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How does it work?

Core Temp lets you monitor Intel "Core Duo", "Core Solo", "Core 2 Duo", "Core 2 Solo", "Core 2 Quad", " Pentium", "Core i3", "Core i5", "Core i7", "Core i9",  series, "Celeron" series (Conroe/Merom architecture and newer), "Xeon 3000/3200/5100/5300/5400/5500/5600/6500/7400/7500/7600" series (Woodcrest, Clovertown, Harpertown, Dunnington and Nehalem based architecture).
All AMD Phenom II, Athlon II, Phenom, Athlon, Opteron, Sempron, Turion II and Turion series series die temperature.
The temperature readings are very accurate as the data is collected from a Digital Thermal Sensor (or DTS) which is located in each individual processing core, near the hottest part. This sensor is digital, which means it doesn't rely on an external circuit located on the motherboard to report temperature, its value is stored in a special register in the processor so any software can access and read it. This eliminates any inaccuracy that can be caused by external motherboard circuits and sensors and then different types of programs trying to read those sensors.

This is how the program works:

Intel defines a certain Tjunction temperature for the processor. This value is usually in the range between 85°C and 105°C. In the later generation of processors, starting with Nehalem, the exact Tjunction Max value is available for software to read in an MSR (short for Model Specific Register).
A different MSR contains the temperature data. The data is represented as a Delta in °C between current temperature and Tjunction.

So the actual temperature is calculated like this 'Core Temp = Tjunction - Delta'

The size of the data field is 7 bits. This means a Delta of 0 - 127°C can be reported in theory. In fact the reported temperature can rarily go below 0°C and in some cases (Core 2 - 45nm series) temperatures below 30° or even 40°C are not reported.

AMD processors report the temperature via a special register in the CPU's northbridge. Core Temp reads the value from the register and uses a formula provided by AMD to calculate the current temperature.
The formula for the Athlon 64 series, early Opterons and Semprons (K8 architecture) is: 'Core Temp = Value - 49'.
For the newer generation of AMD processors like Phenom, Phenom II, newew Athlons, Semprons and Opterons (K10 architecture), and their derivatives, there is a differnt formula: 'CPU Temp* = Value / 8'.

The sensor in AMD CPUs can report temperatures between -49C and 206C.

*CPU Temp is because the Phenom\Opteron (K10) have only one sensor per package, meaning there is only one reading per processor.