, which was initiated in the fourth quarter of 2002,restructuring charges of $0.5 million and $3.5 million were incurred in 2004and 2003, respectively. The loss from discontinued operations before taxalso includes a $3.1 million loss on the sale of Lamb B&A in 2003 and LambB&A operating losses of $2.0 million, and $9.2 million, in 2004 and 2003,respectively.

The tax benefit fordiscontinued operations for the year ended December 31, 2005, reflects asignificant difference from the U.S. statutory tax rate of 35% as a result of Intermec’sdivestiture of its IAS businesses through the disposition of the CincinnatiLamb business and the Landis business in the first and fourth quarters of 2005,respectively. The increase is primarily due to approximately $24.0 million oftax benefits from the disposition of the Cincinnati Lamb business. Thesebenefits, including a tax effected capital loss carry forward in the U.S. inthe amount of $12.4 million, resulted from differences between the book basisof assets sold and the related tax basis of the stock and a benefit of $6.9million from a deferred intercompany sale and an election to treat a foreignsubsidiary as a branch.

Intermec ceasedpermanently reinvesting in Canada, Germany, Korea and the U.K. as a result ofthe divestitures. Income tax liability on repatriated earnings wassubstantially offset by estimated foreign tax credits available.

The tax benefit for discontinued operations for theyear ended December 31, 2004, reflects an effective tax rate of 7.4%compared to the U.S. statutory tax rate of 35%. The reduction in the effectivetax rate is largely attributable to the $63.3 million impairment charge relatedto non-deductible goodwill and additional state and foreign valuationallowances recorded against previously recognized deferred tax assets, resultingfrom Intermec’s plan to divest IAS. Intermec expects that certain of its stateand foreign 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

deferred tax assets ofdiscontinued operations will not be realizable and, in 2004, recorded valuationallowances of $5.4 million and $31.3 million, respectively. The tax benefit for2003 reflects an effective rate of 18.2% primarily due to valuation allowancesrecorded for foreign deferred tax assets.

**ForeignCurrency Transactions**

Intermec is subject to theeffects of international currency fluctuations due to the global nature of itsoperations. Foreign currency exposures are hedged as part of Intermec’s globalrisk management program, which is designed to minimize short-term exposure toforeign currency fluctuations. Movements in exchange rates, net of hedgingactivities, resulted in net currencytransaction gains (losses) of $0.7 million, $(1.7) million and $1.2 million forthe years ended December 31, 2005, 2004 and 2003, respectively.

For fiscal year 2005, Intermec’scontinuing operations derived approximately 45.3% of its revenues from non-U.S.customers. At December 31, 2005, long-lived assets attributable to foreigncountries comprised 5.0% of total long-lived assets. The largest components ofthese foreign assets are attributable to European nations, primarily theNetherlands and France.

**Liquidityand Capital Resources**

Intermec’s financialcondition remains strong. At December 31, 2005, cash and cash equivalentstotaled $256.8 million, an increase of $38.9 million compared to theDecember 31, 2004, balance of $217.9 million. Intermec’s net cash,defined as cash and cash equivalents less total debt, increased to $156.8million.

Cash provided by operatingactivities of continuing operations comprises net income adjusted for certainnon-cash items and changes in assets and liabilities. For 2005, cash providedby operating activities of continuing operations was $57.8 million, compared to$44.9 million in 2004 and $41.1 million in 2003. In 2005, cash provided byoperating activities of continuing operations was primarily due to operatingprofit of $40.6 million, and cash proceeds recorded as deferred revenue from Intermec’s2005 Rapid Start intellectual property licensing program of approximately $21.4million.

In 2004, the majority ofthe increase in cash provided by operating activities of continuing operationswas due to higher net earnings and reductions in other current assets andprepaid pension cost, partially offset by increases in net deferred tax assetsand net working capital. The increase innet earnings includes $15.6 millionof net proceeds before tax from an IP settlement.

Investing activities ofcontinuing operations in 2005 provided $1.6 million of net cash primarily dueto $11.0 million in proceeds from the sale of property, plant and equipment,which was principally offset by capital expenditures. Investing activitiesof continuing operations in 2004 and 2003 used net cash of $6.5 millionand $8.1 million, respectively, primarily for capital expenditures, partiallyoffset by proceeds from the sale of property, plant and equipment. Capitalexpenditures were $10.1 million, $10.3 million and $11.9 million for 2005,2004 and 2003, respectively. Proceeds from sales of property, plant andequipment were $11.0 million, $4.0 million and $3.4 million for 2005, 2004 and2003, respectively.

Financing activities of continuing operations in 2005includes $18.0 million in proceeds from stock option exercises and the releaseof the $50.0 million of restricted cash reserved for the repayment of debtoffset by repayment of long-term debt of $108.5 million, reflecting a net useof $38.3 million in cash. Financing activities of continuing operations in 2004reflects $5.7 million in proceeds from stock option exercises offset by the$50.0 million of cash classified as restricted cash in preparation for therepayment of debt, reflecting a net use of $44.1 million in cash. Financingactivities of continuing operations in 2003 reflects $12.9 million in proceedsfrom stock option exercises offset by debt repayments of $16.2 million,reflecting a use of $5.8 million in cash.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)

Net cash used by operating activities of discontinuedoperations was $52.6 million and $13.4 million in 2005 and 2004, respectively.The net cash used by operating activities in 2005 was primarily due to a $13.5 millionsettlement of a lawsuit, a contribution of $11.1 million made by Intermec toits non U.S. pension plan covering retirees of the divested IAS businesses, aswell as an increase in net working assets prior to the divestures. The net cashused by operating activities in 2004 was primarily due to an increase inaccounts receivable. Net cash provided by operating activities of discontinuedoperations was $24.6 million in 2003. The net cash provided was due primarilyto reductions in net working capital, partially offset by restructuring costs.

Net cash provided by investing activities ofdiscontinued operations was $70.4 million in 2005. The net cash provided wasdue primarily to sale of the IAS businesses. Net cash used by investingactivities of discontinued operations was $1.4 million in 2004. Net cashprovided by investing activities of discontinued operations was $8.4 million in2003, primarily from the sale of property, plant and equipment.

Intermec has maintained a secured long-term revolvingcredit facility (the “Revolving Facility”) which originally had a maximumamount available of $100 million. As a result of Intermec’s sale of the IASbusinesses in 2005, and in accordance with its terms, the maximum amountavailable under the Revolving Facility was reduced by reference to the netproceeds received by Intermec from such sale. Effective December 9, 2005,which was the closing date of the sale of the Landis Grinding Systems business,the maximum amount available under the Revolving Facility was reduced to $50million. Management of Intermec believes that the reduction of the maximumamount available under the Revolving Facility will not have any adverse effecton the financial condition or liquidity of Intermec.

Net of outstanding letters of credit and limitationson availability, Intermec had borrowing capacity at December 31, 2005, of$32.1 million under the Revolving Facility. Intermec made no borrowings underthe Revolving Facility during 2005, and as of December 31, 2005, noborrowings were outstanding under this facility. As of December 31, 2005, Intermecwas in compliance with the financial covenants of this agreement.

The key terms ofthe Revolving Facility are as follows:

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

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

·       Untilit retired its 6.875% Notes due March 15, 2005, Intermec was required tomaintain a minimum balance of $50 million as restricted cash. This amountis classified as restricted cash on Intermec’s consolidated balance sheet as ofDecember 31, 2004. This cash restriction was  removed as of December 31, 2005.

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

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

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

Intermec also has maintained a secured long-term £15.0 million ($25.9million) revolving facility and related overdraft facility (collectively, the “UKFacility”). Net of outstanding letters of credit and limitations onavailability, Intermec had no borrowing capacity under the UK Facility at December 31,2005, primarily as a result of disposition of the IAS business. Intermec madeno borrowings under the UK Facility during 2005, and as of December 31,2005, no borrowings were outstanding under this facility. As of December 31,2005, Intermec was in compliance with the financial covenants of thisagreement.

In accordance with its terms, the UK Facilityterminated on February 9, 2006 and Intermec did not extend the term offacility. Managementof Intermec believes that the termination of UK Facility will not have anyadverse effect on the financial condition or liquidity of Intermec.

In March 1998, Intermec sold $200.0 millionprincipal amount of senior unsecured debt in an underwritten offering. The debtcomprised $100.0 million of 6.875% seven-year notes and $100.0 million of 7.00%ten-year notes. Interest payments on the seven-year and ten-year notes are duesemi-annually in March and September. Including underwriting fees,discounts and other issuance costs, the effective interest rates on theseven-year and ten-year notes are 7.125% and 7.175%, respectively. As of December 31,2004, the $100.0 million seven-year notes, maturing in March 2005, areclassified as current portion of long-term obligations on Intermec’sconsolidated balance sheet. In March 2005, Intermec retired the $100.0million seven-year notes. The 7.00% ten-year notes mature in March 2008.

In July 2005, Intermec retired an $8.5 millionindustrial revenue bond, which carried a variable interest rate of 4.97%. Theamount was classified as current portion of long-term obligations on Intermec’sconsolidated balance sheet as of December 31, 2004.

Management believes thatcash and cash equivalents on hand combined with projected cash flow fromoperations and the sale of certain assets will provide adequate funding to meetits expected working capital, capital expenditure and restructuring costrequirements for the next twelve months and working capital, capitalexpenditure and debt repayment obligations for the foreseeable future.Projected cash flows from operations are largely based on Intermec’s revenueestimates, cost estimates, and the related timing of cash receipts and cashdisbursements. If actual performance differs from estimated performance, cashflow from operations could be positively or negatively impacted. Additionalsources of liquidity for Intermec include the Revolving Facility.

**Contractual Obligations**

Thefollowing table summarizes Intermec’s significant contractual commitments forcontinuing operations as of December 31, 2005 (millions of dollars). Thetable does not include amounts recorded on Intermec’s consolidated balancesheet as current liabilities. Long-term debt and operating leases are discussedin the indicated Notes to Intermec’s Consolidated Financial Statements.
| ** **                     | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1 - 3 Years** | ** ** | **3 - 5 Years** | ** ** | **After  5 Years** | ** ** |
| Long-term debt  (Note B)       |       | $                                         | 100.0      |   |   |   |   |   |   | $ | — |   |   |   | $ | 100.0 |   |   |   | $ | — |   |   |
| Interest on long-term  debt    |       | 15.8                                      |       |   | 7.0 |   |   |   | 8.8 |   |   |   | — |   |   |   | — |   |   |
| Operating leases  (Note D)     |       | 64.3                                      |       |   | 12.5 |   |   |   | 17.7 |   |   |   | 12.8 |   |   |   | 21.3 |   |   |
| Total contractual  obligations |       | $                                         | 180.1      |   |   | $ | 19.5 |   |   |   | $ | 26.5 |   |   |   | $ | 112.8 |   |   |   | $ | 21.3 |   |   |
|                                |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Purchase orders or contracts for the purchase of raw materialsand other goods and services are not included in the table above. Intermec isnot able to determine the aggregate amount of such purchase orders thatrepresent contractual obligations, as purchase orders may representauthorizations to purchase 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

rather than binding agreements. For the purposes ofthis table, contractual obligations for the purchase of goods or services aredefined as agreements that are enforceable and legally binding on Intermec andthat specify all significant terms, including: fixed or minimum quantities tobe purchased; fixed, minimum or variable price provisions; and the approximatetiming of the transaction. Intermec’s purchase orders are based on currentmanufacturing needs and are fulfilled by vendors within short time horizons.

Expected future benefitpayments by Intermec’s pension and other postretirement benefit plans are $7.8million in 2006, $17.2 million for 2007 and 2008 combined, $19.9 million for2009 and 2010 combined, and $68.4 for the subsequent five-year period 2011through 2015. Projected benefit payments beyond 2015 are not currentlydeterminable.

**Off-Balance Sheet Arrangements**

At December 31, 2005,Intermec had aggregate off-balance-sheet letter-of-credit reimbursementagreements of $25.8 million that relate to Intermec’s performance on operatingcontracts with customers and generally expire within one year. Management doesnot believe that these letter-of-credit reimbursement agreements have amaterial effect on Intermec’s financial condition, changes in the financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

**Inflation**

In the opinion ofmanagement, inflation has not been a significant factor in the markets in whichIntermec operates in 2005, 2004 or 2003 and has not had a significant impactupon the results of its operations during these fiscal years.

**CriticalAccounting Policies and Estimates**

Intermec’s consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilities,and the reported amounts of revenues and expenses. Actual amounts could differfrom those estimates under different assumptions or conditions. Significant estimates and assumptions were usedto determine the provisions for uncollectible accounts receivable, excess andobsolete inventory, tax valuation allowances, tax contingency accruals, recoverabilityof goodwill and other intangible assets, warranty costs,percentage-of-completion on long-term contracts, retiree medical and pensionobligations, estimated proceeds on businesses to be divested, estimated netrealizable value of assets held for sale and litigation loss contingencies.Despite these inherent limitations, management believes that Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”)and the financial statements and related footnotes provide a meaningful andfair perspective of Intermec.

A summary of Intermec’s significant accountingpolicies is included in Note A to the consolidated financial statements.Management believes that the application of these policies on a consistentbasis enables Intermec to provide the users of the financial statements withuseful and reliable information about Intermec’s operating results andfinancial position. Management believes that the following critical accountingpolicies affect its more significant judgments and estimates used in thepreparation of its consolidated financial statements.

*Allowance for DoubtfulAccounts.*   Intermec maintains an allowance fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. Changes in the financial 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

condition of Intermec’s customers could result inupward or downward adjustments to the allowance for doubtful accounts.

*InventoryObsolescence.*   Intermec writes down its inventoryfor estimated obsolete or unsalable inventory based on assumptions about futuredemand for its products and market conditions. If future demand and marketconditions are less favorable than management’s assumptions, additionalinventory write-downs could be required. Likewise, favorable future demand andmarket conditions could positively impact future operating results ifpreviously written-off inventory is sold.

*IncomeTaxes.*   Intermec considers future market growth,forecasted earnings, future taxable income, the mix of earnings in thejurisdictions in which Intermec operates and prudent, feasible and permissibletax planning strategies in determining the realizability of deferred taxassets. If Intermec were to determine that it would not be able to realize aportion of its net deferred tax asset in the future for which there iscurrently no valuation allowance, an adjustment to the valuation allowancewould be charged to earnings in the period such determination was made.Conversely, if Intermec were to make a determination that it is more likelythan not that the deferred tax assets for which there is currently a valuationallowance would be realized, the related valuation allowance would be reducedand a benefit to earnings would be recorded.

Intermec conducts business in various countriesthroughout the world and is subject to tax in numerous jurisdictions. As aresult of its business activities, Intermec files a significant number of taxreturns that are subject to audit by various tax authorities. Tax audits areoften complex and may require several years to resolve. Intermec recordsestimated tax liabilities to the extent the contingencies are probable and canbe reasonably estimated. Such estimated tax liabilities are based on management’sjudgment and best estimate as to the ultimate outcome of tax audits. However, Intermec’sfuture results may include favorable or unfavorable adjustments to Intermec’sestimated tax liabilities in the period the assessments are made or resolved orwhen statutes of limitation on potential assessments expire. As a result, Intermec’seffective tax rate may fluctuate significantly on a quarterly basis.

*Goodwilland Other Intangible Assets.*   Intangible assetswith finite useful lives are amortized generally on a straight-line basis overthe periods benefited. All of Intermec’s finite lived intangible assets pertainto Intermec’s patent portfolio and have estimated useful lives of 18 years. SeeNote E to the consolidated financial statements for additional information.

The carrying values of intangible assets withindefinite useful lives are tested for impairment annually or when events orcircumstances indicate the carrying value of an asset may not be recoverable.If the carrying value of a reporting unit’s intangible asset exceeds its fairvalue, an impairment loss is recognized. Fair value is estimated based on discountedexpected future cash flows.

During the fourth quarter of 2005, Intermec wroteoff its remaining goodwill balance of $7.8 million, in conjunction with thesale of the Landis business. See Note G to the Consolidated FinancialStatements for additional information.

*Impairmentof Long-lived Assets.**  *Intermecassesses the recoverability of long-lived assets when events or circumstancesindicate that the carrying amount of an asset may not be fully recoverable. Ifundiscounted expected cash flows to be generated by a long-lived asset or assetgroup are less than its carrying amount, Intermec records an impairment towrite down the long-lived asset or asset group to its estimated fair value.Fair value is estimated based on discounted expected future cash flows.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)

*Discontinued Operations.**  *SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” establishes accounting and reportingrequirements for the impairment or disposal of long-lived assets. For thosebusinesses where management has committed to a plan to divest, each business isvalued at the lower of its carrying amount or estimated fair value less cost tosell. If the carrying amount of the business exceeds its estimated fair value,a loss is recognized. The fair values are estimated using accepted valuationtechniques such as a discounted cash flows model, earnings multiples, orindicative bids, when available. A number of significant estimates andassumptions are involved in the application of these techniques, including theforecasting of markets and market share, sales volumes and prices, costs andexpenses, and multiple other factors. Management considers historicalexperience and all available information at the time the estimates are made;however, the fair values that are ultimately realized upon the sale of thebusinesses to be divested may differ from the estimated fair values reflectedin the financial statements.

Businesses divested by Intermecare classified in the consolidated financial statements as discontinuedoperations. For businesses classified as discontinued operations, the balancesheet amounts and income statement results and cash flows are reclassified fromtheir historical presentation to assets and liabilities of discontinuedoperations on the consolidated balance sheets, to loss from discontinuedoperations in the consolidated statements of operations, and to cash flows fromdiscontinued operations on the consolidated statements of cash flows for allperiods presented. Additionally, segment information does not include theresults of businesses classified as discontinued operations.

*Pension Benefits and OtherPostretirement Benefits.**  *Intermec has retirement and pension plans which covermost of its employees. Most of Intermec’s U.S. employees as well as theemployees of certain non-U.S. subsidiaries are covered by contributory definedbenefit plans, under which employees may contribute up to 4% of coveredcompensation annually. Annual employer contributions are made to the extentsuch contributions are actuarially determined to adequately fund the plans.Retiree benefits are based on the amount of participant contributions over theterm of the participant’s employment.

Assumptions used indetermining projected benefit obligations and the fair values of plan assetsfor Intermec’s pension plans and other postretirement benefits are evaluatedperiodically by management in consultation with an external actuary. Changes inassumptions are based on relevant Company data, such as the rate of increase incompensation levels and the expected long-term rate of return on plan assets.Critical assumptions such as the discount rate used to measure the benefitobligations, the expected long-term rate of return on plan assets and healthcare cost projections are evaluated and updated annually. Note K to theconsolidated financial statements includes disclosure of these rates for Intermec’sdomestic and foreign plans. Intermec believes the assumptions are appropriate.However, these assumptions could vary materially from actual results due toeconomic events or different rates of retirement, mortality or withdrawal,positively or negatively impacting future results of operations.

The discount rate, used to discount future cash flowsof benefit obligations back to the measurement date, reflects the market ratefor high-quality fixed-income debt instruments. The discount rates for domesticand foreign plans as of December 31, 2005 were 5.75% and 5.50%,respectively, compared to 6.00% and 5.50% as of December 31, 2004. Thedecline in the discount rate used for domestic plans reflects lower interestrates in the current market. The effect of a one-half percentage point decreasein Intermec’s discount rate on pension cost result in an increase in pensionexpense of $1.7 million. To determine the expected long-term rate of return, Intermecuses historic market trends combined with current market conditions. Theweighted average expected long-term rate of return on its domestic and foreignplans was 8.75% and 8.00%, respectively. The effect on Intermec’s pension costof a one-half percentage point decrease in the expected long-term rate ofreturn would be an increase of $0.6 million. Intermec determines the expectedrate of compensation increase based on historic trends and comparisons to 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

external rates. Fordomestic plans Intermec concluded that no adjustment to the expected rate ofcompensation increase was necessary and continued to use 4.00%. Intermecincreased the rate used for foreign plans to 3.75% annually for 2005 comparedto 3.50% annually for 2004.

Actuarial assumptions usedto measure the accumulated benefit obligation for other postretirement benefitsinclude a discount rate of 5.50%, 6.00% and 6.00% at December 31, 2005,2004 and 2003, respectively. The effect on Intermec’s postretirement benefitcost of one-half percentage point decrease in the discount rate would be immaterial.The assumed health care cost trend rate for fiscal year 2005 was 10.00% and isprojected to decrease over 12 years to 6.00%, where it is expected to remainthereafter. The effect of a one-percentage-point increase ordecrease in the assumed health care cost trend rate on the service cost andinterest cost components of the net periodic postretirement benefit cost is notmaterial. A one-percentage-point increase in the assumed healthcare cost trend rate on the postretirement benefit obligation would result inan increase of approximately $0.3 million, while a one-percentage pointdecrease would result in a decrease of $0.3 million.

*Revenue Recognition.*   Revenuesare generally recognized when products are shipped or services are rendered,the title and risk of loss has passed to the customer, the sales price is fixedor determinable and collectibility is reasonably assured. Royalty revenue isrecorded when the revenue is earned, the price is fixed or determinable andcollectibility is reasonably assured. Service and maintenance revenue isrecognized as services are rendered, generally over the contract term, andcollectibility is reasonably assured. When a sale involves multiple elements,such as sales of products that include services, the entire revenue from thearrangement is allocated to each respective element based on its relative fairvalue and is recognized when the revenue recognition criteria for each elementare met. Fair value for each element is established based on the sales pricecharged when the same element is sold separately. Intermec reduces revenue forestimated customer returns, price protection, rebates and other offerings thatoccur under sales programs established by Intermec directly or with Intermec’sdistributors and resellers. Intermec accrues the estimated cost of post-saleobligations, including basic product warranties, based on historical experienceat the time Intermec recognizes revenue.

Rapid Start RFIDintellectual property (“RFID IP”) royalties—Intermec licenses rights to useportions of its IP portfolio, including certain patents essential to and/oruseful in the manufacture and sale of certain RFID products. As a result of Intermec’sRFID IP licensing program, which ended on August 31, 2005, Intermec hasexpanded its revenue recognition policy to include the license fees from thisprogram. Licensees participating in the Rapid Start program typically paid anonrefundable up-front fee and agreed to pay ongoing royalties based on theirsales of products incorporating or using Intermec’s licensed RFID IP. Under theterms of such Rapid Start RFID license agreements, the licensees receive theright to certain future divisions, continuations and continuations-in-part ofthe licensed RFID patents. Non-refundable up-front fees related to Intermec’sRapid Start RFID IP licensing program are recorded as deferred revenue andrecognized over five years, representing the estimated future period Intermecexpects to receive patents on certain divisions, continuations and/orcontinuations-in-part for the licensed RFID patents and Intermec’s estimate ofthe average technology lifecycle for the automated identification data capture(“AIDC”) industry. Intermec earns royalties on licensed RFID products soldworldwide by its licensees at the time that the licensees’ sales occur. Intermec’slicensees report and pay royalties owed for sales made in any given quarterafter the conclusion of that quarter. Intermec has determined that, due to thelack of historical trends coupled with the anticipated escalating businesstrends, Intermec does not have the ability to reliably estimate the runningroyalties when earned. Therefore, Intermec recognizes such royalty revenue inthe quarter in which the royalties are reported to Intermec by the licensees.

Long-term contracts, principally within the IASbusinesses, classified as discontinued operations, are accounted for under thepercentage-of-completion, cost-to-cost method of accounting, which requires 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

Intermec to estimate total expected contract revenuesand costs and record revenues and profits over the term of the contract.Estimated contract revenues and costs are based on contract specifications,expected requirements, and achievement of contract milestones, includingdeliveries. The cumulative impact of changes in expected contract revenues andcosts and any anticipated losses are charged to operations as soon as they aredeterminable.

*Contingencies.*   Intermecassesses its exposure to loss contingencies, including environmental, legal andincome tax matters, and provides for an exposure if it is judged to be probableand estimable. If the actual loss from a contingency differs from management’sestimates, results of operations are adjusted upward or downward.

*Stock-Based Compensation.*   Asof December 31, 2005, Intermec had four stock-based compensation plansavailable for future grants. These plans are accounted for under therecognition and measurement principles of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related Interpretations. No stock-basedcompensation cost is reflected in net income, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. During the first quarter of 2006, Intermecwill begin expensing stock options as required under SFAS No. 123(R),Share-Based Payments.

**New Accounting Pronouncements**

In November 2005, the FASB issued FASB StaffPosition (“FSP”) No. FAS 115-1 and FAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”which addresses the determination as to when an investment is consideredimpaired, whether that impairment is other than temporary, and the measurementof an impairment loss. This FSP also includes accounting considerationssubsequent to the recognition of an other-than-temporary impairment andrequires certain disclosures about unrealized losses that have not beenrecognized as other-than-temporary impairments. The guidance in this FSP amendsSFAS No. 115, Accounting for Certain Investments in Debt and EquitySecurities, and SFAS No. 124, Accounting for Certain Investments Held byNot-for-Profit Organizations, and APB Opinion No. 18, The Equity Method ofAccounting for Investments in Common Stock. This FSP becomes effective forIntermec in the first quarter of 2006. Intermec does not expect the adoption ofthis Statement to have a material impact on its financial condition or resultsof operations.

In June 2005, the FASB issued FSP No. SFAS No. 143-1,“Accounting for Electronic Equipment Waste Obligations”, that provides guidanceon how commercial users and producers of electronic equipment should recognizeand measure asset retirement obligations associated with the European Directive2002/96/EC on Waste Electrical and Electronic Equipment. Intermec adopted SFAS143-1 during the three months ended June 30, 2005. The adoption ofSFAS 143-1 did not have a material effect on Intermec’s financialstatements. Due to the fact that several major EU-member countries have not yetenacted country-specific laws, Intermec cannot estimate the effect of applyingthis guidance in future periods.

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—a Replacement of APB Opinion No. 20 and FASBStatement No. 3”, which changes the requirements for the accounting andreporting of a change in accounting principle. The Statement applies to allvoluntary changes in accounting principles and to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. This Statement requiresretrospective application to prior periods’ financial statements of a change inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

Intermec is required to adopt this statement duringthe first quarter of 2006, and does not expect the adoption of this statementto have a material impact on its financial condition or results of operations.

In March 2005, the FASB issued Interpretation No. (FIN)47, Accounting for Conditional Asset Retirement Obligations, to clarify therequirement to record liabilities stemming from a legal obligation to clean upand retire fixed assets, such as a plant or factory, when an asset retirementdepends on a future event. Intermec plans to adopt FIN 47 in the first quarterof fiscal 2006, and does not expect the application of FIN 47 to have amaterial impact on its results of operations, cash flows or financial position.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (“SFAS 123R”). Under the provisions of SFAS 123R, companies arerequired to measure the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value of the award(with limited exceptions). That cost will be recognized over the period duringwhich an employee is required to provide service in exchange for the award,usually the vesting period. On April 14, 2005, the Securities and ExchangeCommission (SEC) approved a delay to the effective date of SFAS 123R. Under thenew SEC rule, SFAS 123R is effective for annual periods that begin after June 15,2005. SFAS 123R applies to all awards granted, modified, repurchased orcancelled by Intermec after December 31, 2005, and to unvested options atthe date of adoption. Intermec will begin expensing stock-based compensation inaccordance with the standard in the first quarter of 2006. Accordingly, theadoption of SFAS 123R’s fair value method is expected to reduce earingsper share by approximately $0.05 per share for the year endingDecember 31, 2006.

FASB Staff Position (“FSP”) No. 109-2, “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004” (“FSP 109-2”), providesguidance under FASB Statement No. 109, “Accounting for Income Taxes,” withrespect to recording the potential impact of the repatriation provisions of theAmerican Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income taxexpense and deferred tax liability. The Jobs Act was enacted on October 22,2004. FSP 109-2 states that an enterprise is allowed time beyond thefinancial reporting period of enactment to evaluate the effect of the Jobs Acton its plan for reinvestment or repatriation of foreign earnings for purposesof applying FASB Statement No. 109. The Jobs Act had no effect on Intermec’saccounting for income tax.

In November 2004, the FASBissued SFAS No. 151, “Inventory Costs—an Amendment of ARB No. 43, Chapter 4.”This standard provides clarification that abnormal amounts of idle facilityexpense, freight, handling costs, and spoilage should be recognized ascurrent-period charges. Additionally, this standard requires that allocation offixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. The provisions of this standard areeffective for inventory costs incurred during fiscal years beginning afterJune 15, 2005. Intermec does not expect the adoption of this standard tohave a material impact on its consolidated financial statements.

**Forward-LookingStatements and Risk Factors**

Forward-looking statements contained in this filingare subject to the safe harbor created by the Private Securities LitigationReform Act of 1995 (alternatively: Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934) and are dependentupon a variety of important factors that could cause actual results to differmaterially from those reflected in such forward-looking statements. Thesefactors include but are not limited to Intermec’s ability to maintain or toimprove the revenues and profits of its continuing operations, maintain orreduce expenses, maintain or improve operational efficiency, use its investmentin research and development to generate future revenue, maintain or improveyear-over-year growth in the revenues and profits of its continuing operationsand the other factors 

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**ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS (Continued)**

described in Item 1A andItem 7 of this filing. Intermec undertakes no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events, changed circumstances or any other reason after the date of thisannual report.

Suchforward-looking statements involve and are dependent upon certain risks anduncertainties. When used in this document and in documents it references, thewords “anticipate,” “believe,” “will,” “intend,” “project” and “expect” andsimilar expressions as they relate to Intermec or its management are intendedto identify such forward-looking statements.

Forward-looking statementsare not guarantees of future performance. A number of factors can impact Intermec’sbusiness and determine whether Intermec can or will achieve any forward-lookingstatement made in this report. Any one of these factors could cause Intermec’sactual results to differ materially from those discussed in a forward-lookingstatement. Intermec outlines these risk factors in reports that it files withthe SEC, in press releases and on its website, www.intermec.com.

Readers of this report areencouraged to review the Risk Factors portion of Item 1A of this filing whichdiscusses the risk factors associated with Intermec’s business.

**ITEM7A.   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

Intermec is exposed tointerest rate risk primarily from its short-term and long-term borrowings andto foreign exchange rate risk with respect to its foreign operations and fromforeign currency transactions.

*Interest Rates:*   Asof December 31, 2005, Intermec’s outstanding borrowings comprised $100.0million in fixed rate debentures that mature in March 2008 and have aninterest rate of 7.00%. The fair value of the fixed rate debentures onDecember 31, 2005, as determined based on recent market trades, was $100.0million. In addition, Intermec had variable rate facilities with no outstandingborrowings comprising the Revolving Facility and the U.K. Facility. Seediscussions of Intermec’s credit facilities under the heading “Liquidity andCapital Resources” in Item 7 of this annual report and in Note B to theConsolidated Financial Statements.

*Foreign Exchange Rates:*   Dueto its global operations, Intermec’s cash flow and earnings are exposed to foreignexchange rate fluctuations. When appropriate, Intermec may attempt to limit itsexposure to changing foreign exchange rates by entering into short-term foreigncurrency exchange contracts. Intermec does not enter into any foreign currencycontracts for speculative or trading purposes. Contracts that effectively meetrisk reduction and correlation criteria are accounted for as hedges and,accordingly, gains and losses from mark-to-market adjustments are deferred inthe cost basis of the underlying transaction. In those circumstances when it isnot appropriate to account for contracts as hedges, gains and losses frommark-to-market adjustments are recorded currently in earnings. Intermecperformed a sensitivity analysis assuming a hypothetical 10 percent movement inforeign currency exchange rates applied to the exposure described above. As ofDecember 31, 2005, the analysis indicated that if Intermec’s hedges offoreign exchange exposure were not in place, such market movements would havean impact of approximately $5.7 million on Intermec’s results of operations.Actual gains or losses in the future may differ significantly from thatanalysis, however, based on changes in the timing and amount of interest rateand foreign currency exchange rate movements and Intermec’s actual exposuresand hedging activities.

During 2005, Intermec’s sales comprised $532.4million, or 61%, denominated in U.S. dollars, $169.9 million, or 19%, denominatedin euros, $55.4 million or 6%, denominated in British pounds, and $117.8million, or 14% denominated in other foreign currencies. Fluctuations inforeign currency translation rates positively impacted Intermec’s sales byapproximately $2.1 million, $24.7 million and $31.5 million in 2005, 2004 and2003, respectively.

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**ITEM8.     FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**
|                                                                                                                                   | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Management’s  Responsibility for Financial Reporting                                                                         |       | F-1      |       |
| Management’s  Report on Internal Control over Financial Reporting                                                            |       | F-1      |       |
| Management’s  Certifications.                                                                                                |       | F-2      |       |
| Reports of  Independent Registered Public Accounting Firm                                                                         |       | F-3      |       |
| Consolidated  Statements of Operations   for the years ended December 31, 2005, 2004 and 2003                                |       | F-6      |       |
| Consolidated  Balance Sheets   as of December 31, 2005 and 2004                                                              |       | F-7      |       |
| Consolidated  Statements of Cash Flows   for the years ended December 31, 2005, 2004 and 2003                                |       | F-8      |       |
| Consolidated  Statements of Changes in Shareholders’ Investment   for the years ended December 31, 2005, 2004 and 2003. |       | F-9      |       |
| Notes to  Consolidated Financial Statements                                                                                       |       | F-10     |       |
| Quarterly Financial  Information (unaudited)                                                                                      |       | Q-1      |       |

 

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Evaluation of Disclosure Controls and Procedures**

Intermec’s Chief ExecutiveOfficer and Chief Financial Officer have evaluated the Company’s disclosurecontrols and procedures as of the end of the period covered by this report andthey have concluded that these controls and procedures are effective.

**Internal control over financialreporting**

(a)           Management’s AnnualReport on Internal Control over Financial Reporting

Management’s Report on Internal Control over FinancialReporting is on page F-1 of this annual report on Form 10-Kand is incorporated by reference.

(b)   AttestationReport of the Registered Public Accounting Firm

Management’s assessment of the effectiveness of Intermec’sinternal control over financial reporting as of December 31, 2005 has beenaudited by Deloitte & Touche LLP, an independent registered publicaccounting firm, as stated in their report which is on page F-3 ofthis annual report on Form 10-K and is incorporated by reference.

(c)    Changes inInternal Control over Financial Reporting

During the fourth quarter2005, Intermec made changes to its controls and procedures as part of itsongoing monitoring of controls. However, none of these changes has materiallyaffected, or is reasonably likely to materially affect, Intermec’s internalcontrol over financial reporting.

**ITEM 9B**          OTHERINFORMATION

None

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**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

Intermec has adopted a code of business conduct andethics for all directors, officers and employees, known as the Standards ofConduct. The Standards of Conduct are available on Intermec’s website underInvestor Information at *http://www.intermec.com*.Intermec intends to disclose on its website any amendment to, or waiver, of theStandards of Conduct related to senior officers. Shareholders may request a freecopy of the Standards of Conduct from:

Intermec, Inc.Attention: Investor Relations6001 36th Avenue WestEverett, WA 98203-1264

Theexecutive officers of Intermec are elected each year by the Board of Directorsat its first meeting following the Annual Meeting of Shareholders to serveduring the ensuing year and until their respective successors are elected andqualified or until their earlier resignation or removal. There are no familyrelationships between any of the executive officers of Intermec. The followinginformation indicates the positions and ages of Intermec’s executive officersat March 1, 2006, and their business experience during the prior fiveyears.
| **Name**            | ** ** | ** ** | ** ** | **Age**                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Position with Company and Principal Business Affiliations  During Past Five Years** |
|---------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|
| Larry D. Brady      |       | 63         |       | Chairman of the Board  since August 2001. Chief Executive Officer since September 2000.  Director since September 1999, and President since July 1999.  Served as Chief Operating Officer from July 1999 to September 2000.  For prior business experience, see the description of Directors in “Election  of Directors” in the 2005 Proxy Statement.                                                                                 |
| Kenneth L. Cohen    |       | 62         |       | Vice President and  Treasurer since January 1, 2004 and Vice President, Taxes since  July 2000. Prior thereto, Staff Vice President, Taxes from  October 1997.                                                                                                                                                                                                                                                                                                 |
| Steven J. Winter    |       | 49         |       | Vice President since  1999. President and Chief Operating Officer of the Company’s Intermec Technologies  Corporation subsidiary (“ITC”) since September 2005. Prior thereto, Executive  Vice President and Chief Operating Officer of ITC from October 2004 to  September 2005. Prior thereto, Executive Vice President from March 2004 to  September 2004. Prior thereto, Senior Vice President of Global Services of  ITC from November 1999 to March 2004. |
| Janis L. Harwell    |       | 51         |       | Senior Vice President,  General Counsel and Corporate Secretary since January 2006. Prior  thereto, Senior Vice President and General Counsel from September 2004  to January 2006. Prior thereto, Vice President, General Counsel and  Secretary of Renessen LLC, an agricultural biotechnology joint venture formed  by Cargill, Inc. and Monsanto Company, from January 1999 to August 2004.                                                 |
| Fredric B. Anderson |       | 38         |       | Vice President and  Controller, and Acting Chief Financial Officer since September 2005. Prior  thereto, Director of Accounting and Financial Reporting, and Chief Accounting  Officer, since July 2002. Prior thereto, employed by Ernst & Young LLP  from 1990 to 2002, including as Senior Manager from 1997 to 2002.                                                                                                                                                  |

 

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Information relating todirectors of Intermec and other information relating to will be contained in Intermec’sdefinitive Proxy Statement relating to the Annual Meeting of Shareholders to beheld on May 17, 2006 (the “2006 Proxy Statement”), which is incorporatedherein by reference.

**ITEM 11.**         EXECUTIVECOMPENSATION

See the informationrelating to executive compensation under the caption “Executive Compensation”in Intermec’s 2006 Proxy Statement, which is incorporated herein by reference.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

See the information with respect to beneficialownership of Intermec’s voting securities by each director, certain executiveofficers and all executive officers and directors as a group, and by any personknown to beneficially own more than 5% of any class of voting security of Intermec,under the caption “Security Ownership of Certain Beneficial Owners andManagement” of Intermec’s 2006 Proxy Statement, which is incorporated herein byreference.

See the informationrelating to the number of securities remaining to be issued under Intermec’sequity compensation plans under the caption “Equity Compensation PlanInformation” of Intermec’s 2006 Proxy Statement, which is incorporated hereinby reference.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

See “Certain Relationshipsand Related Transactions” in Intermec’s 2006 Proxy Statement.

**ITEM 14.**   PRINCIPALACCOUNTANT FEES AND SERVICES

See the informationrelating to principal accounting fees and services under the caption “PrincipalAccountant Fees and Services” in Intermec’s 2006 Proxy Statement, which isincorporated herein by reference.

**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULE

(a)           (1)   Financial Statements

See listing of financial statements as set forth inItem 8 of this annual report on Form 10-K.

(2)         Financial StatementSchedule

Schedule II. Valuation and Qualifying Accounts at page S-1of this annual report on Form 10-K.

All other schedules specified under Regulation S-X areomitted because they are either not applicable, not required or the informationcalled for therein appears in the consolidated financial statements or notesthereto.

(3)         Executive CompensationPlans and Arrangements

Executive compensation plans and arrangements arelisted as exhibits 10.7 through 10.37 as set forth in the Index to Exhibits at page E-1of this annual report.

(b)                   Index to Exhibits at page E-1 of this annualreport.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|        |   | Intermec, Inc.                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |   | /s/ FREDRIC B. ANDERSON                                                                                               |
|   |   | Fredric B. Anderson                                                                                                   |
|   |   | *Vice  President, Controller and*

*Acting  Chief Financial Officer*

*(Principal  Financial and Accounting Officer)* |
|   |   | March 15, 2006                                                                                                   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:
|                          |   | Vice President, Controller and         |   |                |
|--------------------------|--------|----------------------------------------|--------|---------------------|
| /s/ FREDRIC B.  ANDERSON |   | Acting Chief Financial Officer         |   | March 15, 2006 |
| Fredric B. Anderson      |   | (Principal Financial                   |   |                |
|                     |   | and Accounting Officer)                |   |                |
| /s/ LARRY D.  BRADY      |   | Director, Chairman of  the Board,      |   | March 15, 2006 |
| Larry D. Brady           |   | President and  Chief Executive Officer |   |                |
| /s/  STEPHEN E. FRANK    |   | Director                               |   | March 15, 2006 |
| Stephen E. Frank         |   |                                   |   |                |
| /s/  CLAIRE W. GARGALLI  |   | Director                               |   | March 15, 2006 |
| Claire W.  Gargalli      |   |                                   |   |                |
| /s/  GREGORY K. HINCKLEY |   | Director                               |   | March 15, 2006 |
| Gregory K.  Hinckley     |   |                                   |   |                |
| /s/  LYDIA H. KENNARD    |   | Director                               |   | March 15, 2006 |
| Lydia H. Kennard         |   |                                   |   |                |
| /s/  ALLEN J. LAUER      |   | Director                               |   | March 15, 2006 |
| Allen J. Lauer           |   |                                   |   |                |
| /s/  STEPHEN P. REYNOLDS |   | Director                               |   | March 15, 2006 |
| Stephen P.  Reynolds     |   |                                   |   |                |
| /s/  STEVEN B. SAMPLE    |   | Director                               |   | March 15, 2006 |
| Steven B. Sample         |   |                                   |   |                |
| /s/  OREN G. SHAFFER     |   | Director                               |   | March 15, 2006 |
| Oren G. Shaffer          |   |                                   |   |                |
| /s/  LARRY D. YOST       |   | Director                               |   | March 15, 2006 |
| Larry D. Yost            |   |                                   |   |                |

 

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**Intermec, Inc.**

**Management’sResponsibility for Financial Reporting**

The consolidated financial statements of Intermec, Inc.and subsidiaries and related financial information included in this annual report,have been prepared by the Company, whose management is responsible for theirintegrity. These statements, which necessarily reflect management’s best estimatesand judgments, have been prepared in conformity with accounting principlesgenerally accepted in the United States of America. The other financialinformation included in the annual report is consistent with that in thefinancial statements.

Management also recognizes its responsibility forconducting the Company’s business with honesty and integrity in all itsbusiness relationships with its employees, customers and suppliers. Theresponsibility is characterized and reflected in the Company’s Standards ofConduct, which apply to all directors, officers and other employees of theCompany. These Standards include the conduct of its business activities withinthe laws of the countries in which the Company operates and potentiallyconflicting outside business interests of its directors, officers and other employees.The Company maintains a systematic program to assess compliance with thesepolicies.

The consolidated financial statements have beenaudited by Deloitte & Touche LLP, the Company’s independent registeredpublic accounting firm, whose report appears on page F-3.

The Audit and ComplianceCommittee of the Board of Directors, which consists solely of independent directorsunder the applicable standards of the New York Stock Exchange, meets at leastquarterly with management, the independent auditors and the Company’s internalauditors to review the scope of their activities and reports relating to internalcontrols and financial reporting matters. The independent and internal auditorshave full and free access to the Audit and Compliance Committee and meet withthe Committee both in and out of the presence of Company management.

**Management’sReport on Internal Control over Financial Reporting**

The Company’s management is responsible forestablishing and maintaining adequate internal control over financial reportingfor the Company. In order to evaluate the effectiveness of internal controlover financial reporting, as required by Section 404 of the Sarbanes-OxleyAct, the Company’s management has conducted an assessment, including testing,using the criteria in *Internal Control—IntegratedFramework*, issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (“COSO”). The Company’s management has concluded that,as of December 31, 2005, its internal control over financial reporting iseffective based on these criteria. The Company’s independent registered publicaccounting firm, Deloitte & Touche LLP, have issued an audit report onthe Company’s assessment of its internal control over financial reporting,which is included herein.

There were no changes in the Company’s internalcontrols over financial reporting during the quarter ended December 31,2005 that have materially affected, or are reasonably likely to materiallyaffect, its internal controls over financial reporting.

The Company’s management,including its Chief Executive Officer and Chief Financial Officer, does notexpect that the Company’s disclosure controls and procedures or its internalcontrol will prevent all errors and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected.

F-1

----

**Management’s Certifications**

Thecertifications of the Company’s Chief Executive Officer and Chief FinancialOfficer required by the Sarbanes-Oxley Act have been included as Exhibits 31and 32 in the Company’s Form 10-K. In addition, in 2005, the Company’sChief Executive Officer provided to the New York Stock Exchange the annual CEOcertification regarding the Company’s compliance with the New York StockExchange’s corporate governance listing standards.
| /s/ LARRY D. BRADY                              |     |     |
|-------------------------------------------------|----------|----------|
| Larry D. Brady                                  |     |     |
| *Chief  Executive Officer*                      | * * | * * |
| March 15,  2006                            |     |     |
| /s/ FREDRIC B. ANDERSON                         |     |     |
| Fredric B.  Anderson                            |     |     |
| *Vice  President and Controller*                | * * | * * |
| *Acting  Chief Financial Officer*               | * * | * * |
| *(Principal  Financial and Accounting Officer)* |     |     |
| March 15,  2006                            |     |     |

 

F-2

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board ofDirectors and Shareholders ofIntermec, Inc.Everett, Washington

We have audited the accompanying consolidated balancesheets of Intermec, Inc. and subsidiaries (the “Company”) as of December 31,2005 and 2004, and the related consolidated statements of operations, changesin shareholders’ investment, and cash flows for each of the three years in theperiod ended December 31, 2005. Our audits also included the financialstatement schedule listed in the Index at Item 15. These financial statements andfinancial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States) (“PCAOB”).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of Intermec, Inc.and subsidiaries as of December 31, 2005 and 2004, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, thefinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

Wehave also audited, in accordance with the standards of the PCAOB theeffectiveness of the Company’s internal control over financial reporting as of December 31,2005, based on the criteria established in *Internal Control—IntegratedFramework,* issued by the Committee of Sponsoring Organizations ofthe Treadway Commission and our report dated March 15, 2006 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an unqualified opinionon the effectiveness of the Company’s internal control over financial reporting.
| /s/ DELOITTE &  TOUCHE LLP |   |   |
|-------------------------------------|--------|--------|
| Seattle,  Washington                |   |   |
| March 15,  2006                |   |   |

 

F-3

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board ofDirectors and Shareholders ofIntermec, Inc.Everett, Washington

We have audited management’s assessment, included inthe accompanying *Management’s Report on Internal Control overFinancial Reporting*, that Intermec, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December 31,2005, based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States) (“PCAOB”).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Companymaintained effective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2005,based on the criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission.

F-4

----

Wehave also audited, in accordance with the standards of the PCAOB, theconsolidated financial statements and financial statement schedule as of andfor the year ended December 31, 2005 of the Company and our report dated March 15,2006 expressed an unqualified opinion on those financial statements andfinancial statement schedule.
| /s/ DELOITTE &  TOUCHE LLP |   |   |
|-------------------------------------|--------|--------|
| Seattle,  Washington                |   |   |
| March 15,  2006                |   |   |

 

F-5

----

**INTERMEC, INC.CONSOLIDATED STATEMENTSOF OPERATIONS(thousands of dollars, except per share amounts)**
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                             |       |                                       |       |   |   |   |   |
| Product                                               |       | $                                          | 720,959    |   | $ | 654,867 |   | $ | 561,362 |   |
| Service                                               |       | 154,523                                    |       | 136,800 |   | 126,553 |   |
| Intellectual property settlements                     |       | —                                     |       | 19,650 |   | 18,668 |   |
| Total Revenues                                        |       | 875,482                                    |       | 811,317 |   | 706,583 |   |
| Costs and  Expenses:                                  |       |                                       |       |   |   |   |   |
| Cost of product revenues                              |       | 420,707                                    |       | 380,578 |   | 333,505 |   |
| Cost of service revenues                              |       | 91,899                                     |       | 80,821 |   | 76,944 |   |
| Cost of intellectual property settlements             |       | —                                     |       | 4,031 |   | 6,174 |   |
| Selling, general and administrative                   |       | 304,995                                    |       | 281,174 |   | 247,295 |   |
| Total Costs and Expenses                              |       | 817,601                                    |       | 746,604 |   | 663,918 |   |
| Operating Profit  from Continuing Operations          |       | 57,881                                     |       | 64,713 |   | 42,665 |   |
| Interest, net                                         |       | (4,026                                     | )          | (12,361 | ) | (13,085 | ) |
| Foreign currency  exchange, net                       |       | 670                                        |       | (1,675 | ) | 1,242 |   |
| Earnings from Continuing  Operations before           |       |                                       |       |   |   |   |   |
| Income Taxes                                          |       | 54,525                                     |       | 50,677 |   | 30,822 |   |
| Provision  (Benefit) for Income Taxes                 |       | 13,880                                     |       | (1,504 | ) | 15,650 |   |
| Earnings from  Continuing Operations                  |       | 40,645                                     |       | 52,181 |   | 15,172 |   |
| Gain (Loss) from  Discontinued Operations, net of tax |       | 21,147                                     |       | (101,310 | ) | (34,439 | ) |
| Net Earnings  (Loss)                                  |       | $                                          | 61,792     |   | $ | (49,129 | ) | $ | (19,267 | ) |
| Basic Earnings  (Loss) per Share                      |       |                                       |       |   |   |   |   |
| Continuing Operations                                 |       | $                                          | 0.66       |   | $ | 0.86 |   | $ | 0.26 |   |
| Discontinued Operations                               |       | 0.34                                       |       | (1.67 | ) | (0.59 | ) |
| Net Earnings (Loss) per Share                         |       | $                                          | 1.00       |   | $ | (0.81 | ) | $ | (0.33 | ) |
| Diluted Earnings  (Loss) per Share                    |       |                                       |       |   |   |   |   |
| Continuing Operations                                 |       | $                                          | 0.64       |   | $ | 0.84 |   | $ | 0.25 |   |
| Discontinued Operations                               |       | 0.34                                       |       | (1.63 | ) | (0.57 | ) |
| Net Earnings  (Loss) per Share                        |       | $                                          | 0.98       |   | $ | (0.79 | ) | $ | (0.32 | ) |
|                                                       |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

F-6

----

**INTERMEC, INC.CONSOLIDATED BALANCE SHEETS(thousands of dollars)**
| ** **                                                                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                      | ** ** | ** **            |       | ** ** | ** ** |
| Current Assets:                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents                                                                       |       | $                     | 256,782    |   | $ | 217,899 |   |
| Restricted cash                                                                                 |       | —                |       | 50,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $8,157 (2005) and $9,771 (2004) |       | 180,985               |       | 157,833 |   |
| Inventories                                                                                     |       | 82,088                |       | 80,854 |   |
| Net deferred tax assets                                                                         |       | 100,656               |       | 81,769 |   |
| Assets held for sale                                                                            |       | 8,517                 |       | 19,748 |   |
| Assets of discontinued operations                                                               |       | —                |       | 211,116 |   |
| Other current assets                                                                            |       | 29,468                |       | 8,831 |   |
| Total Current Assets                                                                            |       | 658,496               |       | 828,050 |   |
| Property, Plant  and Equipment, Net                                                             |       | 30,820                |       | 30,375 |   |
| Intangibles, Net                                                                                |       | 6,871                 |       | 4,072 |   |
| Net Deferred Tax  Assets                                                                        |       | 137,578               |       | 134,978 |   |
| Long-term Assets  of Discontinued Operations                                                    |       | —                |       | 21,238 |   |
| Other Assets                                                                                    |       | 68,955                |       | 53,964 |   |
| Total Assets                                                                                    |       | $                     | 902,720    |   | $ | 1,072,677 |   |
| **LIABILITIES AND SHAREHOLDERS’ INVESTMENT**                                               | ** ** | ** **            |       | ** ** | ** ** |
| Current Liabilities:                                                                            |       |                  |       |   |   |
| Accounts payable and accrued expenses                                                           |       | $                     | 148,731    |   | $ | 128,630 |   |
| Payroll and related expenses                                                                    |       | 31,011                |       | 30,077 |   |
| Deferred revenue                                                                                |       | 38,369                |       | 31,371 |   |
| Current portion of long-term debt                                                               |       | —                |       | 108,500 |   |
| Current liabilities of discontinued operations                                                  |       | —                |       | 130,257 |   |
| Total Current Liabilities                                                                       |       | 218,111               |       | 428,835 |   |
| Deferred Revenue                                                                                |       | 20,095                |       | 2,730 |   |
| Long-term Debt                                                                                  |       | 100,000               |       | 100,000 |   |
| Other Long-term  Liabilities                                                                    |       | 88,711                |       | 83,490 |   |
| Long-term  Liabilities of Discontinued Operations                                               |       | —                |       | 46,388 |   |
| Commitments and  Contingencies                                                                  |       | —                |       | — |   |
| Shareholders’ Investment                                                                   |       |                  |       |   |   |
| Preferred stock; no shares outstanding                                                          |       | —                |       | — |   |
| Common stock; shares outstanding:  62,727,922 (2005) and 61,148,274 (2004)                      |       | 627                   |       | 611 |   |
| Additional paid-in capital                                                                      |       | 736,224               |       | 703,416 |   |
| Accumulated deficit                                                                             |       | (244,903              | )          | (306,695 | ) |
| Accumulated other comprehensive income (loss)                                                   |       | (16,145               | )          | 13,902 |   |
| Total Shareholders’ Investment                                                             |       | 475,803               |       | 411,234 |   |
| Total Liabilities and  Shareholders’ Investment                                            |       | $                     | 902,720    |   | $ | 1,072,677 |   |

 

See accompanying notes to consolidated financial statements.

F-7

----

**INTERMEC, INC.CONSOLIDATED STATEMENTSOF CASH FLOWS(thousands of dollars)**
| ** **                                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash and Cash Equivalents at Beginning of Year                                                              |       | $                                          | 217,899    |   | $ | 238,447 |   | $ | 178,269 |   |
| Cash Flows from  Operating Activities:                                                                      |       |                                       |       |   |   |   |   |
| Net earnings from continuing operations                                                                     |       | 40,645                                     |       | 52,181 |   | 15,172 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities:                        |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                                               |       | 9,865                                      |       | 10,847 |   | 14,079 |   |
| Change in prepaid pension cost                                                                              |       | 11,525                                     |       | 11,098 |   | 5,357 |   |
| Deferred taxes                                                                                              |       | 11,615                                     |       | (33,698 | ) | (878 | ) |
| Stock-based compensation and other                                                                          |       | 1,975                                      |       | 1,665 |   | 5,408 |   |
| Changes  in operating assets and liabilities:                                                               |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                                         |       | (33,561                                    | )          | (10,191 | ) | 17,127 |   |
| Inventories                                                                                                 |       | (2,344                                     | )          | (6,599 | ) | (5,301 | ) |
| Other current assets                                                                                        |       | (1,906                                     | )          | 11,069 |   | (12,219 | ) |
| Accounts payable and accrued expenses                                                                       |       | 9,134                                      |       | 6,952 |   | 2,378 |   |
| Payroll and related expenses                                                                                |       | (636                                       | )          | (2,628 | ) | (6,821 | ) |
| Other long-term liabilities                                                                                 |       | 15,111                                     |       | 2,565 |   | 2,592 |   |
| Other operating activities                                                                                  |       | (3,640                                     | )          | 1,603 |   | 4,200 |   |
| Net Cash Provided by Operating Activities of  Continuing Operations                                         |       | 57,783                                     |       | 44,864 |   | 41,094 |   |
| Cash Flows from  Investing Activities:                                                                      |       |                                       |       |   |   |   |   |
| Capital expenditures                                                                                        |       | (10,136                                    | )          | (10,284 | ) | (11,903 | ) |
| Proceeds from sale of property, plant and equipment                                                         |       | 10,987                                     |       | 4,026 |   | 3,423 |   |
| Other investing activities                                                                                  |       | 729                                        |       | (225 | ) | 373 |   |
| Net Cash Provided by (Used in) Investing Activities  of Continuing Operations      |       | 1,580                                      |       | (6,483 | ) | (8,107 | ) |
| Cash Flows from  Financing Activities:                                                                      |       |                                       |       |   |   |   |   |
| Repayment of long-term obligations                                                                          |       | (108,500                                   | )          | — |   | (16,200 | ) |
| Cash restricted for repayment of debt                                                                       |       | 50,000                                     |       | (50,000 | ) | — |   |
| Stock options exercised                                                                                     |       | 18,014                                     |       | 5,683 |   | 12,912 |   |
| Other financing activities                                                                                  |       | 2,148                                      |       | 211 |   | (2,469 | ) |
| Net Cash Used in Financing Activities of Continuing  Operations                                             |       | (38,338                                    | )          | (44,106 | ) | (5,757 | ) |
| Net Cash Provided by (Used in) Continuing Operations                                                        |       | 21,025                                     |       | (5,725 | ) | 27,230 |   |
| Net Cash Provided by (Used in) Operating Activities  of Discontinued Operations                        |       | (52,558                                    | )          | (13,382 | ) | 24,576 |   |
| Net Cash Provided by (used in) Investing Activities  of Discontinued  Operations                            |       | 70,416                                     |       | (1,441 | ) | 8,372 |   |
| Resulting Increase (Decrease) in Cash and Cash  Equivalents                                                 |       | 38,883                                     |       | (20,548 | ) | 60,178 |   |
| Cash and Cash Equivalents at End of Year                                                                    |       | $                                          | 256,782    |   | $ | 217,899 |   | $ | 238,447 |   |
| **Supplemental  Information**                                                                               |       |                                       |       |   |   |   |   |
| Effect of exchange rates on cash and cash equivalents                                                       |       | $                                          | (7,928     | ) | $ | 6,677 |   | $ | 5,450 |   |
| Cash Payments:                                                                                              |       |                                       |       |   |   |   |   |
| Interest on Long-Term Debt                                                                                  |       | (11,498                                    | )          | (15,379 | ) | (15,592 | ) |
| Income Taxes                                                                                                |       | (6,199                                     | )          | (4,338 | ) | (9,046 | ) |
| Non-Cash Transactions:                                                                                      |       |                                       |       |   |   |   |   |
| Impairment of  assets                                                                                       |       | 1,987                                      |       | 104,078 |   | 4,081 |   |
|                                                                                                             |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

F-8

----

**INTERMEC, INC.CONSOLIDATED STATEMENTSOF CHANGES IN SHAREHOLDERS’ INVESTMENT(thousands of dollars)**

| ** **                                                                   | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
| Balance,  January 1, 2003                                               |       |              | 586        |                             |       | 674,715                           |       | (238,299                                                  | )          |      | (19,104    | ) |   | 417,898 |   |
| Comprehensive  Income:                                                       |       |              |       |                             |       |                              |       |                                                      |       |      |       |   |   |   |   |
| Net loss                                                                     |       |              |       |                             |       |                              |       | (19,267                                                   | )          |      |       |   |   | (19,267 | ) |
| Currency translation adjustment                                              |       |              |       |                             |       |                              |       |                                                      |       |      | 19,029     |   |   | 19,029 |   |
| Minimum pension liability adjustment, net of tax  effect of $0          |       |              |       |                             |       |                              |       |                                                      |       |      | (2,881     | ) |   | (2,881 | ) |
| Comprehensive Loss                                                           |       |              |       |                             |       |                              |       |                                                      |       |      |       |   |   | (3,119 | ) |
| Issuances of  common stock                                                   |       |              | 19         |                             |       | 16,030                            |       |                                                      |       |      |       |   |   | 16,049 |   |
| Balance, December 31, 2003                                              |       |              | 605        |                             |       | 690,745                           |       | (257,566                                                  | )          |      | (2,956     | ) |   | 430,828 |   |
| Comprehensive  Income:                                                       |       |              |       |                             |       |                              |       |                                                      |       |      |       |   |   |   |   |
| Net loss                                                                     |       |              |       |                             |       |                              |       | (49,129                                                   | )          |      |       |   |   | (49,129 | ) |
| Currency translation adjustment and other                                    |       |              |       |                             |       |                              |       |                                                      |       |      | 15,519     |   |   | 15,519 |   |
| Minimum pension liability adjustment, net of tax  effect of ($119)           |       |              |       |                             |       |                              |       |                                                      |       |      | 1,339      |   |   | 1,339 |   |
| Comprehensive Loss                                                           |       |              |       |                             |       |                              |       |                                                      |       |      |       |   |   | (32,271 | ) |
| Issuances of  common stock                                                   |       |              | 6          |                             |       | 12,671                            |       |                                                      |       |      |       |   |   | 12,677 |   |
| Balance, December 31, 2004                                              |       |              | 611        |                             |       | 703,416                           |       | (306,695                                                  | )          |      | 13,902     |   |   | 411,234 |   |
| Comprehensive  Income:                                                       |       |              |       |                             |       |                              |       |                                                      |       |      |       |   |   |   |   |
| Net income                                                                   |       |              |       |                             |       |                              |       | 61,792                                                    |       |      |       |   |   | 61,792 |   |
| Currency translation adjustment and other, net of  tax effect of $1,818 |       |              |       |                             |       |                              |       |                                                      |       |      | (26,464    | ) |   | (26,464 | ) |
| Minimum pension liability adjustment, net of tax  effect of ($3,321)    |       |              |       |                             |       |                              |       |                                                      |       |      | (3,583     | ) |   | (3,583 | ) |
| Comprehensive Income                                                         |       |              |       |                             |       |                              |       |                                                      |       |      |       |   |   | 31,745 |   |
| Issuances of  common stock                                                   |       |              | 16         |                             |       | 32,808                            |       |                                                      |       |      |       |   |   | 32,824 |   |
| Balance,  December 31, 2005                                             |       |              | $          | 627                              |       |                              | $          | 736,224                                                   |       | $         | (244,903   | ) |   | $ | (16,145 | ) |   | $ | 475,803 |   |
|                                                                              |            |                   |            |                                  |            |                                   |            |                                                           |            |           |            |  |  |  |  |  |  |  |  |  |

 

 

See accompanying notes to consolidated financial statements.

F-9

----

**INTERMEC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NoteA: Significant Accounting Policies**

*Nature of Operations.*   EffectiveJanuary 1, 2006, the Company changed its name from UNOVA, Inc. toIntermec, Inc. (“Intermec” or the “Company”). Intermec is a leader inglobal supply chain solutions and in the design, development, manufacture andintegration of wired and wireless automated data collection, mobile computingsystems, bar code printers, label media and Intermec RFID (radio frequencyidentification). Intermec’s products and services are used by customers in manyindustries to improve productivity, quality and responsiveness of businessoperations, from supply chain management and enterprise resource planning tofield sales and service. Intermec’s products and services are sold globally toa diverse set of customers in markets such as manufacturing, warehousing,direct store delivery, retail, consumer goods, field services, government,security, healthcare, transportation and logistics.

In2005, Intermec divested its 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 leading producers of value-added manufacturingproducts and services, including integrated manufacturing systems, machiningsystems, stand-alone machine tools and precision grinding and abrasivesoperations primarily serving the globalaerospace, automotive, off-road vehicle and diesel engine industries, as wellas the industrial components, heavy equipment and general job shop markets.

*Principles ofConsolidation.*   The consolidated financialstatements include the accounts of Intermec, Inc., its wholly ownedsubsidiaries and companies in which Intermec has a controlling interest.Investments in companies over which Intermec has influence but not acontrolling interest are accounted for using the equity method. Equityinvestments of less than 20% ownership in other companies are carried at cost.All significant intercompany transactions and balances have been eliminated inconsolidation. Intermec has no unconsolidated subsidiaries.

*Use of Estimates in thePreparation of Financial Statements.*   Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses foreach reported period. Actual results could differ from those estimates.Significant estimates and assumptions were used to determine the provisions foruncollectible accounts receivable, excess and obsolete inventory, tax valuationallowances, tax contingency accruals, recoverability of goodwill and otherintangible assets, warranty costs, percentage-of-completion on long-termcontracts, retiree medical and pension obligations, estimated proceeds onbusinesses to be divested, estimated net realizable value of assets held forsale and litigation loss contingencies.

F-10

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

**Note A: SignificantAccounting Policies (Continued)**

*StockBased Compensation.*   As permitted by Statement ofFinancial Accounting Standards (“SFAS’) No. 123, Intermec accounts for itsstock-based compensation plans in accordance with Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees”, under which nocompensation cost has been recognized at the grant of stock options. Hadcompensation cost for these plans been determined consistent with SFAS No. 123,“Accounting for Stock-Based Compensation”, Intermec’s net earnings (loss) and basicand diluted earnings (loss) per share of continuing and discontinued operationsfor 2005, 2004, and 2003 would have been reduced to the pro forma amountsindicated as follows (thousands of dollars):
| ** **                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ***Continuing Operations:***                                                           | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings as  reported                                                                   |       | $                                           | 40,645     |   | $ | 52,181 |   | $ | 15,172 |   |
| Add stock  compensation expense recorded under the intrinsic value method, net of tax  |       | 1,427                                       |       | 1,108 |   | 593 |   |
| Less pro forma  stock compensation expense computed under the fair value method, net of tax |       | (4,257                                      | )          |    (3,498 | ) |    (2,672 | ) |
| Pro forma net  earnings                                                                     |       | $                                           | 37,815     |   | $ | 49,791 |   | $ | 13,093 |   |
| Basic pro forma  earnings per share                                                         |       | $                                           | 0.61       |   | $ | 0.82 |   | $ | 0.22 |   |
| Diluted pro forma  earnings per share                                                       |       | $                                           | 0.60       |   | $ | 0.80 |   | $ | 0.22 |   |
|                                                                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ***Discontinued Operations:***                                                         | ** ** | ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net earnings  (loss) as reported                                                            |       | $                                           | 21,147     |   | $ | (101,310 | ) | $ | (34,439 | ) |
| Add stock  compensation expense recorded under the intrinsic value method, net of tax  |       | 1,734                                       |       | 384 |   | 133 |   |
| Less pro forma  stock compensation expense computed under the fair value method, net of tax |       | (1,623                                      | )          | (715 | ) | (403 | ) |
| Pro forma net  earnings (loss)                                                              |       | $                                           | 21,258     |   | $ | (101,641 | ) | $ | (34,709 | ) |
| Basic pro forma  earnings (loss) per share                                                  |       | $                                           | 0.34       |   | $ | (1.68 | ) | $ | (0.59 | ) |
| Diluted pro forma  earnings (loss) per share                                                |       | $                                           | 0.33       |   | $ | (1.63 | ) | $ | (0.58 | ) |
|                                                                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-11

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

**Note A: SignificantAccounting Policies (Continued)**

Todetermine the pro forma compensation expense, Intermec used the Black Scholesoption pricing model to determine the weighted average fair value of options onthe dates they were granted. The weighted average fair value of option grantsmade during 2005, 2004 and 2003 was $10.75, $8.96 and $3.82, respectively. Thereis no assurance that the assumptions used in determining the fair values ofstock options will prove true in the future. The actual value of the optionsdepends on several factors, including the actual market price of the commonstock on the date of exercise. Changes in any of these factors, as well asfluctuations in the market price of Intermec’s common stock, will cause theactual value of these options to vary from the theoretical value indicatedabove. The following weighted average assumptions were applied in determiningthe pro forma compensation expense.
| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free  interest rate         |       | 3.84     | %          | 3.81     | %          | 2.55     | %          |
| Expected option  life            |       | 5 years  |       | 5 years  |       | 5 years  |       |
| Expected stock  price volatility |       | 53.29    | %          | 56.13    | %          | 56.38    | %          |
| Expected dividend yield          |       | 0.0      | %          | 0.0      | %          | 0.0      | %          |

* *

*Revenue Recognition.*   Revenuesare generally recognized when products are shipped or services are rendered,the title and risk of loss has passed to the customer, the sales price is fixedor determinable and collectibility is reasonably assured. Royalty revenue isrecorded when the revenue is earned, the price is fixed or determinable andcollectibility is reasonably assured. Service and maintenance revenue isrecognized as services are rendered, generally over the contract term, andcollectibility is reasonably assured. When a sale involves multiple elements,such as sales of products that include services, the entire revenue from thearrangement is allocated to each respective element based on its relative fairvalue and is recognized when the revenue recognition criteria for each elementare met. Fair value for each element is established based on the sales pricecharged when the same element is sold separately. Intermec reduces revenue forestimated customer returns, price protection, rebates and other offerings thatoccur under sales programs established by Intermec directly or with Intermec’sdistributors and resellers. Intermec accrues the estimated cost of post-saleobligations, including basic product warranties, based on historical experienceat the time Intermec recognizes revenue.

Rapid Start intellectual property (“RFID IP”)royalties—Intermec licenses rights to use portions of its IP portfolio,including certain patents essential to and/or useful in the manufacture andsale of certain RFID products. As a result of Intermec’s RFID IP licensingprogram, which ended on August 31, 2005, Intermec has expanded its revenuerecognition policy to include the license fees from this program. Licenseesparticipating in the Rapid Start program typically paid a nonrefundableup-front fee and agreed to pay ongoing royalties based on their sales ofproducts incorporating or using Intermec’s licensed RFID IP. Under the terms ofsuch Rapid Start RFID license agreements, the licensees receive the right tocertain future divisions, continuations and continuations-in-part of thelicensed RFID patents. Non-refundable up-front fees related to Intermec’s RapidStart RFID IP licensing program are recorded as deferred revenue and recognizedover five years, representing the estimated future period Intermec expects toreceive patents on certain divisions, continuations and/or continuations-in-partfor the licensed RFID patents and Intermec’s estimate of the average technologylifecycle for the automated data capture industry. Intermec earns royalties onlicensed RFID products sold worldwide by its licensees at the time that thelicensees’ sales occur. Intermec’s licensees report and pay royalties owed forsales in any given quarter after the conclusion of that quarter. Intermec hasdetermined that, due to the lack of

F-12

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

**Note A: Significant Accounting Policies (Continued)**

historical trends coupledwith the anticipated escalating business trends, Intermec does not have theability to reliably estimate the running royalties when earned. Therefore, Intermecrecognizes such royalty revenue in the quarter in which the royalties arereported to Intermec by the licensees.

*Cash Equivalents.*   Intermecconsiders highly liquid investments purchased within three months of their dateof maturity to be cash equivalents.

*Accounts Receivable.*   Intermecprovides an allowance for doubtful accounts equal to the estimateduncollectible accounts receivable. That estimate is based on historicalcollection experience, the aging of the accounts receivable, currentinternational, political, economic and market conditions, and a review of thecurrent status of specific customer’s trade accounts receivable.

*Inventories.*   Inventoriesare stated at the lower of cost or market. Cost is determined using thefirst-in, first-out method. Inventoried costs include material, labor andmanufacturing overhead. General and administrative costs are expensed asincurred. Intermec “writes down” estimated obsolete or unsalable inventorybased on assumptions about future demand for its products and marketconditions.

*Property, Plant andEquipment.*   Property, plant and equipment arestated at cost, net of accumulated depreciation. Depreciation, computedgenerally by the straight-line method, is provided over the estimateduseful lives of the related assets.

*Pension Benefits and OtherPostretirement Benefits.**  *Intermec has retirement and pension plans which covermost of its employees. Most of Intermec’s U.S. employees, as well as theemployees of certain non-U.S. subsidiaries, are covered by contributory definedbenefit plans, under which employees may contribute up to 4% of coveredcompensation annually. Annual employer contributions are made to the extentsuch contributions are actuarially determined to adequately fund the plans.Retiree benefits are based on the amount of participant contributions over theterm of the participant’s employment.

Assumptions used indetermining projected benefit obligations and the fair values of plan assetsfor Intermec’s pension plans and other postretirement benefits are evaluated atleast annually by management in consultation with an external actuary. Changesin assumptions are based on relevant Intermec data, such as the rate ofincrease in compensation levels and the expected long-term rate of return onplan assets. Critical assumptions such as the discount rate used to measure thebenefit obligations, the expected long-term rate of return on plan assets andhealth care cost projections are evaluated and updated annually. Note K to the ConsolidatedFinancial Statements includes disclosure of these assumptions for Intermec’sdomestic and foreign plans. Intermec believes the assumptions are appropriate.However these assumptions could vary materially from actual results due toeconomic events or different rates of retirement, mortality or withdrawal,positively or negatively impacting future results of operations.

*Income Taxes.*   Intermecaccounts for income taxes using the asset and liability approach, whichrequires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of temporary differences between the carryingamounts and the tax bases of assets and liabilities. This method also requiresthe recognition of future tax benefits, such as net operating losscarryforwards and other tax credits. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to reverse. Valuationallowances are provided to reduce deferred tax assets to an amount that is morelikely than not to be realized. Intermec evaluates the likelihood of realizingits deferred tax assets by estimating sources of future

F-13

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

**Note A: Significant Accounting Policies (Continued)**

taxable income and theimpact of tax planning strategies. Intermec’s deferred tax assets includefuture tax benefits of discontinued operations that remain with Intermec. Intermecalso determines its tax contingencies in accordance with SFAS No. 5, *Accounting for Contingencies*. Intermec records estimated taxliabilities to the extent the contingencies are probable and can be reasonablyestimated. Intermec classifies its contingent tax liabilities based upon whenexpected cash will ultimately be paid.

*Concentrations of CreditRisk.*   Financial instruments that potentiallysubject Intermec to concentrations of credit risk consist primarily of cash andcash equivalents and accounts receivable. Intermec places its cash and cashequivalents with high-credit-quality institutions. Concentrations of creditrisk with respect to trade receivables are limited because a large number ofgeographically diverse customers make up Intermec’s customer base, thusspreading the credit risk. Intermec evaluates the creditworthiness of itscustomers and maintains an allowance for anticipated losses. No single customeraccounted for more than 10% of Intermec’s revenues in 2005, 2004 or 2003.

*Foreign Currencies.*   Intermec’sconsolidated financial statements are presented in U.S. dollars. The financialstatements of Intermec’s foreign operations, whose functional currencies arenot the U.S. dollar, are translated into U.S. dollars at the exchange rates ineffect at the balance sheet dates for assets and liabilities and at averagerates for the period for revenues and expenses. The unrealized translationgains and losses on Intermec’s net investment in these operations, includinglong-term intercompany advances considered part of the net investment, areaccumulated as a component of other comprehensive income (loss). Currencytransaction gains and losses are recorded on the consolidated statements ofoperations. Operating results include net currency transaction gains (losses)of $0.7 million, ($1.7) million and $1.2 million for the years ended December 31,2005, 2004 and 2003.

*Derivative Instruments andHedging Activities.*

Dueto its global operations, Intermec’s cash flows and earnings are exposed toforeign exchange rate risk. Intermec’s use of derivatives is limited toforeign currency exchange contracts entered into to limit this exposure toforeign currency exchange rate fluctuations. Intermec enters into thesecontracts with major financial institutions to minimize its risk of foreignexchange loss. Intermec’s policies do not permit active trading of orspeculation in derivative financial instruments. Intermec’s policy is to hedgemajor foreign currency cash flow exposures through foreign exchange forward contractsat amounts up to 100% of such cash flows. The translation gains and losses onthe effective portion of the hedging instruments that qualify for hedgeaccounting are recorded in OCI; other translation gains and losses are recordedin net earnings (loss). The fair values of derivative instruments are recordedon the consolidated balance sheets. The difference between the net fair valuesof foreign exchange contracts and the underlying foreign currency based assetsand liabilities as of December 31, 2005 and 2004 was not material.

*Goodwill and OtherIntangibles.*   Intangibleassets with finite useful lives are amortized generally on a straight-line basis over the periods benefited. All of Intermec’s finite lived intangible assets pertain to Intermec’spatent portfolio and have estimated useful lives of 18 years. See Note Efor additional information.

The carrying values ofintangible assets with indefinite useful lives are tested for impairmentannually or when events or circumstances indicate the carrying value of anasset may not be recoverable. If the carrying value of a reporting unit’sintangible asset exceeds its fair value, an impairment loss is recognized. Fair value is estimated based on discountedexpected future cash flows.

During the fourth quarterof 2005, Intermec wrote off its remaining goodwill balance of $7.8 million inconjunction with the sale of the Landis business. See Note G for additionalinformation.

F-14

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

**Note A: SignificantAccounting Policies (Continued)**

*Impairment of Long-LivedAssets.*   Intermec assesses the recoverability oflong-lived assets when events or circumstances indicate that the carryingamount of an asset may not be fully recoverable. If undiscounted expected cashflows to be generated by a long-lived asset or asset group are less than itscarrying amount, Intermec records an impairment to write down the long-livedasset or asset group to its estimated fair value. Fair value is estimated basedon discounted expected future cash flows.

*Discontinued Operations.**  *SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” establishes accounting and reportingrequirements for the impairment or disposal of long-lived assets. For those businesseswhere management has committed to a plan to divest, each business is valued atthe lower of its carrying amount or estimated fair value less cost to sell. Ifthe carrying amount of the business exceeds its estimated fair value, a loss isrecognized. The fair values are estimated using accepted valuation techniquessuch as a discounted cash flows model, earnings multiples, or indicative bids,when available. A number of significant estimates and assumptions are involvedin the application of these techniques, including the forecasting of marketsand market share, sales volumes and prices, costs and expenses, and multipleother factors. Management considers historical experience and all availableinformation at the time the estimates are made; however, the fair values thatare ultimately realized upon the sale of the businesses to be divested maydiffer from the estimated fair values reflected in the financial statements.

Businesses to be divestedare classified in the consolidated financial statements as discontinuedoperations. For businesses classified as discontinued operations, the balancesheet amounts and income statement results and cash flows are reclassified fromtheir historical presentation to assets and liabilities of discontinued operationson the consolidated balance sheets to loss from discontinued operations in theconsolidated statements of operations and to cash flows from discontinuedoperations on the consolidated statements of cash flows for all periodspresented. Additionally, segment information does not include the results ofbusinesses classified as discontinued operations. Management does not expectany continuing involvement with these businesses following their planned sales,and these businesses are expected to be disposed of within one year.

*Environmental Costs.*   Aliability for environmental costs is recorded when Intermec determines itsresponsibility for remedial efforts and such amounts are reasonably estimable.Environmental costs were not material for all years presented.

*Contingencies.*   Intermecassesses its exposure to loss contingencies, including environmental, legal andincome tax matters, and provides for an exposure if it is judged to be probableand estimable. If the actual loss from a loss contingency differs from management’sestimates, results of operations could be adjusted upward or downward.

*Research and Development.*   Researchand development (“R&D”) costs are charged to selling, general andadministrative expense as incurred. Total expenditures of continuing operationson research and development activities amounted to $66.5 million, $65.9 millionand $49.8 million for the years ended December 31, 2005, 2004 and 2003,respectively. These expenditures were for Company-sponsored R&D and wereprimarily for labor, materials and other administrative costs. Intermecincurred no costs associated with R&D sponsored by customers or otherexternal parties.

F-15

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

**Note A: SignificantAccounting Policies (Continued)**

*Advertising.**  *Advertising costs are expensed as incurred.Advertising expenses for the years ended December 31, 2005, 2004 and 2003were $1.7 million, $1.7 million and $2.2 million, respectively.

*New AccountingPronouncements.*

In November 2005, the FASB issued FASB StaffPosition (“FSP”) No. FAS 115-1 and FAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”which addresses the determination as to when an investment is consideredimpaired, whether that impairment is other than temporary, and the measurementof an impairment loss. This FSP also includes accounting considerationssubsequent to the recognition of an other-than-temporary impairment andrequires certain disclosures about unrealized losses that have not beenrecognized as other-than-temporary impairments. The guidance in this FSP amendsSFAS No. 115, Accounting for Certain Investments in Debt and EquitySecurities, and SFAS No. 124, Accounting for Certain Investments Held byNot-for-Profit Organizations, and APB Opinion No. 18, The Equity Method ofAccounting for Investments in Common Stock. This FSP becomes effective for Intermecin the first quarter of 2006. Intermec does not expect the adoption of thisStatement to have a material impact on its financial condition or results ofoperations.

In June 2005, the FASB issued FSP No. SFAS No. 143-1,“Accounting for Electronic Equipment Waste Obligations”, that provides guidanceon how commercial users and producers of electronic equipment should recognizeand measure asset retirement obligations associated with the European Directive2002/96/EC on Waste Electrical and Electronic Equipment. Intermec adopted SFAS143-1 during the three months ended June 30, 2005. The adoption ofSFAS 143-1 did not have a material effect on Intermec’s financialstatements. Due to the fact that several major EU-member countries have not yetenacted country-specific laws, Intermec cannot estimate the effect of applyingthis guidance in future periods.

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—a Replacement of APB Opinion No. 20 and FASBStatement No. 3”, which changes the requirements for the accounting andreporting of a change in accounting principle. The Statement applies to allvoluntary changes in accounting principles and to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. This Statement requiresretrospective application to prior periods’ financial statements of a change inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. Intermec isrequired to adopt this statement during the first quarter of 2006, and does notexpect the adoption of this statement to have a material impact on itsfinancial condition or results of operations.

In March 2005, the FASB issued Interpretation No. (FIN)47, Accounting for Conditional Asset Retirement Obligations, to clarify therequirement to record liabilities stemming from a legal obligation to clean upand retire fixed assets, such as a plant or factory, when an asset retirementdepends on a future event. Intermec plans to adopt FIN 47 in the first quarterof fiscal 2006, and does not expect the application of FIN 47 to have amaterial impact on its results of operations, cash flows or financial position.

In December 2004, the FASB issued Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (“SFAS 123R”). Under the provisions of SFAS 123R, companies arerequired to measure the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value of the award(with limited exceptions). That cost will be recognized over the period duringwhich an employee is required to provide service in exchange for the award,usually the 

F-16

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

**Note A: SignificantAccounting Policies (Continued)**

vesting period. On April 14, 2005, the Securitiesand Exchange Commission (SEC) approved a delay to the effective date of SFAS123R. Under the new SEC rule, SFAS 123R is effective for annual periods thatbegin after June 15, 2005. SFAS 123R applies to all awards granted,modified, repurchased or cancelled by the Company after December 31, 2005,and to unvested options at the date of adoption. Intermec will begin expensingstock-based compensation in accordance with the standard in the first quarterof 2006. Accordingly, the adoption of SFAS 123R’s fair value method is expectedto reduce earnings per share by approximately $0.05 per share for the yearending December 31, 2006.

FASB Staff Position (“FSP”) No. 109-2, “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004” (“FSP 109-2”), providesguidance under FASB Statement No. 109, “Accounting for Income Taxes,” withrespect to recording the potential impact of the repatriation provisions of theAmerican Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income taxexpense and deferred tax liability. The Jobs Act was enacted on October 22,2004. FSP 109-2 states that an enterprise is allowed time beyond thefinancial reporting period of enactment to evaluate the effect of the Jobs Acton its plan for reinvestment or repatriation of foreign earnings for purposesof applying FASB Statement No. 109. The Jobs Act had no effect on Intermec’saccounting for income tax.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs—an Amendment of ARB No. 43, Chapter 4.” This standardprovides clarification that abnormal amounts of idle facility expense, freight,handling costs, and spoilage should be recognized as current-period charges.Additionally, this standard requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. The provisions of this standard are effective forinventory costs incurred during fiscal years beginning after June 15,2005. Intermec does not expect the adoption of this standard to have a materialimpact on its consolidated financial statements.

*Reclassifications.*   Certainprior-year amounts have been reclassified to conform to the current-yearpresentation.

**Note B: Cash and Cash Equivalents, Long-term Debt andInterest**

Cash and cash equivalents amounted to $256.8 millionand $217.9 million at December 31, 2005 and 2004, respectively, andconsisted mainly of time deposits. Cash and cash equivalents at December 31,2005 and 2004, include $5.7 million and $17.8 million of bank deposits requiredto be maintained in support of letters of credit and foreign exchangecontracts. Letters of credit are purchased guarantees to ensure Intermec’s contractperformance to third parties in accordance with specified terms and conditions.Management has determined that Intermec’s letters of credit do not createadditional risk to Intermec.

F-17

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

**Note B: Cashand Cash Equivalents, Long-term Debt and Interest (Continued)**

Long-term debtcomprises the following (thousands of dollars):

|                                                                                                         | ** ** | **Current Portion of** | ** ** | **Non-Current Portion of** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                              | ** ** | **Long-term Debt**          | ** ** | **Long-term Debt**              | ** ** |
| ** **                                                                                              | ** ** | **December 31,**            | ** ** | **December 31,**                | ** ** |
| ** **                                                                                              | ** ** | **2005**                         | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Debentures, with  interest at 6.875%, due March 2005.                                              |       | $                                | —     |                                 | $          | 100,000 |   | — |   | — |   |
| Debentures, with  interest at 7.00%, due March 2008.                                               |       | —                           |       | —                               |       | $ | 100,000 |   | $ | 100,000 |   |
| Industrial  revenue bonds, with interest at 4.18% as of December 31, 2004, retired July 2005. |       | —            |       | 8,500                      |       | —   |   | —   |   |
| Long-term obligations.                                                                                  |       | $                                | —     |                                 | $          | 108,500  |   | $ | 100,000  |   | $ | 100,000  |   |

 

Intermec has maintained a secured long-term revolvingcredit facility (the “Revolving Facility”), which originally had a maximumamount available of $100 million. As a result of Intermec’s sale of the IASbusinesses in 2005, and in accordance with its terms, the maximum amountavailable under the Revolving Facility was reduced by reference to the netproceeds received by Intermec from such sale. Effective December 9, 2005,which was the closing date of the sale of the Landis Grinding Systems business,the maximum amount available under the Revolving Facility was reduced to $50million. Management of Intermec believes that the reduction of the maximumamount available under the Revolving Facility will not have a material adverseeffect on the financial condition or liquidity of the Company.

Net of outstanding letters of credit and limitationson availability, Intermec had borrowing capacity at December 31, 2005, of$32.1 million under the Revolving Facility. Intermec made no borrowings underthe Revolving Facility during 2005, and as of December 31, 2005, noborrowings were outstanding under this facility. As of December 31, 2005, Intermecwas in compliance with the financial covenants of this agreement.

The key terms ofthe Revolving Facility are as follows:

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

·       Borrowingsunder the Revolving Facility bear interest at a variable rate equal to (at Intermec’soption) (i) LIBOR plus an applicable margin ranging from 1.5% to 2.5%based on consolidated leverage or (ii) the greater of the federal fundsrate plus 0.50% or the bank’s prime rate plus an applicable margin ranging from0.5% to 1.5% based on consolidated leverage.

·       Untilit retired its 6.875% Notes due March 15, 2005, Intermec was required tomaintain a minimum balance of $50 million as restricted cash. This amountis classified as restricted cash on Intermec’s consolidated balance sheet as ofDecember 31, 2004. This cash restriction was removed as of March 15,2005.

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

F-18

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

**Note B: Cashand Cash Equivalents, Long-term Debt and Interest (Continued)**

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

Intermec also has maintained a secured long-term £15.0million ($25.9 million) revolving facility and related overdraft facility(collectively, the “UK Facility”). Net of outstanding letters of credit andlimitations on availability, Intermec had no borrowing capacity under the UKFacility at December 31, 2005, primarily as a result of disposition of theIAS business. Intermec made no borrowings under the UK Facility during 2005,and as of December 31, 2005, no borrowings were outstanding under thisfacility. As of December 31, 2005, Intermec was in compliance with thefinancial covenants of this agreement.

In accordance with its terms, the UK Facilityterminated on February 9, 2006 and Intermec did not extend the term offacility. Managementof Intermec believes that the termination of the UK Facility will not have amaterial adverse effect on the financial condition or liquidity of Intermec.

In March 1998, Intermec sold $200.0 millionprincipal amount of senior unsecured debt in an underwritten offering. The debtcomprised $100.0 million of 6.875% seven-year notes and $100.0 million of 7.00%ten-year notes. Interest payments on the seven-year and ten-year notes are duesemi-annually in March and September. Including underwriting fees,discounts and other issuance costs, the effective interest rates on theseven-year and ten-year notes are 7.125% and 7.175%, respectively. As of December 31,2004, the $100.0 million seven-year notes, maturing in March 2005, areclassified as current portion of long-term obligations on Intermec’sconsolidated balance sheet. In March 2005, Intermec retired the $100.0million seven-year notes.

In July 2005, Intermec retired an $8.5 millionindustrial revenue bond, which carried a variable interest rate of 4.97%. Theamount was classified as current portion of long-term obligations on Intermec’sconsolidated balance sheet as of December 31, 2004.

Interest,net comprises of the following (thousands of dollars):
|                  | ** ** | **Year Ended December 31,** | ** ** |
|------------------|------------|--------------------------------------------|------------|
| ** **       | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest expense |       | $                                          | 11,042     |   | $ | 16,527 |   | $ | 16,829 |   |
| Interest income  |       | (7,016                                     | )          | (4,166 | ) | (3,744 | ) |
| Interest, net    |       | $                                          | 4,026      |   | $ | 12,361 |   | $ | 13,085 |   |
|                  |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2005 and 2004, Intermec’s fixedrate debentures had a carrying value of $100.0 million and $200.0 million, respectively,and an estimated fair market value of $100.0 million and $202.1 million,respectively, based on market trade values. The carrying values of the variablerate borrowings, including the industrial revenue bonds, approximate fair valuebecause they bear interest at market rates currently available to Intermec.Fair values of Intermec’s accounts receivable and accounts payable approximatetheir carrying values due to their short-term nature.

F-19

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

**Note B: Cash and CashEquivalents, Long-term Debt and Interest (Continued)**

Intermec also has letter-of-credit reimbursementagreements totaling $25.8 million at December 31, 2005, compared to $53.6million at December 31, 2004. As of December 31, 2005, $9.8 millionof the agreements related to performance on contracts with current customersand vendors, $13.0 million of the agreements related to customer contractsassumed by the purchaser of the Cincinnati Lamb operations that were sold and $3.0million of the agreements related to customer contracts assumed by thepurchaser of the Landis operations that were sold. Intermec is indemnified bythe purchaser of the Cincinnati Lamb operation on the $13.0 million ofletter-of-credit agreements related to Cincinnati Lamb and is the beneficiaryof a backup letter-of-credit in the aggregate amount of $5.8 million issuedpursuant to the terms of the sale. Intermec believes it is not practicable toestimate fair values of these instruments and considers the risk ofnon-performance on the contracts to be remote. Intermec is indemnified by thepurchase of the Landis operations on the $3.0 million of letter-of-creditagreement to Landis.

**Note C: Inventories**

Inventoriescomprise the following (thousands of dollars):

|                 | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|
| ** **      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Raw materials   |       | $                     | 50,505     |   | $ | 53,714 |   |
| Work in process |       | 705                   |       | 304 |   |
| Finished goods  |       | 30,878                |       | 26,836 |   |
| Inventories     |       | $                     | 82,088     |   | $ | 80,854 |   |

 

**Note D: Property, Plantand Equipment, Net, Commitments  andAssets Held for Sale**

Property,plant and equipment comprise the following (thousands of dollars):

|                                              | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Property, plant and  equipment, at cost:     |       |                  |       |   |   |
| Land                                         |       | $                     | 5,859      |   | $ | 5,978 |   |
| Buildings and improvements                   |       | 6,032                 |       | 5,754 |   |
| Machinery and equipment                      |       | 117,961               |       | 118,357 |   |
| Total property, plant and equipment, at cost |       | 129,852               |       | 130,089 |   |
| Less: accumulated  depreciation              |       | (99,032               | )          | (99,714 | ) |
| Property, plant and  equipment, net          |       | $                     | 30,820     |   | $ | 30,375 |   |

 

Depreciation expense from continuing operations was$9.5 million, $10.5 million and $13.7 million for the years ended December 31,2005, 2004 and 2003, respectively.

Therange of estimated useful lives of the major classes of assets are:
| Buildings               |   | 21-30  years |
|-------------------------|--------|--------------|
| Building improvements   |   | 2-10  years  |
| Machinery and equipment |   | 2-10 years   |

 

F-20

----

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

**Note D: Property,Plant and Equipment, Net, Commitments  andAssets Held for Sale (Continued)**

As of December 31,2005 and 2004, Intermec deferred $4.1 million and $4.5 million, respectively,of gains related to sale-leaseback transactions. These deferred gains are beingamortized over the terms of the related leases. Minimum rental commitments, netof deferred gain amortization, under noncancellable operating leases were asfollows at December 31, 2005 (thousands of dollars):
| 2006       |   | $      | 12,480 |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 9,849  |   |
| 2008       |   | 7,855  |   |
| 2009       |   | 6,527  |   |
| 2010       |   | 6,249  |   |
| Thereafter |   | 21,369 |   |
| Total      |   | $      | 64,329 |   |
|            |        |        |        |        |  |

 

Rental expense for operating leases of continuingoperations, including amounts for short-term leases with nominal, if any,future rental commitments, was $12.8 million, $12.6 million and $12.1 million,for the years ended December 31, 2005, 2004 and 2003, respectively.

Aggregate future minimum rental income to be receivedunder non-cancelable subleases is $5.3 million at December 31, 2005.

*Assets Held for Sale:*During2003, in conjunction with restructuring activities related to the Company’s IASbusiness, Intermec reclassified certain property, plant and equipment with anet book value of $30.9 million to assets held for sale. In accordance withSFAS No. 144, the carrying amount of these assets is the lower of bookvalue or net realizable value. An impairment charge of $4.1 million related tothese assets is classified as loss from discontinued operations on thestatement of operations for the year ended December 31, 2003. Assets heldfor sale with a carrying amount of approximately $3.0 million were sold during2003 for a price approximating their carrying value. During 2004 assets heldfor sale with a carrying amount of $3.5 million were sold for proceeds ofapproximately $4.0 million. An impairment charge of $0.6 million on assets heldfor sale is classified as loss from discontinued operations on the statement ofoperations for the year ended December 31, 2004. At December 31,2003, assets held for sale of $23.8 million comprise $18.8 million of land andbuildings and $5.0 million of machinery and equipment. At December 31,2004, assets held for sale of $19.7 million comprise $17.7 million of land andbuildings and $2.0 million of machinery and equipment. During 2005 assets heldfor sale with a carrying amount of $10.3 million were sold for proceeds ofapproximately $11.0 million. An impairment charge of $2.0 million on assetsheld for sale is classified as loss from discontinued operations on thestatement of operations for the year ended December 31, 2005. At December 31,2005, assets held for sale of $8.5 million primarily comprised of land andbuildings.

F-21

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

**NoteE: Intangibles, Net**

Intangibles,net are comprised of a $3.7 million of patent portfolio and $3.2 million of an intangibleasset from an adjustment to recognize minimum pension liability related to Intermec’sUS defined benefit pension plans. The components of intangibles, net, includingthe gross carrying amount and accumulated amortization of Intermec’samortizable intangibles, are as follows (thousands of dollars):
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Amortizable  intangibles:                    |       |                  |       |   |   |
| Gross carrying amount                        |       | $                     | 10,064     |   | $ | 10,067 |   |
| Accumulated amortization                     |       | (6,391                | )          | (5,995 | ) |
| Other intangibles, net                       |       | 3,673                 |       | 4,072 |   |
| US defined  benefit pension intangible asset |       | 3,198                 |       | — |   |
| Intangibles, net                             |       | $                     | 6,871      |   | $ | 4,072 |   |
|                                              |            |                       |            |  |  |  |  |  |  |

 

Amortization expense onintangible assets for the years ended December 31, 2005, 2004 and 2003 was$0.4 million, $0.4 million and $0.4 million, respectively.

Estimatedamortization expense for the succeeding five fiscal years are as follows(thousands of dollars):
| **Year Ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                        |       | $          | 398        |       |
| 2007                                        |       | 398        |       |
| 2008                                        |       | 398        |       |
| 2009                                        |       | 398        |       |
| 2010                                        |       | 398        |       |
|                                             |            |            |            |            |            |  |

 

**NoteF: Shareholders’ Investment**

**Capital Stock**

At December 31, 2005,there were authorized 250 million shares of common stock, par value $0.01, and50 million shares of preferred stock, par value $0.01.

**Shareholder RightsPlan**

In September 1997, Intermec’sBoard of Directors adopted a Share Purchase Rights Plan (the “Plan”) and, inaccordance with such Plan, declared a dividend of one preferred share purchaseright (the “Right”) for each outstanding share of Intermec common stock,payable to shareholders of record on October 31, 1997. The Plan will causesubstantial dilution to a party that attempts to acquire Intermec in a manneror on terms not approved by the Board of Directors. Each Right entitles theholder to purchase from Intermec one one-hundredth of a share of Series APreferred Stock at a price of seventy dollars. The Rights become exercisable ifa person other than a person which presently holds more than 15 percent of Intermec’scommon stock acquires 15 percent or more, or announces a tender offer for 15percent or more, of Intermec’s outstanding common stock. If a person acquires15 percent or more of Intermec’s outstanding common stock, each right willentitle the holder to purchase Intermec’s common stock having a market value oftwice the exercise price of the Right. The Rights, which expire in September 2007,may be redeemed by Intermec Inc. at a price of one cent per Right at any timeprior to a person acquiring 15 percent or more of the outstanding common stock.

F-22

----

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

**Note F: Shareholders’ Investment(Continued)**

**Earnings (Loss) Per Share**

**Basicearnings (loss) per share is calculated using the weighted average number ofcommon shares outstanding and issuable for the year. Diluted earnings (loss)per share is computed using basic weighted average outstanding shares plus thedilutive effect on income from continuing operations of unvested restrictedstock and outstanding stock options using the “treasury stock” method.**

**Sharesused for basic and diluted earnings (loss) per share were computed as followsfor the years ended December 31:**
| ** **                                                                                 | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Weighted average  common shares—Basic                                                 |       | 61,785,295 |       | 60,501,931 |       | 58,827,769 |       |
| Dilutive effect  of options, unvested restricted shares and other common stock equivalents |       | 1,565,057  |       | 1,651,905  |       | 1,406,279  |       |
| Weighted average  shares—Diluted                                                      |       | 63,350,352 |       | 62,153,836 |       | 60,234,048 |       |

 

At December 31, 2004and 2003, employees and directors held options to purchase 30,420 and 16,420shares, respectively, of Intermec common stock that were antidilutive to thecomputation of diluted earnings (loss) per share from continuing operations dueto the exercise price of these options exceeding the average fair value of Intermec’scommon stock for the respective periods. These options could become dilutive infuture periods if the average market price of Intermec’s common stock exceedsthe exercise price of the outstanding options and Intermec reports netearnings.

**Stock Awards**

The UNOVA, Inc. 2001,1999 and 1997 Stock Incentive Plans and the UNOVA Inc. 2004 Omnibus IncentiveCompensation Plan (the “Stock Incentive Plans,” collectively) provide for thegrant of incentive awards to officers and other key employees. The numbers ofshares authorized for grant under the 2004, 2001 and 1999 plans are 3,000,000,1,000,000, and 4,500,000, respectively. No additional shares are authorized forgrant under the 1997 plan, which was frozen subsequent to the approval of the1999 Stock Incentive Plan. As of December 31, 2005, there were 621,829options outstanding that were granted under the 1997 Plan before it was frozen.

Incentive awards may begranted in the form of stock options with or without related stock appreciationrights, restricted stock, restricted stock units and performance units. Under the Stock Incentive Plans, stock optionsmay not be granted at an exercise price less than the market value of Intermec’s common stock on the date of grant. The StockIncentive Plans options generally vest in equal increments over five years andexpire in ten 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 the Company’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 becomefully exercisable on the first anniversary of their date of grant.

F-23

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

**Note F: Shareholders’Investment (Continued)**

As of December 31,2005 there were 3,243,026 shares available for grant under Intermec’s StockIncentive Plans and DSOPs. The following table summarizes changes in optionsoutstanding and exercisable under Intermec’s stock award plans:
| ** **              | ** ** | **Outstanding**            | ** ** | **Exercisable**                                             | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| ** **              | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** |
| January 1,  2003   |       | 5,537,565                  |       |                                                        | 10.74      |   |   | 3,556,061 |   |   | 12.99 |   |   |
| Granted                 |       | 535,835                    |       |                                                        | 7.57       |   |   |   |   |   |   |   |   |
| Exercised               |       | (1,182,350                 | )          |                                                        | 10.85      |   |   |   |   |   |   |   |   |
| Canceled                |       | (146,495                   | )          |                                                        | 6.12       |   |   |   |   |   |   |   |   |
| December 31,  2003 |       | 4,744,555                  |       |                                                        | 10.50      |   |   | 3,012,269 |   |   | 12.77 |   |   |
| Granted                 |       | 570,500                    |       |                                                        | 17.29      |   |   |   |   |   |   |   |   |
| Exercised               |       | (656,990                   | )          |                                                        | 8.78       |   |   |   |   |   |   |   |   |
| Canceled                |       | (242,799                   | )          |                                                        | 9.26       |   |   |   |   |   |   |   |   |
| December 31,  2004 |       | 4,415,266                  |       |                                                        | 11.70      |   |   | 2,876,822 |   |   | 12.37 |   |   |
| Granted                 |       | 685,151                    |       |                                                        | 20.91      |   |   |   |   |   |   |   |   |
| Exercised               |       | (1,525,145                 | )          |                                                        | 12.27      |   |   |   |   |   |   |   |   |
| Canceled                |       | (356,346                   | )          |                                                        | 11.37      |   |   |   |   |   |   |   |   |
| December 31, 2005  |       | 3,218,926                  |       |                                                        | 13.35      |   |   | 1,902,288 |   |   | 11.66 |   |   |

 

Thetable below summarizes outstanding stock option data as of December 31,2005, excluding 308,151 options outstanding, held by directors:
| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                             | ** ** |
|-----------------------------------------|------------|------------------------------|------------|----------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Outstanding**              | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** | **Exercisable** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** |
| $3.52 to $5.02                          |       |                         | 437,385    |                                                     |       |   | 4.82 |   |   |   | $ | 4.22 |   |   | 431,885 |   |   | $ | 4.22 |   |   |
| $5.38 to $7.92                          |       |                         | 843,409    |                                                     |       |   | 6.20 |   |   |   | 7.40 |   |   | 446,865 |   |   | 7.31 |   |   |
| $12.38 to $17.56                        |       |                         | 707,237    |                                                     |       |   | 5.76 |   |   |   | 16.66 |   |   | 409,717 |   |   | 16.42 |   |   |
| $18.81 to $27.53                        |       |                         | 922,744    |                                                     |       |   | 6.27 |   |   |   | 19.85 |   |   | 394,094 |   |   | 19.20 |   |   |
|                                    |       |                         | 2,910,775  |                                                     |       |   |   |   |   |   |   |   |   | 1,682,561 |   |   |   |   |   |

 

In August 2001, Intermec extended to itsemployees a tender offer to exchange on a four-for-one basis certainoutstanding stock options granted during the period June 1, 1999 through May 31,2000 for restricted shares of Intermec’s common stock. On the exchange date, October 8,2001, options to purchase 1,271,500 shares were tendered by employees andcanceled, and 317,884 shares of restricted stock were issued under Intermec’sStock Incentive Plans. The restricted shares vest over a three-year period,with one-third of the restricted shares vesting on each of the first threeanniversaries of the exchange date. The tender offer resulted in variableaccounting for all options subject to the offer until the options arecancelled, exercised or expired. As of December 31, 2005, 2004 and 2003, Intermechad outstanding 19,200, 32,301 and 42,302 options that are subject to thevariable method of accounting, which 

F-24

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

**Note F: Shareholders’Investment (Continued)**

requires Intermec to record compensation expense whenthe market value of Intermec’s common stock exceeds the exercise price of theoption. Compensation expenses related to these options were $0.2 million $0.3million and $0.3 million for the years ended December 31, 2005, 2004 and2003, respectively.

In 2005, 2004 and 2003, Intermec granted 9,332,132,975 and 294,752 shares of restricted stock, respectively, under theprovisions of the 1999 and 2001 Stock Incentive Plans. For the years ended December 31,2005, 2004 and 2003, the restricted stock was issued at weighted average marketvalues at the date of grant of $21.95, $18.04 and $8.24 per share,respectively. The restricted shares vest in three equal installments at each ofthe first three anniversaries from the date of grant. The unearned portion ofthese grants is being amortized as compensation expense on a straight-linebasis over the vesting period. For the years ended December 31, 2005, 2004and 2003, deferred compensation was $0.3 million, $1.8 million and $1.8million, respectively. For the years ended December 31, 2005, 2004 and2003, restricted stock-related compensation expense was $1.1 million, $1.7million and $1.1 million, respectively.

In 2005, Intermec granted127,500 performance units under the provision of the 2004 Omnibus IncentiveCompensation Plan, of which 28,333 performance units were cancelled during theyear. In 2004, Intermec granted 79,700 restricted stock units and 75,833performance units under the provision of the 2004 Omnibus IncentiveCompensation Plan, of which 4,700 restricted stock units were released and 25,000performance units cancelled during 2005. The restricted stock units are payablein common stock upon vesting and the performance units are payable in cash orstock upon vesting. In 2005, the performance units were issued at weightedaverage market prices of $19.98. In 2004, the restricted stock units andperformance units were issued at weighted average market prices of $16.33 and$17.04, respectively. Of the restricted stock units, 47,500 units vest after 3years and 27,500 units vest after three years contingent upon the achievementof specific performance goals. The performance units are payable in commonstock and vest after three years contingent upon the achievement ofspecificperformance goals. For the years ended December 31, 2005 and 2004,compensation expense related to restricted stock units was $0.4 million and$0.3 million, respectively, and compensation expense related to performanceunits was $1.3 million and $0.4 million, respectively.

**Employee Stock Purchase Plan**

In January 1998,UNOVA adopted an Employee Stock Purchase Plan under which Intermec isauthorized to sell up to five million shares of common stock to its eligiblefull-time employees. The purchase price of the stock is 85% of the lower of themarket price on the first day or last day of the applicable offering period,which is normally six months in duration. In 2005, 2004 and 2003, employeespurchased 156,176, 210,454 and 438,572 shares, respectively. Theweighted-average fair value of purchase rights granted in 2005, 2004 and 2003was $7.35 per share, $6.13 per share and $2.21 per share, respectively. Thefair values of the stock purchase rights were determined using the followingweighted-average assumptions in 2005, 2004, and 2003, respectively: risk-freeinterest rate of 3.60%, 2.01%, and 0.94%; expected life equal to the applicableoffering periods for each year; and expected volatility of 53.29%, 56.13%, and56.38%. The actual value of purchase rights may vary from the theoretical valuedetermined using the Black-Scholes option pricing model. As of December 31,2005, there were 910,509 shares remaining available for sale to employees underthe ESPP.

F-25

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

**Note F: Shareholders’ Investment (Continued)**

**Accumulated OtherComprehensive Income (Loss)**

At December 31,2005, 2004 and 2003, accumulated other comprehensive income (loss) comprisedthe following, (thousands of dollars):
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Currency  translation adjustment               |       | $                     | (3,418     | ) | $ | 23,046 |   | $ | 7,527 |   |
| Minimum pension  liability adjustment          |       | (12,727               | )          | (9,144 | ) | (10,483 | ) |
| Accumulated other  comprehensive income (loss) |       | $                     | (16,145    | ) | $ | 13,902 |   | $ | (2,956 | ) |
|                                                |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

Currency translationadjustment as of December 31, 2004, includes $19.7 million relating to discontinuedoperations. The minimum pension liability adjustment as of December 31,2004, and 2003, relates to discontinued operations. At December 31, 2005,$4.9 million of the minimum pension liability adjustment relates to continuingoperations and $7.8 million relates to discontinued operations. (See Note J).

**Note G: Discontinued Operations**

During the fourth quarter of 2004, Intermec committedto a plan to dispose of its IAS business, comprising the Cincinnati Lamb andLandis Grinding Systems businesses, after it was determined that the IASbusiness was no longer aligned with Intermec’s long-term strategy. Inaccordance with SFAS 144, “Accounting for Disposal or Impairment of Long-LivedAssets,” the IAS business is classified as discontinued operations in Intermec’s consolidated financial statementsfor all periods presented.

In conjunction with the disposal plan, Intermecanalyzed the net assets of the IAS business for impairment, resulting in acharge of $104.1 million in 2004 to write down the net assets of CincinnatiLamb to its estimated net realizable value. The charge included impairments of$63.3 million for goodwill, $30.2 million for property, plant and equipment andother long-lived assets and $10.6 million for current assets. In computing theimpairment loss, Intermec considered the $9.1 million credit balance for thecumulative translation adjustment and the $9.1 million unrealized minimumpension liability adjustment, net of tax, related to Cincinnati Lamb, which wasincluded in the accumulated other comprehensive income component ofshareholders’ investment (“OCI”).

On April 3, 2005, Intermec completed the sale ofthe Cincinnati Lamb business. The consideration received for the CincinnatiLamb business included (i) $16 million, paid in cash on April 4,2005, (ii) a $10.0 million long-term secured note receivable with anestimated fair value of $8.4 million and (iii) liabilities related tocertain pension and other post-retirement obligations of $39.1 million assumedby the buyer. Intermec was also required to deliver to the buyer a guaranteednet working asset balance. Accordingly, during the second quarter of 2005 Intermecreimbursed the buyer $12.6 million for accounts payable related to theCincinnati Lamb business, satisfying the net working asset adjustment.

In connection with the sale, during the second quarterof 2005 Intermec loaned to the buyer $1.5 million. This note receivable, the$10.0 million long-term secured note and an additional $1.0 million of facevalue were combined into a single $12.5 million long-term note receivablesecured by the assets sold, bearing interest at an annual rate of LIBOR plus 3.0%percent (7.4% as of December 31, 2005), with interest payable quarterly.Principal payments on the note are due in six semiannual installments beginningApril 2007 of $1.5 million, $2.0 million, $2.0 million, $2.5 million, $2.0million and $2.5 million. As of 

F-26

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

**Note G: DiscontinuedOperations (Continued)**

December 31, 2005, the estimated fair value ofthe note is $10.6 million, based on the estimated cash flows from the note anda risk-adjusted discount rate equal to LIBOR plus eight percent. Intermec’sconsolidated balance sheet as of December 31, 2005, classifies the $10.6million long-term note receivable as other assets.

Intermecrecognized a pre-tax loss on the sale of the Cincinnati Lamb business of $34.7million during the quarter ended April 3, 2005. During the second quarterof 2005 Intermec recognized an additional $1.2 million pre-tax loss on the saleof the Cincinnati Lamb business. The net assets sold of the Cincinnati Lambbusiness were recorded at $36.7 million as of the date of the sale andcomprised the following (thousands of dollars):
| ** **                            | ** ** | **April 3, 2005** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| Current Assets:                       |       |                        |       |   |   |
| Accounts receivable, net              |       |                        | $          | 125,217 |   |   |
| Inventories, net                      |       |                        | 33,684     |   |   |
| Other current assets                  |       |                        | 5,279      |   |   |
| Impairment of current assets          |       |                        | (10,563    | ) |   |
| Total current assets                  |       |                        | 153,617    |   |   |
| Current  Liabilities:                 |       |                        |       |   |   |
| Accounts payable and accrued expenses |       |                        | 71,280     |   |   |
| Accrued payroll                       |       |                        | 6,470      |   |   |
| Total current liabilities             |       |                        | 77,750     |   |   |
| Long-term Liabilities                 |       |                        | 39,127     |   |   |
| Net Assets Sold                       |       |                        | $          | 36,740 |   |   |
|                                       |            |                             |            |  |  |  |  |

 

Long-term liabilities in the above table representpension and post-retirement obligations assumed by the buyer (see Note J to theConsolidated Financial Statements).

The loss on the sale includes an $8.3 million gainrelated to cumulative translation adjustment and a $12.9 million charge relatedto the adjustment to recognize minimum pension liability related to CincinnatiLamb, which previously had been included in the accumulated other comprehensiveincome component of shareholders’ investment (“OCI”). Intermec also incurred$5.3 million of transaction-related expense primarily for severance andprofessional services.

On December 9, 2005, Intermec completed the saleof the Landis Grinding Systems division (“Landis”). The consideration receivedfor the Landis purchased assets consists of $69 million in cash, a $10 milliontwo-year note at an interest rate of 5% per annum guaranteed by the buyer’sparent, classified as other assets on the balance sheet, and the buyer’sassumption of certain liabilities, including certain pension and otherpost-retirement obligations. As of December 31, 2005, the estimated fairvalue of the note is $9.4 million, based on the estimated cash flows from thenote and a risk-adjusted discount rate equal to LIBOR plus 2.25%. Intermecadditionally has recorded $10.6 million due from the buyer, classified asother current assets on the balance sheet, resulting from the estimatedpurchase price adjustment based on the amount of net working assets at closing.The calculation of the estimated purchase price adjustment is subject topossible adjustment based on final determination of net working assets atclosing.

F-27

----

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

**Note G: DiscontinuedOperations (Continued)**

Thenet assets sold of the Landis business were recorded at $34.8 million as of thedate of the sale and comprised the following (thousands of dollars):

|                                       | ** ** | **December 9, 2005** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| Current Assets:                       |       |                           |       |   |   |
| Accounts receivable, net              |       |                           | $          | 30,531 |   |   |
| Inventories, net                      |       |                           | 32,755     |   |   |
| Other current assets                  |       |                           | 324        |   |   |
| Total current assets                  |       |                           | 63,610     |   |   |
| Long-term Assets.                     |       |                           | 7,460      |   |   |
| Current  Liabilities:                 |       |                           |       |   |   |
| Accounts payable and accrued expenses |       |                           | 18,831     |   |   |
| Accrued payroll                       |       |                           | 3,575      |   |   |
| Total current liabilities             |       |                           | 22,406     |   |   |
| Long-term Liabilities                 |       |                           | 13,827     |   |   |
| Net Assets Sold                       |       |                           | $          | 34,837 |   |   |

 

Long-term liabilities sold include domesticpostretirement medical obligations and foreign pension obligations that wereassumed by the buyer.

The gain on the sale of Landis was $42.9 million. Thegain includes a $2.7 million gain related to cumulative translation adjustment,a $7.8 million charge for the write-off of goodwill, a $3.8 millionaccrual relating to the fair value of below-market leases provided to buyerunder the terms of the sale agreement, and $14.3 million in settlement andcurtailment gains that includes $13.8 million of long-term liabilities sold. Intermecalso incurred $2.8 million of transaction-related expense primarily forprofessional services.

Thefollowing table sets forth the components of earnings (loss) from discontinuedoperations, net of tax, for the years ended December 31, 2005, 2004 and2003 (thousands of dollars):
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Product and service  revenues                            |       | $                                          | 223,460    |   | $ | 471,135 |   | $ | 448,730 |   |
| Operating Loss                                           |       | (14,114                                    | )          | (109,410 | ) | (42,089 | ) |
| Loss on sale of  Cincinnati Lamb                         |       | (35,926                                    | )          | — |   | — |   |
| Gain on sale of  Landis                                  |       | 42,945                                     |       | — |   | — |   |
| Loss from discontinued operations before tax             |       | (7,095                                     | )          | (109,410 | ) | (42,089 | ) |
| Benefit for  income taxes                                |       | 28,242                                     |       | 8,100 |   | 7,650 |   |
| Earnings (loss) from  discontinued operations net of tax |       | $                                          | 21,147     |   | $ | (101,310 | ) | $ | (34,439 | ) |

 

The loss from discontinued operations before tax in2005 includes non-cash impairment charges of $2.0 million and $9.9 million incharges relating to settlement of lawsuits (See Note K). Loss from discontinued

F-28

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

**Note G: DiscontinuedOperations (Continued)**

operations, before tax, in 2004 and 2003 includeimpairment charges of $104.1 million and $4.1 million, respectively. Inaddition, as a result of merging the Cincinnati Machine, Lamb Machining Systemsand Lamb Body and Assembly Systems (“Lamb B&A”) divisions, which wasinitiated in the fourth quarter of 2002, restructuring charges of $0.5 millionand $3.5 million were incurred in 2004 and 2003, respectively. The loss fromdiscontinued operations before tax also includes a $3.1 million loss on thesale of Lamb B&A in 2003 and Lamb B&A operating losses of $2.0 millionand $9.2 million, in 2004 and 2003, respectively.

The tax benefit for discontinued operations for theyear ended December 31, 2005 reflects a significant difference from theU.S. statutory tax rate of 35% as a result of Intermec’s divestiture of its IASbusiness through the disposition of the Cincinnati Lamb business and the Landisgrinding business in the first and fourth quarters of 2005, respectively. Theincrease is primarily due to approximately $24.0 million of tax benefits fromthe disposition of the Cincinnati Lamb business. These benefits, including atax effected capital loss in the U.S. in the amount of $12.4 million, resultedfrom differences between the book basis of assets sold and the related taxbasis of the stock and a benefit of $6.9 million from a deferred intercompanysale and an election to treat a foreign subsidiary as a branch.

Intermec ceased permanently reinvesting in Canada,Germany, Korea and the U.K. as a result of the divestitures. Income taxliability on repatriated earnings was substantially offset by estimated foreigntax credits available.

The tax benefit for discontinued operations for theyear ended December 31, 2004, reflects an effective tax rate of 7.4%compared to the U.S. statutory tax rate of 35%. The reduction in the effectivetax rate is largely attributable to the $63.3 million impairment charge relatedto non-deductible goodwill and additional state and foreign valuationallowances recorded against previously recognized deferred taxassets, resulting from Intermec’s plan to divest IAS. Intermec expectsthat certain of its state and foreign deferred tax assets of discontinuedoperations will not be realizable and in 2004 recorded valuation allowances of$5.4 million and $31.3 million, respectively. The tax benefit for 2003 reflectsan effective rate of 18.2 %, primarily due to valuation allowances recorded forforeign deferred tax assets.

Rental expense foroperating leases of discontinued operations, including amounts for short-termleases with nominal, if any, future rental commitments, was $1.3 million, $3.9million and $6.4 million, for the years ended December 31, 2005, 2004 and2003, respectively**.**

**Note H: Income Taxes**

Earningsfrom continuing operations before income taxes by geographic area are asfollows (thousands of dollars):

|                                                          | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States                                            |       | $                                          | 41,950     |   | $ | 33,784 |   | $ | 21,567 |   |
| International                                            |       | 12,575                                     |       | 16,893 |   | 9,255 |   |
| Earnings from continuing  operations before income taxes |       | $                                          | 54,525     |   | $ | 50,677 |   | $ | 30,822 |   |

 

F-29

----

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

**Note H: IncomeTaxes (Continued)**

Income taxes forcontinuing operations consist of the following (benefit) provision (thousandsof dollars):
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:                    |       |                                       |       |   |   |   |   |
| United States taxes         |       | $                                          | 19         |   | $ | (354 | ) | $ | 1,582 |   |
| International taxes         |       | 167                                        |       | 12,949 |   | 898 |   |
| Total Current               |       | 186                                        |       | 12,595 |   | 2,480 |   |
| Deferred:                   |       |                                       |       |   |   |   |   |
| United States taxes         |       | 11,604                                     |       | (9,722 | ) | 10,829 |   |
| International taxes         |       | 2,090                                      |       | (4,377 | ) | 2,341 |   |
| Total Deferred              |       | 13,694                                     |       | (14,099 | ) | 13,170 |   |
| Provision for Income  Taxes |       | $                                          | 13,880     |   | $ | (1,504 | ) | $ | 15,650 |   |
|                             |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing is a reconciliation of income taxes at the U.S. statutory rate to the(benefit) provision for income taxes:
| ** **                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Tax at U.S.  statutory rate                                      |       |                                       | 35.0       | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| State income taxes  net of federal benefit                       |       |                                       | (0.9       | )% |   |   | (4.8 | )% |   |   | 3.6 | % |   |
| Deductible  goodwill & intangibles                      |       |                                       | 2.8        | % |   |   | (26.7 | )% |   |   | 0.0 | % |   |
| Tax credits                                                      |       |                                       | (8.9       | )% |   |   | (5.7 | )% |   |   | 13.2 | % |   |
| Extraterritorial  income exclusion                               |       |                                       | (1.6       | )% |   |   | (1.6 | )% |   |   | (2.2 | )% |   |
| Foreign net  earnings taxed at other than U.S. statutory rate(a) |       |                                       | (7.0       | )% |   |   | 7.3 | % |   |   | 0.0 | % |   |
| Deferred tax  assets                                             |       |                                       | 5.8        | % |   |   | (7.3 | )% |   |   | 0.0 | % |   |
| Nondeductible  expenses                                          |       |                                       | 1.2        | % |   |   | 1.3 | % |   |   | 1.2 | % |   |
| Other items                                                      |       |                                       | (0.9       | )% |   |   | (0.5 | )% |   |   | 0.0 | % |   |
|                                                             |       |                                       | 25.5       | % |   |   | (3.0 | )% |   |   | 50.8 | % |   |

----

(a)           Includes the effect ofresolution of tax audits.

F-30

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

**Note H: IncomeTaxes (Continued)**

Deferred income taxes reflect the net tax effect oftransactions which are recognized in different periods for financial and taxreporting purposes. The primary components of Intermec’s deferred tax assetsand liabilities are as follows (thousands of dollars):
| ** **                          | ** ** | **December 31** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Current Deferred tax assets:        |       |                 |       |   |   |
| Accrued expenses                    |       | $                    | 20,918     |   | $ | 37,949 |   |
| Receivables and  inventories        |       | 7,508                |       | 19,077 |   |
| Net operating loss  carryforwards   |       | 73,850               |       | 26,460 |   |
| Other items                         |       | 330                  |       | 715 |   |
| Total current deferred  tax assets  |       | 102,606              |       | 84,201 |   |
| Valuation allowance                 |       | (1,950               | )          | (2,432 | ) |
| Net current deferred tax  assets    |       | 100,656              |       | 81,769 |   |
| Long-term deferred tax assets:      |       |                 |       |   |   |
| Retiree medical benefits            |       | 8,653                |       | 18,381 |   |
| Intangibles                         |       | 12,537               |       | 11,998 |   |
| Tax credit carryforwards            |       | 91,132               |       | 45,712 |   |
| Deferred income                     |       | 2,723                |       | 2,860 |   |
| Fixed assets                        |       | 1,048                |       | 10,052 |   |
| Net operating loss  carryforwards.  |       | 72,351               |       | 124,970 |   |
| Cumulative translation  adjustments |       | 1,580                |       | — |   |
| Other items                         |       | 1,025                |       | — |   |
| Total deferred tax  assets          |       | 291,705              |       | 295,742 |   |
| Valuation allowance                 |       | (9,990               | )          | (74,964 | ) |
| Net deferred tax assets             |       | 281,715              |       | 220,778 |   |
| Deferred tax liabilities:           |       |                 |       |   |   |
| Pensions                            |       | —               |       | (3,696 | ) |
| Foreign earnings                    |       | (43,103              | )          | — |   |
| Other                               |       | (378                 | )          | (335 | ) |
| Net deferred tax asset              |       | $                    | 238,234    |   | $ | 216,747 |   |
|                                     |            |                      |            |  |  |  |  |  |  |

 

Intermec has considered future market growth,forecasted earnings, future taxable income, the mix of earnings in thejurisdictions in which Intermec operates and prudent, feasible and permissibletax planning strategies in determining the realizability of deferred tax assets.If Intermec were to determine that it would not be able to realize a portion ofits net deferred tax asset in the future for which there is currently novaluation allowance, an adjustment to the net deferred tax asset would becharged to earnings in the period such determination was made. Conversely, if Intermecwere to make a determination that it is more likely than not that the deferredtax assets for which there is currently a valuation allowance would berealized, the related valuation allowance would be reduced and a benefit toearnings would be recorded. Intermec’s deferred tax assets include future taxbenefits of discontinued operations that remain with Intermec. Intermec removeda deferred tax asset of approximately $65 million related to foreign netoperating losses and the associated valuation allowance of $65 million asa result of the sale.

Intermec has available at December 31,2005 net operating tax loss carryforwards in the United States of approximately$362.5 million, which result in a deferred tax benefit of $126.9 million. Theselosses are expected to expire from 2019 through 2025. In 2003, Intermecdetermined that certain foreign tax 

F-31

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

**Note H: Income Taxes (Continued)**

credit carryforwards would not be realized prior totheir scheduled expiration dates ranging from 2004 through 2007. Therefore,these tax credits were converted to $5.2 million of net operating tax losscarryforwards.

Intermec also has available at December 31, 2005capital tax loss carryforwards in the United States of approximately $4.5million which are expected to expire in 2010. The deferred tax benefitassociated with these losses is $1.6 million.

Intermec has general business credit carryforwards andforeign tax credit carryforwards of $40.5 million and $50.6 million at December 31,2005, respectively. The general business credit carryforwards have expirationdates ranging from 2010 through 2025. With respect to foreign tax credit carryforwards,they are expected to expire between 2013 and 2016.

Intermec has provided a valuation allowance in theamount of $5.5 million for state deferred tax assets from discontinuedoperations of which $5.0 million relates to net operating tax losscarryforwards. Intermec determined that other state deferred tax assets of $4.0million, which includes net operating loss carryforwards of $1.8 million, ismore likely than not to be realized.

At December 31, 2005, Intermec has foreign netoperating tax loss carryforwards of $12.6 million which result in a deferredtax benefit of $4.9 million. Valuation allowance provided for deferred incometax benefits related to the foreign tax loss carryforwards was $0.3 million asof December 31, 2005. Intermec also has foreign capital loss carryforwardsof $20.4 million as of December 31, 2005 and a full valuation allowancefor the related deferred tax asset of $6.1 million has been recorded.

Intermec conducts business in various countriesthroughout the world and is subject to tax in numerous jurisdictions. As aresult of its business activities, Intermec files a significant number of taxreturns that are subject to audit by various tax authorities. Tax audits areoften complex and may require several years to resolve. Intermec recordsestimated tax liabilities to the extent the contingencies are probable and canbe reasonably estimated. These liabilities for tax contingencies totaled $18.8million and $32.6 million as of December 31, 2005 and 2004, respectively. Thereduction in the tax contingency accrual relates to Credit for IncreasingResearch Activities, resulting from the resolution of a U.S. tax audit of aformer parent for the same issue, and the resolution of a German tax audit. Suchestimated tax liabilities are based on management’s judgment and best estimateas to the ultimate outcome of tax audits. However, Intermec’s future resultsmay include favorable or unfavorable adjustments to Intermec’s estimated taxliabilities in the period the assessments are made or resolved or when statutesof limitation on potential assessments expire. As a result, Intermec’seffective tax rate may fluctuate significantly on a quarterly basis.

In 2005, Intermec completed the divestiture of the IASbusiness through the disposition of its Cincinnati Lamb business and the LandisGrinding Systems business in the first and fourth quarter, respectively. Intermecceased reinvesting permanently in Canada, Germany and Korea as of the end ofthe first quarter. Income tax liability associated with repatriated dividendswas substantially offset by foreign tax credits.

In early December 2005, Intermec sold the LandisGrinding Systems business in the U.S. and in the U.K. As of December 31,2005, Intermec accrued a tax provision for $43.1 million of estimated deferredtaxes in connection with its decision of not permanently reinvesting in theU.K. The deferred tax liability was largely offset by $45.1 million ofestimated foreign tax credits available.

F-32

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

**Note H: Income Taxes(Continued)**

In mid 2005, Intermec ceased reinvesting permanentlyin Finland with respect to its Intermec business. Income tax liabilityassociated with repatriated dividends was substantially offset by foreign taxcredits.

The new repatriation provision in the American JobsCreation Act of 2004 (“the Job Act”) which was signed into law on October 22,2004 had no effect on Intermec’s accounting for income taxes.

Intermec has not provideddeferred U.S. income taxes on undistributed earnings of foreign subsidiariesthat Intermec intends to reinvest permanently outside of the United States; thetotal amount of such earnings as of December 31, 2005, was $36.7 million.Should Intermec distribute earnings of foreign subsidiaries in the form ofdividends or otherwise, Intermec may be subject to U.S. income taxes. Due tocomplexities in tax laws and various assumptions that would have to be made, itis not practicable to estimate the amount of unrecognized deferred U.S. taxeson these earnings.

**Note I: IntellectualProperty Settlements**

During the year ended December 31, 2004, Intermecreceived compensation in relation to one settlement regarding certain of itsintellectual property (“IP settlements”). Intermec received compensation inrelation to three similar IP settlements during the year ended December 31,2003, and four IP settlements during the year ended December 31, 2002. Theterms of these settlements are confidential.

In aggregate, revenues and related gross profit fromintellectual property settlements, net of legal fees, were $19.6 million and$15.6 million in 2004 and $18.7 million and $12.5 million in 2003,respectively.

In March 2006, Intermecreceived compensation in relation to an additional similar IP settlement. Forthe first quarter of 2006, the settlement will have a significant positiveimpact on revenue and Intermec currently estimates that the settlement, net ofattorney’s fees and costs, will have a favorable impact on its revenues and onoperating profit from continuing operations in the range of $14 - 18 million.

**Note J: Pension and OtherPostretirement Benefit Plans**

Intermec has retirement and pension plans that covermost of its employees. Most of Intermec’s U.S. employees, as well as the employeesof certain non-U.S. subsidiaries, are covered by contributory defined benefitplans under which employees may contribute up to 4% of covered compensationannually. Annual contributions are made to the extent such contributions areactuarially determined to adequately fund the plans. Retiree benefits are basedon the amount of participant contributions over the term of the participant’semployment. There are also defined contribution voluntary savings programsgenerally available for U.S. employees, which qualify under Sections 401(a) and401(k) of the Internal Revenue Code. These plans are designed to enhancethe retirement programs of participating employees. Under these plans, Intermecmatches up to 50% of a certain portion of participants’ contributions.

In 2005, Intermec recorded an adjustment to recognizethe minimum pension liability related to its U.S. plans in accordance with SFASNo. 87. The amount recorded in 2005 included an accrued benefit liabilityof $11.1 million, intangible assets of $3.9 million, long-termdeferred tax assets of $2.5 million, and other comprehensive loss of $4.7 million,related to minimum pension liability of its U.S plans related to 2004 and priorperiods. This adjustment had no effect on Intermec’s results of operations,cash flows or the benefit obligation or funded status of Intermec’s pensionplan.

F-33

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

**Note J: Pensionand Other Postretirement Benefit Plans (Continued)**

Intermec uses ameasurement date of September 30 for the majority of its pension and otherpostretirement benefit plans. The following table sets forth the change inbenefit obligations and plan assets of Intermec’s pension plans and the amountsrecognized in Intermec’s balance sheets (thousands of dollars):
| ** **                                        | ** ** | **2005** | ** ** | **2004**          | ** ** |
|---------------------------------------------------|------------|----------|------------|-------------------|------------|
| ** **                                        | ** ** | **U.S.** | ** ** | **Non U.S.** | ** ** | **U.S.** | ** ** | **Non U.S.** | ** ** |
| Change in benefit  obligations:                   |       |     |       |              |       |   |   |   |   |
| Benefit obligation at beginning of year           |       | $        | 160,081    |              | $          | 192,459 |   | $ | 141,163 |   | $ | 169,680 |   |
| Service cost                                      |       | 8,254    |       | 3,459             |       | 9,670 |   | 5,148 |   |
| Interest cost                                     |       | 10,107   |       | 5,947             |       | 8,953 |   | 9,429 |   |
| Special termination benefits                      |       | 2,027    |       | —            |       | 2,430 |   | — |   |
| Plan participants’ contributions             |       | 2,284    |       | 819               |       | 2,331 |   | 1,106 |   |
| Actuarial loss (gain)                             |       | 26,736   |       | 11,791            |       | (585 | ) | 983 |   |
| Benefits paid                                     |       | (4,454   | )          | (4,456            | )          | (3,881 | ) | (8,427 | ) |
| Curtailment                                       |       | (6,425   | )          | (5,396            | )          | — |   | — |   |
| Settlements                                       |       | 2,195    |       | (150,014          | )          | — |   | — |   |
| Foreign currency translation adjustment           |       | —   |       | (11,091           | )          | — |   | 14,540 |   |
| Benefit obligation at end of year                 |       | 200,805  |       | 43,518            |       | 160,081 |   | 192,459 |   |
| Change in plan  assets:                           |       |     |       |              |       |   |   |   |   |
| Fair value of plan assets at beginning of year    |       | 100,191  |       | 143,879           |       | 92,568 |   | 120,787 |   |
| Actual return on plan assets                      |       | 13,024   |       | 15,831            |       | 7,146 |   | 14,183 |   |
| Plan participants’ contributions             |       | 2,284    |       | 819               |       | 2,331 |   | 1,106 |   |
| Employer contributions                            |       | 2,191    |       | 4,032             |       | 2,027 |   | 5,577 |   |
| Benefits paid                                     |       | (4,454   | )          | (4,456            | )          | (3,881 | ) | (8,427 | ) |
| Settlement                                        |       | 2,195    |       | (120,066          | )          | — |   | — |   |
| Foreign currency translation adjustment           |       | —   |       | (7,573            | )          | — |   | 10,653 |   |
| Fair value of plan assets at end of year          |       | 115,431  |       | 32,466            |       | 100,191 |   | 143,879 |   |
| Funded status                                     |       | (85,374  | )          | (11,052           | )          | (59,890 | ) | (48,580 | ) |
| Unrecognized net actuarial loss                   |       | 66,856   |       | 12,356            |       | 54,694 |   | 48,867 |   |
| Unrecognized prior service cost                   |       | 3,340    |       | —            |       | 4,149 |   | — |   |
| Unrecognized transition asset                     |       | —   |       | (1,193            | )          | — |   | (848 | ) |
| Fourth quarter contribution                       |       | —   |       | 11,052            |       | — |   | — |   |
| Adjustment to recognize minimum pension liability |       | (10,757  | )          | (11,163           | )          | — |   | (13,961 | ) |
| Net pension asset  (accrued liability)            |       | $        | (25,935    | )                 | $          | — |   | $ | (1,047 | ) | $ | (14,522 | ) |
|                                                   |            |          |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-34

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

**Note J: Pensionand Other Postretirement Benefit Plans (Continued)**

Amounts recognized on Intermec’sconsolidated balance sheets are classified as follows (thousands of dollars):
| ** **                                        | ** ** | **2005** | ** ** | **2004**          | ** ** |
|---------------------------------------------------|------------|----------|------------|-------------------|------------|
| ** **                                        | ** ** | **U.S.** | ** ** | **Non U.S.** | ** ** | **U.S.** | ** ** | **Non U.S.** | ** ** |
| Prepaid benefit  cost                             |       | $        | 35,068     |              | $          | 11,163 |   | $ | 44,011 |   | $ | — |   |
| Accrued benefit  liability                        |       | (50,246  | )          | —            |       | (45,058 | ) | (1,048 | ) |
| Additional  minimum liability                     |       | (10,757  | )          | (11,163           | )          | — |   | — |   |
| Long-term  liabilities of discontinued operations |       | —   |       | —            |       | — |   | (13,474 | ) |
| Intangible asset                                  |       | 3,198    |       | —            |       | — |   | — |   |
| Accumulated other  comprehensive loss             |       | 7,559    |       | 11,163            |       | — |   | 11,817 |   |
|                                              |       | $        | (15,178)   |              | $          | 11,163 |   | $ | (1,047 | ) | $ | (2,705 | ) |
|                                                   |            |          |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

To recognize changes in its additional minimum pensionliability, Intermec recorded adjustments, net of tax, to other comprehensiveincome (loss) of ($3.6) million, $1.3 million and ($2.9) million for the yearsended December 31, 2005, 2004 and 2003.

The accumulated benefit cost for the U.S. plans was$164.4 million and $119.4 million as of December 31, 2005, and 2004,respectively. The accumulated benefit cost for the U.K. plans was $43.5 millionand $158.4 million as of December 31, 2005, and 2004, respectively. Intermec’sU.S. plans in the preceding table include prepaid pension cost of funded plans,presented net of pension liabilities for unfunded plans. For these unfundedplans, in aggregate, as of December 31, 2005, and 2004, the accruedpension cost was $50.2 million and $45.1 million, the benefit obligation was$63.9 million and $55.5 million, and the accumulated benefit obligation was$54.5 million and $48.9 million, respectively.

Intermec does not expect to contribute to its U.S.funded plans in 2006. For the U.K. plans, expected employer contributions for2006 are $1.8 million.

Theweighted average actuarial assumptions used to determine benefit obligations atthe end of the 2005 and 2004 fiscal years are as follows:
| ** **                     | ** ** | **U.S**  | ** ** | **Non. U.S.** | ** ** |
|--------------------------------|------------|----------|------------|--------------------|------------|
| ** **                     | ** ** | **2005** | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate                  |       | 5.75     | %          | 6.00               | %          | 5.0 | % | 5.50 | % |
| Rate of compensation  increase |       | 4.00     | %          | 4.00               | %          | N/A |   | 3.75 | % |

 

F-35

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

**Note J: Pension and OtherPostretirement Benefit Plans (Continued)**

U.S. plan assets consist primarily of equitysecurities, U.S. government securities, and corporate bonds and at December 31,2005 and 2004, include 31,475 shares of Intermec’s common stock. The assetallocation for Intermec’s U.S pension plans as of December 31, 2005 and2004, and the target allocation, by asset category, are as follows:
| ** **                       | ** ** | **Target ** | ** ** | **Allocation of Plan  Assets at  Measurement Date** | ** ** |
|----------------------------------|------------|------------------|------------|-------------------------------------------------------------------------|------------|
| **U.S. Pension Plans** | ** ** | ** **       | ** ** | **Allocation**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Equity securities                |       |             | 65         | %                                                                       |       |   | 57 | % |   |   | 55 | % |   |
| Debt securities                  |       |             | 29         | %                                                                       |       |   | 27 | % |   |   | 31 | % |   |
| Other                            |       |             | 5          | %                                                                       |       |   | 12 | % |   |   | 12 | % |   |
| Cash and cash  equivalents       |       |             | 1          | %                                                                       |       |   | 4 | % |   |   | 2 | % |   |
| Total                            |       |             | 100        | %                                                                       |       |   | 100 | % |   |   | 100 | % |   |
|                                  |            |                  |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

The majority of Intermec’s US pension obligations are20 to 30 years in the future. Consistent with this obligation, Intermec’sinvestment strategy for the plan assets is to invest for strong long-termreturns. As a result of a reversion of surplus pension assets in 2001, theallocation of assets among asset categories is different from Intermec’s targetallocation. Intermec’s objective is to adjust the investment allocation toreflect the target allocation as certain alternative investments liquidate. Alternativeinvestments, classified as other in the above table, represent primarilyprivate equity-type investments and private placements.

Non-U.S.plan assets consist primarily of equity securities, U.K. government securities,and corporate bonds. Intermec’s investment strategy for the plan assets is toinvest for strong long-term returns. The asset allocation for Intermec’s U.K.pension plans as of December 31, 2005 and 2004, and the target allocation,by asset category, are as follows:
| ** **                           | ** ** | **Target** | ** ** | **Allocation of Plan  Assets at  Measurement Date** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------------------------|------------|
| **Non-U.S. Pension Plans** | ** ** | ** ** | ** ** | **Allocation**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Equity securities                    |       |       | 75         | %                                                                       |       |   | 76 | % |   |   | 66 | % |   |
| Debt securities                      |       |       | 25         | %                                                                       |       |   | 12 | % |   |   | 34 | % |   |
| Cash and cash  equivalents and other |       |       | 0          | %                                                                       |       |   | 12 | % |   |   | 0 | % |   |
| Total                                |       |       | 100        | %                                                                       |       |   | 100 | % |   |   | 100 | % |   |
|                                      |            |            |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

F-36

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

**Note J: Pensionand Other Postretirement Benefit Plans (Continued)**

In 2005, 2004 and 2003, Intermecoffered voluntary early retirement to certain U.S. employees resulting inspecial termination benefits charges of $2.0 million, $2.4 million and $0.1million, respectively. A summary of the components of net periodic pensionexpense (income) for Intermec’s defined benefit plans and defined contributionplans is as follows (thousands of dollars):
| ** **                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                       | ** ** | **U.S.**                                   | ** ** | **Non-U.S.** | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** |
| Components of net  periodic pension expense:                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                                     |       | $                                          | 8,254      |   | $ | 3,459 |   | $ | 9,670 |   |   | $ | 5,148 |   |   | $ | 8,571 |   |   | $ | 5,205 |   |   |
| Interest cost                                                    |       | 10,107                                     |       | 5,947 |   | 8,953 |   |   | 9,429 |   |   | 7,439 |   |   | 7,960 |   |   |
| Expected return on plan assets                                   |       | (10,086                                    | )          | (5,682 | ) | (9,792 | ) |   | (9,694 | ) |   | (9,893 | ) |   | (9,655 | ) |   |
| Amortization of prior service cost                          |       | 714                                        |       | — |   | 717 |   |   | — |   |   | 719 |   |   | — |   |   |
| Recognized net actuarial loss                                    |       | 3,282                                      |       | 1,239 |   | 3,146 |   |   | 1,917 |   |   | 610 |   |   | 224 |   |   |
| Amortization of transition asset                                 |       | —                                     |       | (336 | ) | (42 | ) |   | (339 | ) |   | (257 | ) |   | (303 | ) |   |
| Special termination benefits                                     |       | 2,027                                      |       | — |   | 2,430 |   |   | — |   |   | 71 |   |   | — |   |   |
| Curtailment and settlement charges      |       | (171                                       | )          | (2,691 | ) | — |   |   | — |   |   | — |   |   | — |   |   |
|                                                             |       | 14,127                                     |       | 1,936 |   | 15,082 |   |   | 6,461 |   |   | 7,260 |   |   | 3,431 |   |   |
| Defined contribution plans                                       |       | 2,232                                      |       | 932 |   | 2,794 |   |   | 1,386 |   |   | 2,877 |   |   | 1,199 |   |   |
| Net periodic  pension expense                               |       | $                                          | 16,359     |   | $ | 2,868 |   | $ | 17,876 |   |   | $ | 7,847 |   |   | $ | 10,137 |   |   | $ | 4,630 |   |   |
|                                                                  |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For the year ended December 31, 2005, netperiodic pension income of $11.9 million, relating to Intermec’s non-U.S. plansis classified in loss from discontinued operations on Intermec’s consolidatedstatements of operations. For 2004 and 2003, net periodic pension expense of$6.2 million, and $3.3 million, respectively, are classified in loss fromdiscontinued operations. The portion of U.S. plan net periodic pension expenseclassified in loss from discontinued operations is $4.0 million, $5.1 millionand $3.0 million for the years ended December 31, 2005, 2004 and 2003,respectively.

Theweighted average actuarial assumptions used to determine net cost are as follows:
| ** **                      | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** |
|---------------------------------|------------|----------|------------|--------------|------------|
| ** **                      | ** ** | **2005** | ** ** | **2004**     | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                   |       | 6.00     | %          | 6.00         | %          | 6.75 | % | 5.50 | % | 5.50 | % | 5.75 | % |
| Expected return  on plan assets |       | 9.00     | %          | 9.00         | %          | 9.00 | % | 8.00 | % | 7.50 | % | 7.75 | % |
| Rate of compensation  increase  |       | 4.00     | %          | 4.00         | %          | 4.25 | % | 3.75 | % | 3.50 | % | 3.25 | % |

 

Management’s analysis of the asset rate of returnassumptions for the U.S. plans supports a long-term rate of approximately 8.75%for the September 30, 2005, measurement date based on the long-termperspective of the investments and the historical results of investment funds.

Management’s analysis of the asset rate of returnassumptions for the U.K. plans supports a long term rate of return ofapproximately 7.6% based on the long-term perspective of the investments andthe historical 

F-37

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

**Note J: Pensionand Other Postretirement Benefit Plans (Continued)**

results of investments funds. Management has set Intermec’sweighted average rate of return assumption at 7.6% for the September 30,2004 measurement date.

The table below sets forththe expected future pension benefit payments for the next five years and thefollowing five year period (millions of dollars):
| **Years**         | ** ** | ** ** | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** |
|-------------------|------------|------------|------------|----------|------------|--------------|------------|
| 2006              |       | $          | 5.2        |     |       | $            | 2.1        |   |   |
| 2007              |       | 5.6        |       |     | 2.1        |         |       |
| 2008              |       | 6.4        |       |     | 2.1        |         |       |
| 2009              |       | 7.0        |       |     | 2.1        |         |       |
| 2010              |       | 7.7        |       |     | 2.1        |         |       |
| 2010 through 2014 |       | 55.5       |       |     | 10.7       |         |       |
|                   |            |            |            |          |            |              |            |  |  |  |  |

 

**Other Postretirement Benefits**

Inaddition to pension benefits, certain of Intermec’s U.S. employees are coveredby postretirement health care and life insurance benefit plans provided by Intermec.These benefit plans are unfunded. The following table sets forth the change inbenefit obligation of Intermec’s other postretirement benefits and amountsrecognized in Intermec’s balance sheets (thousands of dollars):
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Change in postretirement  benefit obligations: |       |                  |       |   |   |
| Benefit obligation at beginning of year        |       | $                     | 41,969     |   | $ | 50,606 |   |
| Service cost                                   |       | 134                   |       | 156 |   |
| Interest cost                                  |       | 1,563                 |       | 2,758 |   |
| Actuarial loss (gain)                          |       | 834                   |       | (7,171 | ) |
| Benefits paid                                  |       | (1,795                | )          | (4,380 | ) |
| Curtailment                                    |       | (270                  | )          | — |   |
| Settlement                                     |       | (37,585               | )          | — |   |
| Benefit obligation at end of year              |       | 4,850                 |       | 41,969 |   |
| Funded status                                  |       | (4,850                | )          | (41,969 | ) |
| Unrecognized net actuarial loss                |       | 1,729                 |       | 13,430 |   |
| Unrecognized prior service cost                |       | —                |       | (12,872 | ) |
| Accrued  postretirement benefit obligation     |       | $                     | (3,121     | ) | $ | (41,411 | ) |
|                                                |            |                       |            |  |  |  |  |  |  |

 

Certain postretirement medical plans were modifiedduring 2003 to eliminate coverage for future retirees and to require retireesto contribute a portion of the plan cost, effective January 1, 2007. Theseplan changes reduced the benefit obligation by $15.7 million as of December 31,2003. This reduction was first used to reduce the remaining unrecognizedtransition obligation of $1.6 million to zero as of December 31, 2003. Theremainder of the reduction is deferred as an unrecognized prior service costand will be amortized over the expected future service period.

F-38

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

**Note J: Pensionand Other Postretirement Benefit Plans (Continued)**

A summary of Intermec’snet periodic postretirement (benefit) cost is as follows (thousands ofdollars):
| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Components of net  periodic postretirement (benefit) cost: | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                               |       | $                                          | 134        |   | $ | 156 |   | $ | 474 |   |
| Interest cost                                              |       | 1,563                                      |       | 2,758 |   | 3,976 |   |
| Recognized actuarial loss and transition obligation        |       | 374                                        |       | 915 |   | 685 |   |
| Amortization of prior service cost                         |       | (598                                       | )          | (1,196 | ) | — |   |
| Curtailment                                                |       | (12,274                                    | )          | — |   | — |   |
| Settlement                                                 |       | (25,694                                    | )          | — |   | — |   |
| Net periodic  postretirement (benefit) cost                |       | $                                          | (36,495    | ) | $ | 2,633 |   | $ | 5,135 |   |
|                                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

For years ended December 31, 2005, 2004 and 2003,($36.8) million, $2.4 million, and $4.8 million,****respectively,of the net periodic postretirement (benefit) cost is classified as (gain) lossfrom discontinued operations within Intermec’s consolidated statements ofoperations.

Actuarial assumptions usedto measure the postretirement benefit obligation include a discount rate of5.50%, 6.00% and 6.00% at December 31, 2005, 2004 and 2003, respectively.The assumed health care cost trend rate for fiscal year 2005 was 10.00% and isprojected to decrease over 12 years to 6.00%, where it is expected to remainthereafter. The effect of one-percentage-point increase or decreasein the assumed health care cost trend rate on the service cost and interestcost components of the net periodic postretirement benefit cost is notmaterial. A one-percentage-point increase in the assumed healthcare cost trend rate on the postretirement benefit obligation results in anincrease of approximately $0.3 million, while a one-percentage pointdecrease results in a decrease of $0.3 million.

In December, 2003, the Medicare Prescription Drug, Improvementand Modernization Act of 2003 (the “Act”) was passed into law. The Actintroduced a prescription drug benefit under Medicare Part D and a federalsubsidy to sponsors of postretirement health care plans that provide aprescription drug benefit that is at least actuarially equivalent to MedicarePart D. The Act is expected to reduce postretirement benefit payments byless that $0.1 million for each of the next five years, 2006 through 2010, and$0.3 million in aggregate for the subsequent five year period, 2011through 2015.

Estimated future grossbenefit payments, excluding the effect of subsidy receipts from the Act, are$0.5 million for each of the next five years, 2006 through 2010, and $2.2million in aggregate for the subsequent five year period, 2011 through 2015.

**Sale of Businesses**

Intermec’s pre-tax loss on the sale of Cincinnati Lambin the first quarter of 2005 (see Note G) takes into consideration thecurtailment and settlement gains totaling $40.5 million, comprising $33.4million relating to the postretirement benefit plans and $7.1 million relatingto the non-U.S. defined benefit plans. These curtailment and settlement gainscomprise the pension and post-retirement obligations assumed by 

F-39

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

**Note J: Pensionand Other Postretirement Benefit Plans (Continued)**

the buyer. In addition,the pre-tax loss on the sale of Cincinnati Lamb includes a loss of $12.9million, representing the cumulative adjustment to recognize the minimumpension liability of the Company’s non-U.S. defined benefit plans, which priorto the sale, had been deferred in the other comprehensive loss component ofshareholders’ investment on Intermec’s consolidated balance sheets.

Intermec’s pre-tax gain on the sale of Landis in thefourth quarter of 2005 (see Note G) takes into consideration the curtailmentand settlement gains totaling $14.3 million, comprising $4.6 million relatingto the postretirement benefit plans, and $9.7 million relating to the non-U.S. definedbenefit plans. These curtailment and settlement gains comprise the pension andpost-retirement obligations assumed by the buyer.

**Note K: Litigation, Commitments and Contingencies**

Provisionsfor estimated expenses related to product warranties are made at the timeproducts are sold. These estimates are established using historical informationon the nature, frequency, and average cost of warranty claims. Managementactively studies trends of warranty claims and takes action to improve productquality and minimize warranty claims. The following table indicates the changein Intermec’s warranty liability from continuing operations during the yearsended December 31, 2005 and 2004, (thousands of dollars):
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Beginning balance                              |       | $                                     | 4,878      |   | $ | 6,179 |   |
| Payments                                       |       | (7,397                                | )          | (5,892 | ) |
| Increase in  liability (new warranties issued) |       | 8,061                                 |       | 4,823 |   |
| Adjustments  (pre-existing warranties)         |       | —                                |       | (236 | ) |
| Currency  translation adjustment               |       | —                                |       | 4 |   |
| Ending Balance                                 |       | $                                     | 5,542      |   | $ | 4,878 |   |
|                                                |            |                                       |            |  |  |  |  |  |  |

 

Tower Automotive Products Co. v. Lamb Technicon Bodyand Assembly was a lawsuit filed on March 11, 2002, in the Kent CountyCircuit Court in Michigan, generally alleging a breach of contract involving aframe assembly production line. No specific claim for damages was made in theComplaint by Tower Automotive Products Co. (“Tower”). On September 15,2005, the parties agreed to settle this lawsuit. Tower agreed to dismiss thecomplaint with prejudice and to release Intermec from any and all claims it mayhave had against Intermec. Intermec agreed to dismiss its counterclaim withprejudice and to release Tower from any and all claims it may have had againstTower. In accordance with the terms of the settlement, Intermec paid $13.5million to Tower on October 12, 2005. The settlement resulted in a chargeof $9.5 million, classified as loss from discontinued operations on Intermec’sconsolidated statements of operations for year ended December 31, 2005.

The settlement agreement was subject to approval ofthe U.S. Bankruptcy Court for the Southern District of New York (“the BankruptcyCourt”) in the case captioned in re: Tower Automotive, Inc., et al. TheBankruptcy Court approved the settlement agreement on September 27, 2005.

F-40

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

**Note K: Litigation,Commitments and Contingencies (Continued)**

On March 10, 2005, Symbol Technologies, Inc.(“Symbol”) terminated its original equipment manufacturing (“OEM”) agreementwith Intermec to supply laser scan engines and stopped shipping laser scanengines to Intermec. On March 10, 2005, Symbol filed a lawsuit in theUnited States District Court for the District of Delaware seeking a declaratoryjudgment that its termination of the OEM agreement is lawful (the “ContractCase”). Intermec believes that the termination of the OEM agreement by Symbolwill not have a material adverse effect on operations.

Also on March 11, 2005, Symbol announced that ithad filed a lawsuit against Intermec on March 10, 2005, in the UnitedStates District Court for the District of Delaware for infringement of certainof Symbol’s wireless technology patents (the “Wireless Case”). On March 23,2005, Intermec filed its answer to Symbol’s complaint and filed counterclaimsagainst Symbol for infringing Intermec’s wireless access, terminal and softwarepatents. Intermec simultaneously filed its answer to Symbol’s declaratoryjudgment action in the contract case and filed counterclaims against Symbol forbreach of the OEM agreement.

On April 28, 2005, Symbol announced that it hadfiled a lawsuit against Intermec in the United States District Court for theWestern District of Wisconsin for infringing Symbol’s barcode decoding patents(the “Decoding Case”). On July 14, 2005, in response to a motion by Intermec,the Decoding Case was transferred to the United States District Court for theDistrict of Delaware. That case has now been consolidated for purposes ofdiscovery with the Wireless Case. Intermec has denied liability in the DecodingCase and pursuant to the standstill agreement discussed below retains the rightto file counterclaims against Symbol in the Decoding Case.

On June 30, 2005, Intermec filed a complaint withthe U.S. International Trade Commission (the “ITC”) alleging that Symbol isillegally importing products that infringe Intermec patents that coverpocket-sized handheld computing devices, modular handheld computing devices andrecharging and data exchanging cradles (the “ITC Case”). On July 29, 2005,the ITC voted to investigate Intermec’s allegations against Symbol. Pursuant tothe standstill agreement, discussed below, Intermec asked the ITC to dismissand close the investigation. On September 26, 2005, in response to Intermec’srequest, the Administrative Law Judge terminated the investigation. On October 12,2005, the ITC entered a Notice Not to Review the Order terminating theinvestigation.

The complaints in Wireless Case and Decoding Case donot contain sufficient details for the Company to assess what Symbol will claimregarding the relationship between its cited patents and Intermec’s products.However, based on Intermec’s analysis of the cited Symbol patents, Intermecbelieves it has substantial defenses to each of those patent infringementclaims and Intermec intends to vigorously defend itself against the claims madein Symbol’s lawsuits.

On September 1, 2005, the parties agreed thatthey would try to resolve their patent disputes through negotiation. Tofacilitate that effort, the parties entered into a standstill agreementpursuant to which they sought the court’s permission to postpone litigationactivity in the cases pending in the U.S. District Court for the District ofDelaware (the Contract, Wireless and Decoding Cases) until December 1,2005, and to postpone filing any new patent infringement law suits against eachother until March 1, 2006. The standstill agreement’s only exception tothe agreed ban on new lawsuits until March 1, 2006, allows Intermec tofile counterclaims against Symbol in the Decoding Case and to file a case inthe United States District Court for the District of Delaware alleginginfringement by Symbol of the patents asserted by Intermec in the ITC case.According to the standstill agreement, these permitted counterclaims and new 

F-41

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

**Note K:Litigation, Commitments and Contingencies (Continued)**

action had to have been filed no sooner than December 1,2005, and no later than December 9, 2005. The parties also agreed not topursue or seek temporary restraining orders, preliminary injunctions or ITCexclusion orders against each other for a period of two years. The UnitedStates District Court for the District of Delaware has granted the schedulingchanges required to effectuate the standstill agreement of the parties.

In December of 2005, the parties agreed toprovide additional time for settlement discussions by extending the scheduleset forth in the standstill agreement by a minimum of 120 days. The partiessought the approval of the United States District Court for the District ofDelaware for the scheduling changes required to postpone litigation activity inthe cases pending in that court for an additional 120 days. The court hasgranted those scheduling changes with respect to the Wireless and DecodingCases. With respect to the Contract Case, the parties agreed that Symbol woulddismiss without prejudice its declaratory judgment complaint and that Intermecwould dismiss without prejudice the breach of contract and patent infringementcounterclaims. If the parties are unable to reach a settlement, each party willhave the right to refile those claims and counterclaims in the same court.

Intermec is currently, andis from time to time, subject to claims and suits arising in the ordinarycourse of its business. In the opinion of Intermec’s General Counsel, theultimate resolution of currently pending proceedings will not have a materialadverse effect on Intermec’s consolidated financial statements.

**Note L: Related Party Transactions**

Unitrin, Inc. and its subsidiaries (“Unitrin”) isa significant shareholder of Intermec, owning approximately 20% of Intermec’soutstanding shares. In January 2005, Unitrin’s Life and Health Insurancesegment agreed to hire Intermec’s Intermec subsidiary to develop the softwarefor the next generation of Life and Health Insurance’s handheld computers. In2005, Intermec recognized $2.7 million in revenues from Unitrin. Alsoduring the year ended December 31, 2005, the Company recorded $0.3 millionof deferred service revenue from Unitrin. Intermec believes that the prices ofgoods and services sold to Unitrin are comparable to those received fromunaffiliated third parties. As of December 31, 2005, accounts receivablefrom Unitrin are not material.

At December 31, 2004,other assets included a receivable due from a certain non-executive Intermecofficer of $0.2 million. This receivable was fully paid during the firstquarter of 2005.

**Note M:  SegmentReporting**

During the fourth quarter of 2005, in conjunction withthe completion of the IAS divestiture, Intermec reorganized its reportablesegments Intermec Technologies. The reportable segments comprise IntermecProducts, Intermec Services and Corporate and Other. Intrasegment transactionshave been eliminated and there are no material intersegment transactions. It isnot practicable to segregate operating profit, capital expenditures,depreciation and amortization expense or total assets into the Intermec Productand Intermec Service segments, so this is reported below in aggregate forIntermec Technologies. Assets classified as corporate and other amounts consistof cash and cash equivalents, prepaid pension costs, deferred tax assets andother corporate assets. The following table sets forth Intermec’s operations 

F-42

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

**NoteM:  Segment Reporting (Continued)**

(seeNote A for discussion surrounding the nature of the Intermec business) andtotal assets by reportable segment (millions of dollars):
| ** **                              | ** ** | **Year Ending December 31,** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|------------|
| ** **                              | ** ** | **2005**                               | ** ** | **2004**   | ** ** | **2003** | ** ** | ** ** |
| Intermec Technologies  Revenues:        |       |                                   | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Product                                 |       | $                                      | 721.0      |       | $ | 674.5 |   | $ | 580.1 |   |   |
| Service                                 |       | 154.5                                  |       | 136.8      |   | 126.5 |   |   |
| Total                                   |       | 875.5                                  |       | 811.3      |   | 706.6 |   |   |
| Intermec  Technologies Gross Profit:    |       | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Product                                 |       | 300.3                                  |       | 289.9      |   | 240.4 |   |   |
| Service                                 |       | 62.6                                   |       | 56.0       |   | 49.6 |   |   |
| Total                                   |       | 362.9                                  |       | 345.9      |   | 290.0 |   |   |
| Operating Profit:                       |       | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Intermec Technologies                   |       | 80.5                                   |       | 89.7       |   | 65.8 |   |   |
| Corporate and other amounts             |       | (22.6                                  | )          | (25.0      | ) | (23.1 | ) |   |
| Total                                   |       | 57.9                                   |       | 64.7       |   | 42.7 |   |   |
|                                    |       |                                   |       |       |   |   |   |   |
| Capital  Expenditures                   |       |                                   |       |       |   |   |   |   |
| Intermec Technologies                   |       | 10.7                                   |       | 10.2       |   | 11.4 |   |   |
| Corporate and other amounts             |       | —                                 |       | 0.1        |   | 0.5 |   |   |
| Total                                   |       | 10.7                                   |       | 10.3       |   | 11.9 |   |   |
| Depreciation and  amortization expense: |       | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Intermec Technologies                   |       | 9.8                                    |       | 10.7       |   | 13.8 |   |   |
| Corporate and other amounts             |       | 0.1                                    |       | 0.1        |   | 0.3 |   |   |
| Total                                   |       | 9.9                                    |       | 10.8       |   | 14.1 |   |   |
| Total assets at  year end:              |       | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Intermec Technologies                   |       | 364.1                                  |       | 340.3      |   | 299.5 |   |   |
| Corporate and other amounts             |       | 538.6                                  |       | 500.0      |   | 475.2 |   |   |
| Total                                   |       | 902.7                                  |       | 840.3      | (A) | 774.7 | (B) |   |
|                                         |            |                                        |            |            |  |  |  |  |  |  |  |

----

(A)       Excludes $232.4 million ofassets of discontinued operations 

(B)        Excludes $316.1 million ofassets of discontinued operations 

F-43

----

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

**NoteM:  Segment Reporting (Continued)**

The following table setsforth Intermec’s revenues by product lines (millions of dollars):
| ** **                         | ** ** | **Year Ending December 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                          | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Systems and  Solutions             |       | $                                      | 497.8      |   | $ | 456.9 |   | $ | 374.3 |   |
| Printer and Media                  |       | 223.2                                  |       | 198.0 |   | 187.1 |   |
| Service                            |       | 154.5                                  |       | 136.8 |   | 126.5 |   |
| Intellectual  Property Settlements |       | —                                 |       | 19.6 |   | 18.7 |   |
| Total                              |       | $                                      | 875.5      |   | $ | 811.3 |   | $ | 706.6 |   |
|                                    |            |                                        |            |  |  |  |  |  |  |  |  |  |

 

Revenues by geographicregion are determined based on the location of the customer. European revenuesand long-lived assets relate primarily to the United Kingdom, Germany andFrance. No individual country, other than the United States, exceeds 10% ofconsolidated revenues. The following table sets forth Intermec’s revenues bygeographic region (millions of dollars):
| ** **    | ** ** | **Year Ending December 31,** | ** ** |
|---------------|------------|---------------------------------------------|------------|
| ** **    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States |       | $                                           | 478.6      |   | $ | 444.1 |   | $ | 395.7 |   |
| Europe        |       | 244.1                                       |       | 237.2 |   | 210.7 |   |
| Other Regions |       | 152.8                                       |       | 130.0 |   | 100.2 |   |
| Total         |       | $                                           | 875.5      |   | $ | 811.3 |   | $ | 706.6 |   |
|               |            |                                             |            |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table sets forth Intermec’s long-lived assets by geographic region(millions of dollars):
| ** **    | ** ** | **December 31,** | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| United States |       | $                     | 101.3      |   | $ | 81.5 |   |
| Europe        |       | 4.6                   |       | 6.1 |   |
| Other Regions |       | 0.7                   |       | 0.8 |   |
| Total         |       | $                     | 106.6      |   | $ | 88.4 |   |
|               |            |                       |            |  |  |  |  |  |  |

 

F-44

----

**INTERMEC, INC.QUARTERLY FINANCIAL INFORMATION (unaudited)**

Beginningin 2005, Intermec’s interim financial periods are based on a thirteen-weekinternal accounting calendar. Intermec does not believe this change has anymaterial impact on comparability of the financial statements.
| ** **                           | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|
| ** **                           | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Revenues(A)                          |       | $        | 196.5      |   | $ | 217.5 |   | $ | 219.8 |   | $ | 241.7 |   |
| Gross Profit                         |       | 82.9     |       | 94.4 |   | 87.7 |   | 97.9 |   |
| Earnings from  Continuing Operations |       | 5.5      |       | 11.8 |   | 11.3 |   | 12.1 |   |
| Net Earnings(B)                      |       | 3.5      |       | 12.1 |   | 4.6 |   | 41.6 |   |
| Basic Earnings  (Loss) per Share     |       | 0.60     |       | 0.20 |   | 0.07 |   | 0.67 |   |
| Diluted Earnings  (Loss) per Share   |       | 0.60     |       | 0.19 |   | 0.07 |   | 0.65 |   |
| Common Stock Sales Price  per Share: |       |     |       |   |   |   |   |   |   |
| High                                 |       | 25.55    |       | 27.44 |   | 35.15 |   | 37.04 |   |
| Low                                  |       | 19.84    |       | 16.69 |   | 26.10 |   | 25.12 |   |
|                                      |            |          |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|
| ** **                           | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Revenues(A)                          |       | $        | 193.0      |   | $ | 186.6 |   | $ | 194.8 |   | $ | 236.9 |   |
| Gross Profit                         |       | 89.1     |       | 77.6 |   | 78.7 |   | 98.0 |   |
| Earnings from  Continuing Operations |       | 15.7     |       | 3.2 |   | 6.8 |   | 26.5 |   |
| Net Earnings  (Loss)(B)              |       | 10.5     |       | 5.7 |   | 5.9 |   | (71.2 | ) |
| Basic Earnings  (Loss) per Share     |       | 0.17     |       | 0.09 |   | 0.10 |   | (1.17 | ) |
| Diluted Earnings  (Loss) per Share   |       | 0.17     |       | 0.09 |   | 0.10 |   | (1.14 | ) |
| Common Stock Sales  Price:           |       |     |       |   |   |   |   |   |   |
| High                                 |       | 26.63    |       | 22.43 |   | 20.24 |   | 25.59 |   |
| Low                                  |       | 19.50    |       | 15.25 |   | 13.59 |   | 13.90 |   |
|                                      |            |          |            |  |  |  |  |  |  |  |  |  |  |

----

(A)       Excludesrevenues from discontinued operations as follows (millions of dollars):
| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| First Quarter  |       | $        | 114.5      |     | $          | 104.7 |   |
| Second Quarter |       | 46.4     |       | 118.5    |       |
| Third Quarter  |       | 37.9     |       | 121.9    |       |
| Fourth Quarter |       | 24.6     |       | 126.0    |       |
|                |            |          |            |          |            |  |  |

 

(B)        Includesearnings (loss) from discontinued operations as follows (millions of dollars):
| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| First Quarter  |       | $        | (1.9       | )        | $          | (5.2 | ) |
| Second Quarter |       | 0.2      |       | 2.5      |       |
| Third Quarter  |       | (6.7     | )          | (0.9     | )          |
| Fourth Quarter |       | 29.5     |       | (97.7    | )          |
|                |            |          |            |          |            |  |  |

 

Q-1

----

**SCHEDULE II**

**VALUATIONAND QUALIFYING ACCOUNTS(Thousands of Dollars)**

|                                                            | ** ** | ** **                                   | ** ** | **Additions**                                | ** ** | ** **                           | ** ** | ** **        | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|
| ** **                                                 | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged to  Cost and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions(A)** | ** ** | **Balance at  End of Year** | ** ** |
| Accounts receivable—allowance  for doubtful accounts: |       |                                         |       |                                         |       |                                 |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Year ended  December 31, 2005                         |       |                                         | $          | 9,771                                        |       |                                 |       | $                 | 1,281      |   |   |   |   |   | $ | (2,895 | ) |   |   | $ | 8,157 |   |   |
| Year ended  December 31, 2004                         |       |                                         | 11,927     |                                         |       |                                 | 744        |              |       |   |   |   | (2,900 | ) |   |   | 9,771 |   |   |
| Year ended  December 31, 2003                         |       |                                         | 9,062      |                                         |       |                                 | 4,549      |              |       |   |   |   | (1,684 | ) |   |   | 11,927 |   |   |
|                                                            |            |                                              |            |                                              |            |                                      |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(A)       Primarily uncollectibleaccounts written off.

S-1

----

**INTERMEC, INC.INDEX TO EXHIBITS**
| Exhibit No. | ** ** | **Description   of Exhibit** |
|------------------|------------|------------------------------|
|             | 3.1        |                         |   | Certificate of  Incorporation of UNOVA, Inc. (now Intermec, Inc. and referred to  hereinafter as the “Company”).* |   |
|             | 3.2        |                         |   | Certificate of Ownership and Merger effective on  January 1, 2006, amending the Certificate of Incorporation to change the  Company’s name from UNOVA, Inc. to Intermec, Inc.* |   |
|             | 3.3        |                         |   | By-Laws of the Company, as amended on  February 5, 1999, filed as Exhibit 3.2 to the Company’s 1998 annual  report on Form 10-K, and incorporated herein by reference. |   |
|             | 4.1        |                         |   | Credit Agreement among the Company, UNOVA Industrial  Automation Systems, Inc., Intermec Technologies Corporation, Intermec  International Inc., Intermec Technologies Manufacturing, LLC, Intermec IP  Corp. and UNOVA IP Corp. as Borrowers, the financial institutions listed on  the signature pages of the Credit Agreement, as the Lenders, Keybank  National Association as Administrative agent, Lead Arranger and Book Manager,  and Keybank National Association, as LC Issuer, dated as of  September 30, 2004, filed as Exhibit 4.1 to the Company’s  September 30, 2004, quarterly report on Form 10-Q, and  incorporated herein by reference. |   |
|             | 4.2        |                         |   | Security Agreement among the Company, UNOVA  Industrial Automation Systems, Inc., Intermec Technologies Corporation,  Intermec Technologies Manufacturing, LLC, Intermec IP Corp. and UNOVA IP  Corp. and Keybank National Association as Administrative Agent, dated as of  September 30, 2004, filed as Exhibit 4.1 to the Company’s  September 30, 2004 quarterly report on Form 10-Q, and  incorporated herein by reference. |   |
|             | 4.3        |                         |   | Credit Agreement among Barclays Bank PLC and UNOVA  U.K. Limited, Cincinnati Machine U.K. Limited (now UNOVA Operations U.K. Limited)  and Intermec Technologies U.K. Limited, as Borrowers, filed as  Exhibit 4.2 to the Company’s March 31, 2004 quarterly report on  Form 10-Q, dated as of February 9, 2004, and incorporated  herein by reference. |   |
|             | 4.4        |                         |   | Rights Agreement dated September 24, 1997,  between the Company and The Chase Manhattan Bank, as Rights Agent, to which  is annexed the form of Right Certificate as Exhibit A, filed on  October 22, 1997, as Exhibit 3C to Amendment No. 2 to the  Company’s registration statement on Form 10 No. 001-13279,  and incorporated herein by reference. |   |
|             | 4.5        |                         |   | Indenture dated as of March 11, 1998, between  the Company and The First National Bank of Chicago, Trustee, providing for  the issuance of securities in series, filed as Exhibit 4.5 to the  Company’s 1997 annual report on Form 10-K, and incorporated herein  by reference (the “Indenture”). |   |
|             | 4.6        |                         |   | Resignation, Appointment and Acceptance agreement  dated March 16, 2001 among Bank One, N.A., as successor-in-interest to  The First National Bank of Chicago, National City Bank of Indiana, and the  Company in relation to the Indenture, filed as Exhibit 4.14 to the Company’s  2002 annual report on Form 10-K, and incorporated herein by reference. |   |

E-1

----

 
|        | 4.7    |   |   | Form of  7.00% Notes due March 15, 2008, issued by the Company under the  Indenture, filed as Exhibit 4.7 to the Company’s 1997 annual report on  Form 10-K, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|--------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 4.8    |   |   | Amendment No. 1 to Credit Agreement and  Consents and Waiver and Amendment No. 1 to Security Agreement—Borrowers,  dated March 29, 2005, among the Company, UNOVA Industrial Automation  Systems, Inc., Intermec Technologies Corporation, Intermec  International, Inc., Intermec Technologies Manufacturing, LLC, Intermec  IP Corp., and UNOVA IP Corp, as the Borrowers, the financial institutions  listed on the signature pages of the Credit Agreement, as the Lenders,  Keybank National Association, a national banking association, as the  Administrative Agent for the Lenders, and Keybank National Association, a  national banking association, as the LC Issuer, filed as Exhibit 4.3 to  the Company’s April 3, 2005, quarterly report on Form 10-Q,  and incorporated herein by reference. |   |
|   |   |   |   | From time to time other instruments defining the  rights of holders of other long-term debt of the Company may not be filed as  exhibits because the amount of debt authorized under any such instrument does  not exceed 10% of the total assets of the Company and its consolidated  subsidiaries. The Company hereby undertakes to furnish a copy of any such  instrument to the Commission upon request.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | 10.1   |   |   | Distribution and Indemnity Agreement dated  October 31, 1997, between Western Atlas Inc. and the Company, filed as  Exhibit 10.1 to the Company’s September 30, 1997 quarterly report  on Form 10-Q, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|   | 10.2   |   |   | Tax Sharing Agreement dated October 31, 1997,  between Western Atlas Inc., and the Company, filed as Exhibit 10.2 to  the Company’s September 30, 1997 quarterly report on Form 10-Q,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|   | 10.3   |   |   | 2002 Directors Stock Option and Fee Plan, as amended  effective January 1, 2006.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | 10.4   |   |   | Intellectual Property Agreement dated  October 31, 1997, between Western Atlas Inc., and the Company, filed as  Exhibit 10.4 to the Company’s September 30, 1997, quarterly report  on Form 10-Q, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|   | 10.5   |   |   | Director Stock  Option and Fee Plan, filed as Exhibit 10.7 to the Company’s  September 30, 1997 quarterly report on Form 10-Q, and  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|   | 10.5.1 |   |   | Amendment  No. 1 to the Director Stock Option and Fee Plan, filed as  Exhibit 10.13 to the Company’s September 30, 1999, quarterly report  on Form 10-Q, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | 10.6   |   |   | Plan Document  Relating to Election to Receive Employee Stock Options in Lieu of Certain  Cash Compensation Payable to Company Officers in fiscal year 2002, filed as  Exhibit 10.6 to the Company’s 2001 annual report on Form 10-K,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.7   |   |   | Employee Benefits  Agreement dated October 31, 1997, between Western Atlas Inc., and the  Company, filed as Exhibit 10.3 to the Company’s September 30, 1997,  quarterly report on Form 10-Q, and incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|        |        |        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |        |  |

E-2

----

 
|        | 10.8  |   |   | Form of Change of Control Employment Agreement  with Larry D. Brady, filed as Exhibit 10.5 to the Company’s  September 30, 1997, quarterly report on Form 10-Q, and  incorporated herein by reference.                        |
|--------|-------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.9  |   |   | Amendment to the Form of Change of Control  Employment Agreement with Larry D. Brady, filed as Exhibit 10.6 to the  Company’s 1999 annual report on Form 10-K, and incorporated herein  by reference.                              |
|   | 10.10 |   |   | Form of Change of Control Employment Agreements  with Kenneth L. Cohen, Thomas O. Miller and Steven J. Winter, filed as  Exhibit 10.7 to the Company’s 1999 annual report on Form 10-K,  and incorporated herein by reference.     |
|   | 10.11 |   |   | Form of Change of Control Employment Agreements  with Janis L. Harwell and Robert T. Smith, filed as Exhibit 10.12 to the  Company’s 2004 annual report on Form 10-K, and incorporated herein  by reference.                       |
|   | 10.12 |   |   | Employment Agreement between the Company and Thomas  O. Miller, dated as of October 21, 2005, filed as Exhibit 4.1 to  the Company’s October 2, 2005, quarterly report on Form 10-Q,  and incorporated herein by reference.   |
|   | 10.13 |   |   | Restoration Plan, filed on August 18, 1997, as  Exhibit 10.1 to the Company’s registration statement on Form 10  No. 001-13279, and incorporated herein by reference.                                                         |
|   | 10.14 |   |   | Amendment to Restoration Plan executed  August 6, 2004.*                                                                                                                                                                                          |
|   | 10.15 |   |   | Supplemental Executive Retirement Plan, filed on  October 1, 1997, as Exhibit 10.H to Amendment No. 1 to the  Company’s registration statement on Form 10 No. 001-13279,  and incorporated herein by reference.          |
|   | 10.16 |   |   | Amendment No. 1 to Supplemental Executive  Retirement Plan, dated September 23, 1998, filed as Exhibit 10.22  to the Company’s September 30, 1998, quarterly report on Form 10-Q,  and incorporated herein by reference. |
|   | 10.17 |   |   | Amendment No. 2 to Supplemental Executive  Retirement Plan, dated March 11, 1999, filed as Exhibit 10.15 to  the Company’s 1998 annual report on Form 10-K, and incorporated  herein by reference.                            |
|   | 10.18 |   |   | Amendment No. 3 to Supplemental Executive  Retirement Plan, dated March 15, 2000, filed as Exhibit 10.20 to  the Company’s 1999 annual report on Form 10-K, and incorporated  herein by reference.                            |
|   | 10.19 |   |   | Amendment No. 4 to Supplemental Executive  Retirement Plan, dated July 11, 2000, filed as Exhibit 10.15 to the  Company’s June 30, 2000, quarterly report on Form 10-Q, and  incorporated herein by reference.           |
|   | 10.20 |   |   | Amendment dated August 6, 2004, to the  Supplemental Executive Retirement Plan.*                                                                                                                                                                  |
|   | 10.21 |   |   | 1997 Stock Incentive Plan, filed as  Exhibit 10.12 to the Company’s September 30, 1997, quarterly report  on Form 10-Q, and incorporated herein by reference.                                                                      |

E-3

----

 
|        | 10.22 |   |   | 1999 Stock Incentive Plan, filed as Annex A to the  Company’s definitive Proxy Statement relating to the Annual Meeting of  Shareholders held on May 7, 1999, and incorporated herein by reference.                                                                                                |
|--------|-------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.23 |   |   | 2001 Stock Incentive Plan, filed as Exhibit B  to the Company’s definitive Proxy Statement relating to the Annual Meeting of  Shareholders held on May 8, 2001, and incorporated herein by reference.                                                                                         |
|   | 10.24 |   |   | Amendment of Restricted Stock Agreements, dated as  of September 12, 2002, filed as Exhibit 10.30 to the Company’s  September 30, 2002, quarterly report on Form 10-Q, and  incorporated herein by reference.                                                                       |
|   | 10.25 |   |   | Management Incentive Compensation Plan, filed as  Annex B to the Company’s 2002 Proxy Statement, and incorporated herein by  reference.                                                                                                                                                                 |
|   | 10.26 |   |   | 2004 Omnibus Incentive Compensation Plan, filed as  Appendix C to the Company’s definitive Proxy Statement relating to the Annual  Meeting of Shareholders held on May 6, 2004, and incorporated herein by  reference.                                                                             |
|   | 10.27 |   |   | 2004 Long-Term Performance Share Program (the  “Long-Term Program”), a sub-plan under the Company’s 2004 Omnibus Incentive  Compensation Plan (the “2004 Plan”), as amended effective January 1,  2006.*                                                                       |
|   | 10.28 |   |   | Form of Restricted Stock Agreement for awards  under the Company’s 2001 Stock Incentive Plan (the “2001 Plan”) and the 2004  Plan, filed as Exhibit 10.4 to the Company’s September 30, 2004,  quarterly report on Form 10-Q, and incorporated herein by  reference. |
|   | 10.29 |   |   | Form of Restricted Stock Unit Agreement for  awards under the 2004 Plan, filed as Exhibit 10.5 to the Company’s  September 30, 2004, quarterly report on Form 10-Q, and  incorporated herein by reference.                                                                          |
|   | 10.30 |   |   | Form of Performance Share Unit Agreement under  the Long-Term Program for use after 2005.*                                                                                                                                                                                                              |
|   | 10.31 |   |   | Form of Amendment dated December 23, 2005,  to all Performance Share Unit Agreements for Performance Periods begun in  2004 and 2005.*                                                                                                                                                             |
|   | 10.32 |   |   | Arrangement for Annual Incentives for 2004 and 2005,  filed as Exhibit 10.1 to the Company’s current report on Form 8-K,  dated February 23, 2005, and incorporated herein by reference.                                                                                                 |
|   | 10.33 |   |   | Form of Incentive Stock Option Agreement for  awards under the 2004 Plan, filed as Exhibit 10.1 to the Company’s  July 3, 2005 quarterly report on Form 10-Q and incorporated  herein by reference.                                                                                 |
|   | 10.34 |   |   | Form of Non-Qualified Stock Option Agreement  for awards under the 2004 Plan, filed as Exhibit 10.2 to the Company’s  July 3, 2005, quarterly report on Form 10-Q and incorporated  herein by reference.                                                                            |
|   | 10.35 |   |   | Form of Incentive Stock Option Agreement for  awards under the 2001 Plan , filed as Exhibit 10.3 to the Company’s  July 3, 2005, quarterly report on Form 10-Q and incorporated  herein by reference.                                                                               |

E-4

----

 
|        | 10.36 |   |   | Form of Non-Qualified Stock Option Agreement  for awards under the 2001 Plan, filed as Exhibit 10.4 to the Company’s  July 3, 2005, quarterly report on Form 10-Q and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|-------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.37 |   |   | Form of Incentive Stock Option Agreement for  awards under the 1999 Stock Incentive Plan (the “1999 Plan), filed as  Exhibit 10.5 to the July 3, 2005, quarterly report on Form 10-Q  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.38 |   |   | Form of Non-Qualified Stock Option Agreement  for awards under the 1999 Plan, filed as Exhibit 10.6 to the  July 3, 2005, quarterly report on Form 10-Q and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 10.39 |   |   | Purchase and Sale Agreement, dated as of  March 17, 2005, among the Company, UNOVA Industrial Automation  Systems, Inc., UNOVA U.K. Limited, Cincinnati Machine U.K. Limited (now  UNOVA Operations U.K. Limited), Honsberg Lamb Sonderwerkzeugmachinen GmbH  (now UNOVA Germany GmbH), UNOVA Canada, Inc., and UNOVA IP Corp., as  Selling entities, and R&B Plastics Holdings, Inc. and MAG Industrial  Automation Systems, LLC, as Purchasing Entities (the “Cincinnati Purchase and  Sale Agreement”), filed as Exhibit 4.1 to the Company’s April 3,  2005, quarterly report on Form 10-Q, and incorporated herein by  reference. |
|   | 10.40 |   |   | First Amendment to the Cincinnati Purchase and Sale  Agreement, dated April 1, 2005, filed as Exhibit 4.2 to the  Company’s April 3, 2005, quarterly report on Form 10-Q, and  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.41 |   |   | Purchase and Sale of Cincinnati Lamb  Group—Settlement Agreement, dated June 30, 2005, filed as  Exhibit 10.7 to the Company’s July 3, 2005, quarterly report on  Form 10-Q and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.42 |   |   | Purchase and Sale Agreement, dated as of  October 27, 2005, among the Company, UNOVA Industrial Automation  Systems, Inc., UNOVA IP Corp. and UNOVA U.K. Limited, as Selling  Entities, and Compagnie De Fives-Lille, Cinetic Landis Grinding Corp. and Cinetic  Landis Grinding Limited, as Purchasing Entities.*                                                                                                                                                                                                                                                                                                                                                                 |
|   | 21    |   |   | Subsidiaries of the Registrant.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 23    |   |   | Consent of Independent Registered Public Accounting  Firm.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 31.1  |   |   | Certification pursuant to section 302 of the  Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section  1350, chapter 63 of Title 18, United States Code), dated March 15, 2006.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | 31.2  |   |   | Certification pursuant to section 302 of the  Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section  1350, chapter 63 of Title 18, United States Code), dated March 15, 2006.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | 32.1  |   |   | Certification pursuant to section 906 of the  Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section  1350, chapter 63 of Title 18, United States Code), dated March 15, 2006.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | 32.2  |   |   | Certification  pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections  (a) and (b) of section 1350, chapter 63 of Title 18, United States  Code), dated March 15, 2006.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

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*                    Copies ofthese exhibits are included in this Annual Report on Form 10-K filedwith the Securities Exchange Commission.

E-5

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