With all the hype surrounding Apple's ( AAPL) new iPhone, the personal computer feels as musty as old wallpaper.

But Intel ( INTC), the world's No.1 chipmaker, is hoping desktops and laptops still have some pizzazz. And when the company reports its quarterly results after Tuesday's market close, investors will get a glimpse into how Intel is sizing up the PC market going forward.

Many investors interpreted chip rival Advanced Micro Devices' ( AMD) recent profit warning as a positive sign about Intel's fourth-quarter performance, given that Intel didn't serve up a shortfall announcement of its own.

But just as important as Intel's financial results for the final quarter of 2006 is its outlook for 2007, both in terms of competition with AMD and for overall PC demand.

After a year of brutal competition, swelling inventory and plummeting profit, Intel is eager to turn a fresh page in 2007.

The chipmaker has a few reasons to be optimistic. The imminent release of Microsoft's ( MSFT) Vista operating system, combined with Intel's own lineup of new dual-core and quad-core processors, could entice consumers to upgrade their PCs and perhaps even shore up the battered average selling prices of Intel's chips.

The average analyst expectation sees Intel's sales rising 7.7% to $37.8 billion in 2007. EPS, however, is expected to jump to $1.13 from 84 cents in 2006.

According to a note by Bank of America analyst Sumit Dhanda, who rates Intel a buy, a key to the stock's near-term performance will be management's guidance on gross margin and operating expenses in 2007.

Clearly, the Street is expecting Intel's gross margins to recover from the third quarter's 49% level -- Intel's lowest in years. Dhanda expects margins to have edged back up to 52% in the fourth quarter, at the high end of Intel's guidance of 50% plus or minus a couple of points, thanks to an improved mix of notebook and server chips.

Bank of America makes a market in Intel shares and has provided the company with investment banking services in the past 12 months.

Investors have endorsed the company's aggressive moves to cut costs through layoffs and other restructuring steps. But whether this will be enough to raise gross margins this year back to the 60% level of past quarters remains to be seen.

Intel's cost-cutting efforts cold prove a zero-sum game, as the company's hand-to-hand combat with AMD forces it to spend more. To counter the AMD threat, for instance, Intel has vowed to come out with new chip microarchitecture every two years.

"Intel has been forced to increase the cadence of its line shrinks and the introduction of new processor architectures, both of which structurally raise development costs," says Credit Suisse analyst Michael Masdea, who recently downgraded his rating on Intel to underperform.

Credit Suisse makes a market in shares of AMD and Intel and has provided both companies with investment and noninvestment banking services in the past 12 months.

Masdea believes Intel's cost-cutting moves, as well as its catalog of popular new chips, are already priced into the stock, which traded at 19.5 times 2007 earnings at Friday's market close. Shares of Intel, which closed Friday at $22.13, have risen nearly one-third since a severe second-quarter earnings report selloff six months ago.

And the PC microprocessor market's shift to a duopoly environment is something that inherently works against Intel.

"Despite Intel's lineup of better performing processors, we expect AMD to gain share in the enterprise desktop and mobile markets as customers get comfortable with AMD's product availability (increased capacity) and prior design wins translate into accelerating unit shipments," Masdea wrote.

For the fourth quarter, the average analyst expectation calls for Intel to earn 25 cents a share, with sales increasing 9% sequentially to $9.45 billion.

A year ago, however, Intel had fourth-quarter sales of $10.2 billion.

Intel has stopped the bleeding. Now it needs to show investors whether margins -- and profit growth -- can regain its past glory.

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