UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 28, 200326, 2004

OR

For the transition period from ____________ to ____________

Commission File Number 1-7882

ADVANCED MICRO DEVICES, INC.

(Exact name of registrant as specified in its charter)

(408) 749-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x  No  ¨

Aggregate market value of the votingcommon stock held by non-affiliates based on the reported closing price of common stock on March 1,June 25, 2004, ($14.89), as reported onwhich was the New York Stock Exchange:last business day of the registrant’s most recently completed second fiscal quarter.

$5,238,679,4765,488,863,023

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

351,825,351393,889,539 shares of common stock as of March 1, 2004February 22, 2005

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on April 29, 2004,28, 2005, are incorporated into Part II and III hereof.

AMD, Advanced Micro Devices,the AMD Arrow logo, AMD Athlon, AMD Duron,Opteron, AMD Opteron,Sempron, AMD Turion, AMD PowerNow!, Alchemy, Geode and Geodecombinations thereof are either our trademarks or our registered trademarks in the United States and/or other jurisdictions.of AMD. Spansion FASL,and MirrorBit, and combinations thereof, are trademarks of FASL LLC in the United States and/or other jurisdictions.Spansion LLC. Vantis is a trademark of Lattice Semiconductor Corporation. Legerity is a trademark of Legerity, Inc. Microsoft, Windows, and Windows NT and MS-DOS are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other jurisdictions. MIPS is a registered trademark of MIPS Technologies, Inc. in the United States and/or other jurisdictions. HyperTransport is a licensed trademark of the HyperTransport Technology Consortium. NetWare is a registered trademark of Novell, Inc. in the United States and/or other jurisdictions. Other terms used to identify companies and products may be trademarks of their respective owners.

Advanced Micro Devices, Inc.

FORM 10-K

For The Fiscal Year Ended December 28, 200326, 2004

INDEX

i

PART I

ITEM 1.    BUSINESS

Cautionary Statement Regarding Forward-Looking Statements

The statements in this report include forward-looking statements. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things,things: our ability to be profitable, our revenues, depreciationsales, operating results and amortization, operating results; anticipated cash flows; capital expenditures; gross margins; adequacydepreciation and amortization expenses; research and development expenses; marketing, general and administrative expenses; the development and timing of resources to fund operationsthe introduction of new products and capital investments;technologies, including our dual-core microprocessors, AMD Turion^™ 64 microprocessors, ORNAND architecture and QuadBit technology; customer and market acceptance of our AMD Opteron^™ and, AMD Athlon^™ 64, microprocessors,AMD Turion 64 and the AMD64 technology upon which they are based;AMD Sempron^™ microprocessors; customer and market acceptance of FASL LLC’s Spansion^™ Flash memory products based on MirrorBit^™ and floating gate technology;technology, including the ORNAND architecture; our ability to remain competitive and maintain or increase our market position; our ability to maintain and develop key relationships with our existing and new customers; the ability to produce theseour microprocessor and Flash memory products in the volumes and mix required by the market at acceptable yields and on a timely basis;market; our and FASL LLC’s ability to maintain the level of investment in research and development and capacity that is required to remain competitive; our and FASL LLC’s ability to transition to new products andadvanced manufacturing process technologies in a timely and effective way; our and FASL LLC’s ability to achieve cost reductions in the amounts and in the timeframes anticipated; our ability to produce microprocessors in the volume required by customers on a timely basis; our ability to maintain or improve average selling prices of our products despite aggressive marketing and pricing strategies of our competitors; our ability, and the ability of third parties, to provide timely infrastructure solutions, such as motherboards and chipsets, to support our microprocessors; the process technology transitions in our wafer fabrication facilities locatedfacilities; and our ability to gain market share in Dresden, Germany (Fab 30)high-growth global markets such as China, Latin America, India and FASL LLC’s wafer fabrication facilities in Austin, Texas (Fab 25) and in Aizu-Wakamatsu, Japan (JV1, JV2 and JV3); and the financing and construction of our 300-millimeter wafer fabrication facility (Fab 36) in Dresden, Germany. Eastern Europe.

For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements, see the “Financial Condition” and “Risk Factors” sections set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 20 below and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission reports and filings. We assume no obligation to update forward-looking statements.

General

We are a leading semiconductor manufacturercompany with manufacturing facilities in the United States, Europe and Asia, and sales offices throughout the world. We design, manufacture and market industry-standard digital integrated circuits, or ICs, that are used in many diverse product applications such as desktop and mobile personal computers, or PCs, workstations, servers, communications equipment such as mobile telephones, and automotive and consumer electronics. Our products includeconsist primarily of microprocessors and Flash memory devices anddevices. In addition, we offer embedded microprocessors for personal connectivity devices which we refer to as our Personal Connectivity Solutions, or PCS, products.and specific consumer markets.

Developments in 2003

During 2003, we endeavored to position our company to take advantage of anticipated growth opportunities within the semiconductor market and anticipated increased demand for semiconductor products in 2004. In April 2003, we introduced our AMD Opteron microprocessors for servers and workstations, and in September 2003, we introduced our AMD Athlon 64 microprocessors for desktop and mobile PCs. We designed these high-performance microprocessors for both 32-bit and 64-bit processing, enabling users to protect their information technology investments by continuing to use their 32-bit software applications while implementing 64-bit software applications on the timetable of their choice.

In order to meet anticipated demand for these and other advanced microprocessor products, we are constructing a new 300-millimeter wafer fabrication facility. This facility, Fab 36, will be located in Dresden, Germany, adjacent to our existing manufacturing facility, Fab 30.

In addition, in order to respond more quickly to changes in market trends in the Flash memory market and improve efficiencies in the production, marketing and design of our Flash memory products, we and Fujitsu Limited formed a new entity named FASL LLC, effective June 30, 2003. We own 60 percent of FASL LLC while Fujitsu owns 40 percent. Accordingly, as of June 30, 2003, we began consolidating the results of FASL LLC’s operations. FASL LLC is headquartered in Sunnyvale, California, and its manufacturing, research, test, and assembly operations are in the United States and Asia. FASL LLC engages in the research, development, manufacture, marketing, and promotion of Flash memory products, which it markets under the Spansion global product brand name. We and Fujitsu are the distributors of FASL LLC’s Spansion Flash memory products. As part of this transaction, we contributed to FASL LLC our Flash memory inventory, our manufacturing facility located in Austin, Texas, known as Fab 25, our Flash memory research and development facility in Sunnyvale, California, known as the Submicron Development Center, or SDC, and our Flash memory assembly and test operations in Thailand, Malaysia and China. Fujitsu contributed its Flash memory division, including related inventory, cash, and its Flash memory assembly and test operations in Malaysia. In addition, both we and Fujitsu contributed our respective investments in our previous manufacturing joint venture, Fujitsu AMD Semiconductor Limited, located in Aizu-Wakamatsu, Japan, which became part of a wholly owned subsidiary of FASL LLC named FASL JAPAN LIMITED, or FASL JAPAN. In this report we refer to the previous manufacturing joint venture with Fujitsu as the Manufacturing Joint Venture.

As part of the transaction, we entered into various contracts with FASL LLC and Fujitsu, including a non-competition agreement pursuant to which we agreed that we would not engage in the development, production, manufacture, marketing, distribution, promotion or sale of Flash memory devices outside of FASL LLC; a patent cross-license agreement pursuant to which each party has been granted a non-exclusive license under the other party’s respective licensed patents for the manufacture and sale of semiconductor products worldwide; services agreements pursuant to which we agreed to provide, among other things, certain information technology, facilities, logistics, legal, tax, finance, human resources, and environmental, health and safety services to FASL LLC; and a distribution agreement pursuant to which we obtained the right to distribute Spansion Flash memory products. The term of the distribution agreement is indefinite, subject to termination by mutual agreement of the parties, upon failure to cure a material breach or upon termination of the limited liability company operating agreement that governs FASL LLC, unless otherwise agreed to by the parties.

Additional Information

We were incorporated under the laws of Delaware on May 1, 1969. Our mailing address and executive offices are located at One AMD Place, Sunnyvale, California 94088, and our telephone number is (408) 749-4000. With the exception of the sections of this report that discuss financial data, which is presented on a consolidated basis, referencesReferences in this report to “AMD,” “we”“we,” “us,” “our,” or the “Company” shall mean Advanced Micro Devices, Inc. and “us” include our consolidated subsidiaries, but,including Spansion LLC and its subsidiaries, unless otherwise indicated, do not include FASLthe context indicates otherwise.

Effective June 30, 2003, we established Spansion LLC, orour Flash memory majority-owned subsidiary in which we hold a 60 percent interest and Fujitsu Limited holds the remaining 40 percent. Spansion is headquartered in Sunnyvale, California, and its subsidiaries. manufacturing, research and assembly operations are in the United States and Asia. As part of the formation of Spansion, we and Fujitsu contributed to Spansion our respective interests in Fujitsu AMD Semiconductor Limited, our former manufacturing joint venture, which we refer to as the Manufacturing Joint Venture in this report. We also contributed our Flash memory inventory, our manufacturing facility in Austin, Texas (Fab 25), our memory research and development facility in Sunnyvale, California (the SDC) and our Flash memory assembly and test facilities in Thailand, Malaysia and Suzhou, China. Fujitsu contributed its Flash memory division, including related inventory, cash and its Flash memory assembly and test facility in Malaysia. Spansion is managed by a ten-member board of managers of which we are currently entitled to appoint six managers and Fujitsu is entitled to appoint four managers.

For a description of certain financing arrangements for Spansion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 20, below.

We post on the Investor Relations page of our Web site,www.amd.com, a link to our filings with the SEC, our Principles of Corporate Governance, Guidelines, our Code of Ethics for our Chief Executive Officer, Chief Financial Officer, Corporate Controller and other senior finance executives, our other Code of Ethics entitled “Worldwide Standards of Business Conduct,” forwhich applies to our directors and all our employees, and the charters of our Audit, Compensation, Finance and Nominating and Corporate Governance and Compensation Committees.committees. Our filings with the SEC are posted as soon as reasonably practical after they are filed electronically with the SEC. You can also obtain copies of these documents by writing to us at: Corporate Secretary, AMD, One AMD Place, M/S 68, Sunnyvale, California 94088, or emailing us atat:Corporate.Secretary@amd.com. All suchthese documents and filings are available free of charge.

For financial information about geographic areas and for segment information with respect to sales and operating results, refer to the information set forth in Note 9 of our consolidated financial statements, beginning on page 83,104, below.

For a discussion of the risk factors related to our business operations, please see the sections entitled, “Cautionary Statement Regarding Forward-Looking Statements,” above, and the “Risk Factors” and “Financial Condition” sections set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 20, below.

The Integrated Circuit MarketOur Industry

Semiconductors are critical components used in a variety of electronic products and systems. An IC is a semiconductor device that consists of many interconnected transistors on a single chip. Since the invention of the transistor in 1948, improvements in IC process and design technologies have led to the development of smaller, more complex and more reliable ICs at a lower cost per function. In order to satisfy the demand for faster, smaller and lower-cost ICs, semiconductor manufacturers have continually developed improvements in manufacturing and process technology. For example, ICs are increasingly being manufactured using smaller geometries. In addition, the size of silicon wafers from which ICs are produced has increased, with some semiconductor manufacturers migrating from 200-millimeter wafers to 300-millimeter wafers. Use of smaller process geometries can result in products that are higher performing, use less power and cost less to manufacture on a per unit basis. Use of larger wafers can contribute further to a decrease in manufacturing costs per unit and increase capacity by yielding more chips per wafer.

The integrated circuit market has grown dramatically over the past two decades, driven primarily by theavailability of low-cost semiconductors, together with increased customer demand for sophisticated electronic business and consumer products.systems, has led to the proliferation of semiconductors. Today, virtually all electronic products use integrated circuits,

semiconductors, including PCs and related peripherals, wired and wireless voice and data communications and networking products including cellular phones,mobile telephones, facsimile and photocopy machines, printers, home entertainment equipment, industrial control equipment and automobiles.

The market for integrated circuits can be divided into separate markets for digital and analog devices. WeWithin the global semiconductor industry, we primarily participate in the market for digital integrated circuits. The three types of digital integrated circuits used in most electronic systems are:two markets:

Within the digital integrated circuit market, we participate primarily in the microprocessor and Flash memory markets. In addition, we participate in theoffer embedded processor marketmicroprocessors for personal connectivity devices.devices and specific consumer markets.

Computation Products

The Microprocessor Market

A microprocessor is a silicon integrated circuitan IC that serves as the central processing unit, or CPU, of a computer. It generally consists of millions of transistors that process data and control other devices in the system, acting as the brain of the computer. The performance of a microprocessor is typically a critical factor impacting the performance of a PC and other similar devices. The principal indicators of microprocessor performance are work-per-cycle, or how many instructions are executed per cycle, and clock speed, representing the rate at which its internal logic operates, measured in units of hertz, or cycles processed per second. Other factors ofimpacting microprocessor performance include the amount of memory storagesize, data access speed and the speed at which data stored in memory can be accessed.power consumption. Developments in circuit design and manufacturing process technologies have resulted in dramaticsignificant advances in microprocessor performance over the past two decades. With the introduction of our AMD Athlon XP processor in October 2001, we began positioningWe market our processors based on overall performance, which is a function of both architecture and clock speed. We believe overall performance is a better indicator of CPU capability than simply clock speed.

The microprocessor market is characterized by short product life cycles and migration to ever-higher-performance microprocessors. To compete successfully in this market, microprocessor manufacturers must transition to new process technologies at a fast pace and offer higher-performance microprocessors in significantly greater volumes. They also must achieve manufacturing yield and volume goals in order to sell microprocessors at competitive prices.

A factor driving change in the microprocessor industry is the introduction of 64-bit computing. The bit rating of a microprocessor generally denotes the largest amount of numerical data that a microprocessor can handle in a single clock cycle. For approximately the last ten years, microprocessors have had 32-bit computing capabilities. While 32-bit processors have historically been sufficient, we believe that they will face challenges as new data and memory-intensive consumer and enterprise software applications gain popularity. Microprocessors with 64-bit processing capabilities enable systems to have greater performance by allowing software applications and operating systems to access more memory and process more data. From applications for multimedia and gaming, to grid computing and extensive enterprise databases, we believe the demand for 64-bit computing will increase across the computing industry. Additionally, we believe that the introduction of advanced operating systems, such as Microsoft^®Windows^®64, and software applications designed to take advantage of the 64-bit platform, will drive further adoption of 64-bit processors.

Another emerging trend in the microprocessor industry is the introduction of dual-core processors, which consist of two processor cores on one semiconductor die. Over the last ten years as microprocessors have increased in transistor density and overall performance capabilities, they have increasingly faced power consumption challenges. By enabling numerous operations to be executed simultaneously across two processor cores, we believe dual-core processors will increase processor performance with a minimal increase in power consumption.

Improvements in the performance characteristics of microprocessors and decreases in production costs resulting from advances in manufacturing process technology, as well as a corresponding decrease inlower selling prices, have increased the demand for microprocessors over time. The greatest demand for our microprocessors today is from PC manufacturers. With few exceptions, these manufacturers require x86 microprocessors that are compatible with the Microsoft^® Windows^® operating system.

The microprocessor market is characterized by short product life cycles and migration to ever-higher-performance microprocessors. To compete successfully in this market, we must transition to new process technologies at a fast pace and offer higher-performance microprocessors in significantly greater volumes. We also must achieve manufacturing yield and volume goals while producing these microprocessors in order to sell them at competitive prices. For more information about competition in the microprocessor market, see the section entitled “Competition,” below.

We believe that worldwide demand for PC microprocessors will increase in 2004 compared with 2003. Factors that we believe will stimulate growth in the demand for PC microprocessors include an anticipated replacement cycle for older PC systems, lower-priced PC systems, enhanced product features, and strategic purchases of new PC systems to deploy new tools and technologies, and improved economic conditions.technologies. In addition, we believe that there will be increased demand for microprocessors from server manufacturers as enterprises continue to upgrade their networks.

Microprocessor Products

We currently offer microprocessor products for desktop and mobile PCs, servers and workstations. Our microprocessors are based on the x86 architecture. In addition, we design them based on a superscalar reduced instruction set computer, or RISC, architecture. RISC architecture allows microprocessors to perform fewer types of computer instructions thereby allowing the microprocessor to operate at a higher speed. We also design our microprocessors to be compatible with operating system software such as Windows XP, Windows 2000, Windows NT^®®, Windows 98 (and Windows predecessor operating systems), Linux, NetWare^®, Solaris and UNIX.

Desktop PCs.Our microprocessors for desktop PCs consist of four product brands: AMD Athlon 64 FX, AMD Athlon 64 and AMD Sempron processors. In September 2003, we introduced our AMD Athlon XP, and AMD Duron^™ processors. We introduced64 microprocessor, the first Windows-compatible, x86 architecture-based 64-bit PC processor, the AMD Athlon 64 microprocessor, in September 2003, an introduction date that we changed from our originally stated date due to a combination of factors, including the features and functionality of these new processors in comparison to our existing PC processors, AMD Athlon XP, the fact that demand for our AMD Athlon XP processors was greater than expected, and the state of the microprocessor market at the time the introduction was planned.processor. AMD Athlon 64 processors are based on the AMD64 technology platform, which extends the industry-standard x86 instruction set architecture to 64-bit computing. We designed our AMD Athlon 64 processors to run bothallow simultaneous 32-bit and 64-bit applications simultaneously,computing, enabling users to protect their information technology investments by continuing to use their 32-bit software applications while implementing 64-bit applications on the timetable of their choice. We design our AMD Athlon 64 processors for enterprises and sophisticated PC users and businesses that seek to access large amounts of data and physical memory. Simultaneously with our introduction of the AMD Athlon 64 processor, we introduced the AMD Athlon 64 FX processor, designed specifically for gamers, PC enthusiasts and digital content creators who require products that can perform graphic-intensive tasks. We design ourOur AMD Athlon XP processors for the value market and offer PC users and small to medium businesses affordable processors that can meet their core computing needs. We also design AMD Duron processors,Sempron microprocessors, which we sell primarilyintroduced in cost-sensitive emerging markets. MostJuly 2004, are designed for value-conscious consumers of our microprocessor product sales in 2003 were of our AMD Athlon XP microprocessors.desktop and notebook PCs.

Mobile PCs.Our microprocessors for the mobile computing market consist of mobile AMD Athlon 64 processors, mobile AMD Sempron processors and AMD Athlon XP-M processors. In January 2005, we announced our new AMD Turion 64 mobile technology, and we expect to introduce our AMD Turion 64 processors in the first half of 2005. Our original equipment manufacturer, or OEM customers incorporate theseour processors into a variety of notebook designs, including full-size and thin-and-light notebooks. We have designed our mobile processor products for high-performance computing and wireless connectivity. They feature advanced power management from AMD PowerNow!^™ technology, which offers reduced power consumption and extended system battery life.During 2003, we primarily providedlife. We intend to continue to invest in our mobile computing products for the full-size or desktop-replacement segment of the mobile computing market. Our strategy for 2004 is to expand ourmicroprocessor product portfolio to address the thin-and-light segment of the mobile computing marketwith increasing emphasis on low-power computing.

Servers and increase our share in the full-size segment of this market.

Workstations.Our x86 microprocessors for servers and workstations consist of the AMD Opteron and AMD Athlon MP processors. A server is a powerful computer on a network that is dedicated to a particular purpose and stores large amounts of information and performs the critical functions for that purpose. A workstation is essentially a heavy-duty desktop, designed for tasks likesuch as computer-aided design. We introduced our first 64-bit microprocessor for servers and workstations, the AMD Opteron, processor, in April 2003, an introduction date that we changed from our originally planned date due to a combination of factors, including the state of the microprocessor market at the time the introduction was planned and our plans to introduce these products on 130-nanometer silicon-on-insulator, or SOI, manufacturing process technology.2003. Like the AMD Athlon 64 processors, the AMD Opteron processors for servers and workstations are based on the AMD64 technology and are designed to run bothallow simultaneous 32-bit and 64-bit applications simultaneously.computing. AMD Opteron processors arewere the first processors to extend the industry-standard x86 instruction set architecture to 64-bit computing. AMD Opteron processors are available in one- to eight-way servers that can be used in a variety of server applications, including business processing (enterprise resource planning, customer relationship management, and supply chain management) and business intelligence. AMD Opteron processors arecan also available in one- to four-way workstation solutions that can be used in workstation applications such as engineering

and digital content creation software, and other information technology infrastructure applications such as intensive Web serving and messaging.

OurDual-Core Processors.We are currently developing dual-core processor technology, which we believe provides a path for increasing processor performance with a minimal increase in power consumption. In August 2004, we demonstrated the first x86 dual-core processor when we showed a Hewlett Packard HP Proliant server powered by our AMD Opteron dual-core processors. We plan to offer dual-core processors for servers and AMD Athlon 64workstations in mid-2005, followed by dual-core processors support HyperTransport^™ technology, which is a high-bandwidth communications interface we developed, as well as integrated memory controllers that enable substantially higher performance than existing, non-integrated memory controller architectures. We expect our advanced architecture to provide users with even greater performance improvements as operating systems and software applications begin leveragingfor the benefitsPC market in the second half of our 64-bit architecture. To that end, in April 2002, we announced a collaboration with Microsoft to incorporate 64-bit support into the Windows operating system. Microsoft has indicated that they intend to release the 64-bit version of Windows XP in 2004. We believe that the backward compatibility of these processors will allow users to migrate more easily from current 32-bit operating systems and applications to future 64-bit operating systems and applications on a common hardware platform.2005.

Chipsets.We also sell chipset products and make available motherboard reference design kits, designed to support our microprocessors for use in PCs and embedded products. A chipset provides the interface between all of a PC’s subsystems and sends data from the microprocessor to all the input/output and storage devices, such as the keyboard, mouse, monitor and hard drive. The primary reason we offer these products to our customers is to provide them with a solution that will allow them to use our microprocessors and develop and introduce their products into the market more quickly. We report the revenue from sales of our chipset products in our Computation Products segment.

We believe the key factors impacting our ability to increase microprocessor revenues in 2004 are: our ability to increase market acceptance of ourOur AMD Opteron and AMD Athlon 64 processors support HyperTransport^™ technology, which is a high-bandwidth communications interface we initially developed, as well as integrated memory controllers that enable substantially higher performance than existing, non-integrated memory controller architectures. We expect our advanced architecture to provide users with even greater performance improvements as operating systems and to produce them in a timely manner on new process technologies, including 90-nanometer SOI technology, insoftware applications begin leveraging the volume and with the performance and feature set required by customers; market acceptance of the newest versionsbenefits of our AMD Athlon XP processors; growth in unit shipments of our microprocessor products; and our ability to maintain or increase average selling prices for our microprocessor products.

In 2004, one of our goals is to increase market acceptance of our AMD64 technology, particularly in the enterprise segment.64-bit architecture. To that end, we intendwork with Microsoft to focus on developingincorporate 64-bit support into the Windows operating system. Microsoft has indicated that it intends to release its Windows Server 2003 Service Pack 1, Windows Server 2003 for 64-bit Extended Systems and introducing products forWindows XP 64-bit Extended Systems in the server and workstation markets and increasing our sharefirst half of these markets.Although we will continue to provide our AMD Athlon MP products pursuant to market demand, we intend to concentrate on developing and producing new versions2005. We believe that the backward compatibility of our AMD Opteron microprocessors for these markets.

Memory ProductsAMD64-based processors will allow users to migrate more easily from current 32-bit operating systems and applications to future 64-bit operating systems and applications on a common hardware platform.

The Flash Memory Market

Memory circuits store data and instructions and are characterized as either volatile or non-volatile. Volatile devices lose stored information after electrical power is shut off while non-volatile devices retain stored information. Volatile memory integrated circuits primarily consist of Dynamic Random Access Memory, or DRAM, devices and Static Random Access Memory, or SRAM, devices. Non-volatile memory integrated circuits include Flash memory, Read-Only Memory, or ROM, Erasable Programmable Read-Only Memory, or EPROM, and Electrically Erasable Programmable Read-Only Memory, or EEPROM, devices.

Flash memory devices have a size and cost advantage over EEPROM devices, which utilize a larger, more expensive memory cell. Flash memory devices also provide greater flexibility and ease of use when compared to other non-volatile memoryis an important semiconductor component used in electronic devices such as ROMmobile phones, digital cameras, DVD players, set top boxes, MP3 players and EPROM, becauseautomotive electronics such as navigation systems. Flash memory devices can be electrically rewrittendiffers from other types of memory due to update parametersits ability to retain stored information after power is turned off. Most electronic products use Flash memory to store important program instructions, or code, as well as multimedia content, or data. Code storage retains the basic operating instructions, operating system software. ROM devices cannot be rewrittensoftware or program code, which allows an electronic product to function while data storage retains digital content, such as multimedia files. For example, Flash memory in camera phones retains both the program code, which enables users to turn on and EPROM devices require information to be erased using ultraviolet light before they can be rewritten. operate the phone, and also stores data such as digital photos.

The Flash memory market has grown significantly in recent years. In particular,can be divided into three major categories based on application. Portable, battery-powered communications applications are categorized as “wireless.” Solid-state removable memory applications are categorized as “removable storage.” All other applications, such as consumer and automotive electronics, are categorized as “embedded.” Applications within the increasing usewireless category include mobile phones, smart phones and functionality ofpersonal digital assistants, or PDAs. Applications within the removable storage category include USB drives and memory cards. Applications within the embedded category include consumer electronics, automotive electronics and networking and telecom equipment such as cellular phones, MP3 players, DVD players, digital cameras,hubs, switches and personal storage USB drives has contributed to an increasing demand forrouters. Currently, we serve the wireless and embedded categories of the NOR Flash memory devices.market with our Spansion Flash memory products.

There are two major typesarchitectures of Flash memory employed in the non-volatile memory market today: Boolean logic-based NOR (Not Or) Flash memory and NAND (Not And) Flash memory.NAND. NOR Flash memory, which is generally more reliable than NAND Flash memory and less prone to data corruption. NOR Flash memorycorruption, is typically used to store program code in communication devices such as cellular telephones, and consumer products such as DVD players.code. NAND Flash memory has been generally been less expensive to manufacture and is typically used in devices that require high-capacity data storage such as memory cards for digital cameras and MP3 players. Within the Flash memory market, we sell primarily NOR Spansion Flash memory-based products. In 2003, we also sold a very limited number of our EPROM devices. Sales of EPROM devices have been steadily declining for the past few years as customers switch over to Flash memory devices. In 2004, we will continue to sell our existing inventory of EPROM products. However, we expect these sales to be minimal and we do not intend to manufacture any new EPROM products in 2004.

Flash Memory Products

Our Spansion Flash memory products encompass a broad spectrum of densities and features and are primarily designed to addresssupport code, or mixed code and data storage applications in the wireless mobile handset and embedded systems markets. Thesecategories of the Flash memory market. Our products are used in cellularmobile telephones, consumer electronics, automotive electronics, networking equipment and other applications that require memory to be non-volatile and electrically rewritten. Our Spansion Flash memory products may be categorized intoare based on two main technologies:technologies today: single bit-per-cell floating gate technology and two bits-per-cell MirrorBit technology.

Spansion Flash memory products using conventional floatingFloating Gate Technology. Floating gate technology are available in densities from one megabit to 128 megabits. Ais the conventional memory cell includestechnology that is utilized by most Flash memory companies today. A memory cell comprises a transistor having a source, and a drain and a control gate. The control gate to regulateregulates the current flow between the source and the drain, thereby defining whether the memory cell stores a “0” bit or a “1” bit. Floating gate technologybit by storing a charge in the cell storage medium. The “floating gate” is memory cell technology in which the memory cell includes a “floating gate”conductive storage medium between the control gate and the source and drain. AddingIt is referred to as a floating gate because it is electrically isolated or removing charge“floating” from the floating gate changes the threshold voltagerest of the cell. Productscell to ensure that stored charge does not leak away resulting in memory loss. Our products using conventional floating gate technology are typically used for their non-volatile code storage and code execution as well as in applications that take advantage of their ease of in-system re-programmability. In addition, floating gate technology has the ability to operate at very high read speeds and temperatures, which we believe is optimal for harsh environments such as automotive applications. Spansion Flash memory products using floating gate technology are available in densities from one megabit to 128 megabits. These products are designed to meet the requirements of a range of Flash memory market segments, from the low-end, low-density value segment to the high-performance, high-density wireless segment.

MirrorBit Technology.Our Spansion Flash memory products also include devices based on MirrorBit technology, aour proprietary technology that stores two bits of data in a single memory cell thereby doubling the density, or storage capacity, of each memory cell. Productscell and enabling higher density products. However, unlike the conductive storage medium used by floating gate technology, MirrorBit technology stores charge in a non-conductive storage medium without a floating gate. NOR Flash memory products based on MirrorBit technology require fewer wafer fabrication process steps to

manufacture and have a simpler layoutscell architecture compared to similar products based on single-bit-per-cell or multi-level-cell (MLC) floating gate technology. As a result, MirrorBit technology can contribute to a smaller die size and improved unit production yields. Due to these characteristics, for a given density, NOR Flash memory products based on MirrorBit technology can be less expensive to producemanufacture than similar products based on conventional floating gate single-bit-per-cell or multi-level cellMLC technology. We believe MirrorBit technology gives us an advantage in the manufacturing of these products equivalent to one lithography node over multi-level cell solutions and two lithography nodes over single-bit-per-cell solutions. Lithography is a process technology used in the manufacture of integrated circuits. In addition, we believe MirrorBit technology enables the production of NOR Flash memory products at higher densities than are commercially viable using single bit-per-cell technology.

Our Spansion Flash memory products using first-generationbased on MirrorBit technology are manufactured using 230-nanometer process technology and are available in densities ranging from 16 megabits through 256to 512 megabits. In September 2003, FASL LLC announcedWe believe the availabilitylower cost and higher yields of engineering samplesMirrorBit technology enable us to manufacture higher density NOR Flash products at a cost that is not achievable using competing NOR MLC floating gate technology. We believe our MirrorBit technology will allow us to compete in certain portions of the first 512 megabitFlash memory market, such as data storage, with die sizes that are similar to NAND Flash memory products on the same process geometry and where high densities and low cost-per-bit are important.

We are developing a new architecture, ORNAND, based on our MirrorBit technology, which we believe will allow us to develop products that combine some of the best attributes of NOR architecture and NAND architecture. We believe that ORNAND architecture will allow us to offer products with higher densities in our traditional NOR Flash memory product based on its second-generation MirrorBit technology. We believe this high density product will enable designersmarkets, while enabling us to create large memory arrays, simplify existing designsenter and compete in new markets that have traditionally been served by using only a single device, and reduce costs by migrating from floating gate technology-based products. InNAND-based products, such as removable storage. During 2004, products based on second-generationwe also demonstrated the ability of MirrorBit technology will be manufactured using primarily 110-nanometer process technology. Weto store four bits-per-cell, which we refer to as QuadBit, with a working proof-of-concept. If successful, we believe manufacturing costs for NOR Flash memory products based on MirrorBitour QuadBit technology that are manufactured using 110-nanometer process technology are similarwould enable us to ortarget the higher density and lower than manufacturing costs for comparable products based on conventional floating gate multi-level cell technology that are manufactured using 90-nanometer process technology.cost portions of the removable storage category, which is currently served by vendors of NAND-based products.

Our Spansion Flash memory products implement different architecturesfeatures and interfaces to address different customer requirements. These different architecturesfeatures and interfaces may be supported on both floating gate technology as well as onand MirrorBit technology. We address demand for lower-performance customer applications by providing asynchronous access products with slower read speeds. We address demand for higher-performance products by providing advanced architectureFor example, we provide products that support faster burst-modeburst- and page-mode read interfaces. Burst-mode products allow fast access to data in a continuous sequential operation, while page-mode products allow fast random access to data within a page. The wireless market in particular currently demands such high-performance solutions. We intend to continue to address the growing performance requirements of our customers in this market by expanding our product offerings and improving our products’ performance. In addition, to a high-performance architecture, Spansion products may also include benefitsfeatures such as Advanced Sector Protection, which improves security by protecting Flash memory content against inadvertent or deliberate changes to code or data, and simultaneous read/write, which improves system performance.performance by allowing a device to conduct read, write or erase operations simultaneously.

We also offerPackaging is an integral element of our Spansion Flash memory in multi-chip packages, or MCPs, acrossproducts. We offer a range of densities. Currently,packaging options, from single-die configurations and multi-chip products (MCPs) to package-less solutions, such as Known Good Die. Our packaging includes lead-frame and ball grid array or BGA, which describe the largest consumersmechanical connection between the package and the printed circuit board. Our packages in the embedded markets mostly use lead-frame solutions while our packages for the wireless markets almost exclusively use BGA solutions due to the small physical size or form factor enabled by BGA. A significant percentage of Flash memory devicesour products are shipped as MCPs due to increasing demand for smaller mobile phone manufacturers.phones. Mobile phone manufacturers require devices that allow them to make feature-rich products in small packages. They are especially interested in MCPs due to the single, space-saving package, low power consumption, and high performance. Our MCP products incorporate Spansion Flash memory devices ranging from 16 megabits to 128 megabits and third-party non-Flash memory die, such as static RAM, or SRAM, or pseudo-static RAM, or pSRAM devices, which FASL LLC purchaseswe purchase from outside vendors, ranging from two megabits to 64 megabits. We intend to continue to provide new products for this growing market, and we expect sales of MCP products to increase in 2004 in comparison to 2003.vendors.

We believe that the key factors impacting our ability to increase Flash memory product revenues in 2004 are the continued market acceptance of MirrorBit technology, our ability to maintain or increase average selling prices for Spansion Flash memory products, and growth in unit shipments of these Flash memory products. In addition, FASL LLC’s ability to successfully transition to 110-nanometer process technologies for specified Flash memory products and its ability to successfully increase manufacturing capacity at its fabrication, assembly and test facilities are key factors impacting our ability to increase Flash memory product revenues.

Other Products and ServicesThe Embedded Processor Market

In addition to our primary microprocessor and Flash memory markets, we also offer embedded microprocessors for personal connectivity devices and specific consumer markets. Personal connectivity devices can be classified into five main segments: computer devices such as thin clients; smart handheld devices and PDAs; access devices such as gateways and access points; entertainment devices such as media players and digital TVs; and automotive devices such as in-car navigation systems, telematics and media playback. The applications in these devices typically require highly integrated systems-on-chip, or SoCs, that include high-performance, low-power embedded processors and microcontrollers.

Personal Connectivity Solutions Products

We offer low-power, high-performance embedded microprocessor products for personal connectivity devices. Our PCS products include low-power x86 and MIPS^® architecture-based embedded processors. We design these embedded processors to address customer needs in the non-PC markets where Internet appliance market.connectivity and/or low power processing is a priority. Typically these embedded processors are used in products that require high to moderate levels of performance where key features include reduced cost, mobility, low power and compactness.small form factor. Products that use our embedded processors also often have limited user interfaces and programmability when compared to PCs and servers.are targeted for specific market segments using SoC design techniques.

In August 2003, we acquiredOur embedded microprocessor products consist of the AMD Geode^™ family and the AMD Alchemy^™ family of microprocessor products from National Semiconductor Corporation.products. AMD Geode microprocessors are based on the x86 architecture and are optimized for high performance and low power. The Geode technology integrates complex functionality, such as processing, system logic, graphics, and audio and video decompression on toonto one integrated device. AMD Geode microprocessors are based on the x86 architecture and are optimized for power and performance. We target our AMD Geode processors for four mainat each of the five market segments: computer systems commonly referred to as “enterprise-thin clients” with low power consumption and minimal memory that leverage application software from a centralized server; low-cost network appliances; set-top boxes; and personal access devices.segments referenced above. With the AMD Geode family of microprocessors, we are able to extend the range of our x86-based product offerings to serve markets from embedded appliances to high-end servers.

We developdeveloped our AMD Alchemy^™ embedded processors for portable media players, Internet access points, and gateways in which low-powerlow power consumption is a key factor. All of these products have an architecture that provides a 32-bit MIPS instruction set. They support operating systems such as Microsoft Windows, CE.NET, Linux, VxWorks, and other operating systems.

In October 2004, we launched the Personal Internet Communicator (PIC), a consumer device that we believe will help provide affordable Internet access to first time technology users in high-growth markets such as Brazil, the Caribbean, China, India, Mexico and Russia. Through the PIC, end users are provided with access to a variety of communication and productivity tools such as an Internet browser, e-mail, word processing, spreadsheet applications and a presentation viewer. The PIC runs on an operating system powered by Microsoft Windows technology. The PIC is manufactured by third-parties, and is designed to be branded, marketed and sold by local service providers such as telecommunications companies and government-sponsored communications programs. We supply the embedded microprocessors for the PIC. We developed the PIC in support of our 50x15 initiative, which is our goal to deliver affordable, accessible Internet connectivity and computing capabilities to 50 percent of the world’s population by 2015.

We believe that our PCS productspersonal connectivity solutions offer our customers high performance at low power, faster time to market and lower product costs. Our strategy is to continue providing cost-effective PCS productsembedded microprocessors for personal connectivity devices that our customers can deploy quickly in their applications.

Foundry ServicesMarketing and Sales

Prior to 2003, we provided foundry services to our former voice communications products subsidiary, Legerity, Inc.,We market and to our former programmable logic devices subsidiary, Vantis Corporation. We had no revenue from these services in 2003 and will not have any revenue for these services in the future.

Research and Development; Manufacturing Process Technology

Manufacturing process technology is a key determinant in the improvement of most semiconductor products. Each new generation of manufacturing process technology has resulted in products with greater performance. We have devoted significant resources to developing and improving manufacturing process technologies used in the production of our products. In order to remain competitive, we must continue to maintain our process technology leadership. In particular, we have made and continue to make significant investments in manufacturing process technologies and in strategic relationships with industry-leading companies relating to manufacturing process technology development. We may not realize our expected return on these investments if we fail to increase market acceptance forsell our products, if the market for our microprocessor orother than Flash memory products, should significantly deteriorate or if we are unableunder the AMD trademark. We sell our products through our direct sales force and through third-party distributors and independent sales representatives in both domestic and international markets pursuant to realize the full benefit of our strategic relationships. In addition, if we are unable to remain competitive with respect to process technology, we will be materiallynon-exclusive agreements. Our AMD channel partner programs provide product information, training and adversely affected.marketing materials.

Our efforts concerning research and development of advanced process technologies are focused on logic technology used for manufacturing our microprocessors. FASL LLC’s efforts concerning research and development of advanced process technologies are focused on non-volatile memory technology used for

manufacturing Spansion Flash memory products.In December 2002, we executed an agreement with IBM to jointly develop new logic process technologies, particularly 65- and 45-nanometer technologies to be implemented on 300-millimeter silicon wafers, for use in producing future high-performance microprocessor products. The joint development agreement terminates on December 31, 2005 and may be extended by the mutual agreement of the parties. The agreement can also be terminated immediately by either party if the other party permanently ceases doing business, becomes bankrupt or insolvent, liquidates or undergoes a change of control, or terminated upon 30 days written notice upon a failure to perform a material obligation thereunder. The new process technologies are being developed at an IBM facility in New York and are aimed at improving microprocessor performance and reducing power consumption. The new process technologies will be based on advanced structures and materials such as high-speed SOI transistors, copper interconnects and improved “low-k dielectric” insulation. During 2002 and 2003, we paid approximately $190 million to IBM in connection with agreements and services related to research and development activities. In addition, in December 2003, we entered into license and consulting services agreements with IBM pursuant to which we licensed technology and know-how developed by IBM in connection with manufacturing products on 300-millimeter silicon wafers. In addition, some development work for logic process technologies took place at Fab 30. Research and development with respect to non-volatile memory technology used for manufacturing Spansion Flash memory products is conducted primarily at FASL LLC’s SDC facility located in Sunnyvale, California and at its facilities in Japan. Currently, FASL LLC is developing new non-volatile memory process technology, including 90-nanometer floating gate technology and 90-nanometer MirrorBit technology utilizing three-layer copper interconnect.

Our expenses for research and development were $852 million in 2003, $816 million in 2002, and $651 million in 2001. These expenses represented 24 percent of consolidated net sales in 2003, 30 percent of consolidated net sales in 2002, and 17 percent of consolidated net sales in 2001.

As of year-end 2003, all of our microprocessors were manufactured using our 130-nanometer process technology on 200-millimeter wafers at Fab 30. In 2004, we expect to convert our microprocessor manufacturing to primarily 90-nanometer process technology. We believe that use of 90-nanometer technology will allow us to provide products that are higher performing, use less power, and that cost less to manufacture.

In November 2003, we announced our intention to construct and facilitize a 300-millimeter wafer fabrication facility, Fab 36. Fab 36 will be owned by a newly created partnership named AMD Fab 36 Limited Liability Company & Co. KG, or AMD Fab 36, and will be located in Dresden, Germany, adjacent to Fab 30. We control the management of AMD Fab 36 through a wholly owned Delaware subsidiary, AMD Fab 36 LLC, which is a general partner of AMD Fab 36. We expect that Fab 36 will produce future generations of our microprocessor products, and that it will be in volume production in 2006. We believe using 300-millimeter wafers will decrease the manufacturing costs for certain of our microprocessor products and increase our capacity for producing these products because it allows us to produce more equivalent chips per wafer than 200-millimeter wafers.

FASL LLC’s Flash memory device production at year-end 2003 was on 130-, 170-, 230- and 320-nanometer process technologies. During 2004, FASL LLC intends to transition some of its Flash memory devices to production on 110-nanometer process technology with the goal that by the end of 2004, Fab 25 and JV3 will employ mostly 110-nanometer technology. In addition, we believe that the demand for our Flash memory products will increase in 2004. Therefore, FASL LLC intends to increase manufacturing capacity at its wafer fabrication facilities.

Manufacturing, Assembly and Test Facilities

Our microprocessor fabrication and FASL LLC’s Flash memory fabrication is conducted at the facilities described in the chart below:

No distributor accounted for ten percent or more of our principal contractual relationshipsconsolidated gross sales in 2002. In each of 2003 and 2004, one of our distributors, Avnet, Inc., accounted for approximately 13 percent of our consolidated gross sales. Avnet primarily distributes our microprocessor products. In addition, in 2003 and 2004, Fujitsu accounted for approximately 13 percent and 22 percent of our consolidated gross sales. Fujitsu primarily distributes Spansion Flash memory products. However, Fujitsu is also an OEM customer with IBM is set forth on page 9, above.respect to our microprocessor products.

Competition

The integrated circuitIC industry is intensely competitive. Products compete on performance, quality, reliability, price, adherence to industry standards, software and hardware compatibility, marketing and distribution capability, brand recognition and availability. Technological advances in the industry result in frequent product introductions, regular price reductions, short product life cycles and increased product capabilities that may result in significant performance improvements.

In each area of the digital integrated circuit markets in which we participate, we face competition from different companies.

Competition in the Microprocessor Market

Intel Corporation has dominated the market for microprocessors used in desktop and mobile PCs for many years. Intel is also a significantdominant competitor in the server segment of the microprocessor market. Because of its dominant position in the microprocessor market, Intel has also been able to control x86 microprocessor and PC system standards and dictate the type of products the microprocessor market requires of Intel’s competitors. In addition, Intel’s significant financial resources allowenable it to market its products aggressively, to target our customers and our channel partners with special incentives, and to discipline customers who do business with us. These aggressive activities can result in lower unit sales and average selling prices for usour products, and adversely affect our margins and profitability. Intel also exerts substantial influence over PC manufacturers and their channels of distribution through the “Intel Inside” brand program and other marketing programs. As long as Intel remains in this dominant position, we may be materially and adversely affected by its:Intel’s:

Intel also dominates the PC system platform.platform, which includes core logic chipsets, graphics chips, motherboards and other components necessary to assemble a PC system. As a result, PC OEMs are highly dependent on Intel, less innovative on their own and, to a large extent, are distributors of Intel technology. Additionally, Intel is able to drive de facto standards for x86 microprocessors that could cause us and other companies to have delayed access to such standards. In marketing our

microprocessors to OEMs, we depend on third-party companies other than Intel for the design and manufacture of core-logic chipsets, graphics chips, motherboards, BIOS software and other components. In recent years, many of these third-party designers and manufacturers have lost significant market share to Intel or exited the business. In addition, Intel has significant leverage over these companies produce chipsets, motherboards, BIOS software and other components tobecause they support each new generation of Intel’s microprocessors, and Intel has significant leverage over their business opportunities.microprocessors.

WeCurrently, we do not currently plan to develop microprocessors that are bus interface protocol compatible with Intel microprocessors because our patent cross-license agreement with Intel does not extend to microprocessors that areIntel’s proprietary bus interface protocol compatible with Intel’s sixth and subsequent generation processors.protocol. Thus, our microprocessors are not designed to function with motherboards and chipsets designed to work with Intel microprocessors. Our ability to compete with Intel in the market for microprocessors will depend on our ability to continue to developcontinued success in developing and maintaining relationships with infrastructure providers andin order to ensure that these third-party designers and manufacturers design PC platforms to support new generations of our microprocessors. A failure of the designers and producers of motherboards, chipsets and other system components to support our microprocessor offerings, particularly our new AMD Athlon 64 and AMD Opteron processors, would have a material adverse effect on us.AMD64-based microprocessors.

Similarly, we offer OEMs and partnersother companies motherboard reference design kits designed to support our processors. The primary reason we offer these products is to provide our customers with a solution that will allow them to use our microprocessors and develop and introduce their products in the market more quickly. We cannot be certain, however, that our efforts will be successful.

We expect Intel to maintain its dominant position in the microprocessor market and to continue to invest heavily in research and development, new manufacturing facilities and other technology companies. Intel has substantially greater financial resources than we do and accordingly spends substantially greater amounts on research and development and production capacity than we do. We expect competition from Intel to continue and increase in 2004 and beyondthe future to the extent Intel reduces the prices for its products and as Intel introduces new competitive products. For example, in February 2004, Intel announced that it intends to introduceintroduced a 64-bit processorsprocessor for servers and workstations that will be able to runruns existing 32-bit software applications in mid-2004. We believe that theseapplications. These processors will compete with our AMD Opteron microprocessors. In addition, Intel recently announced that it will offer dual-core 64-bit processors for the desktop market and other market segments that will be able to run existing 32-bit software applications in a time frame based on both timing and availabilitythe second quarter of the infrastructure required to support them, and customer demand. These products would compete with our AMD Athlon 64 microprocessors.2005. Moreover, Intel currently manufactures certain of its microprocessor products on 300-millimeter wafers using 90-nanometer process technology. Use of 90-nanometer technology, which can result in products that are higher performing, use less power and that cost less to manufacture. Use ofWe are currently transitioning to 90-nanometer process technology for microprocessor manufacturing, and we expect to transition to using 300-millimeter wafers can decrease manufacturing costs and increase capacity by yielding more equivalent chips per wafer than 200-millimeter wafers. We have not yet made comparable transitions at our microprocessor manufacturing facilities. As a result, we may be more vulnerable to Intel’s aggressive pricing strategies for microprocessor products. Intel’s strong position in the microprocessor market, its existing relationships with top-tier OEMs and its aggressive pricing strategies could result in lower unit sales and average selling prices for our products, which could adversely affect our revenues.2006.

Competition in the Flash Memory Market

With respect to Flash memory products, our principal competitors are Intel, Samsung, Toshiba, STMicroelectronics N.V., Sharp Electronics Corporation, Renesas Technology, Silicon Storage Technology, and Macronix International. Most of these competitors market devices incorporating multi-level-cell floating gate technology that store fractional charge levels within a single cell thereby permitting the storage of two bits per cell. We believe many of our other competitors plan to develop multi-level-cell technology.

We expect competition in the market for Flash memory devices to increase in 2004 and beyond as existing manufacturers introduce new products, andnew manufacturers enter the market, industry-wide production capacity increases.increases and competitors aggressively price their Flash memory products to increase market share. In addition, we and certain of our competitors have licensed non-volatile memory technology called NROM technology from a third party.

NROM technology allows memory devices to store two bits of data in a memory cell using a nitride-based non-conducting storage medium. NROM technology has similar characteristics to our MirrorBit technology and may allow these competitors to develop Flash memory technology that is competitive with MirrorBit technology. Furthermore, in 2003, NAND Flash memory vendors gained an increasing share of the overall Flash memory market.market in 2003 and 2004. If further significant improvements in NAND Flash memory technology occur in the future, applications currently using NOR technologyFlash memory may transition to NAND technology.Flash memory. As a result, NAND Flash memory vendors may gain a substantial share of the overall Flash memory market.

Competition With Respect to Our Other ProductsPersonal Connectivity Solutions

With respect to PCS products,our embedded processors for personal connectivity devices, our principal competitors are Freescale (formerly Motorola Semiconductor), Hitachi, Intel, Motorola, Inc., NEC Corporation, Toshiba, Transmeta, and Via Technologies. We expect competition in the market for PCSthese devices to increase in 2004 as our principal competitors focus more resources on developing low-power embedded processor solutions.

MarketingResearch and SalesDevelopment

Our research and development is focused on product design and system and process development. We have devoted significant resources to product design and to developing and improving manufacturing process technologies. In order to remain competitive, we must continue to maintain our technology leadership. In particular, we have made and continue to make significant investments in manufacturing process technologies and in strategic relationships with industry-leading companies relating to manufacturing process technology development.

Our research and development expenses for fiscal 2004, 2003, and 2002 were $935 million, $852 million and $816 million.

Microprocessors

We marketconduct product and sellsystem research and development activities for our microprocessor products in the United States with additional design and development engineering teams located in Germany, China, Japan and India. With respect to process development, some research and development takes place at Fab 30. We also have a joint development agreement with IBM pursuant to which we work together to develop new microprocessor process technologies to be implemented on silicon wafers. On September 15, 2004, we amended our joint development agreement and extended the relationship for an additional three years, from December 31, 2005 to December 31, 2008. Under the amended development agreement, we agreed to continue to develop jointly new microprocessor process technologies. In addition, we received a license from IBM to have our products made in 90-nanometer and 65-nanometer at a third-party foundry or a joint manufacturing facility owned by us and a third-party foundry. The development agreement may be extended further by the mutual agreement of the parties, and can also be terminated immediately by either party if the other thanparty permanently ceases doing business, becomes bankrupt or insolvent, liquidates or undergoes a change of control, or can be terminated by either party upon 30 days written notice upon a failure of the other party to perform a material obligation thereunder.

Flash Memory

We conduct product and system research and development activities for our Flash memory products under the AMD trademark. We employ a direct sales force through our principal facilitiesprimarily in Sunnyvale, California and field sales offices throughoutin Japan, with additional design and development engineering teams located in the United States, Europe and Asia. Currently, our primary development focus with respect to Flash memory is on products based on MirrorBit technology for the wireless and embedded business markets. In addition, we are developing new non-volatile memory process technology, including 90-nanometer floating gate technology and 90-nanometer MirrorBit technology utilizing three-layer copper interconnect. Our SDC facility is developing processes on 200-millimeter and 300-millimeter wafer technology.

As of December 26, 2004, our Spansion Flash memory products were manufactured on 110-, 130-, 170-, 200-, 230- and 320-nanometer process technologies. In addition, we plan to be in production on 90-nanometer process technology in the second half of 2005.

Manufacturing, Assembly and Test Facilities

We operate 12 owned manufacturing facilities, of which five are wafer fabrication facilities and seven are assembly and test facilities. In addition, we have substantially finished the construction of our Fab 36 wafer fabrication facility, and we are in the process of installing equipment. Fab 36 is located adjacent to Fab 30 and will be equipped to manufacture microprocessor products on 300-millimeter wafers at 65-nanometer geometries and below.

Our microprocessor and Flash memory fabrication is conducted at the facilities described in the chart below:

As of December 26, 2004, we manufactured our microprocessor products at Fab 30, primarily on 90-nanometer process technology. With respect to our Flash memory products, JV3 employs mostly 110-nanometer technology in production. We are also manufacturing 90-nanometer MirrorBit technology development wafers in Fab 25 and plan to be in production with this technology in the second half of 2005. We use process technologies at 200-nanometers and above to manufacture our low-to medium-density Spansion Flash memory products. During 2004, we transitioned the manufacturing of certain of these products from 230-nanometer to 200-nanometer process technology to further reduce our manufacturing costs.

We have foundry arrangements with third parties for the production of our embedded processor and chipset products. In addition, in November 2004 we entered into sourcing and manufacturing technology agreements with Chartered Semiconductor Manufacturing pursuant to which Chartered will become an additional manufacturing source for our AMD64-based microprocessors. We intend to use the additional capacity provided by Chartered to augment production at our manufacturing facilities. We expect that Chartered will commence production for us in 2006.

We have also developed an approach to manufacturing that we call Automated Precision Manufacturing, or APM. APM comprises a suite of automation, optimization and real-time data analysis technologies which automate the way decisions are made within our fabrication facilities. We use APM during process technology transitions, and believe APM enables greater efficiency, higher baseline yields, better binning and faster yield learning.

Our current assembly and test facilities for microprocessor and Flash memory products are described in the chart set forth below:

Some assembly and final testing of our microprocessor and personal connectivity solutions products is also performed by subcontractors in the United States and Asia.

Intellectual Property and Licensing

We rely on a combination of protections provided by contracts, copyrights, patents, trademarks and other common law rights such as trade secret laws, to protect our products and technologies from unauthorized third-party copying and use. As of December 26, 2004, we had more than 6,500 U.S. patents and had over 2,000 patent applications pending in the United States. In certain cases, we have filed corresponding applications in foreign jurisdictions. We expect to file future patent applications in both the United States and abroad primarily Europeon significant inventions, as we deem appropriate. We do not believe that any individual patent, or the expiration thereof, is or would be material to our business.

In May 2001, we signed a patent cross-license agreement with Intel Corporation, under which we granted each other a non-exclusive license under each party’s patents for the manufacture and Asia Pacific.sale of semiconductor products worldwide. We also sellpay Intel a royalty for certain licensed microprocessor products sold by us or any AMD affiliate anywhere in the world. The license terminates in January 2010.

In connection with the formation of Spansion, we and Fujitsu transferred to Spansion an ownership interest in, or granted Spansion a license to, use all patents, copyrights, trade secrets (know-how), trademarks and maskwork rights necessary for Spansion’s business. Specifically, under an intellectual property contribution and assignment agreement, we and Fujitsu:

In addition, we and Fujitsu entered into cross license agreements with Spansion pursuant to which we and Fujitsu each granted Spansion a non-exclusive agreements. Distributors also sell products manufacturedlicense to all semiconductor patents wholly owned by our competitors. In 2003, oneus or as to which we had the right to grant licenses or sublicenses (without such grant resulting in the payment of royalties).

The agreements enable Spansion to use these patent rights within the scope of their business, but Spansion is not permitted to grant licenses or sublicenses to third parties with respect to these licensed patent rights.

Spansion granted to us and Fujitsu a license to its patents for use in the manufacture and sale of semiconductor products. The patent cross-license agreements terminate upon the later of July 1, 2013 or upon the transfer of all of our distributors, Avnet, Inc., accountedor Fujitsu’s ownership or economic interest in Spansion, unless earlier terminated upon 30 days notice following a change of control of the other party.

In addition to the patent cross-licenses, and for approximately 13 percent ofso long as we have a controlling interest in Spansion, we have the right to sublicense Spansion’s patents and patent applications. In return, for as long as we have a controlling interest in Spansion, we are required to enforce our consolidated net sales. Avnet primarily purchasespatents to minimize losses to Spansion from third party claims that Spansion is infringing such third party’s intellectual property rights. At such time as our microprocessor products. Alsodirect or indirect beneficial ownership interest in 2003, Fujitsu Limited accounted for approximately 13 percent of our consolidated net sales. Fujitsu primarily purchases Spansion Flash memory products from FASL LLC. No distributor accounted for tendecreases to fifty percent or more of our consolidated net salesless, we will no longer be contractually obligated to defend Spansion in 2002 and 2001. No OEM customer accounted for ten percent or more of our consolidated net sales in 2003, 2002 or 2001.connection with such third party claims.

FASL LLC’s Flash memory products are marketedEffective June 30, 2003, we entered into a patent cross-license with Fujitsu whereby each party was granted a non-exclusive license under certain of the other party’s respective semiconductor-related patents. This patent cross-license agreement terminates upon the tenth anniversary of the agreement, unless earlier terminated upon 30 days notice following a change of control of the other party. In addition, we entered into numerous cross-licensing and soldtechnology exchange agreements with other companies under the Spansion trademark. We and Fujitsu act as distributors of Spansion Flash memory productswhich we both transfer and receive a commission from FASL LLC. We distribute Spansion products in the same manner as we sell our other products, through our direct sales forcetechnology and through third-party distributors and independent representatives.intellectual property rights.

Backlog

We manufacture and market our products through our direct marketing and co-marketing programs. Our direct marketing activities include print and Web-based advertising as well as consumer and trade events and other industry and consumer communications. In 2003, we primarily focused our direct marketing activities on the launchstandard lines of products. Consequently, a significant portion of our AMD Opteronsales are made from inventory on a current basis. Sales are made primarily pursuant to purchase orders for current delivery or agreements covering purchases over a period of time, which orders or agreements may be revised or canceled without penalty. Generally, in light of current industry practice and AMD Athlon 64 microprocessor productsexperience, we do not believe that such agreements provide meaningful backlog figures or are necessarily indicative of actual sales for any succeeding period.

Employees

As of December 26, 2004, we had approximately 8,300 employees and the AMD64 technology platform. In addition, we have cooperative advertising and marketing programsSpansion had approximately 7,600 employees. Approximately 220 individuals remained employed by us or Fujitsu but were made available on a full-time basis to Spansion or its subsidiaries. We expect that substantially all of these individuals will become employees of Spansion or its subsidiaries in 2005. Certain employees of Spansion Japan are represented by a union. We believe that our relationship with our customers, including market development programs. Under these programs, eligible customers can use market development funds in partial reimbursement for advertisements and marketing programs related to our products.employees is good.

We intend to build upon our position as a global supplier of integrated circuits by expanding our focus to include emerging global markets. In 2003, we focused on expanding our participation in China’s microprocessor, embedded processor and Flash memory markets, and we expect to continue these efforts in 2004. For example, in order to strengthen and consolidate our efforts in China, effective in February 2004, we established a new entity, Advanced Micro Devices (China) Co., Ltd., which will serve as our regional headquarters in the region. We also established relationships with OEMs such as Dawning Information Industry Corp. Ltd., a server manufacturer in China. These activities expanded on our existing investments in China, including FASL LLC’s Flash memory assembly and test facility in Suzhou.

Distributors typically maintain an inventory of our products. Generally, we sell to distributors under terms allowing the distributors certain rights of return and price protection on any inventory of our products held by them. We defer the gross margin on these sales to distributors, resulting from both our deferral of revenue and related product costs, until the applicable products are re-sold by the distributors. The price protection and return rights we offer to our distributors could materially and adversely affect us if there is an unexpected significant decline in the price of our products.

In 2003, international sales as a percent of net sales were 80 percent. Our international sales operations entail political and economic risks, including expropriation, currency controls, exchange rate fluctuations, changes in freight rates and changes in rates and exemptions for taxes and tariffs.

Raw Materials

CertainOur manufacturing operations depend upon obtaining deliveries of equipment and adequate supplies of materials on a timely basis. We purchase equipment and materials from a number of suppliers. From time to time, suppliers may extend lead times, limit supply to us or increase prices due to capacity constraints or other factors. Because some equipment and material that we purchase is complex, it is sometimes difficult for us to substitute one supplier for another or one piece of equipment for another. In addition, certain raw materials we use in the manufacture of our products and FASL LLC uses in the manufacture of its products are available from a limited number of suppliers. For example, we are largely dependent on one supplier for our 200-millimeter and 300-millimeter silicon-on-insulator (SOI) wafers. Although there are alternative sources available for us to procure these wafers, we have not qualified these sources and do not believe that they currently have sufficient capacity to meet our requirements. We are also dependent on key chemicals from a limited number of suppliers and also rely on a fewlimited number of foreign companies to supply the majority of certain types of the integrated circuitIC packages we purchase. Similarly, FASL LLC purchaseswe purchase commercial non-Flash memory die, such as SRAM and pSRAM, from third-party suppliers and incorporatesincorporate these

die into its MCPSpansion multi-chip package products. Some of these suppliers are also our competitors. Interruption of supply or increased demand in the industry could cause shortages and price increases in various essential materials. If we or FASL LLC wereare unable to procure certain of these materials, we or FASL LLC mightmay have to reduce our manufacturing operations. Such a reduction could have a material adverse effect on us. To date, neither we nor FASL LLC have experienced significant difficulty in obtaining the raw materials required for our manufacturing operations.

In June 2002, we formed Advanced Mask Technology Center GmbH and Co., KG, (AMTC)or AMTC, and Maskhouse Building Administration GmbH and Co., KG, (BAC),or BAC, two joint ventures with Infineon Technologies AG and Dupont Photomasks, Inc., for the purpose of constructing and operating an advanced photomask facility in Dresden, Germany. Photomasks are used during the production of integrated circuits.ICs. The purpose of the AMTC is to conduct research, development and pilot production of optical photomasks for advanced lithography technology. In October 2003, the AMTC announced the official commencement ofhas commenced pilot production of optical photomasks and has provided test photomasks to Fab 30 for qualification and production photomasks. In 2004, weWe intend to procure advanced photomasks from the AMTC pursuant to the terms of our joint venture arrangement and use these photomasks in the manufacture of certain of our microprocessor products.

Environmental Regulations

Many aspects of our and FASL LLC’s business operations and products are regulated by domestic and international environmental laws and regulations. These regulations include limitations on dischargesdischarge of pollutants to air, water, and water;soil; remediation requirements; product chemical content limitations; manufacturing chemical use and handling restrictions; pollution control requirements; waste minimization considerations; and hazardous materials transportation, treatment, transport, storage and disposal restrictions.of solid and hazardous wastes. If we or FASL LLC fail to comply with any of the applicable environmental regulations we may be subject to fines, suspension of production, alteration of our manufacturing processes, sales limitations, andand/or criminal and civil liabilities. Existing or future regulations could require us or FASL LLC to procure expensive pollution abatement or remediation equipment,equipment; to modify product designsdesigns; or to incur other expenses to comply with environmental regulations. Any failure to control the use, disposal or storage, or adequately restrict the discharge of hazardous substances could subject us to future liabilities and could have a material adverse effect on our business. We believe we are in material compliance with applicable environmental requirements, and do not expect those requirements to result in material expenditures in the foreseeable future.

Intellectual Property and LicensingITEM 2.     PROPERTIES

As of March 1, 2004, we had over 5,900 United States patents and had over two thousand patent applications pending in the United States. In certain cases, we have filed corresponding applications in foreign jurisdictions. We expect to file future patent applications in both the United States and abroad on significant inventions, as we deem appropriate. FASL LLC also has patents and pending patent applications in the United States and Japan. In certain cases, FASL LLC filed corresponding applications in foreign jurisdictions. We expect FASL LLC to file future patent applications in both the United States and abroad on significant inventions, as it deems appropriate.

In May 2001, we signed a ten-year cross-license agreement with Intel Corporation. In addition, we have entered into numerous cross-licensing and technology exchange agreements with other companies under which we both transfer and receive technology and intellectual property rights. As part of the FASL LLC transaction we entered into a patent cross-license agreement with FASL LLC whereby each party has been granted a non-exclusive license under the other party’s respective licensed patents for the manufacture and sale of

semiconductor products worldwide. In addition, FASL LLC has granted us the right to sublicense FASL LLC patents and patent applications. FASL LLC has entered into a similar cross-license agreement (without the grant of sublicense rights) with Fujitsu Limited. These patent cross-license agreements terminate upon the later of July 1, 2013 or upon the transfer of all of the respective party’s ownership or economic interest in FASL LLC, unless earlier terminated upon 30 days notice following a change of control of the other party. We have also entered into a patent cross-license with Fujitsu Limited whereby each party has been granted a non-exclusive license under certain of the other party’s respective semiconductor-related patents. This patent cross-license agreement terminates upon the tenth anniversary of the agreement, unless earlier terminated upon 30 days notice following a change of control of the other party.

Although we attempt to protect our intellectual property rights, in the United States and abroad through patents, copyrights, trade secrets and other measures, we may not be able to adequately protect our technology or other intellectual property or prevent others from independently developing similar technology. Any patent licensed by us or issued to us could be challenged, invalidated or circumvented, or rights granted thereunder may not provide a competitive advantage to us. Furthermore, patent applications that we file may not be issued. Despite our efforts to protect our rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to cost-effectively monitor compliance with, and enforce, our intellectual property rights on a worldwide basis.

From time to time, we have been notified that we may be infringing intellectual property rights of others. If any such claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. We cannot assure you that we will be able to obtain all necessary licenses on satisfactory terms, or at all. We could decide, in the alternative, to resort to litigation to challenge such claims. Such challenges could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to the intellectual property rights of us or others will always be avoided or successfully concluded.

Backlog

We manufacture and market standard lines of products. Consequently, a significant portion of our sales are made from inventory on a current basis. Sales are made primarily pursuant to purchase orders for current delivery or agreements covering purchases over a period of time, which orders or agreements may be revised or canceled without penalty. Generally, in light of current industry practice and experience, we do not believe that such agreements provide meaningful backlog figures or are necessarily indicative of actual sales for any succeeding period.

Employees

As of March 1, 2004, we (excluding FASL LLC and its subsidiaries) employed approximately 7,400 employees, none of whom are represented by collective bargaining arrangements. Also, as of March 1, 2004, FASL LLC and its subsidiaries employed approximately 6,900 employees. In addition, approximately an aggregate of 180 individuals remained employed by us or Fujitsu but were made available on a full-time basis to FASL LLC or its subsidiaries. FASL LLC expects that substantially all of these individuals will become employees of FASL LLC or its subsidiaries in 2004 and 2005. Certain employees of FASL JAPAN are represented by a company union. We believe that our relationship with our employees is good and that FASL LLC’s relationship with its employees is good.

ITEM 2.

PROPERTIES

Our principal engineering, manufacturing, warehouse and administrative facilities (excluding Spansion) comprise approximately 3.33.7 million square feet and are located in the United States, Germany, Singapore, China and Malaysia. Approximately 2.2 million square feet of this space is in buildings we own. We lease approximately 115,000 square feet of land in Singapore and 270,000 square feet of land in Suzhou, China for our microprocessor assembly and test facilities, and we lease the building for our microprocessor assembly and test facility in Suzhou, China. We acquired approximately 115 acres9.7 million square feet of land in Dresden, Germany for Fab 30. In August 2004, we transferred 5.4 million square feet to our German Subsidiary, AMD Fab 3036 Limited Liability Company & Co. KG, or AMD Fab 36 KG, for Fab 36. Fab 36 and the land owned by AMD Fab 36 KG is encumbered by a lien securingwhich will secure AMD Saxony’sFab 36 KG’s obligations under the Dresden Loan Agreements. For more detail regarding the Dresden Loan Agreements, seeFab 36 Term Loan. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—DresdenFab 36 Term Loan and DresdenGuarantee and Fab 36 Partnership Agreements.”

Spansion’s principal engineering, manufacturing and administrative facilities comprise approximately 4.4 million square feet and are located in the United States, France, Japan, Korea, Malaysia, Thailand and China. Approximately 4.2 million square feet of this space is in buildings Spansion owns. The remainder of this space is leased, primarily from us. Spansion also leases approximately 625,000 square feet of land in Suzhou, China for its assembly and test facility and approximately 3.9 million square feet of land in Japan for its wafer fabrication facilities. Spansion’s assembly and test facility in Suzhou, China is encumbered by a lien securing the Spansion Term Loan and its Fab 25 facility in Austin, Texas is encumbered by a lien securing the July 2003 Spansion Term Loan. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—July 2003 Spansion Term Loan and Guarantee,” and “—Spansion China Term Loan,” below.

In addition to principal engineering, manufacturing, warehouse and administrative facilities, we lease sales office facilities in 21 locations globally, totaling approximately 200,000 square feet. These facilities are generally located in commercial centers near our customers, principally in the United States, Latin America, Europe and the Asia region.

We have an operating lease on property containing two buildings with an aggregate of approximately 364,000 square feet, located on 45.6 acres of land in Sunnyvale, California (One AMD Place). This operating lease ends in December 2018. In 2000, we entered into a lease agreement for three buildings, totaling 175,000 square feet, located adjacent to One AMD Place, which we call AMD Square, to be used as engineering offices and lab facilities. During 2002, we determined that we no longer required AMD Square. As of December 28, 2003, AMD Square is vacant, and we are actively marketing it for sublease. During 2003, we also vacated approximately 75,000 square feet of leased administrative office space in Austin, Texas. We continue to have lease obligations with respect to these facilities ranging from 18 to 24 months, and we are marketing these facilities for sublease.

In addition to principal engineering, manufacturing, warehouse and administrative facilities, we lease sales office facilities in 20 locations globally, totalling approximately 150,000 square feet. These facilities are generally located in commercial centers near our customers, principally in Latin America, Europe and the Asia Pacific region.

FASL LLC’s principal engineering, manufacturing, warehouse and administrative facilities comprise approximately four million square feet and are located in the United States, Japan, Malaysia, Thailand and China. Over 3.9 million square feet of this space is in buildings FASL LLC owns. The remainder of this space is leased, primarily from us. FASL LLC leases approximately 15 acres of land in Suzhou, China for its assembly and test facility. In addition, FASL LLC also leases approximately 90 acres of land in Japan for its wafer fabrication facilities. Its Fab 25 facility in Austin, Texas is encumbered by a lien securing the July 2003 FASL Term Loan. For more detail regarding the July 2003 FASL Term Loan, see, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—July 2003 FASL Term Loan and Guarantee,” below.

Our and FASL LLC’sSpansion’s leases cover facilities with expiration terms of generally one to 20 years. We currently do not anticipate difficulty in either retaining occupancy of any of our facilities through lease renewals prior to expiration or through month-to-month occupancy, or replacing them with equivalent facilities.

ITEM 3.     LEGAL PROCEEDINGS

Environmental Matters

We are named as a responsible party on Superfund clean-up orders for three sites in Sunnyvale, California that are on the National Priorities List. Since 1981, we have discovered hazardous material releases to the groundwater from former underground tanks and proceeded to investigate and conduct remediation at these three sites. The chemicals released into the groundwater were commonly used in the semiconductor industry in the United States in the wafer fabrication process prior to 1979.

In 1991, we received four Final Site Clean-up Requirements Orders from the California Regional Water Quality Control Board relating to the three sites. We have entered into settlement agreements with other responsible parties on two of the orders. Under these agreements other parties have assumed most of the costs and primary responsibility foras well as the lead in conducting remediation activities under the orders. We remain responsible for these costs in the event that the other parties do not fulfill their obligations under the settlement agreements.

To address anticipated future remediation costs under the orders, we have computed and recorded an estimated environmental liability of approximately $3.3$3.7 million in accordance with applicable accounting rules and have not recorded any potential insurance recoveries in determining the estimated costs of the cleanup. The progress of future remediation efforts cannot be predicted with certainty, and these costs may change. Environmental charges to earnings have not been material during any of the last three fiscal years. We believe that the potential liability, if any, in excess of amounts already accrued, will not have a material adverse effect on our financial condition or results of operation.

In 1998, the U.S. Environmental Protection Agency (EPA) identified us as one of hundreds of Superfund “potentially responsible parties” as a result of disposal of waste at a regulated landfill in Santa Barbara County, California that was later abandoned by its owners and designated as a Superfund site by the EPA. We have reached a settlement with EPA and completed payment. However, the public notification, judicial review and issuance of a consent decree remain pending. The amount of the settlement did not have a material adverse effect on our financial condition or results of operations.

Other Matters

We are a defendant or plaintiff in various other actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial condition or results of operations.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

PART II

Our common stock (symbol “AMD”) is listed on the New York Stock Exchange. On March 1, 2004,February 22, 2005, there were 8,0417,653 registered holders of our common stock. We have never paid cash dividends on our stock and may be restricted from doing so pursuant to the loan agreementsagreement that we entered into with several domestic financial institutions. See discussionIn addition, under the July 2003 Spansion Term Loan, Spansion is prohibited from paying dividends to us in certain circumstances, and under the “Notes PayableFab 36 Loan Agreements, AMD Fab 36 KG and the affiliated limited partners are generally prohibited from paying any dividends or other payments to Banks” section set forth in,us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”Operations” beginning on page 20, below. The high and low sales price per share of common stock (based on the intra-day high and low sales price) were as follows:

The information under the caption, “Equity Compensation Plan Information,” in our Proxy Statement for our Annual Meeting of Stockholders to be held on April 29, 2004 (200428, 2005 (2005 Proxy Statement) is incorporated herein by reference.

During 2003,2004, we did not sell any of our equity securities that were not registered under the Securities Act of 1933, as amended.amended, except as previously disclosed by us in a Current Report on Form 8-K or a Quarterly Report on Form 10-Q.

ITEM 6.

SELECTED FINANCIAL DATA

Five Years Ended December 28, 200326, 2004

(ThousandsIn thousands except per share amounts)

(2)

Interest income and other, net includes a charge of approximately $32 million associated with our exchange of $201 million of our 4.50% Notes for common stock and a charge of approximately $14 million in connection with the prepayment of the Dresden Term Loan.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and related notes as of December 28, 200326, 2004 and December 29, 2002,28, 2003, and for each of the three years in the period ended December 28, 2003,26, 2004, which are included in this annual report. Certain prior period amounts have been reclassified to conform to the current period presentation.

Overview

We design, manufacture and market industry-standard digital integrated circuitsICs that are used in diverse product applications such as desktop and mobile PCs, workstations, and servers, communications equipment such as mobile phones and automotive and consumer electronics. Our products includeconsist primarily of microprocessors and Flash memory devices. We also sell embedded microprocessors for personal connectivity devices and Personal Connectivity Solutions products.other consumer markets.

The semiconductor industry has recently shown signsIn 2004, we continued to focus on customer-centric innovation by developing microprocessor and Flash memory products that assist our customers in adding functionality and enhancing the performance of recovery fromtheir products. We continued to design and develop microprocessor products based on AMD64 technology, which allow our customers to protect their existing investments by continuing to use their 32-bit software applications while transitioning to a 64-bit platform. As of December 26, 2004, sales of AMD64-based processors represented approximately one-half of our net sales for the downturn experienced during 2001Computation Products segment.

In Flash memory, we continued to manufacture products based on our MirrorBit technology, which we believe will enable our customers to cost effectively include next-generation applications, such as high-resolution cameras and 2002, which contributedstreaming video, on their mobile phone. We also introduced floating gate memory products manufactured on 110-nanometer technology and substantially completed the integration of our and Fujitsu’s Flash memory operations in Spansion.

We also continued to an improvementdevote resources to develop advanced manufacturing process technologies. During 2004, we successfully transitioned to smaller manufacturing geometries for both our microprocessor and Flash memory products. As of December 26, 2004, we were manufacturing our microprocessor products using primarily 90-nanometer technology and we were manufacturing our highest density and performance Flash memory products on 110-nanometer floating gate and MirrorBit technology.

In 2004, despite a net loss in our operating results during 2003 comparedthe fourth quarter, we returned to 2002.a full year of profitability. Total net sales for 20032004 of $3,519 million$5.0 billion increased 3042 percent compared with net sales of $2,697 million$3.5 billion for 2002.2003. This increase was driven primarily by increased sales of microprocessors and Flash memory products across all geographies as well as the consolidationeffects of FASL LLC’sconsolidating Spansion’s results of operations, which include sales by FASL LLCSpansion to Fujitsu. In addition,Fujitsu, for the restructuringtwelve months in 2004 as compared to six months in 2003.

Our transition to smaller manufacturing process geometries for both our microprocessor and cost-cutting measures that we initiated in 2002Flash memory products contributed to significant cost savings in 2003. These cost savings, combinedlower manufacturing costs per unit and higher overall gross margins, which, along with the increase in revenues,increased net sales, contributed to a 79 percent decrease in net loss from a net lossincome of $1,303$91 million in 20022004 compared to a net loss of $274 million in 2003.

During 2003, we reached an agreement with Fujitsu to form FASL LLC. The formation of FASL LLC has allowed us to combine our and Fujitsu’s product manufacturing and technology development efforts to respond more quickly toWe also substantially completed the demands of our Flash memory product customers. As a result of the transaction, we began consolidating FASL LLC’s results of operations on June 30, 2003. However, as FASL LLC did not exist prior to June 30, 2003, the results of operations for prior periods did not include the consolidation of FASL LLC’s operations. Accordingly, the segment operating information for our Memory Products segment for the year ended December 28, 2003, is not fully comparable to the segment information for all prior periods presented.

In addition, we introduced our 64-bit microprocessor products during 2003 with the launch of our AMD Opteron processor for servers and workstations in April and our AMD Athlon 64 processor for desktop and mobile PCs in September. In November 2003, we began construction of a newFab 36, our 300-millimeter wafer fabrication facility in Dresden, Germany and we are currently in the process of installing equipment. We believe the new capacity provided by this facility, which we expect to be in volume production in 2006. We believe the new capacity provided by this facility2006, will allow us to satisfy anticipated demand for our 64-bit microprocessors.

However, in 2004, the cyclical Flash memory market posed unique challenges for us. In the second half of 2004, Memory Products net sales decreased by $259 million, compared to the first half of 2004. Factors that

contributed to this decline included aggressive pricing by competitors and an imbalance in the supply and demand for Flash memory products. In addition, decreased demand from the wireless handset market in Asia, in part due to providing increased capacity, we believe that manufacturingchannel inventory accumulation by wireless handset OEMs in China, contributed to a decline in Memory Products net sales during the third quarter of 2004. The down-turn in the overall Flash memory market, lower than expected sales in Japan and a delay in our 64-bit processors on 300-millimeter silicon wafers, and employing advanced manufacturing process technologies, will allow usqualification of a Flash memory product for the wireless category contributed to reduce our manufacturing costs.lower Memory Products net sales during the fourth quarter of 2004.

For 2004,2005, we believe critical success factors include: increasingcontinuing to increase market acceptance of 64-bit computing; our AMD64 technology, particularly in the enterprise segment; taking products based on our second-generation MirrorBit technology to market and FASL LLC’s abilityeffectively ramping such products to mass production on a timely basis; strengthening our relationships with key customers and establishing relationships with new customers that are industry leaders in their markets; successfully developdeveloping and continuing to transition to the latest manufacturing process technologies;technologies for both our ability to developmicroprocessor and introduceFlash memory products; developing and introducing new microprocessor products for the mobile, server and workstation markets, including dual-core processors, on a timely basis and increasing our share of those markets; developing and introducing new Flash memory products on a timely basis; controlling costs; increasing the adoption of MirrorBit technology; and expanding our participation in emerginghigh-growth global markets, including China, Latin America, India and Eastern Europe; improving our share of the Flash memory market, including enabling the increased adoption of MirrorBit technology; and maximizing the synergies of FASL LLC.Europe.

We intend the discussion of our financial condition and results of operations that follows to provide information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year, the primary factors that resulted in those changes, and how certain accounting principles, policies and estimates affect our financial statements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.States accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenues, inventories, asset impairments, restructuring charges and income taxes and commitments and contingencies.taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

We believe the following critical accounting policies are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments.

Revenue Reserves.    We record a provision for estimated sales returns and allowances on product sales and a provision for estimated future price reductions in the same period that the related revenues are recorded. We base these estimates on management judgment while considering actual historical sales returns, allowances, historical price reductions, market activity, allowances, and other known or anticipated trends and factors. ActualThese estimates are subject to management’s judgment, and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenues and operating results.

Inventory Valuation.    At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory and are also used for near-term factory production planning. Inventories on hand in excess of forecasted demand of generally six months or less, are not valued. In addition, we write off inventories that are considered obsolete. We adjust remaining specific inventory balances to approximate the lower of our standard manufacturing cost or market value. Among other

factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. We adjust remaining inventory balances to approximate the lower of our standard manufacturing cost or market value. If we anticipate future demand or market conditions to be less favorable than our projections as forecasted, additional inventory write-downs may be required, and would be reflected in cost of sales in the period the revision is made. This would have a negative impact on our gross margins in that period. If in any period we are able to sell inventories that were not valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period. To the extent these factors materially affect our gross margins, we would disclose them.them in our filings with the SEC.

Impairment of Long-Lived Assets.    We consider no less frequently than quarterly whether indicators of impairment of long-lived assets are present. These indicators may include, but are not limited to, significant decreases in the market value of an asset and significant changes in the extent or manner in which an asset is used. If these or other indicators are present, we determine whether the estimated undiscounted cash flows attributable to the assets in question are less than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the asset determined to be impaired is to be held and used, we recognize an impairment loss through a charge to our operating results to the extent the present value of anticipated net cash flows attributable to the asset is less than the asset’s carrying value, which we depreciate over the remaining estimated useful life of the asset. We may incur additional impairment losses in future periods if factors influencing our estimates of the undiscounted cash flows change.

Restructuring Charges.    We record and account for our restructuring activities following formally approved plans that identify the actions and timeline over which the restructuring activities will occur. Restructuring chargesOur remaining restructuring accruals include estimates pertaining to employee severancefacility exit costs and fringe benefit costs, facility exit

costs, subleasing assumptions and facility and equipment decommissioning costs resulting from exiting certain facilities. We review remaining restructuringthese accruals on a quarterly basis and adjust these accruals when changes in facts and circumstances suggest actual amounts will differ from our estimates. Although we do not anticipate significant changes, actual costs may be different than our original or revised estimates. These changes in estimates can result in increases or decreases to our results of operations in future periods and would be presented on the restructuring and other special charges (recoveries), net, line of our consolidated operating statements.

Income Taxes.    In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a charge to income tax expense, in the form of a valuation allowance, for the deferred tax assets that we estimate will not ultimately be recoverable. We consider past performance, future expected taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In fiscal 2002, we recorded a valuation allowance against all of our U.S. deferred tax assets, net of deferred tax liabilities, based on past performance and the likelihood of realization of our deferred tax assets at the time. In fiscal 2003, we continued to provide a valuation allowance against all of our U.S. deferred tax assets, net of deferred tax liabilities. In fiscal 2004, a portion of the valuation allowance was utilized as a result of net operating profits. If we later determine that it is more likely than not that the net deferred tax assets will be realized, an appropriate amount of the previously provided valuation allowance will be reversed, resulting in a benefit to our earnings. Such benefits would be recorded on the income tax provision (benefit) line of our statement of operations.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment by the Internal Revenue Service or other taxing

jurisdiction. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result.

Commitments and Contingencies.    From time to time we are a defendant or plaintiff in various legal actions that arise in the normal course of business. We are also a party to environmental matters, including local, regional, state and federal government cleanup activities at or near locations where we currently or have in the past conducted our business. We are also a guarantor of various third-party obligations and commitments. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these commitments and contingencies, if any, that would be charged to earnings includes assessing the probability of adverse outcomes and estimating the amount of potential losses. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. Changes in required reserves could increase or decrease our earnings in the period the changes are made.

Results Of Operations

As discussed aboveIn March 1993, we and Fujitsu formed Fujitsu AMD Semiconductor Limited, a joint venture for the purpose of manufacturing Flash memory devices. Through the Manufacturing Joint Venture, we and Fujitsu constructed and operated advanced integrated circuit manufacturing facilities in the section entitled, “Developments in 2003,” on page 1, effectiveAizu-Wakamatsu, Japan. Effective June 30, 2003, we and Fujitsu formed FASL LLC.executed agreements to integrate our Flash memory operations. The Manufacturing Joint Venture was contributed to a new entity, Spansion LLC, which is owned 60 percent by us and 40 percent by Fujitsu. As a result of thethis transaction, we began consolidating FASL LLC’sSpansion’s results of operations on June 30, 2003. Prior to June 30, 2003, we accounted for our share of the Manufacturing Joint Venture’s operating results under the equity method.

As FASL LLCSpansion did not exist prior to June 30, 2003, the results of our operations for periods prior to the third quarter of 2003 do not include the consolidation of FASL LLC’sSpansion’s results of operations. Accordingly, our operating results for the yearyears ended December 26, 2004 and December 28, 2003 are not fully comparable with our results for prior periods. AsAlso, because we have a 60 percent controlling interest in FASL LLC,Spansion, Fujitsu’s 40 percent share in the net income (loss) of FASL LLCSpansion is reflected as a minority interest adjustment to our consolidated financial statements. This minority interest adjustment willdoes not correspond to operating income (loss) of our Memory Products segment because operating income (loss) becausefor our Memory Products segment operating income (loss) includes operations incremental to those of FASL LLC.Spansion. In addition, the minority interest calculation is based on FASL LLC’sSpansion’s net income (loss) rather than operating income (loss).

We review and assess operating performance using segment revenues and operating income before interest, taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on management judgment. Prior to the third quarter of 2003, we had two reportable segments: the Core Products segment, which consisted of the microprocessor, memory products and other IC products operating segments, and the Foundry Services segments. Primarily as a resultsegment, which consisted of the formation of FASL LLC, we re-evaluatedfees for products sold to Vantis Corporation, our reportable segments.former programmable logic devices subsidiary, and Legerity Inc., our former voice communication products subsidiary.

Beginning in the third quarter of 2003, we changed our reportable segments to:to the Computation Products segment, which includes microprocessor products for desktop and mobile PCs, servers and workstations and chipset products, and the Memory Products segment, which includes Flash memory products. We believe that separate reportingIn addition, in the fourth quarter of these2004, we began presenting our Personal Connectivity Solutions operating segments, given our new focus on FASL LLCsegment as a separate reportable segment because the operating companyloss from this operating segment exceeded 10 percent of the combined profit of all our operating segments and its separate market brand—Spansion, provides more useful information totherefore this operating segment became a reportable segment under the requirements of Statement of Financial Standards 131, “Segment Reporting” (FAS 131). Previously, we included our stockholders.

Personal Connectivity Solutions operating segment in our All Other category. The Personal Connectivity Solutions segment includes primarily low power, high performance x86 and MIPS architecture-based embedded microprocessors. In addition to our three reportable segments, we also have the All Other category, thatwhich is not a reportable segment, but rather it includes other small operating segments that are neither individually nor in the aggregate greater than ten percent of our consolidated revenues or assets. This category alsoand which includes certain operating expenses and credits that are not allocated to the operating segments. Prior period segment information has been reclassified to conform to the current period presentation. However, as FASL LLCbecause Spansion did not exist prior to June 30, 2003, the results of operations for periods prior periodsto June 30, 2003 did not include the consolidation of FASL LLC’sSpansion’s operations. Accordingly, the segment operating information for the Memory Products segment for the year ended December 28, 2003,26, 2004, is not fully comparable to the reclassified segment information for allthe prior periods presented.

We use a 52- to 53-week fiscal year ending on the last Sunday in December. The years ended December 26, 2004, December 28, 2003 and December 29, 2002, and December 30, 2001, each included 52 weeks.

The following is a summary of our net sales and operating income (loss) by segment and category for 2004, 2003 2002 and 2001.2002.

Net Sales Comparison for Years Ended December 28, 2003 and December 29, 2002Computation Products

Total net sales of $3,519 million in 2003 increased 30 percent compared to net sales of $2,697 million in 2002.

Computation Products net sales of $1,960 million$2.5 billion in 2004 increased 29 percent compared to net sales of $2.0 billion in 2003. The increase was primarily due to a 19 percent increase in average selling prices and a nine percent increase in microprocessor unit shipments. The increase in average selling prices was primarily due to increased sales of our higher-priced AMD64-based processors, particularly our AMD Athlon 64 processors, which contributed to a richer product mix. Similarly, the increase in unit shipments reflected the increased demand for these processors. As of December 26, 2004, sales of AMD64-based processors represented approximately one-half of our net sales for the Computation Products segment. Sales increased across all geographic regions, and growth was particularly strong in North America and Asia.

Computation Products net sales of $2.0 billion in 2003 increased 12 percent compared to net sales of $1,756 million$1.8 billion in 2002. The increase in net sales was primarily due to a 15 percent increase in microprocessor unit shipments due primarily to increased demand from our OEM customers,customers. The increase in net sales was partially offset by a decline of four percent in the average selling pricesprices.

Computation Products operating income of $303 million in 2004 increased by $326 million compared to an operating loss of $23 million in 2003. The increase was primarily due to a 29 percent increase in net sales, partially offset by a 12 percent increase in operating expenses. Operating expenses increased due primarily to an increase in marketing and cooperative advertising costs of $79 million in connection with our AMD64-based products, a nine percent increase in unit shipments, and a $28 million increase in research and development costs. The increase in research and development costs was due primarily to a $29 million increase in Fab 36 start-up costs and a $24 million increase in silicon design related to future generations of our microprocessor products. Unit shipment growthmicroprocessors offset by a $23 million decrease in Fab 30 research and development activities.

Computation Products operating loss of $23 million in 2003 improved by $638 million compared to an operating loss of $661 million in 2002. The improvement was particularly strongprimarily due to a 12 percent increase in Latin Americanet sales and China, which accounted for 77 percenta decrease in both manufacturing costs of overall unit growth.$330 million and marketing, general and administrative expenses of $39 million, as a result of our cost reduction initiatives and the 2002 Restructuring Plan. In addition, cooperative advertising and marketing expenses decreased by $55 million from 2002.

Memory Products

Memory Products net sales of $1,419 million$2.3 billion in 20032004 increased 9265 percent compared to net sales of $741 million$1.4 billion in 2002.2003. The increase in net sales was primarily attributabledue to increased demand for Flash memory products across all geographies, which resulted in a nine percent increase in average selling prices, and the effect of consolidating FASL LLC’sSpansion’s results of operations, which include FASL LLC’sSpansion’s sales to Fujitsu and increasedof $1.1 billion for 12 months in 2004 compared to $449 million for six months in 2003. In the second half of 2003, demand for Flash memory products began to increase significantly, and this trend continued through the first half of 2004. In the second half of 2004, however, our Memory Products net sales declined due to aggressive pricing by competitors and an imbalance in the supply and demand for Flash memory products. In addition, decreased demand from the wireless handset market in Asia, due in part to channel inventory accumulation by wireless OEMs in China, contributed to a decline in Memory Products net sales during the third quarter. The downturn in the overall Flash memory market, lower than expected sales in Japan and a delay in qualifying a new Flash memory product for the wireless category contributed to lower Memory Products net sales during the fourth quarter. Further quantification of the breakdown in the increase in net sales is not practical due to the reorganization of geographical sales territories between AMD and Fujitsu.

All OtherMemory Products net sales of $1.4 billion in 2003 increased 92 percent compared to net sales of $741 million in 2002. The increase was primarily due to the effect of consolidating Spansion’s results of operations, which include Spansion’s sales to Fujitsu during the last six months of fiscal 2003 and increased demand for Flash memory products, particularly in the second half of 2003. Further quantification of the breakdown in the increase in net sales is not practical due to the reorganization of geographical sales territories between AMD and Fujitsu.

Memory Products operating income of $35 million increased $224 million from an operating loss of $189 million in 2003. The increase was primarily due to the effect of consolidating Spansion’s results of operations, which include Spansion’s sales to Fujitsu, for 12 months in 2004 compared to six months in 2003. In addition, our manufacturing costs decreased due to our transition to 110-nanometer process technology for certain of our Flash memory products in 2004 and as a result of increased shipments of Flash memory products based on MirrorBit technology, which are less expensive to manufacture than Flash memory products based on floating gate technology. Further quantification of the changes is not practical due to the consolidation of Spansion on June 30, 2003.

Memory Products operating loss of $189 million in 2003 increased $30 million from an operating loss of $159 million in 2002. Further quantification of the changes is not practical due to the consolidation of Spansion on June 30, 2003.

Personal Connectivity Solutions

Personal Connectivity Solutions (PCS) net sales of $131 million in 2004 decreased seven percent compared to net sales of $140 million in 2003. The decrease was primarily due to a $43 million decrease in sales of certain end-of-life embedded microprocessors, partially offset by a $33 million increase in sales of AMD Geode products. We acquired the Geode product line from National Semiconductor in August 2003. Accordingly, the increase in sales of AMD Geode products in 2004 was due to the fact that in 2004 we had 12 months of sales whereas in 2003 we had approximately four months of sales.

PCS net sales of $140 million in 2003 decreased 3015 percent compared to net sales of $200$166 million in 2002 and consisted primarily of net sales of our Personal Connectivity Solutions products.2002. The decrease was primarily due

to a $53 million decrease in revenue resulting from discontinued productionsales of selected maturecertain end-of-life embedded processorsmicroprocessors and networking products, and a $34 million decrease in Foundry Services revenue,partially offset by a $28 million increase in revenues from sales of AMD Geode and wireless products.

Net Sales Comparison for Years Ended December 29, 2002 and December 30, 2001

Total net salesPCS operating loss of $2,697$72 million in 2002 decreased 31 percent2004 increased compared to net salesan operating loss of $3,892$14 million in 2001.

Computation Products net sales of $1,756 million in 2002 decreased 29 percent compared to net sales of $2,466 million in 2001. This decrease was almost wholly due to a decrease in unit sales of 16 percent, and a decrease in average selling prices of 13 percent, reflecting industry-wide weakness in PC sales, competitive pricing pressure, and the execution of our plan to align our microprocessor inventory2003. The increase in the supply chain with forecasted customer demand, which included our decision to limit shipments and accept receipt of product returns from certain customers.

Memory Products net sales of $741 million in 2002 decreased 35 percent compared to net sales of $1,133 million in 2001. The decreaseoperating loss was primarily due to a decrease$48 million increase in average selling pricesoperating expenses. Operating

expenses increased due to an increase of 36 percent, reflecting continued weaknessapproximately $35 million in manufacturing costs as a result of a change in product mix, and an aggregate increase of $14 million in research and development expenses and marketing, general and administrative expenses as a result of activities related to our AMD Geode products and other product development. Manufacturing costs increased primarily because we manufactured more AMD Geode products, which generally are more expensive to manufacture than our other embedded processors.

PCS operating loss of $14 million in 2003 improved compared to the operating loss of $25 million in 2002. The improvement was primarily due to sales of $12 million of certain embedded microprocessors and networking products that had been previously written off.

All Other Category

There were no net sales generated in the telecommunications and networking equipment industries.All Other category in 2003 or 2004.

All Other net sales of $200zero in 2003 decreased from $34 million in 2002 decreased 32 percent compareddue to net salesthe discontinuation of $293our Foundry Services in 2002.

All Other operating loss of $44 million in 2001. The decrease was2004 increased from $6 million in 2003, primarily due to a decrease in Foundry Services revenuesan increase of approximately $64$30 million in corporate bonus and profit sharing expense. In addition, All Other operating loss in 2004 included approximately $5 million of restructuring and other special charges, while in 2003 we had a decrease$14 million credit adjustment to the restructuring charge.

All Other operating loss of $6 million in net sales2003 improved by $374 million compared to an operating loss of $31$380 million from embedded processorsin 2002, primarily due to $331 million of restructuring and networking products as a result of sustained market declinesother special charges included in the communications and networking equipment industries.All Other category for 2002, compared to a $14 million credit adjustment to the restructuring charge in 2003.

Comparison of Gross Margin, Percentage, Expenses, Interest Income and Other, Net, and Interest Expense and Taxes

The following is a summary of certain consolidated statement of operations data for 2004, 2003 and 2002:

Gross margin percentage increased to 39 percent in 2004 compared to 34 percent in 2003. The increase in gross margin was primarily due to an increase in net sales of 42 percent and lower unit manufacturing costs resulting from our transition to smaller, more cost efficient, manufacturing process technologies for both of our microprocessors and Flash memory products. Further quantification of the improvement in gross margin percentage expenses and interest income and other, net, and interest expense for 2003, 2002 and 2001:is not practical due to the consolidation of Spansion’s operating results as of June 30, 2003.

Gross margin percentage increased to 34 percent in 2003 compared to 22 percent in 2002. The increase in gross margin was primarily due to an increase in net sales of 30 percent, accompanied by an increase in cost of sales of only ten percent. Our cost of sales increased at a lower rate than net sales primarily due to cost reductions from the 2002 Restructuring Plan and other cost reduction initiatives. In addition, microprocessor unit sales

increased 15 percent while average selling prices of microprocessor products decreased by four percent, and we realized revenues of $63 million, or approximately two gross margin percentage points, resulting from the sale of microprocessor products that had been previously written off. Further quantification of the improvement in gross margin percentage is not practical due to the consolidation of FASL LLC’sSpansion’s operating results onas of June 30, 2003.

We amortize capital grants and allowances, interest subsidies and research and development subsidies that we receive from the State of Saxony and the Federal Republic of Germany for Fab 30 as they are earned. The

amortization of these grants and subsidies is recognized as creditsa credit to research and development expenses and cost of sales. The creditscredit to cost of sales totaled $67.1 million in 2004, $46.2 million in 2003 and $37.5 million in 2002.

Gross margin percentage decreasedResearch and development expenses of $935 million in 2004 increased ten percent from $852 million in 2003 due in part to 22 percent in 2002 compared to 33 percent in 2001. This decrease was primarily due to a 31 percent decrease in the combined sales of PC processorshigher research and Flash memory products,development expenses as a result of lower unit demandthe consolidation of Spansion’s results of operation, an increase in start-up costs of approximately $29 million associated with the Fab 36 project and average selling prices duea $24 million increase in silicon design related to weakened customer demand and industry-wide excess inventory,future generations of our microprocessors. These factors were partially offset by cost savings realized from the closure of certain facilities pursuant to the 2001 Restructuring Plan, which is discussed below.

a $23 million decrease in Fab 30 research and development activities. Research and development expenses of $852 million in 2003 increased four percent from $816 million in 2002, due primarilyin part to an increase inhigher research and development expenses as a result of the FASL LLC transaction,consolidation of Spansion’s results of operation, $23 million in research and development efforts related to new microprocessors, and $58 million in expenses related to amounts paid to IBM to jointly develop new logic process technologies for use in future high-performance microprocessor products. TheseThe increases in research and development expenses were offset by a $35 million reduction in internal research and development costs, from 2002 to 2003, primarily due to the reduction of research and development activities associated with our PCS products and the absence of the $42 million charge representing amounts paid to IBM in 2002 in exchange for consulting services relating to optimizing the performance of our manufacturing processes.

We amortize capital grants and allowances, interest subsidies and research and development subsidies that we receive from the State of Saxony and the Federal Republic of Germany for Fab 30 as they are earned. The amortization of these grants and subsidies is recognized as creditsa credit to research and development expenses and cost of sales. The creditscredit to research and development expenses totaled $29.0$20.7 million in 2004, $29 million in 2003 and $21.8 million in 2002.

ResearchMarketing, general and developmentadministrative expenses of $816$807 million in 20022004 increased 2537 percent compared to $651$587 million in 2001. This increase was2003, primarily due to an overall increaseincreased sales and cooperative advertising and marketing expenses of $112 million primarily associated with our AMD 64-based processors, expenses from Spansion of $153 million for 12 months of 2004 compared to $78 million for six months in research2003 and development efforts directed to our microprocessors. In addition, research and development expenses in 2002 included a $42 million charge for amounts paid to IBM in exchange for consulting services relating to optimizing the performance of our manufacturing processes in the fourth quarter of 2002, as well as the reallocation of $30 million from manufacturing resources, previously included innew regulatory compliance costs of goods sold, to research and development activities for microprocessors.$15 million.

Marketing, general and administrative expenses of $587 million in 2003 decreased 12 percent compared to $670 million in 2002. The decrease was primarily due to decreased cooperative advertising and marketing expenses of $55 million and cost reductions from the 2002 Restructuring Plan and other cost reduction initiatives.

Marketing, general and administrative expensesEffects of $670 million in 2002 increased eight percent compared to $620 million in 2001 primarily as a result of increased advertising and marketing expenses associated with the launch of our branding campaign.Restructuring Plan

In December 2002, we began implementing a restructuring plan (the 2002 Restructuring Plan) to further align our cost structure to industry conditions resulting from weak customer demand and industry-wide excess inventory.

As part of this plan, and as a result of our agreement with IBM to jointly develop future generations of our logicmicroprocessor manufacturing process technology, we ceased logicmicroprocessor related research and development in the SDC and eliminated most of thosethe related resources, including the sale or abandonment of certain equipment used in the SDC.

The 2002 Restructuring Plan resulted in the consolidation of facilities, primarily at our Sunnyvale, California site and at sales offices worldwide. We vacated and are attempting to sublease certain facilities

currently occupied under long-term operating leases through 2013.2011. We also terminated the implementation of certain partially completed enterprise resource planning (ERP) software and other information technology implementation activities, resulting in the abandonment of certain software, hardware and capitalized development costs.

Pursuant to the 2002 Restructuring Plan, we recorded restructuring costs and other special charges of $330.6 million in the fourth quarter of 2002, consisting primarily of $68.8 million of anticipated severance and fringe benefit costs, an asset impairment charge of $32.5 million relating to a license that has no future use because of its association with discontinued logicmicroprocessor development activities, asset impairment charges of $30.6 million resulting from the abandonment of equipment previously used in logicmicroprocessor process development and manufacturing activities, anticipated exit costs of $138.9 million almost wholly related to vacating and consolidating our facilities and a charge of $55.5 million resulting from the abandonment of partially completed ERP software and other information technology implementation activities.

During 2003, management approved the sale of additional equipment primarily equipment used in the SDC that was identified as no longer useful in our operations. As a result, we recorded approximately $11 million of asset impairment charges in the first quarter of 2003, including $3.3 million of charges for decommission costs necessary to complete the sale of the equipment.

During 2003, we also revised our estimates of the number of positions to be eliminated pursuant to the 2002 Restructuring Plan from 2,000 to 1,800 in response to the additional resources required due to the FASL LLCSpansion transaction. As a result, we reversed $8.9 million of the estimated severance and fringe benefit accrual. As of December 28, 2003, 1,73626, 2004, 1,786 employees had been terminated pursuant to the 2002 Restructuring Plan resulting in cumulative cash payments of $53$60 million in severance and employee benefit costs.

During 2004, we adjusted the restructuring accrual related to the 2002 Restructuring Plan, which resulted in an additional $5.2 million restructuring charge for the period. The remaining accrualadjustment was primarily related to a change in our estimate of $6.7 million represents the severance benefits cost obligations for individuals whose employments terminated but who elected to defer receipt of severance benefits until 2004 and for employees who were pre-notifiedpotential sublease opportunities associated with abandoned facilities located in 2003 of their employment terminations, which will occur in 2004.Sunnyvale, California.

With the exception of exit costs consisting primarily of remaining lease payments on abandoned facilities net of estimated sublease income that are payable through 2011, we have substantially completed the activities associated with the 2002 Restructuring Plan asPlan. With the formation of December 28, 2003. As a result ofSpansion and other business changes, we no longer track the overall cost savings from the 2002 Restructuring Plan because we realized overall cost reductions of approximately $150 million in 2003. We also implemented other cost reduction initiatives incremental to the specific expense reductions resulting from the 2002 Restructuring Plan.do not believe this information would be useful.

The following table summarizes activities under the 2002 Restructuring Plan through December 28, 2003:26, 2004:

Effects of 2001 Restructuring Plan

In 2001, we announced a restructuring plan (the 2001 Restructuring Plan) duein response to the continued slowdown in the semiconductor industry and a resulting decline in revenues.revenues, we implemented a restructuring plan (the 2001 Restructuring Plan). We substantially completed our execution of the

2001 Restructuring Plan as of December 28, 2003. 26, 2004.

During 2003, we reduced the estimated accrual of the facility and equipment decommission costs by $12.2 million based on the most current information available. During 2003,available and we also realized a recovery of approximately $3.9 million for the excess of the sale price over the estimated fair value of equipment that waswe determined to bewas impaired as a result of the 2001 Restructuring Plan. Both amounts were included in restructuring and other special charges (recoveries), net. As a resultWith the formation of Spansion and other business changes, we no longer track the overall cost savings from this 2001 Restructuring Plan because we have realized overall cost reductions of $211 million as of December 28, 2003.do not believe the information would be useful.

The following table summarizes activity under the 2001 Restructuring Plan from December 30, 2001 through December 28, 2003:26, 2004:

Interest Income and Other, Net

We recorded a net charge of interest income and other, net of $31 million in 2004 compared to interest income and other, net of approximately $21 million in 2003. This charge was due primarily to a charge of approximately $32 million related to a series of transactions pursuant to which we exchanged $201 million of our 4.50% Convertible Senior Notes due 2007 (the 4.50% Notes) for our common stock. The charge represented the difference between the fair value of the common stock issued in the transactions and the fair value of common stock issuable pursuant to the original conversion terms of the 4.50% Notes. In addition, interest income and other, net, in 2004 included a charge of approximately $14 million in connection with our prepayment of the Dresden Term Loan, and a loss of approximately $6 million during the second quarter of 2004 resulting from the mark-to-market of certain foreign currency forward contracts that we used as economic hedges of forecasted capital contributions to AMD Fab 36 KG, which do not qualify as accounting hedges.

Interest income and other, net, of approximately $21 million in 2003 decreased 34 percent from $32 million in 2002. The decrease was primarily due to a decrease in investment income of $16 million caused by lower cash equivalents and short-term investment balances and a charge of $2.3 million in charges in 2003 for other-than-temporary declines in our equity investments. This decrease was offset by a gain of approximately $6 million based on the difference between the carrying value and fair value of assets contributed by us to FASL LLC.Spansion. Fujitsu now owns a 40 percent interest in these assets. The gain on the deemed sale of these assets to FASL LLCSpansion was limited to the difference in carrying value of our interest in the assets following the completion of the transaction and the carrying value of the assets immediately prior to the transaction.

Interest income and other, net,Expense

Interest expense of $32$112 million increased $6 million or 23 percent in 20022004 was flat compared to $26$110 million in 2001. The increase2003. On October 29, 2004, we sold $600 million of 7.75% Senior Notes due 2012 (the 7.75% Notes). Interest accrued on the 7.75% Notes was primarily duepartially offset by the absence of interest expense, as of November 2, 2004, for amounts outstanding under the Dresden Term Loan, which we prepaid on November 2, 2004, and the absence of interest expense with respect to $4.7$201 million of our 4.50% Notes, which we exchanged for our common stock in a series of transactions during the fourth quarter of 2004. We also capitalized interest during 2004 of $9 million in charges for other-than-temporary declinesconnection with our Fab 36 construction activities in our equity investments as compared to $27 million in charges in 2001, offset by a decrease of $20 million in interest income as a result of lower interest rates on our investment portfolio and lower cash equivalents and short term investment balances.Dresden, Germany.

Interest expense of $110 million in 2003 increased 55 percent compared to $71 million in 2002. The increase was due primarily to the effect of our 4.50% Convertible Senior Notes due 2007 (4.50% Notes), issued in November 2002, which resulted in annual interest charges of $18 million intereston our 4.50% Notes sold in November 2002, $5 million of $5 millioninterest on $110 million drawn at the end of September 2002outstanding under our July 2003 Loan Agreement,revolving credit facility, and the FASL LLCSpansion transaction, which resulted in additional interest expense of approximately $9 million in 2003. In addition, in 2002 we capitalized interest of $10.7 million on continued expansion and facilitization of Fabs 25 and 30 compared to only $1.5 million in 2003.

Interest expense of $71 million in 2002 increased 16 percent compared to $61 million in 2001. The increase was due primarily to the effect of interest expense incurred on our 4.75% Convertible Senior Debentures Due 2022 (4.75% Debentures), issued in January 2002, which resulted in interest charges of $22 million, partially offset by an increase in capitalized interest associated with conversion of Fab 25 to a Flash memory facility, facilitization activities at Fab 30, and a decrease of $11 million in interest expense due to a partial repayment of the outstanding loans under the Dresden Loan Agreements in 2002.

We recorded an income tax provision of $6 million in 2004, $3 million in 2003 anand $45 million in 2002. The income tax provision in 2004 primarily reflects U.S. income taxes, including taxes on the dividends repatriated from controlled foreign corporations, partially offset by foreign tax benefits because of $45 millionlosses in 2002 and an income tax benefit of $14 million in 2001.certain foreign jurisdictions. The income tax provision in 2003 primarily reflected income tax expense generated in certain foreign tax jurisdictions, offset by a benefit of a U.S. federal tax refund from a carryback claim we filed in 2003. No net tax benefit was recorded in 2003 on pre-tax losses due to continuing operating losses. Our tax provision for 2003 does not reflect an increase in our net deferred tax liability of approximately $46 million. This net deferred tax liability was recognized by the Japanese subsidiary of FASL LLC, FASL JAPAN, as tax expense in periods prior to our consolidation of FASL LLC on June 30, 2003, and therefore has not been recorded as a component of our tax expense for 2003. The 2002 income tax provision was recorded primarily for taxes due on income generated in certain state and foreign tax jurisdictions. No tax benefit was recorded in 2002 on pre-tax losses due tojurisdictions and the establishment of a valuation allowance against the remainder of our U.S. deferred tax assets, net of U.S. deferred tax liabilities in the fourth quarter, due to the incurrence of continuing substantial operating losses in the United States.

As of December 26, 2004, we had federal and state net operating loss carryforwards of approximately $930 million and $45 million. We also had foreign loss carryforwards of approximately $88 million. We also had

federal and state tax credit carryforwards of approximately $246 million and $86 million. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2005 through 2024, if not utilized. We maintain a full valuation allowance against all our net U.S. The effective benefit ratefederal and state deferred tax assets and certain of 15.4 percent for 2001 was less than the statutory rateour foreign deferred tax assets ($694 million at December 26, 2004) because of a lower than U.S. statutory 24 percent tax benefit rate on the 2001 restructuring charges, reflecting the allocationour history of the charges between the U.S. and foreign lower-taxed jurisdictions, and a provision for U.S. taxes on certain previously undistributed earnings of lower-taxed foreign subsidiaries.recent losses.

Other Items

International sales as a percent of net sales were 79 percent in 2004, 80 percent in 2003 compared toand 73 percent in 20022002. During 2004 and 67 percent in 2001. During 2003, approximately 22 and 15 percent of our net sales were denominated in currencies other than the U.S. dollar, primarily the Japanese yen, as compared to one percent during 2002. The increase in the percentage in 2004 and 2003 compared to 2002 was primarily due to the consolidation of FASL LLC’sSpansion’s results of operations, effective June 30, 2003, which include sales by FASL LLCSpansion to Fujitsu, which are denominated in yen. Our foreign exchange risk exposure resulting from these sales is partially mitigated as a result of our yen-denominated manufacturing costs. In addition, we are subject to foreign currency risk related to our manufacturing costs in Fab 30, which are denominated in euros.euro. We use foreign currency forward and option contracts to reduce our exposure to the euro, but future exchange rate fluctuations may cause increases or decreases to our Fab 30 and Fab 36 manufacturing costs. The impact on our operating results from changes in foreign currency rates individually and in the aggregate has not been material, on an annual basis, principally as a result of our foreign currency hedging activities. See “Quantitative and Qualitative Disclosure About Market Risk,” below.

Comparison of Operating Income (Loss)

The following is a summary of operating income (loss) for 2003, 2002 and 2001:

Computation Products operating loss of $23 million in 2003 improved by $638 million compared to $661 million in 2002. The improvement was primarily due to incremental net sales of $204 million and a decrease in both manufacturing costs of $330 million and marketing, general and administrative expenses of $39 million, which resulted primarily from our cost reduction initiatives and the 2002 Restructuring Plan. In addition, cooperative advertising and marketing expenses decreased by $55 million from 2002.

Computation Products operating loss of $661 million in 2002 increased by $470 million compared to $191 million in 2001 primarily due to a decrease in net sales. The decrease was primarily due to a decline in average selling prices of 13 percent and a decline in unit sales of 16 percent for microprocessors as a result of the sustained downturn in the PC industry.

Memory Products operating loss of $189 million in 2003 increased $30 million from 2002. Further quantification of the changes is not practical due to the consolidation of FASL LLC on June 30, 2003.

Memory Products operating loss was $159 million in 2002 compared to $268 million of operating income in 2001. The change in the operating result was primarily due to decrease in net sales of $392 million as a result of a 36 percent decline in average selling prices due to continued weakness in the Flash memory market.

Our All Other operating loss of $21 million in 2003 improved by $384 million compared to 2002, primarily due to $331 million of restructuring and other special charges included in the 2002 results, and a $14 million credit adjustment to the restructuring charge in 2003.

Our All Other operating loss of $405 million in 2002 increased by $270 million compared to 2001. The operating loss included $331 million of restructuring and other special charges in 2002 compared to approximately $89 million in 2001. The remaining increase of operating loss was primarily due to an increase in operating loss of Personal Connectivity Solutions products, partially offset by approximately $27 million of improvement of operating results in Foundry Services.

Financial ConditionFINANCIAL CONDITION

Our cash, cash equivalents and short-term investments at December 28, 200326, 2004 totaled $1.1$1.2 billion, which included approximately $330$196 million in cash, cash equivalents, and short-term investments maintained by FASL LLC. FASL LLC’sof Spansion. Spansion’s operating agreement governs its ability to use this cash balance for operations or to distribute it to us and Fujitsu. Pursuant to the operating agreement, and subject to restrictions contained in third party loan agreements, FASL LLCSpansion must first distribute any cash balance to us and Fujitsu in an amount sufficient to cover each party’s estimated tax liability, if any, related to FASL LLC’sSpansion’s taxable income for each fiscal year. Any remaining cash balance after the tax liability distribution would be used by FASL LLCSpansion to fund its operations in accordance with its budget. If any cash remains, it must be used to repay FASL LLC’sSpansion’s outstanding debt to us and Fujitsu. Any remaining cash after such distributions ismay be distributed at the discretion of FASL LLC’sSpansion’s Board of Managers, to us and Fujitsu, pro rata, based on each party’s membership interest at the time of distribution, which currently is 60 percent and 40 percent.

Due to our repayment of amounts outstanding under the Dresden Term Loan on November 2, 2004 and the related termination of the Dresden Loan Agreements effective December 23, 2004, we are no longer required to maintain a compensating cash balance. Therefore, as of December 26, 2004, our compensating cash balance was zero as compared to $218 million as of December 28, 2003.

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities was approximately $1.1 billion in 2004. Net income of $91 million, non-cash charges, consisting primarily of $1.2 billion of depreciation and amortization expense and a $32 million charge associated with our exchange of $201 million of our 4.50% Notes for common stock, contributed to the positive cash flows from operations. The net changes in operating assets in 2004 as compared to 2003 included an increase in accounts receivable due to higher net sales, and increased inventories due primarily to an increase in microprocessor inventories resulting from a higher percentage of AMD64-based processors and improved market conditions. For fiscal 2004, Fujitsu accounted for approximately 23 percent of our consolidated accounts receivable and approximately 22 percent of our consolidated gross sales.

Net cash provided by operating activities was approximately $296 million in 2003. Although we had a net loss of $274 million for the year, adjustments for non-cash charges, which were primarily depreciation and

amortization, resulted in a positive cash flow from operations. The net changes in operating assets in 2003 as compared to 2002 included an increase in accounts receivable due to higher net sales and the consolidation of FASL LLC’sSpansion’s results of operations, which include FASL LLC’sSpansion’s sales to Fujitsu, and an increase in net inventory due to the consolidation of FASL LLC’sSpansion’s results of operations. At December 28,For fiscal 2003, Fujitsu accounted for approximately 31 percent of our consolidated net accounts receivable and approximately 13 percent of our consolidated netgross sales. TheIn 2003, the net changes in payables and accrued liabilities primarily included payments in 2003 of $90 million for a technology license from IBM and approximately $64 million of payments in 2003 under the 2002 Restructuring Plan and an accrual of $29 million in December 2003 related to our license from IBM for technology and know-how related to manufacturing products on 300-millimeter silicon wafers.Plan.

Net cash used in operating activities was $120 million in 2002, primarily as a result of our net loss of $1,303 million,$1.3 billion, adjusted by non-cash related charges. Changes in operating assets and liabilities in 2002 as compared to 2001 were attributable to a decrease in accounts receivable due to a 31 percent decrease in net sales. At December 29, 2002, inventory increased as compared to December 29, 2001 due to an increase of products to support anticipated 2003 sales, a change in the mix of inventory, and the impact of Flash memory production from Fab 25 following its conversion from logic manufacturing.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by operatingused in investing activities was $168$1.6 billion in 2004, primarily as a result of $1.4 billion used to purchase property, plant and equipment, including approximately $569 million used to construct Fab 36, and a net cash outflow of $150 million from sales and purchases of available-for-sale securities, offset by $34 million in 2001. Although we had a net lossproceeds from sales of $61 million, adjustments for non-cash charges resulted in a positive cash flow from operations. These adjustments included: $623 million of depreciationproperty, plant and amortization expense, $82 million of restructuring charges, $27 million of impairment charges on equity investments and $10 million of provision for doubtful accounts, offset by non-cash credits of $98 million from net charges in deferred income taxes and foreign grant and subsidy income, and other uses of cash in operating activities of approximately $423 million due to net changes in operating assets and liabilities.equipment.

Net cash provided by investing activities was $83 million in 2003, primarily as a result of net cash inflowproceeds of $482 million from sales and purchases of available-for-sale securities, $148 million of cash acquired fromin conjunction with the FASL LLCSpansion transaction and $30 million in proceeds from salesales of property, plant and equipment, offset by $570 million used to purchase property, plant and equipment.

Net cash used in investing activities was $854 million in 2002, including $705 million used for purchases of property, plant and equipment primarily for Fab 30 and Fab 25, $27 million, net of cash acquired, used to acquire Alchemy Semiconductor, Inc., and $131 million from net purchases of available-for-sale securities, offset by $9 million of proceeds from the salesales of property, plant and equipment.

Net Cash Provided by (Used in) Financing Activities

Net cash used in investingprovided by financing activities was $554$413 million in 2001, primarily2004. This amount included $745 million of proceeds from financing activities, including $588 million in proceeds, net of $13 million in debt issuance costs, from the issuance of our 7.75% Notes, approximately $250 million in investments from the non-affiliated limited partners of AMD Fab 36 KG, $60 million of proceeds from equipment sale and leaseback transactions, $30 million of capital investment grants and allowances from the Federal Republic of Germany and the Free State of Saxony for the Fab 36 project, $124 million in proceeds from the issuance of stock under our Employee Stock Purchase Plan and the exercise of stock options and the elimination of our $224 million compensating cash balance due to $679the prepayment of our Dresden Term Loan. These amounts were offset by $898 million in payments on debt and capital lease obligations, including approximately $647.2 million used forto prepay amounts outstanding under the purchases of property, plant,Dresden Term Loan, including accrued and equipment, primarily for Fab 30 and our assembly and test facilities in Asia, and $122 million for additional equity investments in the Manufacturing Joint Venture, offset by $246 million of net proceeds from sales and maturities of available-for-sale securities.unpaid interest.

Net cash provided by financing activities was $267 million in 2003, primarily due to $245 million received from equipment sale and leaseback transactions completed by FASL LLC,Spansion, a $40 million cash note to FASL LLCSpansion from Fujitsu as part of the FASL LLCSpansion transaction, $155 million of capital investment allowances received from the Federal Republic of Germany as part offor the Fab 30 project and $35 million of proceeds from saleissuance of stock under our Employee Stock Purchase Plan and employeethe exercise of stock option exercises,options, offset by $141 million in payments on debt and capital lease obligations, and a $74 million increase in a compensating cash balance. Theour compensating cash balance, representswhich represented the minimum cash balance that must be maintained by AMD Saxony was required to maintain in order to comply with the minimum liquidity covenant set forth in the Dresden Loan Agreements.Term Loan.

Net cash provided by financing activities was $907 million in 2002, primarily due to $486 million in proceeds, net of $14 million in debt issuance costs, from issuingthe issuance of our 4.75% Debentures, $391 million in proceeds, net of $11 million in debt issuance costs, from issuingthe issuance of our 4.50% Notes, $108 million drawn pursuant to the September 2002 Term Loan Agreement (currently referred to asunder the July 2003 FASLSpansion Term Loan),Loan, net of $2 million in debt issuance costs, $120 million drawn pursuant to the Loan and Security Agreement dated July 13, 1999 (currently referred to as the July 2003 Loan Agreement),under our revolving credit facility, $21 million in proceeds from equipment lease financing,financings, $29 million in proceeds from the saleissuance of stock under our Employee Stock Purchase Plan and employeethe exercise of stock option exercises,options, and $76 million of net capital investment allowances and interest subsidies received from the Federal Republic of Germany and the State of Saxony as part offor the Fab 30 project. These amounts were offset by payments of $325 million in payments on debt and capital lease obligations.

NetLiquidity

We believe that cash provided byflows from operations and current cash balances, together with currently available credit facilities (see “Revolving Credit Facilities,” below) and external financing, activities was $141 millionwill be sufficient to fund our operations and capital investments in 2001, primarilythe short term and long term. We also believe that we have sufficient financing arrangements in place to fund the estimated $2.5 billion required to facilitize Fab 36. See “Fab 36 Term Loan and Guarantee and Fab 36 Partnership Agreements,” below. Should additional funding be required, such as to meet payment obligations of our long-term debts when due, we may need to $63 million in proceedsraise the required funds through borrowings or public or private sales of debt or equity securities. Such funding may be obtained through bank borrowings, or from issuances of additional debt or equity securities, which may be issued from time to time under an effective registration statement; through the issuance of notes payable to banks, $308 million drawn pursuant tosecurities in a transaction exempt from registration under the Dresden Loan Agreements, $38 million in capital investment allowances and interest subsidies received from the Federal RepublicSecurities Act of Germany and the State1933; or a combination of Saxony as partone or more of the Fab 30 project, and $37 million in proceeds from the sale of stock under our Employee Stock Purchase Plan and employee stock option exercises, offset by $137 million in payments on debt and capital lease obligations, $77 million used to repurchase our common stock and a $91 million increaseforegoing. We believe that, in the compensating cash balance discussed above.

Notes Payable to BanksRevolving Credit Facilities

On July 7, 2003, we amended and restated our 1999 Loan and Security Agreement with a consortium of banks led by a domestic financial institution (the July 2003 Loan Agreement). We further amended the July 2003 Loan Agreement on October 3, 2003. The July 2003 Loan Agreement currentlyAMD Revolving Credit Facility

Our revolving credit facility provides for a secured revolving line of credit of up to $125$100 million that expires in July 2007. We can borrow, subject to amounts set aside by the lenders, up to 85 percent of our eligible accounts receivable from OEMs and 50 percent of our eligible accounts receivable from distributors. As of December 28, 2003,26, 2004, no amount wasborrowings were outstanding under our revolving credit facility.

Pursuant to the July 2003 Loan Agreement. Weterms of our revolving credit facility, we have to comply, among other things, with the following financial covenants if our net domestic cash (as defined in the July 2003 Loan Agreement)our revolving credit facility) declines below $125 million:

As of December 28, 2003,26, 2004, net domestic cash, as defined, totaled $567$831 million and the preceding financial covenants were not applicable. Our obligations under the July 2003 Loan Agreementour revolving credit facility are secured by all of our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds, excluding FASL LLC’sSpansion’s accounts receivable, inventory and general intangibles.

Spansion Japan Revolving Loan Agreement

In March 2004, Spansion Japan Limited, a subsidiary of Spansion, entered into a revolving credit facility agreement with certain Japanese financial institutions in the aggregate amount of 15 billion yen (approximately $145 million as of December 26, 2004). Spansion Japan can draw under the facility until March 24, 2005.

The revolving facility consists of two tranches: tranche A in the aggregate amount of up to nine billion yen (approximately $87 million as of December 26, 2004) and tranche B in the aggregate amount of up to six billion yen (approximately $58 million as of December 26, 2004). However, as described in more detail below, the total amount that Spansion Japan can draw is limited based on the value of Spansion Japan’s accounts receivable from Fujitsu, which are pledged as security to the lenders. As of December 26, 2004, there were no borrowings outstanding under this facility.

Amounts borrowed under tranche A bear interest at a rate of TIBOR plus 0.55 percent. Amounts borrowed under tranche B bear interest at a rate of TIBOR plus 1.2 percent. Spansion Japan must first fully draw under tranche A prior to drawing amounts under tranche B. Borrowings must be used for working capital purposes and must be repaid no later than April 24, 2005.

Pursuant to the terms of the revolving credit facility agreement, Spansion Japan is required to comply with the following financial covenants:

As of December 26, 2004, Spansion Japan was in compliance with these financial covenants.

As security for amounts outstanding under the revolving facility, Spansion Japan pledged its accounts receivable from Fujitsu. The accounts receivable are held in trust pursuant to the terms of a trust agreement. Under the trust agreement, Spansion Japan is required to maintain the value of its accounts receivable at specified thresholds (as defined by the trust agreement), based upon the amounts outstanding under tranche A and tranche B. In addition, the trustee collects payments from Fujitsu into a separate trust account and releases these amounts to Spansion Japan, subject to the calculated thresholds, upon instruction from the agent for the lenders. At any

time when the accounts receivable balance in the trust account is less than the required thresholds, Spansion Japan is required to do one of the following to cure the shortfall:

Amounts outstanding under the revolving credit facility may become automatically due and payable upon the occurrence of specified events with respect to Spansion Japan, including: filings or proceedings in bankruptcy, failure to pay any obligations under the revolving credit facility that have become due, failure to pay other third-party indebtedness where such debt exceeds 200 million yen (approximately $2 million as of December 26, 2004), or if the value of the accounts receivable from Fujitsu held in trust is below the required thresholds and such shortfall is not remedied within three business days. In addition, amounts outstanding under the revolving credit facility may become automatically due and payable upon the occurrence of specified events with respect to Fujitsu including: filings or proceedings in bankruptcy, default by Fujitsu with respect to payments to Spansion Japan or other obligations under their purchase and sale agreement, or default by Fujitsu with respect to other third-party indebtedness where such debt exceeds one billion yen (approximately $10 million as of December 26, 2004). As of December 26, 2004, the amount of accounts receivable held in the trust was approximately $166 million.

Because most amounts under the Spansion Japan Revolving Loan are denominated in yen, the dollar amounts stated above are subject to change based on applicable exchange rates. We used the exchange rate as of December 26, 2004 of 103.62 yen to one U.S. dollar to translate the amounts denominated in yen into U.S. dollars.

Contractual Cash Obligations and Guarantees

The following tables summarizetable summarizes our principal contractual cash obligations that are recorded on our consolidated balance sheets and principal guarantees of such indebtedness at December 28, 2003,26, 2004, and areis supplemented by the discussion following the tables.

Principal contractual cash obligations that are recorded on our consolidated balance sheets at December 28, 200326, 2004 were: