UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 26, 200425, 2005

OR

For the transition period from ____________ to ____________

Commission File Number 1-7882001-07882

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x  No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  ¨  No  x

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.  x¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act). YesExchange Act. Large accelerated filer  x NoAccelerated filer  ¨ Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)  Yes  ¨  No  x

AggregateAs of June 24, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $6,799,159,288 based on the reported closing sale price of common stock$17.17 per share as reported on the New York Stock Exchange on June 25, 2004,24, 2005, which was the last business day of the registrant’s most recently completed second fiscal quarter.

$5,488,863,023

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

393,889,539480,887,662 shares of common stock, $0.01 par value per share, as of February 22, 2005

17, 2006

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on April 28, 2005,May 5, 2006, are incorporated into Part II and III hereof.

AMD, the AMD Arrow logo, AMD Athlon, AMD Opteron, AMD Sempron, AMD Turion, AMD PowerNow!, Alchemy, Geode and combinations thereof are trademarks of AMD. Spansion and MirrorBit, and combinations thereof, are trademarks of Spansion LLC. Vantis is a trademark of Lattice Semiconductor Corporation. Legerity is a trademark of Legerity, Inc. Microsoft, Windows, and Windows NT 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 26, 200425, 2005

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,” “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: our sales, operating results and anticipated cash flows;sales; capital expenditures; depreciation and amortization expenses; researchthe adequacy of resources to fund operations and developmentcapital expenditures; operating expenses; marketing, general and administrative expenses;tax rate; the development and timing of the introduction of new products and technologies, including our dual-core microprocessors, AMD Turion^™ 64 microprocessors, ORNAND architecture and QuadBit technology;technologies; customer and market acceptance of our AMD Opteron^™, AMD Athlon^™ 64, AMD Turion 64 and AMD Sempron^™microprocessors; customer and market acceptance of Spansion^™ Flash memory products based on MirrorBit^™ and floating gate 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;customers and suppliers; the ability to produce our microprocessor and Flash memory products in the volumes and mix required by the market;market either in our own facilities or at foundries, at acceptable yields and on a timely basis; our ability to maintain the level of investment in research and development and capacity that is required to remain competitive; our ability to transition to advanced manufacturing process technologies in a timely and effective way; our ability to achieve cost reductions in the amounts and in the timeframes anticipated; the process technology transitions in our wafer fabrication facilities; and our ability to gain market share in high-growth global markets such as China, Latin America, India and Eastern Europe.Europe; Spansion’s ability to implement 300-millimeter wafer manufacturing capacity; and customer and market acceptance of Spansion^™ Flash memory products based on MirrorBit^™ and floating gate technology, including the ORNAND architecture.

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 2024 below and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission (SEC) reports and filings. We assume no obligation to update forward-looking statements.

General

We are a leading semiconductor company with manufacturing or testing 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 diverse product applications such as desktop and mobile personal computers, or PCs, workstations, servers,microprocessor solutions for the computing, communications equipment such as mobile telephones, and automotive and consumer electronics. Our products consist primarily of microprocessors and Flash memory devices. In addition, we offerelectronics markets. These solutions include embedded microprocessors for personal connectivity devices and specificother consumer markets. Prior to the closing of the initial public offering, or IPO, of Spansion Inc. on December 21, 2005, which is described in more detail below, we also manufactured and sold Flash memory devices through our formerly consolidated, majority owned subsidiary, Spansion LLC.

Effective June 30, 2003, we and Fujitsu Limited, a company incorporated in Japan, formed a Delaware limited liability company named FASL LLC to integrate AMD’s and Fujitsu’s Flash memory businesses. On June 28, 2004, FASL LLC changed its name to Spansion LLC. As part of the new joint venture, we and Fujitsu each contributed various assets to Spansion LLC and became Spansion LLC’s two members. The contribution of assets included certain intellectual property, equipment and real estate. We owned 60 percent of the membership interests of Spansion LLC, and Fujitsu owned 40 percent of the membership interests of Spansion LLC. Because Spansion LLC was our majority owned subsidiary, its results of operations, financial position and cash flows were consolidated with ours.

On December 21, 2005, Spansion Inc. closed its initial public offering, or IPO, of 47,264,000 shares of its Class A common stock as well as offerings of senior notes to institutional investors with an aggregate principal amount of $250 million and senior subordinated notes to us with an aggregate principal amount of $175 million. Shortly prior to the pricing of the IPO, Spansion LLC was reorganized into a corporate structure and became an indirect wholly-owned subsidiary of Spansion Inc. Following the IPO, we own 48,529,403 shares, or approximately 37.9 percent, of Spansion’s outstanding common stock. As of December 21, 2005, Spansion Inc. is an independent company and is no longer our majority owned subsidiary. Therefore, its financial position, results of operations and cash flows have been consolidated with ours only through December 20, 2005. We currently report our interest in Spansion’s results of operations using the equity method of accounting. As a result, our share of Spansion’s net income (loss) will impact our net income (loss). Also, from December 21, 2005, our investment in Spansion is reflected on our consolidated balance sheet in the “Net Investment in Spansion” line item.

This report generally reflects our structure at December 25, 2005, which is after Spansion’s IPO. However, because Spansion’s results of operations are consolidated with our results of operations for substantially all of 2005, and because Spansion’s results of operations can materially affect our results of operations, we include a discussion of the Flash memory market and Spansion’s Flash memory operations under this section entitled, “Business,” a discussion of the results of operations of our Memory Products segment through December 20, 2005 under the section entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 24 below, and risks and uncertainties that Spansion faces that could affect Spansion’s results of operations and correspondingly our results of operations under the section entitled, “Risk Factors,” beginning on page 54 below.

In connection with Spansion’s IPO, we entered into a Stockholders Agreement as of December 21, 2005, with Fujitsu and Spansion, which imposes certain restrictions and obligations on us and Fujitsu and our respective shares of Spansion’s common stock and provides for certain matters pertaining to Spansion’s management and governance. Pursuant to the Stockholders Agreement, neither we nor Fujitsu can transfer any shares of Spansion’s common stock, except to majority owned subsidiaries, until the earlier of December 21, 2006 or the conversion of the Class D common stock, which is a class of common stock owned by Fujitsu, into Class A common stock. In addition, neither we nor Fujitsu can transfer shares in an amount equal to or greater than one percent of the then outstanding common stock to any entity whose principal business competes with Spansion, without first obtaining the consent of the non-transferring party, such consent not to be unreasonably withheld after June 30, 2007. With the exception of board observer rights and stock registration rights, the Stockholders Agreement will terminate when each party’s aggregate ownership interest in Spansion falls below ten percent.

Additional Information

We were incorporated under the laws of Delaware on May 1, 1969.1969 and became a publicly held company in 1972. Since 1979 our common stock has been listed on the New York Stock Exchange under the symbol “AMD.” Our mailing address and executive offices are located at One AMD Place, Sunnyvale, California 94088, and our telephone number is (408) 749-4000. References in this report to “AMD,” “we,” “us,” “our,” or the “Company” shall meanmeans Advanced Micro Devices, Inc. and our consolidated subsidiaries, including, prior to December 21, 2005, Spansion LLCInc. (formerly Spansion LLC) and its subsidiaries, unless the context indicates otherwise.

Effective June 30, 2003, we established Spansion LLC, our 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 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.subsidiaries.

We post on the Investor Relations pagepages of our Web site,www.amd.com, a link to our filings with the SEC, our Principles of Corporate Governance, our Code of Ethics for our Chief Executive Officer, Chief Financial Officer, Corporate Controller and other senior finance executives, our “Worldwide Standards of Business Conduct,” which applies to our directors and all our employees, and the charters of our Audit, Compensation, Finance and Nominating and Corporate Governance 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 at:

Corporate.Secretary@amd.com. All these documents and filings are available free of charge. Please note that information contained on our Web site is not incorporated by reference in, or considered to be a part of, this report.

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 910 of our consolidated financial statements, beginning on page 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 20,107 below.

Our Industry

Semiconductors are critical components used in a variety of electronic products and systems. An integrated circuit, or 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 availability of low-cost semiconductors, together with increased customer demand for sophisticated electronic systems, has led to the proliferation of semiconductors. Today, virtually all electronic products use

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

Within the global semiconductor industry, during 2005 we primarily participateparticipated in twothree markets:

In addition,As a result of Spansion’s IPO on December 21, 2005, we offer embedded microprocessors for personal connectivityno longer directly participate in the Flash memory market. Moreover, we entered into a Non-Competition Agreement as of December 21, 2005, with Fujitsu and Spansion pursuant to which we agreed not to directly or indirectly engage in a business that manufactures or supplies standalone semiconductor devices (including single chip, multiple chip or system devices) containing only Flash memory. These non-competition obligations will last until the earlier of (i) the dissolution of Spansion, and specific consumer markets.(ii) two years after the date on which our ownership interest in Spansion is less than or equal to five percent.

Computation Products

The Microprocessor Market

A microprocessor is an 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 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 impacting microprocessor performance include memory size, data access speed and power consumption. Developments in circuit design and manufacturing

process technologies have resulted in significant advances in microprocessor performance over the past two decades. We 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 manufacturerswe must transition to new process technologies at a fast pace and offer higher-performance microprocessors in significantly greater volumes. TheyWe 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 ofOur microprocessors currently are designed with both 32-bit and 64-bit computing.processing capabilities. The bit rating of a microprocessor generally denotes the largest amountsize of numerical data that a microprocessor can handle in a single clock cycle.handle. 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.memory. 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.increase.

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 prices and performance characteristics of microprocessors and decreases in production costs resulting from advances in manufacturing process technology, as well as lower selling prices,in software operating systems and applications, and computer components and systems generally have increasedcombined to increase the demand for microprocessors over time. The greatest demand for our microprocessors today is from PC manufacturers. Factors that we believe will stimulate growth in the demand for microprocessors include lower-priced PC systems, enhanced product features, and strategic purchases of new PC systems to deploy new tools and 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 instruction set 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 NTMicrosoft^® Windows®, Windows 98 (and Windows predecessor operating systems), Linux, NetWare^®, Solaris and UNIX.

Desktop PCs.    Our microprocessors for desktop PCs consist of the following tiered product brands: AMD Athlon^™ 64 FX, AMD Athlon 64^™ and AMD Sempron^™ processors. In September 2003, we introducedWe designed the AMD Athlon 64 FX processor specifically for gamers, PC enthusiasts and digital content creators who require processors that can perform graphic-intensive tasks. We designed our AMD Athlon 64 microprocessor,processors for enterprises and sophisticated PC users that seek to access large amounts of data and memory. For value-conscious consumers of desktop and notebook PCs, we offer the first Windows-compatible, x86 architecture-based 64-bit PC processor.AMD Sempron microprocessors, which we designed to provide core computing needs at affordable prices. AMD Athlon 64 and AMD Athlon 64 FX 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 allow simultaneous 32-bit and 64-bit 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

In May 2005, we introduced our AMD Athlon 64 X2 dual-core processors for enterprisesdesktop PCs. These processors contain two CPU cores on one semiconductor die, which enables them to execute more operations simultaneously during each clock cycle. These processors offer users improved overall performance compared to single-core processors as well as improved performance-per-watt. The performance advantages of AMD Athlon 64 X2 dual-core processors are especially evident in multi-tasking environments where they can enable operating systems to prioritize and sophisticated PCmanage tasks from multiple software applications simultaneously. For example, users that seekare able to access large amountssimultaneously download audio files such as MP3s, burn a CD, check and write e-mail, edit a digital photo and run virus protection without compromising the performance of data and memory. Simultaneously with our introductiontheir PC. AMD Athlon 64 X2 dual-core

processors can also deliver performance improvements for “multithreaded” software applications by processing different parts of the software programs, or “threads,” simultaneously on two cores, thereby maximizing the performance of the application. We design the AMD Athlon 64 processor, we introduced theX2 dual-core processors for “prosumer” and digital media enthusiasts or other users who routinely run multiple processor-intensive software applications simultaneously. We expect sales of our AMD Athlon 64 FX processor,X2 dual-core processors to increase as software applications designed specifically for gamers, PC enthusiasts and digital content creators who require products that can perform graphic-intensive tasks. Our AMD Sempron microprocessors, which we introduced in July 2004, are designed for value-conscious consumersto take advantage of desktop and notebook PCs.the performance features of dual-core processors become increasingly available.

Mobile PCs.    Our microprocessors for the mobile computing market consist of mobile AMD Athlon 64 processors and 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 OEM customers incorporate our processors into a variety of 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.

In March 2005, we introduced AMD Turion^™ 64 mobile technology. Processors incorporating this technology represent our most advanced family of 32- and 64-bit Windows-compatible processors for notebook PCs, and provide performance improvements such as longer battery life, reduced heat generation, enhanced security and compatibility with current wireless and graphics solutions. We intendexpect to continue to investintroduce dual-core processors based on AMD Turion 64 mobile technology in our mobile microprocessor product portfolio with increasing emphasis on low-power computing.mid-2006.

Servers and Workstations.    Our x86 microprocessors for servers and workstations consist primarily of the AMD Opteron and AMD Athlon MP^™ processors. A server is a powerful computer on a network, often with multiple microprocessors working together, 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 such as computer-aided design.design and digital content creation. We introducedbased our first 64-bit microprocessor for servers and workstations, AMD Opteron, in April 2003. Like the AMD Athlon 64 processors, the AMD Opteron processors for servers and workstations are based on the AMD64 technology and are designed them to allow simultaneous 32-bit and 64-bit computing. AMD Opteron processors were the first processors to extend the industry-standard x86 instruction set architecture to 64-bit computing. AMD OpteronThese processors 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 processorsThey can also 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.

Dual-Core Processors.We also offer AMD Opteron processors for high-end embedded designs that require low-power and high-performance. For these designs, our low-power AMD Opteron processors deliver the same performance as their corresponding full-power parts, while offering the added benefit of reduced power consumption and thermal output. The target markets for these processors include standard servers and blade servers where lower power is needed to enable dense designs and in embedded controllers like those found in networking, mass storage and telecommunications. A blade server is typically used for a single, dedicated application (such as serving Web pages) and can be inserted into a space-saving rack with many other similar servers.

In April 2005, we introduced our dual-core AMD Opteron processors. Like our AMD Athlon 64 X2 dual-core processors, our dual-core AMD Opteron processors offer improved overall performance such as improved multithreading and multitasking, and improved performance-per-watt, which can reduce the operational costs related to power usage.

Our AMD Opteron, AMD Athlon 64, AMD Turion 64 and certain AMD Sempron processors are currently developingbased on AMD64 technology with direct connect architecture. Direct connect architecture connects an on-chip memory controller and I/O, or input/output, channels directly to one or more microprocessors cores. For dual-core processorprocessors, each core has its own dedicated cache, which is memory that is located on the semiconductor die. We believe this architecture, and in particular the integrated memory controller, enables substantially higher performance because memory can be accessed more directly rather than traversing a traditional front-side bus, which results in increased bandwidth and reduced memory latencies. We also designed the AMD64 architecture to enhance the security of a user’s computing environment by integrating security features that are designed to prevent the spread of certain viruses when enabled by the anti-virus features of current versions of certain

operating systems, including Linux, Microsoft^® Windows^® and Solaris operating systems. In addition, these processors support HyperTransport^™ technology, which is a high-bandwidth communications interface we initially developed, that enables substantially higher performance. We designed our AMD64-based processors to be fully compatible with the Microsoft Windows 64-bit operating system as well as other operating systems. We believe providesthat the backward compatibility of our AMD64-based processors will allow users to migrate more easily from current 32-bit operating systems and applications to 64-bit operating systems and applications on 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 workstations in mid-2005, followed by dual-core processors for the PC market in the second half of 2005.common hardware platform.

Chipsets.    We also sell chipset products primarily to support certain models of our AMD Opteron processors 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’sPCs subsystems and sends data from the microprocessor to all the input/outputinput, display 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.

Our 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 software applications begin leveraging the benefits of our 64-bit architecture. To that end, we work with Microsoft to incorporate 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 Windows XP 64-bit Extended Systems in the first half of 2005. We believe that the backward compatibility of our AMD64-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.Memory Products

The Flash Memory Market

Flash memory is an important semiconductor component used in electronic devices such as mobile phones, digital cameras, DVD players, set top boxes, MP3 players and automotive electronics such as navigation systems. Flash memory differs from other types of memory due to its ability to retain stored information after power is turned off. Most electronic products use Flash memory to store important program instructions, orknown as code, as well as multimedia content or other digital content known as data. Code storage retainsallows the basic operating instructions, operating system software or program code to be retained, which allows an electronic product to function, while data storage retainsallows digital content, such as multimedia files.files, to be retained. For example, Flash memory in camera phones retains both the program code, which enables users to turn on and operate the phone, and also stores data such as digital photos.

The Flash memory market can be divided into three major categories based on application.application: wireless, embedded and removable storage. 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 wireless category include mobile phones and smart phones and personal digital assistants, or PDAs.phones. Applications within the removable storage category include USB drives and memory cards. Applications within the embedded category include consumer electronics, automotive electronics, andPC peripherals, networking and telecom equipment such as hubs, switches(excluding mobile phones) and routers. Currently, we serveindustrial, medical and military products. Spansion participates in the wireless and embedded categories of the NOR Flash memory market with our Spansion Flash memory products.market.

There are two major architectures of Flash memory employed in the market today: NOR and NAND. NOR Flash memory, which is generally more reliable thanused for code and data storage in mobile phones and primarily for code storage in consumer electronics, and NAND Flash memory, which is primarily used for data storage in removable memory applications, such as compact Flash cards and less prone to data corruption, is typically used to store program code. NAND Flash memory has been generally less expensive to manufactureUSB drives, and is typicallyincreasingly being used in devices that require high-capacity data storage such as memory cards for digital camerassome high-end mobile phones and MP3 players.embedded applications. Within the Flash memory market, we sellSpansion sells NOR Flash memory products.

Flash Memory Products

Our SpansionSpansion’s Flash memory products encompass a broad spectrum of densities and features and are primarily designed to support code, or mixed code and data storage applications in the wireless and embedded categories of the Flash memory market. OurSpansion’s products are used in mobile 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 are based on two technologies today: single bit-per-cell floating gate technology and two bits-per-cell MirrorBit technology. Flash memory technology refers to the structure of an individual memory cell or transistor.

Floating Gate Technology.    Floating gate is the conventional memory cell technology that is utilized by most Flash memory companies today.today for both NOR and NAND products. A memory cell comprises a transistor having a source, a drain and a control gate. The control gate regulatesto regulate the current flow between the source and the drain, thereby defining whether the memory cell stores a “0” bit or a “1” bit by storing a charge in the cell storage medium. TheFloating gate is a memory cell technology in which the “floating gate” is a conductive storage medium between the control gate and the source and drain. It is referred to as a floating gate because it is electrically isolated or “floating” from the rest of the cell to ensure that stored charge does not leak away resulting in memory loss. OurSpansion’s products using floating gate are typically used for code storage and code execution as well as infor applications that take advantage of their ease of in-system re-programmability. In addition, floating gate technology has the ability to operate atrequiring very high read speeds, andextreme temperatures which we believe is optimal forand harsh environments such as automotive applications. Spansion Flash

Floating gate technology has traditionally stored one bit of data per memory products usingcell, referred to as single level cell floating gate technology, or SLC. To achieve higher densities and lower costs per bit, the industry has developed floating gate technology to store two bits of data per memory cell, referred to as floating gate multi-level cell, or MLC, technology. MLC floating gate stores one of four different quantities of charge, known as fractional charge storage, in the memory cell; these different quantities of charge are availabledecoded as equivalent to two bits of information. Spansion has chosen not to use MLC floating gate to achieve two bits per cell 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.its products.

MirrorBit Technology.Our Spansion    Spansion’s Flash memory products also include devices based on MirrorBit technology, ourwhich is a proprietary technology that stores two bits of data in a single memory cell thereby doubling the density, or storage capacity, of each memory cell 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, silicon nitride, without the need for a floating gate. NORWhile electrons stored on a floating gate will diffuse, those stored in a particular location of a MirrorBit nitride cell will stay in place. This enables MirrorBit to store charge in two physically distinct locations, rather than having to use four levels of charge like MLC floating gate Flash memory products based onmemory. Storing charge in a silicon nitride layer and eliminating the requirement for a floating gate simplifies the manufacturing process, which results in higher yields. MirrorBit technology require fewer wafer fabrication process steps to manufacture and have a simpler cell architectureoffers manufacturing cost advantages compared to similar products based on single-bit-per-cell or multi-level-cell (MLC)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 manufacture than similar products based on conventional floating gate single-bit-per-cell or MLC technology.

Our Spansion Flash memory products based on MirrorBit technology are available in densities rangingSpansion’s product portfolio ranges from 16 megabitsone megabit to 512 megabits. We believe the lower cost and higher yields of MirrorBit technology enable us to manufacture higher density NOR FlashWhile historically Spansion’s products at a cost that is not achievable using competing NOR MLChave been based on floating gate technology, the majority of its new product designs use MirrorBit technology. We believe our MirrorBit technology will allow usSpansion’s products have traditionally been designed to compete in certain portionssupport code, or mixed code and data storage applications and serve the wireless and embedded categories of the Flash 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.market. Some of its product families address both of these categories.

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 markets, while enabling us to enter and compete in new markets that have traditionally been served by NAND-based products, such as removable storage. During 2004, we also demonstrated the ability of MirrorBit technology to store four bits-per-cell, which we refer to as QuadBit, with a working proof-of-concept. If successful, we believe our QuadBit technology would enable us to target the higher density and lower cost portions of the removable storage category, which is currently served by vendors of NAND-based products.

Our Spansion Flash memory products implement different features and interfaces to address different customer requirements. These different features and interfaces may be supported on both floating gate and MirrorBit technology. For example, we provide products that support faster burst- 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 solutions. In addition, Spansion products may also include features 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 by allowing a device to conduct read, write or erase operations simultaneously.

Packaging is an integral element of our Spansion Flash memory products. We offer a range of 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 mechanical 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 our products are shipped as MCPs due to increasing demand for smaller mobile phones. Mobile phone manufacturers 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 and third-party non-Flash memory die, such as static RAM, or SRAM, or pseudo-static RAM, or pSRAM devices, which we purchase from outside vendors.Personal Connectivity Solutions

The Embedded Processor Market

In addition to our primary microprocessor and Flash memory markets, weWe also offer embedded microprocessors for personal connectivity devices and specific consumer markets. Personal connectivity devices can be classified into fivefour main segments: computer devices such as thin clients;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

We offer low-power, high-performance embedded microprocessor products for personal connectivity devices. Our products include low-power x86 and MIPS^® architecture-based embedded processors. We design these

embedded processors to address customer needs in non-PC markets where Internet 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 small form factor. Products that use our embedded processors are targeted for specific market segments using SoC design techniques.

Our embedded microprocessor products consist of the AMD Geode^™ family and the AMD Alchemy^™ family of 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 onto one integrated device. We target our AMD Geode processors at each of the five market 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.

Our AMD Geode processors exemplify our “x86 Everywhere” strategy, which is our goal for utilizing the x86 instruction set architecture to power a wide variety of devices in diverse places such as the home, office or car, in the supply chain, storage networks, and/or the data center. We believe that when a greater number of devices are standardized upon an x86-based platform, end-users can benefit from the ability to run their existing x86-based software on devices that interoperate with each other. This can accelerate and simplify the process of enabling faster, easier connectivity and data sharing between a wide range of products, from portable consumer electronics to PCs and servers.

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

We believe our personal 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 embedded microprocessors for personal connectivity devices that our customers can deploy quickly in their applications.

Other

In October 2004, we launched the Personal Internet Communicator (PIC), a consumer Internet access 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.markets. 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,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.

As of December 25, 2005, telecommunications companies and Internet service providers had introduced PIC products in countries such as Brazil, the Caribbean, India, Mexico, Panama and Turkey.We believereport sales of PIC products under our personal 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 embedded microprocessors for personal connectivity devices that our customers can deploy quickly in their applications.“All Other” category.

Marketing and Sales

We market and sell our products, other than Flash memory products, under 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 non-exclusive agreements. Our AMDagreements typically contain standard terms and conditions covering matters such as payment terms, warranties and indemnities for issues specific to our products such as third-party claims that our products when used for their intended purpose(s) infringe the U.S. patent rights or certain other intellectual property rights of a third

party. We also have various channel partnermarketing programs pursuant to which we may provide product information, training, marketing materials and marketing materials.funds.

Spansion Flash memoryWe market and sell our products are marketed and sold under the SpansionAMD trademark. WeOur product brands for microprocessors include AMD Athlon 64, AMD Athlon 64 FX and Fujitsu act as distributors of Spansion Flash memory productsAMD Sempron processor brands for desktop PCs, the AMD Opteron processor brand for servers and receive a commission from Spansion. We distribute Spansion products inworkstations and the same manner as we sellAMD Turion 64 mobile technology and AMD Sempron and AMD Athlon 64 processor brands for notebook PCs.Our product brands for our other products, through our direct sales forceembedded processors include AMD Alchemy solutions and through third-party distributors and independent sales representatives.

AMD Geode processors. We 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. We also sponsor teams such as the Discovery Channel Pro Cycling Team and the Scuderia Formula One, and we also have established relationships with associations such as NASCAR, each of who is a leader in their domain of expertise. We work with these groups to determine their technology needs and how our AMD64 technology can help support those needs. The goal of these sponsorships is to increase awareness of our brand and technology. In addition, we have cooperative advertising and marketing programs with our customers or third parties, including market development programs. Under theseour marketing development programs, eligible customers can use market development funds inas partial reimbursement for advertisements and marketing programs related to our products, subject to meeting defined criteria. Market development funds are earned by customers based on purchases of our products.

We also have the AMD LIVE! brand, through which we promote film, broadcast and music professional artists that use AMD64 technology. In January 2006 we announced our intention to extend the AMD LIVE! professional brand to consumers through multimedia desktop and notebook PCs. We expect these PCs to be available in mid-2006 and to offer users enhanced digital entertainment experiences, including the ability to connect, store, distribute and access digital media content throughout their home.

Spansion markets and sells its Flash memory products under the Spansion trademark. Fujitsu acts as the sole distributor of Spansion Flash memory products in Japan and also as a distributor throughout the rest of the world, other than Europe and the Americas, with limited exceptions. Our sales force responsible for selling Spansion Flash memory products and related personnel was transferred to Spansion in the second quarter of 2005. The transition of some related support functions, including booking and billing is still underway. Therefore, we currently continue to provide support to Spansion for incremental administrative services related to sales of Spansion Flash memory products. In addition, because Spansion does not yet have the capability to ship products and invoice customers, we continue to act as Spansion’s agent to provide logistical support services in connection with the sale of Spansion Flash memory products. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Matters—Spansion Agency Agreement.”

Customers

Our customers consist primarily of original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, and third-party distributors in both domestic and international markets. ODMs provide design and/or manufacturing services to branded and unbranded private label resellers. We generally warrant that products sold to our customers will, at the time of shipment, be free from defects in workmanship and materials and conform to our approved specifications. Subject to certain exceptions, we offer a three-year limited warranty to end users for microprocessor products that are commonly referred to as “processors in a box” and a one-year limited warranty to direct purchasers of all other microprocessor Flash memory and embedded processor products. Under limited circumstances, we may offer an extended limited warranty to direct purchasers of Flash memory products or of microprocessor products that are intended for systems targeted at the commercial and embedded end markets. Generally, our customers may cancel orders 30 days prior to shipment without incurring a penalty.

Original Equipment Manufacturers

We focus on three types of OEMs: multi-nationals, selected regional accounts and target market customers. Large multi-nationals and regional accounts are our core OEM customers. Our OEM customers for

microprocessors include numerous foreign and domestic manufacturers of servers and workstations, desktop and notebook PCs and PC motherboards. Our OEM customers for Flash memory products include foreign and domestic manufacturers of mobile telephones, consumer electronics, automotive electronics and networking equipment companies. Generally, OEMs do not

have a right to return our products other than pursuant to the standard limited warranty. However, from time to time we may agree to repurchase a portion of these products pursuant to negotiated terms.

No OEM customer accounted for ten percent or more of our consolidated gross sales in 2002. In 2003 and 2004, one of our customers, Fujitsu,2005, Hewlett-Packard Company accounted for approximately 13 percent and 2212 percent of our consolidated grossnet sales. FujitsuSales to Hewlett-Packard consisted primarily distributes Spansion Flash memory products. However, Fujitsu also is an OEM customer with respect toof products from our microprocessor products.Computation Products segment.

Third-Party Distributors

Our authorized distributors resell to sub-distributors and mid-sized and smaller OEMs and to electronic manufacturing service providers and other companies.ODMs. Typically, distributors handle a wide variety of products, including those that compete with our products. Distributors typically maintain an inventory of our products. In most instances, our agreements with distributors protect their inventory of our products against price reductions and provide return rights with respect to any product that we have removed from our price book or that is not more than twelve months older than the manufacturing code date. In addition, some agreements with our distributors may contain standard stock rotation provisions permitting limited levels of product returns.

No distributor accounted for ten percent or more of our consolidated gross sales in 2002. In each of 2003 and 2004, one of our distributors, Avnet, Inc.,2005, Fujitsu accounted for approximately 1315 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 grossnet sales. Fujitsu primarily distributesdistributed Spansion Flash memory products. However, Fujitsu is also an OEM customer with respect to products from our microprocessor products.Computation Products segment.

Competition

The IC 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. Our ability to compete depends on our ability to develop, introduce and sell new products or enhanced versions of existing products on a timely basis and at competitive prices, while reducing our manufacturing costs.

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 dominant competitor in the server segmentcategory of the microprocessor market. Because of its dominant position in the microprocessor market, Intel has 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 enable 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 our 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 adversely affected by Intel’s:

For example, Intel exerts substantial influence over PC manufacturers and their channels of distribution through various brand and marketing programs. Because of its dominant position in the microprocessor market, Intel has been able to control x86 microprocessor and PC system standards and dictates the type of products the microprocessor market requires of Intel’s competitors. Intel also dominates the PC system 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 are not designed to function with motherboards and chipsets designed to work with Intel microprocessors because our microprocessorspatent cross-license agreement with Intel does not extend to OEMs,Intel’s proprietary bus interface protocol. Therefore, 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.components that support our microprocessor offerings. 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 because they support each new generation of Intel’s microprocessors.

Currently, we do not 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 Intel’s proprietary bus interface 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 continued success in developing and maintaining relationships with infrastructure providers in order to ensure that these third-party designers and manufacturers of motherboards, chipsets and other system components support our microprocessor offerings, particularly our AMD64-based microprocessors.

Similarly, we offer OEMs and other 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 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 the future to the extent Intel reduces the prices for its products and as Intel introduces new competitive products. For example, in 2004, Intel introduced a 64-bit processor for servers and workstations that runs existing 32-bit software applications. These processors compete with our AMD Opteron microprocessors. In addition, Intel recently announced that it will offer dual-core 64-bit processors for the desktop market in the second quarter of 2005. Moreover, Intel currently manufactures certain of its microprocessor products on 300-millimeter wafers using 90-nanometer process technology, which can result in products that are higher performing, use less power and cost less to manufacture. We are currently transitioning to 90-nanometer process technology for microprocessor manufacturing, and we expect to transition to using 300-millimeter wafers in 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, 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 as existing manufacturers introduce new products, new manufacturers enter the market, industry-wide production capacity 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, NAND Flash memory vendors gained an increasing share of the overall Flash memory market in 2003 and 2004. If further significant improvements in NAND Flash memory technology occur in the future, applications currently using NOR Flash memory may transition to NAND 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 Personal Connectivity Solutions

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

Competition in the Flash Memory Market

Prior to the closing of Spansion’s IPO on December 21, 2005, we sold Spansion’s Flash memory products. With respect to Flash memory products, our principal competitors were Intel, Samsung Electronics Co., Ltd., STMicroelectronics N.V., Silicon Storage Technology, Macronix International Co., Ltd., Toshiba Corporation, Sharp Electronics Corp. and Renesas Technology Corp. In the future, Spansion’s principal competitors may also include the joint venture between Intel and Micron Technology. Most of these competitors market devices incorporating MLC floating gate technology. We believe many of Spansion’s other competitors plan to develop MLC technology. Some of these competitors, including Intel, Samsung, STMicroelectronics, Toshiba, Sharp and Renesas, are more broadly diversified than Spansion and may be able to sustain lower operating margins in their Flash memory business based on profitability of their other, non-Flash memory businesses.

Competition in the market for Flash memory devices is likely to increase as existing manufacturers introduce new products, new manufacturers enter the market, industry-wide production capacity increases and

competitors aggressively price their Flash memory products to increase market share. Competition may also increase if NOR memory vendors merge or otherwise consolidate their operations. Furthermore, Spansion faces increasing competition from NAND Flash memory vendors in some portions of the embedded and wireless market categories.

Moreover, competitors are working on a number of new technologies, including FRAM, MRAM, polymer and phase-change based memory technologies. If successfully developed and commercialized as viable alternatives to Flash memory, these technologies could pose a competitive threat to Spansion. In addition, Spansion and certain of its competitors have licensed Flash memory technology called NROM technology from a third party. NROM technology has similar characteristics to MirrorBit technology, which may allow these competitors to develop Flash memory technology that is competitive with MirrorBit technology.

To the extent that these or other competitive conditions adversely effect Spansion’s results of operations, our results of operations could also be adversely affected.

Research and Development

OurWe focus our research and development is focusedactivities on product design and system and manufacturing process development. We have devoted significant resources to product design and to developing and improving manufacturing process technologies. We also work with other industry leaders as well as public foundations, universities and industry consortia to conduct early stage research and development. For example, we conduct our microprocessor manufacturing process development primarily through our joint development agreement with IBM. We are also a joint venture partner with Infineon Technologies AG and Toppan Printing Co., Ltd. for research and development related to optical photomasks that we use during microprocessor manufacturing. We are also a member with Infineon, the Fraunhofer-Gesellschaft research institution, the German Ministry of Education and Research and the Free State of Saxony in the Fraunhofer Center for Nanoelectronic Technology, the CNT, in Dresden, Germany. The CNT is a joint development effort that conducts research and development projects that focus on developing improvements in semiconductor processing technology particularly on 300-millimeter technology.

We are currently focusing on delivering the next generation of microprocessors and on advanced manufacturing process technologies, including implementing 65-nanometer technology and continuing development of our 45-nanometer technology. In order to remain competitive, we must continue to maintain our technology leadership. In particular, we have madeAs of December 25, 2005, our total research and continue to make significant investmentsdevelopment staff consisted of approximately 2,700 employees. Because Spansion’s IPO closed on December 21, 2005, Spansion’s research and development staff is not included in manufacturing process technologies and in strategic relationships with industry-leading companies relating to manufacturing process technology development.

the number of employees listed above. Our research and development expenses for fiscal2005, 2004, and 2003 and 2002 were $1,144 million, $935 million and $852 millionmillion. For more information, see “Management’s Discussion and $816 million.Analysis of Financial Conditions and Results of Operations.”

Microprocessors

We conduct product and system 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 toIn December 2005, we announced the opening of the Korea Technology Development Center. The center will focus on helping local customers and partners develop customized embedded processor platforms for various digital consumer devices, including WiBro terminals, digital media broadcast solutions, personal media players, HDTV and Internet access solutions.

We conduct our microprocessor manufacturing process development some research and development takes place at Fab 30. We also have aactivities primarily through our joint development agreement with IBM. In August 2005, we and IBM pursuantexecuted the Second Amended and Restated “S” Process Development Agreement. Under this agreement, we agreed to which we work togethercontinue to jointly develop new microprocessor process technologies, including 32-nanometer, 22-nanometer and certain other advanced technologies, to be

implemented on silicon wafers. On September 15, 2004,Through this agreement, we amendedexpanded our alliance with IBM to also include laboratory-based research of emerging technologies such as new transistor, interconnect, lithography and die-to-package connection technologies. Furthermore, if we jointly develop bump technology, which is the technology associated with connecting an integrated circuit to a chip package, during the term of the agreement, these technologies will be licensed to us under the terms of the agreement.

The agreement also extended the joint development agreement and extended the relationship for an additional three years, from December 31, 20052008 to December 31, 2008. Under2011. However, the amendedcontinuation of capital purchases by IBM necessary for process development projects under the agreement we agreedpast December 31, 2008 is conditioned upon the approval of IBM’s board of directors. If IBM’s board of directors does not approve this agreement by September 30, 2007, either party has the right to continue to develop jointly new microprocessor process technologies.terminate the agreement effective December 31, 2008 without liability. 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 developmentthe agreement may be extended further by the mutual agreement of the parties and 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 can be terminated by either party upon 30 days written notice upon a failure of the other party to perform a material obligation thereunder. Under this agreement, research and development takes place in IBM’s Watson Research Center in Yorktown Heights, New York, the Center for Semiconductor Research at Albany NanoTech, and at IBM’s 300 millimeter manufacturing facility in East Fishkill, N.Y.

Under the agreement, we agreed to pay fees to IBM for joint development projects. The actual amounts to be paid to IBM are dependent upon the number of partners, including us and IBM, engaged in related development projects under the agreement. The fees for the joint development projects are generally payable on a quarterly basis over the term of the agreement. In addition, we agreed to pay IBM specified royalties upon the occurrence of certain events, including in the event that we sublicense the jointly developed process technologies to certain third parties or if we bump wafers for a third party. For more information on the fees paid or payable to IBM, see “Unconditional Purchase Commitments,” and “Risk Factors—We cannot be certain that our substantial investments in research and development of process technologies will lead to timely improvements in technology and equipment used to fabricate our products or that we will have sufficient resources to invest in the level of research and development that is required to remain competitive.”

Flash Memory

We conduct productProduct and system research and development activities for ourSpansion Flash memory products is conducted primarily in Sunnyvale, California and in Japan, with additional design and development engineering teams located in the United States, Europe and Asia. Currently, ourSpansion’s primary development focus with respect to Flash memory is on products based on MirrorBit technology for the wireless and embedded business markets. In addition, weResearch and development activities related to process development are conducted primarily at the Submicron Development Center in Sunnyvale, California, a manufacturing facility in Austin, Texas referred to as Fab 25 and at facilities in Aizu-Wakamatsu, Japan. Spansion is focusing on developing new non-volatile memory process technology, including 90-nanometer floating gate technologytechnologies and 90-nanometer MirrorBit technology utilizing three-layer copper interconnect. Our SDC facilityhas announced plans for development of 65-nanometer technology. Spansion 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 bealso participates in production on 90-nanometer process technologyalliances or other arrangements with external partners in the second halfarea of 2005.product technology and systems solutions.

Manufacturing, Assembly and Test Facilities

We own and operate 12 ownedfive manufacturing facilities, of which fivetwo are wafer fabrication facilities and seventhree 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, 2004,25, 2005, we manufactured our microprocessor products at Fab 30, primarily on 90-nanometer process technology. With respectWe started production at Fab 36 in late 2005, and we intend to our Flash memory products, JV3 employs mostly 110-nanometer technology in production. We are also manufacturingmake production shipments of wafers manufactured using 90-nanometer MirrorBit technology development wafers in Fab 25 and plan to be in production with this technology in the second halffirst quarter of 2005.2006. By the end of 2006, we intend to begin manufacturing using 65-nanometer technology. Our goal is to be substantially converted to 65-nanometer technology in Fab 36 by mid-2007. Use of 300-millimeter wafers can contribute to decreasing manufacturing costs per unit and helps increase capacity by yielding significantly more chips per wafer than 200-millimeter wafers. Use of smaller process geometries allows us to put more transistors on an equivalent size chip, which can result in products that are higher performing, use less power and/or cost less to manufacture. We use process technologiescurrently plan to add production output on a steady year-to-year basis and to keep fab utilization 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.high levels.

We have foundry arrangements with third parties for the production of our embedded processor and chipset products. In addition, in November 2004 we entered intohave 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 foundry arrangements with third parties for the production of our embedded processor and chipset products.

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.

Prior to December 21, 2005, we also owned and operated eight Flash memory manufacturing facilities through Spansion. Four of these facilities were wafer fabrication facilities and four were assembly and test facilities. These facilities are described in the charts below:

Wafer Fabrication Facilities

Assembly and Test Facilities

During 2005, Spansion’s products were manufactured on 110-, 130-, 170-, 200-, 230- and 320-nanometer process technologies. Process technologies at 200-nanometers and above were used to manufacture low to medium density products where improved cost structure is achieved by leveraging JV1 and JV2, which are substantially depreciated fabs. In 2005, 110-nanometer floating gate and MirrorBit technologies were deployed in production at Fab 25 and JV3. All of the manufacturing facilities produced 200-millimeter wafers. Spansion also has entered into an agreement with Taiwan Semiconductor Manufacturing Company to augment its internal production capacity.

Raw Materials

Our manufacturing processes require many raw materials, such as silicon wafers, IC packages, mold compound, substrates and various chemicals and gases, and the necessary equipment for manufacturing. We obtain these materials and equipment from a large number of suppliers located throughout the world.

Intellectual Property and Licensing

We rely on a combination of protections provided by contracts copyrights, patents, trademarks and other common lawintellectual property rights such as trade secret laws, to protect our products and technologies from unauthorized third-party copying and use. Intellectual property rights include copyrights, patents, patent applications, trademarks, trade secrets and maskwork rights. As of December 26, 2004,25, 2005, we had more than 6,5005,500 U.S. patents and had over 2,0001,250 patent applications pending in the United States. The number of issued patents and patent applications decreased from December 26, 2004 because we assigned a number of patents and patent applications to Spansion in connection with its IPO, as discussed below. 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. We do not believe that any individual patent, or the expiration thereof, is or would be material to our business.

In connection with the formation of Spansion LLC as of June 2003, we and Fujitsu transferred to Spansion various intellectual property rights pursuant to an Intellectual Property Contribution and Ancillary Matters Agreement, or IPCAAMA. Under the IPCAAMA, Spansion became the owner or joint owner with each of us and Fujitsu, of certain patents, patent applications, trademarks and other intellectual property rights and technology. We reserved rights, on a royalty free basis, to practice the contributed patents and to license these patents to our affiliates and successors-in-interest. We also have the right to use the jointly-owned intellectual property for our internal purposes and to license such intellectual property to others to the extent consistent with our non-competition obligations to Spansion.

In May 2001,addition, for as long as our ownership interest in Spansion remains above a specific minimum level, Spansion is required to identify its technology to us and to provide copies of and training with respect to that technology. Spansion also granted a non-exclusive, perpetual, irrevocable, fully paid and royalty-free license of its rights in this technology to us. We may grant licenses under Spansion’s patents, provided that these licenses are of no broader scope than, and are subject to the same terms and conditions that apply to, any license of our patents granted in connection with such license, and the recipient of such license grants to Spansion a license of similar scope under its patents.

Under the IPCAAMA, for as long as we signedcontinue to hold a majority of shares entitled to vote for the election of Spansion’s directors, we must enforce our applicable patents to minimize, to the extent reasonably possible, any of Spansion’s losses for the infringement of third party patents. However, the manner in which we enforce our patents, including which patents we enforce, is left to our discretion.

Effective with the closing of Spansion’s IPO, we and Fujitsu transferred additional patents and patent applications to Spansion. The patents that we transferred included patents and patent applications covering Flash memory products and technology, the processes necessary to manufacture Flash memory products, and the operation and control of Flash memory products.

We also have a patent cross-license agreement 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 on June 30, 2013, unless earlier terminated upon 30 days notice following a change of control of the other party. We also have a patent cross-license agreement with Spansion. The patents and patent applications that are licensed are those with an effective filing date prior to the termination of the patent cross-license agreement. The agreement will automatically terminate on the later of June 30, 2013 and the date we sell our entire equity interest in Spansion. The agreements may be terminated by a party on a change in control of the other party or its semiconductor group.

In addition, as is typical in the semiconductor industry, we have numerous cross-licensing and technology exchange agreements with other companies under which we both transfer and receive technology and intellectual property rights. One such agreement is the patent cross-license agreement with Intel Corporation under which is effective as of January 1, 2001. Under this agreement we granted each other a non-exclusive license under each party’s patents for the manufacture and sale of semiconductor products worldwide. We pay Intel a royalty for certain licensed microprocessor products sold by us or any AMD affiliate anywhere in the world. The license terminatesapplies to each party’s patents that have a first effective filing date during the capture period, which is the period from January 1, 2001 through January 1, 2010. Either party may terminate the agreement if the other party commits a material breach of the agreement and does not correct the breach within 60 days after receiving written notice thereof, In addition, either party may terminate the agreement upon 60 days written notice in January 2010.

In connection with the formationevent 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 license to all semiconductor patents wholly owned by usthe liquidation 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 or 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 so 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 patents 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 direct or indirect beneficial ownership interest in Spansion decreases to fifty percent or less, we will no longer be contractually obligated to defend Spansion in connection with such third party claims.

Effective June 30, 2003, we entered into a patent cross-license with Fujitsu whereby each party was granted a non-exclusive license under certainwinding up of the other party’s respective semiconductor-related patents. This patent cross-license agreement terminates uponbusiness, or in the tenth anniversaryevent of the agreement, unless earlier terminated upon 30 days notice following a change of control. For purposes of our agreement with Intel, change of control means a transaction or a series of related transactions in which (i) one or more related parties who did not previously own at least a 50 percent interest in a party obtain at least a 50 percent interest in such party, and, in the

reasonable business judgment of the other party. In addition, we entered into numerous cross-licensingparty, such change in ownership will have a material effect on the other party’s business, or (ii) a party acquires, by merger, acquisition of assets or otherwise, all or any portion of another legal entity such that either the assets or market value of such party after the close of such transaction are greater than one and technology exchange agreements with other companies under which we both transfer and receive technology and intellectual property rights.one third of the assets or market value of such party prior to such transaction.

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, whichtime. These orders or agreements may be revised or canceled without penalty. Generally, in light of current industry practice and experience and the fact that substantially our entire order backlog is cancelable, 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, 2004,25, 2005, we had approximately 8,3009,860 employees. Spansion’s employees and Spansion 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 allare not included in the number of these individuals will become employees of Spansion or its subsidiaries in 2005. Certain employees of Spansion Japan are represented by a union.listed above. We believe that our relationship with our employees is good.

Raw Materials

Our 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 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 limited number of foreign companies to supply the majority of certain types of IC packages we purchase. Similarly, we purchase commercial non-Flash memory die, such as SRAM and pSRAM, from third-party suppliers and incorporate these

die into Spansion 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 are unable to procure certain of these materials, we may have to reduce our manufacturing operations. Such a reduction could have a material adverse effect on us.

In June 2002, we formed Advanced Mask Technology Center GmbH and Co. KG, or AMTC, and Maskhouse Building Administration GmbH and Co. KG, 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 ICs. The purpose of AMTC is to conduct research, development and pilot production of optical photomasks for advanced lithography technology. AMTC has commenced pilot production of optical photomasks and has provided test photomasks to Fab 30 for qualification and production photomasks. We intend to procure advanced photomasks from 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 business operations and products are regulated by domestic and international environmental laws and regulations. These regulations include limitations on discharge of pollutants to air, water, and soil; remediation requirements; product chemical content limitations; manufacturing chemical use and handling restrictions; pollution control requirements; waste minimization considerations; and requirements addressing treatment, transport, storage and disposal of solid and hazardous wastes. If we fail to comply with any of the applicable environmental regulations we may be subject to fines, suspension of production, alteration of our manufacturing processes, import/export restrictions, sales limitations, and/or criminal and civil liabilities. Existing or future regulations could require us to procure expensive pollution abatement or remediation equipment; to modify product designs; or to incur other expenses to comply with environmental regulations. Any failure to adequately control the use, disposal or storage, or adequately restrict the discharge of hazardous substances could subjectexpose us to future liabilities andthat 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.

Environmental laws are complex, change frequently and have tended to become more stringent over time. For example, the European Union has enacted in recent years restrictions on the use of lead, among other chemicals, in electronic products, which affects semiconductor packaging. Other regulatory requirements potentially affecting our manufacturing processes and the design and marketing of our products are in development throughout the world. While we have budgeted for foreseeable associated expenditures, we cannot assure you that future environmental legal requirements will not become more stringent or costly in the future. Therefore, we cannot assure you that our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past and future releases of, or exposure to, hazardous substances will not have a material adverse effect on us.

ITEM 1A.    RISK FACTORS

Disclosure regarding the most significant factors that may adversely affect our business, operations, industry or financial position or our future financial performance is set forth under the section entitled, “Risk Factors,” beginning on page 54 below.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

We have not received any written comments that were issued more than 180 days before December 25, 2005, the end of the fiscal year covered by this report, from the Securities and Exchange Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934 that remain unresolved.

ITEM 2.    PROPERTIES

OurAt December 25, 2005, we owned principal engineering, manufacturing, warehouse and administrative facilities (excluding Spansion) comprise approximately 3.7 million square feet and are located in the United States, Germany, Singapore China and Malaysia. ApproximatelyThese facilities totaled approximately 2.8 million square feet. Of this amount, 2.2 million square feet were located in Dresden, Germany and were used primarily for wafer fabrication, research and development, and administrative offices.

In some cases, we lease all or a portion of this space is in buildingsthe land on which these facilities are located. Specifically, 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,facilities.In addition, Fab 30 and we lease the building for our microprocessor assembly and test facility in Suzhou, China. We acquiredFab 36 are located on approximately 9.7 million square feet of land in Dresden, Germany forland. Of this amount, Fab 30. In August 2004, we transferred36 owns approximately 5.4 million square feet, toand both the facility and the land are encumbered by a lien securing the obligations of our German Subsidiary,subsidiary, AMD Fab 36 Limited Liability Company & Co. KG or AMD(AMD Fab 36 KG, for Fab 36. Fab 36 andKG), the land owned by AMD Fab 36 KG is encumbered by a lien which will secure AMD Fab 36 KG’s obligations underentity that owns the Fab 36 Term Loan.assets, under its EUR 700 million term loan facility agreement with a consortium of banks in connection with the Fab 36 project, (Fab 36 Loan Agreements.) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fab 36 Term Loan and Guarantee and Fab 36 Partnership Agreements.”

Spansion’s principal engineering, manufacturing and administrative facilities compriseAs of December 25, 2005, we also leased approximately 4.4 million square feet and are located in the United States, France, Japan, Korea, Malaysia, Thailand and China. Approximately 4.21.8 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 leaseuse, including 26 sales office facilities in 21 locations globally, totaling approximately 200,000 square feet. These facilities are generallyoffices located in commercial centers near our customers, principally in the United States, Latin America, Europe and the Asia region.Asia. These leases expire at varying dates through 2018.

We also 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 75,000270,000 square feet of leased administrative officebuilding space in Austin, Texas.that is currently vacant. We continue to have lease obligations with respect to these facilities ranging from 18 to 24 months, and wethis space that expire at various dates through 2011. We are actively marketing these facilitiesthis space for sublease. We anticipate that Spansion will lease approximately 71,000 square feet of this building space in 2006.

OurIn April 2005, we announced plans for a new campus for design and Spansion’s leases cover facilitiesadministrative functions to be developed on approximately 58 acres in Austin, Texas. We expect that the campus will consist of approximately 825,000 square feet and will include four office buildings, garage structures and a common building to be used for an employee cafeteria, fitness center and conference space. We intend to incorporate advanced environmentally sensitive building techniques and materials during the design, development and construction process and to concentrate development to approximately 33 of the available 58 acres. The remainder of the land would remain undeveloped. We expect construction of the new campus to begin in 2006 with expiration terms of generally onerelocation to 20 years. occur during 2007.

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. We believe that our existing facilities are suitable and adequate for our present purposes, and that, except as discussed above, the productive capacity of such facilities is substantially being utilized or we have plans to utilize it.

ITEM 3.    LEGAL PROCEEDINGS

AMD v. Intel Corporation and Intel Kabushiki Kaisha, Civil Action No. 05-441, in the United States District Court for the District of Delaware.

On June 27, 2005, we filed an antitrust complaint against Intel Corporation and Intel Kabushiki Kaisha, collectively “Intel,” in the United States District Court for the District of Delaware under Section 2 of the Sherman Antitrust Act, Sections 4 and 16 of the Clayton Act, and the California Business and Professions Code. The complaint alleges that Intel has unlawfully maintained a monopoly in the x86 microprocessor market by engaging in anti-competitive financial and exclusionary business practices that in effect limit Intel’s customers’ ability and/or incentive to deal with AMD. The complaint alleges anti-competitive business practices, including:

We have requested the following findings and remedies:

Intel filed its answer on September 1, 2005.

Other Related Proceedings

On June 30, 2005, our Japanese subsidiary, AMD Japan K.K., or AMD Japan, filed an action in Japan against Intel Corporation’s Japanese subsidiary, Intel Kabushiki Kaisha, or Intel K.K., in the Tokyo High Court and the Tokyo District Court for damages arising from violations of Japan’s Antimonopoly Act.

Through its suit in the Tokyo High Court, AMD Japan seeks US$50 million in damages, following on the Japan Fair Trade Commission’s (JFTC) findings in its March 8, 2005 Recommendation, or the JFTC Recommendation, that Intel K.K. committed violations of Japan’s Antimonopoly Act. The JFTC Recommendation concluded that Intel K.K. interfered with AMD Japan’s business activities by providing large amounts of funds to five Japanese PC manufacturers (NEC, Fujitsu, Toshiba, Sony, and Hitachi) on the condition that they refuse to purchase AMD’s microprocessors. The suit alleges that as a result of these illegal acts, AMD Japan suffered serious damages, losing all of its sales of microprocessors to Toshiba, Sony, and Hitachi, while sales of microprocessors to NEC and Fujitsu also fell precipitously.

Through its suit in the Tokyo District Court, AMD Japan seeks US$55 million in damages for various anticompetitive acts in addition to those covered in the scope of the JFTC Recommendation. The suit alleges that these anticompetitive acts also had the effect of interfering with AMD Japan’s right to engage in normal business and marketing activities.

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 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.orders during the term of such agreements. Under these agreements other parties have assumed most of the foreseeable costs as well as the leadprimary role in conducting remediation activities under the orders. We remain responsible for theseadditional costs beyond the scope of the agreements as well as all remaining 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 $3.7$4.2 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. 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 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 February 22, 2005,17, 2006, there were 7,6537,330 registered holders of our common stock. The following tables sets forth on a per share basis the high and low intra-day sales prices on the New York Stock Exchange for our common stock for the periods indicated:

We have never paid any cash dividends on our common stock and may be restricted from doing so pursuanthave no present plans to the loan agreement that we entered into with several domestic financial institutions.do so. In addition, under the July 2003 Spansion Term Loan, Spansion is prohibited from paying dividends to us in certain circumstances, and under the Fab 36 Loan Agreements, AMD Fab 36 KG, and the affiliated limited partners are generally prohibitedis restricted by its borrowing arrangement from paying anycash dividends to AMD, or other paymentsproviding loans or advances to us. See “Management’s Discussion and AnalysisAMD, in certain circumstances, without the prior written consent of Financial Condition and Results of 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:lenders.

The information under the caption, “Equity Compensation Plan Information,” in our Proxy Statement for our Annual Meeting of Stockholders to be held on April 28, 2005 (2005May 5, 2006 (2006 Proxy Statement) is incorporated herein by reference.

During 2004,the period covered by this report, we did not sell any of our equity securities that were not registered under the Securities Act of 1933, as amended, except as previously disclosedamended.

We have an ongoing authorization from the Board of Directors to repurchase up to $300 million worth of our common stock over a period of time to be determined by usmanagement. These repurchases may be made in a Current Report on Form 8-Kthe open market or a Quarterly Report on Form 10-Q.in privately negotiated transactions from time to time in compliance with applicable rules and regulations, subject to market conditions, applicable legal requirements and other factors. We are not required to repurchase any particular amount of our common stock and the program may be suspended at any time at our discretion. During the fourth quarter of 2005, we did not repurchase any of our equity securities.

ITEM 6.

SELECTED FINANCIAL DATA

Five Years Ended December 26, 200425, 2005

(In thousands except per share amounts)

June 30, 2003, the date of formation of the Spansion LLC (formerly known as FASL LLC). Prior to June 30, 2003 we accounted for our interest in the predecessor manufacturing joint venture under the equity method. Therefore, consolidated Spansion results and arestatement of operations data for 2004 is not comparable to 2003, nor is 2003 data completely comparable to prior years.years’ data. Minority interest consists primarily of the elimination of Fujitsu Limited’s share of the income or loss from(loss) of Spansion. Fujitsu the holder ofheld a 40 percent minority ownership interest in Spansion.Spansion, prior to the IPO of Spansion Inc.

(2)(3)

Interest income and other income (expense), 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 DresdenFab 30 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 26, 200425, 2005 and December 28, 2003,26, 2004, and for each of the three years in the period ended December 26, 2004,25, 2005, 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 ICs that are used in diverse product applications such as desktop and mobile PCs, workstations, servers,microprocessors for the computing, communications equipment such as mobile phones and automotive and consumer electronics. Our products consist primarily of microprocessors and Flash memory devices.electronics markets. We also sell embedded microprocessors for personal connectivity devices and other consumer markets. Prior to the closing of the initial public offering, or IPO, of Spansion Inc., our formerly consolidated majority owned subsidiary, on December 21, 2005, which is described in more detail below, we also manufactured and sold Flash memory devices through, Spansion (formerly Spansion LLC).

In 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 their 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 ourTotal net sales for the Computation 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 streaming video, on their mobile phone. We also introduced floating gate memory products manufactured on 110-nanometer technology and substantially completed the integration2005 of our and Fujitsu’s Flash memory operations in Spansion.

We also continued to devote 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 the fourth quarter, we returned to a full year of profitability. Total$5.8 billion increased 17 percent compared with net sales for 2004 of $5.0 billion increased 42 percent compared withbillion. This growth was driven by the performance of our Computation Products segment where net sales of $3.5$3.8 billion increased by 50 percent compared to 2004, due to increased unit sales and average selling prices. We believe that our strategy of developing new generations of products based on our customers’ needs contributed to accelerating customer and end-user adoption of our microprocessors across all geographies.

In particular, our introduction of AMD Turion 64 processors for 2003. This increasenotebook PCs in March 2005, AMD Opteron dual-core processors for servers and workstations in April 2005, and AMD Athlon 64 dual-core processors for desktop PCs in May 2005 helped drive increasing customer adoption of our products. Moreover, we believe that our sales growth in each of our product lines outpaced the industry, resulting in increased market share for us. Sales of products for the server market was driven primarilythe fastest growing part of our business in 2005, followed by increased sales of microprocessorsproducts for notebook PCs and Flash memorysales of products across all geographies as well asfor desktop PCs. Increasing demand from enterprises for our products allowed us to add a number of new customers. As a result, 90 percent of the effectstop 100, and more than 45 percent of consolidatingthe top 500 of theForbes Global 2000 companies or their subsidiaries use AMD64 technology.

On December 21, 2005, Spansion Inc. completed its IPO of 47,264,000 shares of its Class A common stock. Prior to the IPO, Spansion was our majority owned subsidiary and its financial position, results of operations and cash flows were consolidated with ours. However, due to Spansion’s IPO, our ownership interest in Spansion was diluted from 60 percent to 37.9 percent. As a result, we no longer exercise control over Spansion and we no longer consolidate Spansion’s financial position, results of operations or cash flows with ours. We began applying the equity method of accounting to reflect our investment in Spansion and our share of Spansion’s net income from December 21, 2005 based on our remaining equity interest, which is currently 37.9 percent.

The overall growth of our annual net sales was partially offset by the results of our Memory Products segment. In 2005, net sales of our Memory Products segment of approximately $1.9 billion decreased 18 percent compared to net sales of approximately $2.3 billion in 2004. In 2005, we consolidated Spansion’s results of operations which includein our Memory Products segment only through December 20, 2005 because of Spansion’s IPO. Therefore, approximately $104 million of Spansion’s net sales from December 21, 2005 through December 25, 2005 were excluded from our Memory Products net sales in 2005. Other factors that contributed to the decline in Memory Products net sales included aggressive pricing by Spansioncompetitors due in most cases to Fujitsu,oversupply of products in the NOR Flash memory market and a delay in Spansion’s qualification of a Flash memory product for the twelve months in 2004 as compared to six months in 2003.

Our transition to smaller manufacturing process geometries for both our microprocessor and Flash memory productswireless category, which contributed to lower manufacturing costs per unit and higher overall gross margins, which, along with increasedMemory Products net sales contributedduring the first half of 2005.

During 2005, we reduced our debt and capital lease obligations by $489 million, which includes the deconsolidation of $370 million of Spansion’s indebtedness to third parties as a net incomeresult of $91Spansion’s IPO.

Moreover, as of December 25, 2005, our cash, cash equivalents and short-term investments totaled $1.8 billion, which includes cash proceeds of approximately $260 million in 2004from Spansion’s repayment of amounts outstanding under loans due to us, compared to a net loss$1.2 billion as of $274 million in 2003.December 26, 2004.

We also substantially completed the construction and initial facilitization of Fab 36, our 300-millimeter wafer fabrication facility in Dresden, Germany and we are currentlyGermany. We intend to make production shipments of wafers manufactured using 90-nanometer technology in Fab 36 in the processfirst quarter of installing equipment. We believe2006 and to begin manufacturing using 65-nanometer technology by the new capacity provided by this facility, which we expectend of 2006. Our goal is to be substantially converted to 65-nanometer technology in volume production in 2006, will allow us to satisfy anticipated demand for our microprocessors.

However, in 2004,Fab 36 by mid-2007. The additional capacity gained through the cyclical Flash memory market posed unique challenges for us. In the second halfuse 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 andlarger 300-millimeter wafers plays 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 channel 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 delayimportant role in our qualification of a Flash memory productgrowth plans for the wireless category contributednext several years. We plan to lower Memory Products net sales during the fourth quarter of 2004.add production output on a steady year-to-year basis, while also keeping fab utilization at consistently high levels.

For 2005,2006, we anticipate further growth in both annual net sales and market share. We believe critical success factors include: continuinginclude our ability to: continue to increase market acceptance of our AMD64 technology, particularly in the enterprise segment; taking products based on our second-generation MirrorBit technology to marketby business enterprises, including small and effectively ramping such products to mass production on a timely basis; strengtheningmedium businesses, as well as large enterprises, academic institutions and government institutions; strengthen our relationships with key customers and establishingsuppliers and establish relationships with new customers and suppliers that are industry leaders in their markets; successfully developingdevelop and continuing to transition to the latest manufacturing process technologies for both our microprocessortechnologies; ramp the production at Fab 36 and Flash memory products; developingat a third-party foundry on a timely basis in response to market requirements; develop and introducingintroduce new microprocessor products for the mobile, server and workstation markets, including dual-core processors, on a timely basis and increasingachieve efficient and timely volume production of these products; extend our shareportfolio of those markets; developingx86 technology from the traditional PC and introducing new Flash memoryserver markets into embedded applications in such markets as storage subsystems, networking and telephony equipment, handheld computing devices, computation and office equipment products, onand consumer electronics; design and deliver products that meet the demands of consumers as digital content becomes increasingly used with a timely basis; controlling costs; increasing the adoptionvariety of MirrorBit technology;connected digital devices; and expandingcontinue to expand our participation in high-growth global markets, including China, Latin America, India and Eastern Europe.markets.

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 U.S. generally accepted United 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. 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 actual historical sales returns, allowances, historical price reductions, market activity, and other known or anticipated trends and factors. These 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. InventoriesGenerally, inventories on hand in excess of forecasted demand of generallyfor the next 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. 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 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 towhich also reduces the extentcarrying basis of the presentrelated asset(s). The new carrying value of anticipated net cash flows attributable to the assetrelated asset(s) is less than the asset’s carrying value, which we depreciatedepreciated over the remaining estimated useful life of the asset.asset(s). 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. Our remaining restructuring accruals include estimates pertaining to facility exit costs and subleasing assumptions resulting from exiting certain facilities. We review these 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 againstAs of December 25, 2005, all of our U.S. deferred tax assets, net of deferred tax liabilities based on past performance andare subject to a full valuation allowance, which was initially established in the likelihoodfourth quarter of 2002. The realization of our deferred taxthese assets is dependent on substantial future taxable income which, at the time.December 25, 2005, in management’s estimate, is not more likely than not to be achieved. 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 of2005, the valuation allowance was utilizedincreased primarily due to the continuation of start-up losses at Fab 36 in Germany net of utilization of valuation allowance as a result of net operating profits.profits in the U.S. If we laterin the future 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.operating results. Such benefits would be recorded on the income tax (benefit) 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 of our uncertain tax positions 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.

Results Ofof Operations

In 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 Aizu-Wakamatsu, Japan. Effective June 30, 2003, we and Fujitsu 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 this transaction, we began consolidating Spansion’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 Spansion 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 Spansion’s results of operations. Accordingly, our operating results for the years ended December 26, 2004 and December 28, 2003 are not fully comparable with our results for prior periods. Also, because we have a 60 percent controlling interest in Spansion, Fujitsu’s 40 percent share in the net income (loss) of Spansion is reflected as a minority interest adjustment to our consolidated financial statements. This minority interest adjustment does not correspond to operating income (loss) of our Memory Products segment because operating income (loss) for our Memory Products segment includes operations incremental to those of Spansion. In addition, the minority interest calculation is based on Spansion’s net income (loss) rather than operating income (loss).

We review and assess operating performance using segment revenues and operating income (loss) before interest, taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on managementmanagement’s 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 segment, which consisted of fees for products sold to Vantis Corporation, our former programmable logic devices subsidiary, and Legerity Inc., our former voice communication products subsidiary.

Beginning in the third quarter ofEffective June 30, 2003, we changedand Fujitsu executed agreements to integrate our Flash memory operations including our existing joint manufacturing venture, Fujitsu AMD Semiconductor Limited, or FASL. FASL was contributed to a new entity, Spansion LLC (formerly known as FASL LLC), which was owned 60 percent by us and 40 percent by Fujitsu. As a result of this transaction, we began consolidating Spansion’s results of operations on June 30, 2003. Prior to June 30, 2003, we accounted for our share of FASL’s operating results under the equity method.

As a result of the formation of Spansion LLC effective June 30, 2003, we reorganized our operating segments and created the following two reportable segments to segments:

In addition to our reportable segments, we also have the All Other category that is not a reportable segment. It includes several operating segments as well as certain operating expenses and credits that are not allocated to any of our operating segments because our Chief Executive Officer, who is our Chief Operating Decision Maker, or CODM, does not consider these operating expenses and credits in evaluating the operating performance of our operating segments.

In the fourth quarter of 2004, we began presenting our Personal Connectivity Solutions operating segment as a separate reportable segment because the operating loss from this operating segmentsegment’s operating losses exceeded 10 percent of the combined profitoperating income (loss) of all our operating segments and thereforesegments. Therefore this operating segment became a reportable segment under the requirements of Statement of Financial Accounting Standards 131 “Segment Reporting” (FAS“Disclosures about Segments of an Enterprise and Related Information” (SFAS 131). Previously, we included our Personal Connectivity Solutions operating segment in our All Other category. The Personal Connectivity Solutions segment includes primarily low power, high performancelow-power, high-performance x86 and MIPS architecture-based embedded microprocessors. In addition to our three reportable segments, we also have themicroprocessors and products for global commercial and consumer markets.

Our All Other category also includes our PIC products, which were reviewed separately by our CODM beginning in the third quarter of 2005. PIC is not a reportable segment and which includes certainbecause the net operating expenses and credits that are not allocated toresults for the PIC operating segment constitute less than 10 percent of the combined operating income of all our operating segments. Prior to 2005, revenue from sales of PIC products was not material.

As a result of Spansion’s IPO in December 2005 and, our deconsolidation of Spansion’s operating results effective December 21, 2005 discussed above, we allocated profit sharing and bonus expenses to the specific operating segments that earned them. Therefore, these expenses are no longer included in the All Other category.

The results of operations for our operating segments presented and discussed in this section follow our segment structure discussed above, and all prior period segment information hasamounts have been reclassified to conform to the current periodyear segment presentation. However,

As a result of Spansion’s IPO, our financial results of operations include Spansion’s financial results of operations as a consolidated subsidiary only through December 20, 2005. From December 21, 2005, Spansion’s operating results and financial position are not consolidated as part of our financial results. Instead, we applied the equity method of accounting to reflect our share of Spansion’s net income from December 21, 2005 through December 25, 2005. Accordingly, our operating results, including the segment operating results for the Memory Products segment, for the year ended December 25, 2005 are not fully comparable with our results for 2004.

In addition, because Spansion did not exist prior to Spansion’s IPO we held a 60 percent controlling interest in Spansion, Fujitsu’s 40 percent share in the net income (loss) of Spansion was reflected as a minority interest adjustment to our consolidated financial statements through December 20, 2005. This minority interest adjustment does not correspond to operating income (loss) of our Memory Products segment because operating income (loss) for our Memory Products segment includes operations incremental to those of Spansion. Furthermore, the minority interest calculation is based on Spansion’s net income (loss) rather than operating income (loss).

Prior to the formation of Spansion LLC on June 30, 2003, the results of operations for periods prior to June 30, 2003 did not include the consolidation of Spansion’s results of operations. Accordingly, the segment operating information for the Memory Products segment for the year ended December 26, 2004, is not fully comparable to the reclassified segment information for the prior periodsperiod presented.

We use a 52- to 53-week fiscal year ending on the last Sunday in December. The years ended December 25, 2005, December 26, 2004 and December 28, 2003, and December 29, 2002, each included 52 weeks.

The following is a summary of our net sales and operating income (loss) by segment and category for 2005, 2004 2003 and 2002.2003.

Computation Products Group

Net sales of our Computation Products of $3.8 billion for 2005 increased 50 percent compared to net sales of $2.5 billion for 2004 primarily due to an increase of 37 percent in unit shipments and an increase of nine percent in average selling prices. Unit shipments increased due to greater demand for desktop, mobile and server products across all geographic regions, particularly in North America and Greater China. In addition, our introduction of AMD Turion 64 processors for notebook PCs in March 2005, AMD Opteron dual-core processors for servers and workstations in April 2005 and AMD Athlon 64 dual-core processors for desktop PCs in May 2005 helped drive increasing customer adoption of our products. The increase in average selling prices was

primarily due to increased sales of our higher priced, high-performance AMD64-based processors which contributed to a richer product mix.

Computation Products net sales of $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 salesoperating income of $2.0 billion$617 million in 20032005 increased 12by 132 percent compared to net salesoperating income of $1.8 billion$266 million in 2002.2004. The increase was primarily due to a 1550 percent increase in microprocessor unit shipments due primarily to increased demand from our OEM customers. The increase in net sales, was partially offset by a decline36 percent increase in operating expenses. Operating expenses increased $914 million primarily due to a 37 percent increase in unit shipments, an increase of four percent$205 million in the average selling prices.research and development costs, and an increase of $110 million in marketing and cooperative advertising costs. The increase in research and development costs was due primarily to an increase of $103 million in product design and process improvement costs for new generations of our microprocessors and a $96 million increase in Fab 36 start-up costs.

Computation Products operating income of $303$266 million in 2004 increased by $326$298 million compared to an operating loss of $23$32 million in 2003. The increase was primarily due to a 29 percent increase in net sales, partially offset by a 1214 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,processors, 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 siliconproduct design and engineering costs related to future generations of our microprocessors offset by a $23 million decrease in Fab 30 research and development activities.

ComputationMemory Products operating lossGroup

Memory Products net sales of $23 million$1.9 billion in 2003 improved by $638 million2005 decreased 18 percent compared to an operating lossnet sales of $661$2.3 billion in 2004. In 2005, we consolidated Spansion’s net sales into Memory Product net sales only through December 20, 2005. Therefore, approximately $104 million of Spansion’s net sales from December 21, 2005 through December 25, 2005 were excluded from Memory Products net sales in 2002. The improvement was primarily2005. In addition, Memory Products net sales were adversely impacted due to a 12decrease of 28 percent in average selling prices in 2005 compared to 2004, partially offset by an increase of 14 percent in unit shipments in 2005 compared to 2004. Net sales for the Memory Products segment for 2005 are not fully comparable with net sales and a decrease in both manufacturing costs of $330 million and marketing, general and administrative expenses of $39 million, as a result offor 2004 because Spansion’s net sales are not consolidated with our cost reduction initiatives and the 2002 Restructuring Plan. In addition, cooperative advertising and marketing expenses decreased by $55 millionnet sales from 2002.

Memory ProductsDecember 21, 2005 through December 25, 2005.

Memory Products net sales of $2.3 billion in 2004 increased 65 percent compared to net sales of $1.4 billion in 2003. The increase in total net sales was primarily due 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 Spansion’s results of operations, which includeincluded Spansion’s sales to Fujitsu of $1.1 billion for 12 months in 2004 compared to $449 million for the last six months of 2003, and also due to stronger market demand in 2003.2004 than in 2003, particularly in the wireless category of the Flash memory market, which resulted in a nine percent increase in average selling prices. 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 imbalanceparticularly in the supply and demand forembedded category of the Flash memory products.market, where competitors began to aggressively pursue increased market share, and aggregate Flash memory product supply exceeded demand. In addition,particular, decreased demand from the wireless handset market in Asia, due in part due to channelexcess inventory accumulation by wireless handset OEMs in China during the first half of 2004, contributed to a decline in Memory ProductsProduct net sales during the third quarter. The quarter of 2004. In addition, a

downturn in the overall Flash memory market, lower than expected sales in Japanthe wireless handset market and a delaydelays in qualifying a newproduct based on Spansion’s second-generation MirrorBit technology also contributed to a decline in net sales in the fourth quarter of 2004. Also, Memory Product net sales declined in the second half of 2004 compared with the first half of 2004 because Spansion was not able to meet demand for certain of lower density products for the embedded category of the Flash memory productmarket in the first half of 2004, which we believe adversely impacted relationships with customers who did not receive allocations of these embedded products. Competitors were able to take advantage of this situation to increase their market share in the second half of 2004. Spansion was unable to meet demand for these products in the first half of 2004 because in 2003 it underestimated demand with respect to these products for the wireless category contributedfirst half of 2004 and was unable to install additional wafer fabrication capacity on a timely basis. As a result, a significant number of end customers for lower Memory Products net sales duringdensity products were under-served, and these customers chose to rely on competitors both for product supply and for their design-in activities in the fourth quarter.first half of 2004, resulting in an increased market share for those competitors in the second half of 2004 when those designs went into production. Further quantification of the breakdown in the increase in net sales is not practical due to the reorganization of geographical sales territories between AMDus and Fujitsu.Fujitsu in connection with the initial formation of Spansion LLC as of June 30, 2003.

Memory Products net saleshad an operating loss of $1.4 billion$311 million in 2003 increased 92 percent2005 compared to net salesoperating income of $741$35 million in 2002.2004. The increasedecline in operating results 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 increasea decrease in net sales of $430 million while the cost of sales only decreased $109 million. Net sales decreased as a result of a decrease of 28 percent in average selling prices in 2005 compared to 2004. Net sales for the Memory Products segment for 2005 are not fully comparable with net sales for 2004 because Spansion’s net sales are not consolidated with our net sales from December 21, 2005 through December 25, 2005. In addition, we recorded a goodwill impairment charge of approximately $16 million during the fourth quarter of 2005. Goodwill in the amount of $16 million was generated on June 30, 2003 as a result of the formation of Spansion LLC, which we accounted for as a partial step acquisition and purchase business combination. In the fourth quarter of 2005, after considering the fact that the estimated fair value of Spansion was less than our carrying net book value and after comparing the estimated fair value of Spansion’s assets (other than goodwill) to our carrying net book value for such assets, we concluded that the implied fair value of goodwill is not practical due tozero. Therefore, we wrote off the reorganizationentire $16 million of geographical sales territories between AMD and Fujitsu.recorded goodwill.

Memory Products operating income of $35 million in 2004 increased $224$225 million from an operating loss of $189$190 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 lossSpansion’s results of $189 million in 2003 increased $30 million from an operating lossoperations with our financial results as 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 Group

Personal Connectivity Solutions (PCS) net sales of $136 million in 2005 increased four percent compared to net sales of $131 million in 2004. The increase was primarily due to $13 million increase in sales of AMD Geode products and $8 million increase in sales of embedded processors, partially offset by a $15 million decrease in sales of networking products and MIPS-architecture based products.

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 operating loss of $55 million in 2005 was flat compared to an operating loss of $54 million in 2004. The increase in net sales of $140$5 million in 2003 decreased 15 percent comparedfrom 2004 to net sales of $166 million in 2002. The decrease2005 was primarily due to a $53 million decrease in sales of certain end-of-life embedded microprocessors and networking products, partially offset by a $28 millionan increase in salesoperating expenses of AMD Geode and wireless products.$6 million.

PCS operating loss of $72$54 million in 2004 increased compared to an operating loss of $14$12 million in 2003. The increase in the operating loss was primarily due to a $48$31 million increase in operating expenses. Operating

expenses increased due to an increase of approximately $35$23 million in manufacturing costs as a result of a change in product mix and an aggregate increase of $14$9 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 All Other category in 2003 or 2004.

All Other net sales in 2005 were $6 million because of zerosales of PIC products. We did not generate any material sales from PIC products in 2003 decreased from $34 million in 2002 due to the discontinuation of our Foundry Services in 2002.2004 or 2003.

All Other operating loss of $44$19 million in 2005 decreased from $25 million in 2004, increased from $6 million in 2003, primarily due to an increaserestructuring and other special charges of approximately $30$5 million incurred during 2004 due to a change in our estimate of potential sublease revenue.

All Other operating loss in 2004 was $25 million compared to operating income of $1 million in corporate bonus2003. We incurred an operating loss in 2004, primarily due to operating expenses associated with developing and profit sharing expense.marketing PIC products. In addition, All Other operating loss in 2004 included approximately $5 million of restructuring and other special charges due to a change in our estimate of potential sublease revenue, while in 2003 we had a $14 million credit adjustment to the restructuring charge.

All Other operating losscharge primarily because we reduced the estimate of $6 millionthe numbers of positions to be eliminated in 2003 improved by $374 million comparedresponse to an operating loss of $380 million in 2002, primarilythe additional resources required due to $331 million of restructuringthe Spansion LLC transaction and other special charges included inreversed the All Other category for 2002, compared to a $14 million credit adjustment to the restructuring charge in 2003.associated severance and fringe benefit accrual.

Comparison of Gross Margin, Expenses, Interest Income and Other Income (Expense), Net, Interest Expense, Income Taxes and TaxesOther Expenses

The following is a summary of certain consolidated statement of operations data for years ended December 25, 2005, December 26, 2004 2003 and 2002:December 28, 2003:

Gross Margin

Gross margin percentage increased to 41 percent in 2005 compared to 39 percent in 2004. The improvement in gross margin percentage was primarily due to microprocessor net sales, which comprised a greater percentage of total net sales in 2005 as compared to 2004. Microprocessor net sales carried a higher gross margin than Flash

memory net sales. In addition, the improvement in gross margin was due to a 1.5 percent increase in gross margin for Computation Products. Computation Products margin improved as a result of a nine percent increase in average selling prices discussed above, partially offset by increased manufacturing costs caused by the shift in our product mix to higher-end microprocessor products. Gross margin also improved because we were better able to absorb our fixed manufacturing costs due in part to improving yields at Fab 30. The improvement in gross margin was partially offset by a 12 percent decrease in gross margin for Memory Products due primarily to a decrease of 28 percent in average selling prices in 2005 compared to 2004, partially offset by an increase of 14 percent in unit shipments in 2005 compared to 2004.

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 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, 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 Spansion’s operating results as of June 30, 2003.

We amortize capitalrecord 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 or Fab 36, and we recorded the interest subsidies we received for Fab 30, as long-term liabilities on our financial statements. We amortize these amounts as they are earned. Theearned as a reduction to operating expenses. We record the amortization of thesethe production related grants and subsidies is recognizedallowances as a credit to research and development expenses and cost of sales. The credit to cost of sales totaled $67.1$72 million in 2005, $67 million in 2004 $46.2and $46 million in 20032003. The fluctuations in the recognition of these credits have not significantly impacted our gross margins.

In 2005 and $37.52004 we capitalized construction and facilitization costs related to Fab 36. Once Fab 36 begins producing revenue-generating products, which we anticipate will be in the first quarter of 2006, we will begin depreciating these costs to cost of sales.

Expenses

Research and Development Expenses

Research and development expenses of $1,144 million in 2002.2005 increased 22 percent from $935 million in 2004 due primarily to an increase of $103 million in product design and process improvement costs for new generations of our microprocessors and increased start-up costs associated with the Fab 36 project of $96 million.

Research and development expenses of $935 million in 2004 increased ten percent from $852 million in 2003 due in part to higher research and development expenses as a result of the consolidation of Spansion’sSpansion LLC’s results of operation, an increase inoperations with our results of operations effective June 30, 2003, increased start-up costs of approximately $29 million associated with the Fab 36 project of approximately $29 million and a $24 million increase in siliconproduct design related to futureand engineering costs for new generations of our microprocessors. These factors were partially offset by a $23 million decrease in Fab 30 research and development activities. Research

From time to time, we also apply for and development expensesobtain subsidies from the State of $852 million in 2003 increased four percent from $816 million in 2002, due in part to higherSaxony, the Federal Republic of Germany and the European Union for certain research and development expenses as a resultprojects. We record the amortization of the consolidation of Spansion’s results of operation, $23 million in research and development efforts related to new microprocessors,grants and $58 million paid to IBM to jointly develop new process technologies for use in future microprocessor products. The increases inallowances as well as the research and development expenses were offset bysubsidies as a $35 million reduction in research and development costs, primarily due to the reduction of research and development activities associated with our PCS productsexpenses when all conditions and requirements set forth in 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 theysubsidy grant are earned. The amortization of these grants and subsidies is recognized as a credit to research and development expenses and cost of sales.met. The credit to research and development expenses totaled $20.7$44 million in 2005, $21 million in 2004 and $29 million in 20032003.

Marketing, General and $21.8Administrative Expenses

Marketing, general and administrative expenses of $1,016 million in 2002.2005 increased 26 percent compared to $807 million in 2004, primarily due to an increase of $110 million in marketing and cooperative advertising costs and other expenses related to the 17 percent increase in revenue in 2005 compared to 2004. In addition, in 2005 we wrote off goodwill of $16 million, which was originally recorded in 2003, as a result of the formation of Spansion LLC.

Marketing, general and administrative expenses of $807 million in 2004 increased 37 percent compared to $587 million in 2003, primarily due to increased 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 2003 and new regulatory compliance costs of $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.

Effects of 2002 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 microprocessor manufacturing process technology, we ceased microprocessor related research and development in the SDC and eliminated most of the 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 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 microprocessor development activities, asset impairment charges of $30.6 million resulting from the abandonment of equipment previously used in microprocessor 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 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 Spansion transaction. As a result, we reversed $8.9 million of the estimated severance and fringe benefit accrual. As of December 26, 2004, 1,786 employees had been terminated pursuant to the 2002 Restructuring Plan resulting in cumulative cash payments of $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 adjustment was primarily related to a change in our estimate of potential sublease opportunities associated with abandoned facilities located in 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 completed the activities associated with the 2002 Restructuring Plan. With the formation of Spansion and other business changes, we no longer track the overall cost savings from the 2002 Restructuring Plan because we do not believe this information would be useful.

The following table summarizes activities under the 2002 Restructuring Plan through December 26, 2004:25, 2005:

Effects of 2001 Restructuring Plan

In 2001, in response to the continued slowdown in the semiconductor industry and a resulting decline in revenues, we implemented a restructuring plan (the 2001 Restructuring Plan). We completed our execution of the 2001 Restructuring Plan as of December 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 and we realized a recovery of approximately $3.9 million for the excess of the sale price over the estimated fair value of equipment that we determined was impaired as a result of the 2001 Restructuring Plan. Both amounts were included in restructuring and other special charges (recoveries), net. With the formation of Spansion and other business changes, we no longer track the overall cost savings from this 2001 Restructuring Plan because we do not believe the information would be useful.

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

Interest Income and Other Income (Expense), Net

We recorded a net income of interest income and other income (expense), net of $14 million in 2005 compared to a net expense of approximately $31 million in 2004, an increase of $45 million. This increase was due primarily to a decrease in other expense, net from $49 million in 2004, the components of which are discussed below, to $24 million in 2005. The $24 million of other expense, net in 2005 consisted primarily of a loss of approximately $10 million during the fourth quarter of 2005 resulting from the mark-to-market to earnings of certain foreign currency forward contracts which became ineffective in hedging against certain forecasted foreign currency transactions that are now not expected to occur due to the change of functional currency for AMD Fab 36 KG from the euro to the U.S. dollar and approximately $14 million of commitment and guarantee fees incurred in connection with the Fab 36 Loan Agreements. In addition, interest income increased approximately $19 million in 2005 compared to 2004 due to a 135 percent increase in average interest rates and an increase in our average cash balances.

We recorded a net chargeexpense of interest income and other income (expense), net, of $31 million in 2004 compared to interesta net income and other, net of approximately $21 million in 2003. This chargeexpense in 2004 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 income (expense), net, in 2004 included a charge of approximately $14 million in connection with our prepayment of the Dresdenterm loan agreement between our German subsidiary, AMD Saxony Limited Liability Company & Co. KG and a consortium of banks in order to finance Fab 30, or the Fab 30 Term Loan, and a loss of approximately $6 million during the second quarter of 2004 resulting from the mark-to-market to earnings 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 millionwas flat in 2003 decreased 34 percent from $32 million in 2002. The decrease was primarily due2004 compared 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 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 Spansion. Fujitsu now owns a 40 percent interest in these assets. The gain on the deemed sale of these assets to Spansion 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.2003.

Interest Expense

Interest expense of $105 million in 2005 decreased six percent compared to $112 million in 2004. In 2004, interest expense included approximately $26 million of interest under the Fab 30 Term Loan. Because we prepaid this loan on November 2, 2004, we did not incur any interest in connection with this loan in 2005. In addition, interest expense incurred on our 4.50% Notes was $9 million in 2005 compared with $19 million in 2004 because the holders of an aggregate principal amount of $201.5 million of these notes converted their notes into our common stock during the fourth quarter of 2005, and we exchanged an aggregate principal amount of $200 million of these notes in a series of transactions during the fourth quarter of 2004 for shares of our common stock. Also, during 2005, we capitalized interest of $35 million in connection with Fab 36 construction activities in Dresden, Germany, compared with $9 million in 2004. Partially offsetting these decreases in interest expense was the higher interest expense of $48 million incurred in connection with our 7.75% Senior Notes due 2012 (the 7.75% Notes), which we sold on October 29, 2004, compared with $8 million in 2004 and interest expense incurred pursuant to capital leases which increased by approximately $10 million in 2005 compared with 2004.

Interest expense of $112 million in 2004 was approximately flat compared to $110 million in 2003. 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 during 2004 was partially offset by the absence of interest expense, as of November 2, 2004, for amounts outstanding under the DresdenFab 30 Term Loan, which we prepaid on November 2, 2004, and the absence of interest expense

with respect to $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 alsoIn addition, we capitalized interest during 2004 of $9 million in connection with our Fab 36 construction activities in Dresden, Germany.activities.

Loss on Dilution of Equity Interest expensein Spansion Inc.

Prior to the Spansion IPO, we held a 60 percent controlling ownership interest in Spansion, and Spansion’s financial position, results of operations and cash flows were consolidated with ours. Consequently, Spansion’s results of operations through December 20, 2005 have been included in our consolidated statements of operations and cash flows. Following Spansion’s IPO, our ownership interest was diluted from 60 percent to 37.9 percent and we no longer exercise control over Spansion. As a result, from December 21, 2005, the closing date of the IPO, through December 25, 2005 we used the equity method of accounting to reflect our investment in Spansion, and we no longer consolidated Spansion’s financial position, operating results or cash flows with ours. This will continue in 2006. In connection with the reduction of our ownership interest in Spansion, we recorded a loss of $110 millionmillion. This loss represents the difference between Spansion’s book value per share before and after the IPO multiplied by the number of shares of Spansion’s common stock owned by us. As of December 25, 2005, we evaluated the carrying value of our investment in 2003 increased 55 percent compared to $71 millionSpansion and concluded that, based on the relevant factors, there was no “other than temporary” impairment of the investment. In accordance with APB Opinion No. 18 (as amended), “The Equity Method of Accounting for Investments in 2002. The increase was due primarily to annual interest chargesCommon Stock,” if future factors indicate that a decline in the fair value of $18 millionthe investment is other than temporary, we would recognize a loss on our 4.50% Notes soldinvestment at that time.

To the extent that our ownership in November 2002, $5 millionSpansion decreases in the future whether it is caused by disposal of our ownership interest or by Spansion’s issuance of additional common stock, we would record either a gain or a loss on $110 million outstanding undersuch further dilution depending on Spansion’s book value and fair value at that time, which could have a material effect on our revolving credit facility, andresults of operations in the Spansion transaction,period in 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 $1.5 million in 2003.this ownership dilution occurs.

Income Taxes

We recorded an income tax provisionbenefit of $7 million in 2005 and income tax provisions of $6 million in 2004 and $3 million in 20032003. The income tax benefit in 2005 primarily reflects U.S. tax benefits realized from the utilization of net operating losses and $45 milliontax credits and foreign tax benefits generated by Spansion in 2002.certain foreign jurisdictions. Spansion’s IPO did not have a material impact on our tax provision. 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 losses in certainvarious foreign jurisdictions. The income tax provision in 2003 primarily reflected income tax expense generated in certainvarious foreign jurisdictions, offset by a benefit of a U.S. federal tax refund from a carryback claim we filed in 2003. The 2002 income tax provision was recorded primarily for taxes due on income generated in certain foreign tax jurisdictions 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 continuing substantial operating losses in the United States.

As of December 26, 2004,25, 2005, we had federal and state net operating loss carryforwards of approximately $930$67 million and $45$90 million. We also had foreign loss carryforwards of approximately $88$428 million. We alsoIn addition, we had

federal and state tax credit carryforwards of approximately $246$274 million and $86$95 million. The net operating loss and tax credit carryforwards subject to expiration will expire at various dates beginning in 20052006 through 2024,2025, if not utilized. We maintain a full valuation allowance against all our net U.S. federal and state deferred tax assets and certain of our foreign deferred tax assets ($694741 million at December 26, 2004)25, 2005) because of our prior history of recent losses.

Other ItemsInternational Sales

International sales as a percent of net sales were 79 percent in 2005, 79 percent in 2004 and 80 percent in 20032003. During 2005 and 73 percent in 2002. During 2004, approximately 14 and 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 Spansion’s results of operations, effective June 30, 2003, which include sales by Spansion to Fujitsu, which are denominated in yen. Our foreign exchange risk exposure resulting from these sales is partially mitigatedHowever, as a result of our yen-denominated manufacturing costs. In addition,the closing of Spansion’s IPO on December 21, 2005, we are subjectdo not expect to foreign currency risk related to our manufacturing costs in Fab 30, which arehave significant sales denominated in 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 andJapanese yen 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.future.

FINANCIAL CONDITION

Our cash, cash equivalents and short-term investments at December 26, 200425, 2005 totaled $1.2 billion, which included approximately $196 million in cash, cash equivalents, and short-term investments of Spansion. Spansion’s operating agreement governs its ability to use this cash 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, Spansion 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 Spansion’s taxable income for each fiscal year. Any remaining cash balance after the tax liability distribution would be used by Spansion to fund its operations in accordance with its budget. If any cash remains, it must be used to repay Spansion’s outstanding debt to us and Fujitsu. Any remaining cash may be distributed at the discretion of Spansion’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.$1.8 billion.

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities was approximately $1.5 billion in 2005. Net income of $165 million, adjusted for non-cash charges consisting primarily of $1.2 billion of depreciation and amortization expense, a non-cash charge of approximately $110 million that we incurred as a result of the dilution of our ownership in Spansion from 60 percent to 37.9 percent as a result of Spansion’s IPO, and a non-cash charge of $16 million in connection with our write-off of goodwill that was generated as of June 30, 2003 as a result of the formation of Spansion LLC, contributed to the positive cash flows from operations. The net changes in operating assets in 2005 compared to 2004 included an increase in accounts receivable due to higher net sales and decreased inventories due primarily to the deconsolidation of Spansion’s results of operations from ours as a result of Spansion’s IPO.

Net cash provided by operating activities was approximately $1.1 billion in 2004. Net income of $91 million, adjusted for 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 in the fourth quarter of 2004, 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 Spansion’s results of operations, which include Spansion’s sales to Fujitsu, and an increase in net inventory due to the consolidation of Spansion’s results of operations. For fiscal 2003, Fujitsu accounted for approximately 31 percent of our consolidated accounts receivable and approximately 13 percent of our consolidated gross sales. In 2003, the net changes in payables and accrued liabilities primarily included payments of $90 million for a technology license from IBM and approximately $64 million of payments under the 2002 Restructuring Plan.

Net cash used in operating activities was $120 million in 2002, primarily as a result of our net loss of $1.3 billion, adjusted by non-cash 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 a microprocessor manufacturing facility.

Net Cash Provided by (Used in) Investing Activities

Net cash used in investing activities was $2.3 billion in 2005, primarily as a result of $1.5 billion used to purchase property, plant and equipment, including approximately $726 million used to construct Fab 36, and a net cash outflow of $726 million from maturities and purchases of available-for-sale securities, including a purchase of $175 million aggregate principal amount of Spansion’s 12.75% Senior Subordinated Notes Due 2016 (Spansion Senior Notes) for approximately $158.9 million, partially offset by $261 million in proceeds from Spansion’s repayment of amounts outstanding under promissory notes to us and $133 million cash decrease due to the deconsolidation of Spansion’s results of operations from ours.

Net cash used in investing activities was $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 salesmaturities and purchases of available-for-sale securities, offset by $34 million in proceeds from sales of property, plant and equipment.

Net cash provided by investing activities was $83 million in 2003, primarily as a result of net cash proceeds of $482 million from salesmaturities and purchases of available-for-sale securities, $148 million of cash acquired in conjunction with the Spansion transaction and $30 million in proceeds from sales 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, and $131 million from net purchases of available-for-sale securities, offset by $9 million of proceeds from sales of property, plant and equipment.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $494 million in 2005. This amount included $186 million in proceeds from borrowings by Spansion and $60 million of silent partnership contributions from the unaffiliated partners of AMD Fab 36 KG which we classify as debt, $189 million in proceeds from the issuance of stock under our Employee Stock Purchase Plan and the exercise of stock options, $163 million of capital investment grants and allowances from the Federal Republic of Germany and the Free State of Saxony for the Fab 36 project, $129 million of proceeds from equipment sale and leaseback transactions completed by Spansion, and approximately $90 million in investments from the unaffiliated limited partners of AMD Fab 36 KG. These amounts were offset by $316 million in payments on debt and capital lease obligations.

Net cash provided by financing activities was $413 million in 2004. 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 the prepayment of our DresdenFab 30 Term Loan. These amounts were offset by $898 million in payments on debt and capital lease obligations, including approximately $647.2$647 million used to prepay amounts outstanding under the DresdenFab 30 Term Loan, including accrued and 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 Spansion, a $40 million cash note to Spansion from Fujitsu as part of the formation of Spansion transaction,LLC as of June 30, 2003, $155 million of capital investment allowances received from the Federal Republic of Germany for the Fab 30 project and $35 million of proceeds from issuance of stock under our Employee Stock Purchase Plan and the exercise of stock options, offset by $141 million in payments on debt and capital lease obligations, and a $74 million increase in our compensating cash balance, which represented the minimum cash balance that AMD Saxony was required to maintain in order to comply with the minimum liquidity covenant set forth in the DresdenFab 30 Term Loan.

Purchase of Spansion LLC 12.75% Senior Subordinated Notes due 2016

Net cash provided by financing activities was $907

On December 21, 2005, Spansion LLC, a wholly owned subsidiary of Spansion Inc., issued to us $175 million aggregate principal amount of the Spansion Senior Notes. We purchased the Spansion Senior Notes for approximately $158.9 million in 2002, primarily duecash, or 90.828% of face value. The Spansion Senior Notes are general unsecured obligations of Spansion LLC and will rank junior to $486 million in proceeds, netany existing and future senior debt of $14 million in debt issuance costs, fromSpansion Inc. or Spansion LLC. Interest is payable on April 15 and October 15 of each year beginning April 15, 2006 until the issuancematurity date of our 4.75% Debentures, $391 million in proceeds, net of $11 million in debt issuance costs, from the issuance of our 4.50% Notes, $108 million drawnApril 15, 2016. Spansion LLC’s obligations under the July 2003 Spansion Term Loan, netSenior Notes are guaranteed by Spansion Inc., Spansion Technology Inc., a subsidiary of $2 millionSpansion Inc., and any restricted subsidiary of Spansion that guarantees any of Spansion’s public debt in debt issuance costs, $120 million drawn under our revolving credit facility, $21 millionthe future. Because we can sell these notes to a third party in proceeds from equipment lease financings, $29 milliona private transaction, and we intend to sell them in proceeds from the issuance of stock under our Employee Stock Purchase Plan and the exercise of stock options, and $76 million of net capital investment allowances and interest subsidies received from the Federal Republic of Germany and the State of Saxony for the Fab 30 project. These amounts were offset by payments of $325 million on debt and capital lease obligations.2006, we classified these notes as short-term investments.

Liquidity

We believe that cash flows from operations and current cash, cash equivalent and short-term investment balances, together with currently available credit facilities (see “Revolving Credit Facilities,” below) and external financing, will be sufficient to fund our operations and capital investments in the short term and long term. We also believeterm, including the estimated additional $1.6 billion in capital expenditures that we have sufficient financing arrangements in placeplan to fundincur for the estimated $2.5 billion required to facilitize Fab 36.36 project from 2006 through 2008. 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 debtsdebt when due, we may need to raise 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 securities in a transaction exempt from registration under the Securities Act of 1933; or a combination of one or more of the foregoing. We believe that, in the event of such requirements, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives. However, given the possibility of changes in market conditions or other occurrences, there can be no certainty that such funding will be available in quantities or on terms favorable to us.

Revolving Credit Facilitiesus or at all.

AMD Revolving Credit Facility4.50% Convertible Senior Notes Due 2007

Our revolving credit facility providesOn November 25, 2002, we issued $402.5 million of 4.50% Convertible Senior Notes due 2007 (the 4.50% Notes) in a registered offering. Interest on the 4.50% Notes was payable semiannually in arrears on June 1 and December 1 of each year, beginning June 1, 2003. Beginning on December 4, 2005, the 4.50% Notes were redeemable by us at our option for cash at specified prices expressed as a secured revolving linepercentage of creditthe outstanding principal amount plus accrued and unpaid interest, provided that we were not able to redeem the 4.50% Notes unless the last reported sale price of up to $100 million that expires in July 2007. We can borrow, subject to amounts set aside by the lenders, up to 85our common stock was at least 150 percent of our eligible accounts receivable from OEMs and 50 percentthe then-effective conversion price for at least 20 trading days within a period of our eligible accounts receivable from distributors. As30 trading days ending within five trading days of December 26, 2004, no borrowings were outstanding under our revolving credit facility.the date of the redemption notice.

Pursuant toDuring the terms 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 our revolving credit facility) declines below $125 million:

As of December 26, 2004, net domestic cash, as defined, totaled $831 million and the preceding financial covenants were not applicable. Our obligations under our revolving credit facility are secured by all of our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds, excluding Spansion’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 trustshares issuable pursuant to the original conversion terms of a trust agreement. Under the trust agreement, Spansion Japan is required to maintain4.50% Notes. During the valuefourth quarter 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 one2005, holders of the followingremaining 4.50% Notes elected 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 millionour common stock. Accordingly, as of December 26, 2004), or if25, 2005 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.4.50% Notes were no longer outstanding.

Contractual Cash Obligations and Guarantees

The following table summarizes our principal contractual cash obligations at December 26, 2004,25, 2005, and is supplemented by the discussion following the table. Because of the closing of Spansion’s IPO on December 21, 2005, we no longer include Spansion’s contractual cash obligations in the table below.

Principal contractual cash obligations at December 26, 200425, 2005 were: