With an onsite gallery devoted to the history of the microchip and see-through furniture filled with old chips, Intel (INTC) Santa Clara, Calif., headquarters treats computing progress with reverence. Actual computers, on the other hand? Slightly less precious. The chipmaker s 80,000 employees are granted a company-issued laptop and at least one breaks every day, to the tune of some 500 busted notebooks every year.

Even with bargain-basement laptops and a bulk discount, that would add up to $250,000 a year enough to drive some CEOs crazy. But Paul Otellini finds it reassuring. After all, if Intel s employees need replacements regularly, so too must the millions of consumers who drive demand for computers which drives demand for Intel s processors, the chips that power more than three-quarters of computers on the market.

Otellini, who rose through Intel s sales and marketing ranks to take the top job in 2005, is counting on that resilience to propel Intel through the weak economy. So far, it seems reasonable: Profit took a big hit in the fourth quarter of 2008 but rebounded significantly through the first half of 2009. Also, second-quarter sales were up 13 percent from the first quarter, though still down from a year ago. The company says it s expecting its typical second-half bump from back-to-school and holiday shopping. So far, the market seems optimistic: After hitting $12 this spring, shares are trading close to $20.

But in the long run, computers alone won t do it for Intel. Computer sales are growing at about 10 percent per year, says Patrick Wang, an analyst at Wedbush Morgan, but prices are falling, and revenue-wise, that s a losing proposition for a company used to double-digit growth. To really grow, Intel will have to tap the market for smaller, more portable devices, like smartphones and health care technology, which means learning to build chips that are even tinier, lighter, and more efficient and reliable. But as of now, that market has an Intel of its own, a little-known company called ARM Holdings that has designed the chips in 90 percent of cell phones on the market. Otellini says it s only a matter of time before Intel is in the mix too, noting that the company plans to invest $7 billion in its domestic factories to foster this kind of innovation. We traveled to Santa Clara to ask Otellini how much more computing power we really need, why domestic manufacturing isn t dead, and what he d like out of technology that even he can t get.

SmartMoney: The conventional wisdom suggests people would have stopped buying computers in a weak economy, but your sales haven t dipped too badly.

Paul Otellini: This is the first down cycle since the PC has become indispensable. Even in the dot-com bust, it wasn t pervasive. If your PC broke tonight, you wouldn t wait until the end of the recession to replace it. To me, that s a valid test of the utility and the indispensability. So that gives us a bit more confidence.

Historically, people didn t buy a new computer because their old one broke. They bought a new one because the old one became obsolete and that doesn t happen as quickly anymore.

That s true it s new utilities and new uses that drive demand, and I don t see that changing. But there are more than 500 million PCs that are more than three years old now. Fine. Windows 7 comes out next year. Are they going to run Windows 7? Probably not. If people want Windows 7 which is stunning, by the way they re going to need a new PC.

But for most people, their current computer might be enough.

I ve had generations of journalists sit in this room and tell me, Why do I need anything more than what I have? In 1985 people said, I ll never need anything more than a 386. If you think that computing is going to stay the same for the rest of your life, then you can keep the computer you have. But at the end of the day, we want computing to be like Star Trek, right? So it just does stuff for us without having to deal with it. And to do that takes more performance, not less.

And now you re working on chips for smartphones and medical devices?

We ve had to develop the smallest, cheapest part with good performance we could. We ve never done that before, but we have to get into these things that don t have the budget a PC does. The architecture is merging.

When did you realize that?

The industry has had the notion that it would merge for a long time. But we didn t really understand the smartphone phenomenon until three or four years ago: The Internet is the killer app. Voice is necessary, but it s not what you buy a smartphone for.

You plan to be in phones within a year.

We ll start at the high end and work our way down, and you ll have the same experience on your phone that you have on a PC. You ll have better graphics, better video, you ll never go to a site where the Flash player doesn t work.

Netbooks and high-end phones sell for less than PCs. You re going to need volume.

It s always been volume. When you build one of those factories, you build to a scale that drives lower costs but also huge amounts of product. The only way we can afford to build cheap computers or make chips for cheap computers is to use the scale capacity that we have.

You re investing $7 billion in the next two years to build factories in the U.S. Why build chips here?

We don t believe that manufacturing in the U.S. is dead. We may not have a competitive advantage making steel anymore, but we ve got a competitive advantage in technology. The workers in our factories are very highly educated people, and they operate our equipment that s worth, in some cases, $40 million to $50 million apiece. You want the best people in the world running them.

You couldn t do it somewhere else, maybe cheaper?

Sure. We have factories in Ireland and Israel, and we re building a semiconductor factory in China, but you asked me why I built them here. We have resources here, we can turn those facilities into new production faster, we have employees who are highly trained here, and we can preserve jobs here. It made sense.

The computer industry, broadly speaking, helped lead an economic recovery in this country in the 70s. Is tech still in that role?

Well, computing is a productivity tool. And so the deployment of computing into more and more sectors of the economy will make us all more productive. For example, health care is the least-penetrated major industry when it comes to technology. Every time you or I go to a doctor s office, we still have to fill out that stupid chart and put that your grandmother had diabetes do that enough times and sooner or later you ll forget. How inefficient is that? And that inefficiency is expensive, and it drags on the economy. Technology can help.

You were talking about how we all want computers to be Star Trek. What could that really look like?

Today, the way the Internet works, if you want to find out something, you go to a search engine or a site you re taking an action. The next step is where the Internet comes to you proactively when you need something. Hold up the phone, and it ll translate a sign, or recognize a monument, and give you reviews and tell you where the bathrooms are. And we re getting there, and it will make your life better.

What would make your life better?

I d like a life.

You can t get that on your handheld?

No, I can t.