UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FormFORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 29, 200228, 2003

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission File Number 1-7882


ADVANCED MICRO DEVICES, INC.


(Exact name of registrant as specified in its charter)

Delaware


94-1692300

(State or other jurisdiction

of incorporation or organization)

 

94-1692300

(I.R.S. Employer

Identification No.)

One AMD Place

Sunnyvale, California


94088

(Address of principal executive offices)

 

94088

(Zip Code)

Registrant’s telephone number, including area code: (408) 732-2400


Indicate by check mark whether the registrantregistrant: (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  x  No  
The¨.

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

Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value common stock outstanding as of October 25, 2002: 343,474,020

November 7, 2003: 348,590,674.



INDEX

Part I.    Financial Information

   
Page No.


        Item 1.  

Part I.Financial Statements (unaudited)Information

   

Item 1. Financial Statements (unaudited)

   

Condensed Consolidated Statements of Operations—Operations – Quarters and Nine Months Ended September 29, 200228, 2003 and September 30, 200129, 2002

  3

  4

  5

  6

Item 2.

  1522

Item 3.

  4655

Item 4.

  4655

Part II.Other Information

   

Item 6.

  4756

  48
4957

-2-


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADVANCED MICRO DEVICES, INC.INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Thousands except per share amounts)

   
Quarter Ended

   
Nine Months Ended

 
   
September 29, 2002

   
September 30, 2001

   
September 29, 2002

   
September 30, 2001

 
Net sales  $508,227   $765,870   $2,010,599   $2,939,881 
Expenses:                    
Cost of sales   453,884    594,056    1,599,048    1,945,085 
Research and development   220,959    161,185    571,266    490,059 
Marketing, general and administrative   158,568    150,918    475,676    456,346 
Restructuring and other special charges   —      89,305    —      89,305 
   


  


  


  


    833,411    995,464    2,645,990    2,980,795 
   


  


  


  


Operating loss   (325,184)   (229,594)   (635,391)   (40,914)
Interest and other income (expense), net   12,941    (11,220)   31,140    19,911 
Interest expense   (21,166)   (9,946)   (49,053)   (51,790)
   


  


  


  


Loss before income taxes and equity in net income (loss) of joint venture   (333,409)   (250,760)   (653,304)   (72,793)
Income tax benefit   (73,350)   (65,018)   (198,884)   (8,758)
   


  


  


  


Loss before equity in net income (loss) of joint venture   (260,059)   (185,742)   (454,420)   (64,035)
Equity in net income (loss) of joint venture   5,888    (1,187)   6,148    19,296 
   


  


  


  


Net loss  $(254,171)  $(186,929)  $(448,272)  $(44,739)
   


  


  


  


Net loss per common share:                    
Basic  $(0.74)  $(0.54)  $(1.31)  $(0.14)
   


  


  


  


Diluted  $(0.74)  $(0.54)  $(1.31)  $(0.14)
   


  


  


  


Shares used in per share calculation:                    
Basic   342,780    345,044    341,796    329,837 
   


  


  


  


Diluted   342,780    345,044    341,796    329,837 
   


  


  


  


   Quarter Ended

  Nine Months Ended

 
   

September 28,

2003


  

September 29,

2002


  

September 28,

2003


  

September 29,

2002


 

Net sales

  $953,759  $508,227  $2,313,575  $2,010,599 

Expenses:

                 

Cost of sales

   626,880   453,884   1,548,556   1,599,048 

Research and development

   213,997   220,959   625,572   571,266 

Marketing, general and administrative

   151,111   158,568   424,500   475,676 

Restructuring and other special charges (recoveries), net

   (8,000)  —     (5,854)  —   
   


 


 


 


    983,988   833,411   2,592,774   2,645,990 
   


 


 


 


Operating income (loss)

   (30,229)  (325,184)  (279,199)  (635,391)

Interest and other income, net

   493   12,941   12,203   31,140 

Interest expense

   (26,848)  (21,166)  (79,017)  (49,053)
   


 


 


 


Income (loss) before income taxes, minority interest and equity in net income of joint venture

   (56,584)  (333,409)  (346,013)  (653,304)

Minority interest in loss of subsidiary

   (25,353)  —     (25,353)  —   

Provision (benefit) for income taxes

   —     (73,350)  2,936   (198,884)
   


 


 


 


Income (loss) before equity in net income of manufacturing joint venture

   (31,231)  (260,059)  (323,596)  (454,420)

Equity in net income of joint venture

   —     5,888   5,913   6,148 
   


 


 


 


Net income (loss)

  $(31,231) $(254,171) $(317,683) $(448,272)
   


 


 


 


Net income (loss) per common share:

                 

Basic:

                 

Net income (loss)

  $(0.09) $(0.74) $(0.92) $(1.31)
   


 


 


 


Diluted:

                 

Net income (loss)

  $(0.09) $(0.74) $(0.92) $(1.31)
   


 


 


 


Shares used in per share calculation:

                 

Basic

   347,334   342,780   346,222   341,796 
   


 


 


 


Diluted

   347,334   342,780   346,222   341,796 
   


 


 


 


See accompanying notes.

-3-


ADVANCED MICRO DEVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands except share amounts)

   
September 29, 2002

   
December 30, 2001*

 
   
(unaudited)
     
Assets
          
Current assets:          
Cash and cash equivalents  $533,389   $427,288 
Short-term investments   332,435    442,709 
   


  


Total cash, cash equivalents and short-term investments   865,824    869,997 
Accounts receivable, net of allowance for doubtful accounts   428,653    659,783 
Inventories:          
Raw materials   16,637    26,489 
Work-in-process   234,991    236,679 
Finished goods   168,604    117,306 
   


  


Total inventories   420,232    380,474 
Deferred income taxes   177,321    155,898 
Prepaid expenses and other current assets   253,616    286,957 
   


  


Total current assets   2,145,646    2,353,109 
Property, plant and equipment, at cost:          
Land   47,707    33,207 
Buildings and leasehold improvements   1,265,229    1,461,228 
Equipment   5,165,948    4,162,652 
Construction-in-progress   458,609    469,191 
   


  


Total property, plant and equipment   6,937,493    6,126,278 
Accumulated depreciation and amortization   (4,007,701)   (3,387,140)
   


  


Property, plant and equipment, net   2,929,792    2,739,138 
Investment in joint venture   374,408    363,611 
Deferred income taxes   85,996    —   
Other assets   195,640    191,384 
   


  


   $5,731,482   $5,647,242 
   


  


Liabilities and Stockholders’ Equity
          
Current liabilities:          
Notes payable to banks  $48,981   $63,362 
Accounts payable   355,576    304,990 
Accrued compensation and benefits   119,666    129,042 
Accrued liabilities   389,861    443,995 
Income taxes payable   38,088    56,234 
Deferred income on shipments to distributors   34,151    47,978 
Current portion of long-term debt, capital lease obligations and other   307,536    268,336 
   


  


Total current liabilities   1,293,859    1,313,937 
Deferred income taxes   —      105,305 
Long-term debt, capital lease obligations and other, less current portion   1,196,531    672,945 
Commitments and contingencies          
Stockholders’ equity:          
Common stock, par value $0.01; 750,000,000 authorized; 343,474,090 shares issued and outstanding at September 29, 2002 and 340,502,883 at December 30, 2001   3,435    3,405 
Capital in excess of par value   1,992,146    1,966,374 
Treasury stock, at cost: 6,310,580 shares   (77,157)   (77,157)
Retained earnings   1,347,408    1,795,680 
Accumulated other comprehensive loss   (24,740)   (133,247)
   


  


Total stockholders’ equity   3,241,092    3,555,055 
   


  


   $5,731,482   $5,647,242 
   


  



   

September 28,

2003


  

December 29,

2002*


 
   (unaudited)    

Assets

         

Current assets:

         

Cash and cash equivalents

  $994,935  $397,698 

Short-term investments

   81,004   608,957 
   


 


Total cash, cash equivalents and short-term investments

   1,075,939   1,006,655 

Accounts receivable, net of allowance for doubtful accounts of $23,929 on September 28, 2003 and $18,906 on December 29, 2002

   543,444   395,828 

Inventories:

         

Raw materials

   26,160   22,741 

Work-in-process

   494,142   254,957 

Finished goods

   172,093   154,905 
   


 


Total inventories

   692,395   432,603 

Prepaid expenses and other current assets

   206,202   184,592 
   


 


Total current assets

   2,517,980   2,019,678 

Property, plant and equipment:

         

Land

   52,754   34,443 

Buildings and leasehold improvements

   2,189,106   1,392,972 

Equipment

   7,553,039   5,256,502 

Construction in progress

   198,079   355,746 
   


 


Total property, plant and equipment

   9,992,978   7,039,663 

Accumulated depreciation and amortization

   (6,184,411)  (4,158,854)
   


 


Property, plant and equipment, net

   3,808,567   2,880,809 

Investment in joint venture

   —     382,942 

Other assets

   337,818   335,752 
   


 


Total Assets

  $6,664,365  $5,619,181 
   


 


Liabilities and Stockholders’ Equity

         

Current liabilities:

         

Notes payable to banks

  $—    $913 

Accounts payable

   335,925   352,438 

Accrued compensation and benefits

   156,569   131,324 

Accrued liabilities

   310,861   435,657 

Restructuring accruals

   43,901   99,974 

Income taxes payable

   47,279   21,246 

Deferred income on shipments to distributors

   89,329   57,184 

Current portion of long-term debt and capital lease obligations

   200,717   71,339 

Other current liabilities

   84,458   89,437 
   


 


Total current liabilities

   1,269,039   1,259,512 

Deferred income taxes

   95,345   —   

Long-term debt and capital lease obligations, less current portion

   1,880,859   1,570,322 

Other liabilities

   425,282   322,082 

Minority interest

   711,056   —   

Commitments and contingencies

         

Stockholders’ equity:

         

Common stock, par value $0.01; 750,000,000 shares authorized; shares issued: 354,811,113 on September 28, 2003 and 351,442,331 on December 29, 2002; shares outstanding: 347,928,781 on September 28, 2003 and 344,528,152 on December 29, 2002

   3,478   3,445 

Capital in excess of par value

   2,032,576   2,014,464 

Treasury stock, at cost (6,882,332 shares on September 28, 2003 and 6,914,179 shares on December 29, 2002)

   (92,608)  (93,217)

Retained earnings

   174,700   492,668 

Accumulated other comprehensive income

   164,638   49,905 
   


 


Total stockholders’ equity

   2,282,784   2,467,265 
   


 


Total liabilities and stockholders’ equity

  $6,664,365  $5,619,181 
   


 


*Amounts as of December 30, 200129, 2002 were derived from the December 30, 200129, 2002 audited consolidated financial statements.

See accompanying notes.

-4-


ADVANCED MICRO DEVICES, INC.INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Thousands)

   Nine Months Ended

 
   

September 28,

2003


  September 29,
2002


 

Cash flows from operating activities:

         

Net loss

  $(317,683) $(448,272)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

         

Depreciation

   677,124   541,987 

Amortization

   31,228   14,315 

Impairment of equity investment

   2,339   —   

Change in provision for doubtful accounts

   5,023   3,354 

Benefit for deferred income taxes

   15,199   (200,364)

Foreign grant and subsidy income

   (49,359)  (47,965)

Net loss on disposal of property, plant and equipment

   19,947   12,372 

Net gain realized on sale of available-for-sale securities

   (3,736)  (4,829)

Undistributed income of joint venture

   (5,913)  (6,148)

Restructuring and other special charges, net

   (4,295)  —   

Recognition of deferred gain on sale of building

   (1,260)  (1,261)

Compensation recognized under employee stock plans

   1,361   2,195 

Tax expense allocated to minority interest

   (1,949)  —   

Minority interest

   (25,353)  —   

Changes in operating assets and liabilities:

         

(Increase) decrease in accounts receivable

   (84,906)  227,834 

Increase in inventories

   (72,164)  (39,603)

Decrease in prepaid expenses and other current assets

   14,837   36,490 

Decrease (increase) in other assets

   26,343   (1,435)

Increase (decrease) in income taxes payable

   25,791   (18,146)

Refund of customer deposits under long-term purchase agreements

   (26,500)  (30,000)

Net decrease in accounts payable, accrued liabilities, and other liabilities

   (330,835)  (21,992)

Increase (decrease) in accrued compensation and benefits

   11,755   (9,374)
   


 


Net cash (used in) provided by operating activities

   (93,006)  9,158 

Cash flows from investing activities:

         

Formation and consolidation of FASL LLC

   147,616   —   

Purchases of property, plant and equipment

   (407,535)  (567,182)

Proceeds from sale of property, plant and equipment

   26,670   5,162 

Acquisition, net of cash acquired

   (6,265)  (26,509)

Purchases of available-for-sale securities

   (970,391)  (3,294,538)

Proceeds from sales and maturities of available-for-sale securities

   1,500,460   3,437,269 
   


 


Net cash provided by (used in) investing activities

   290,555   (445,798)

Cash flows from financing activities:

         

Proceeds from borrowings, net of issuance costs

   47,350   735,643 

Proceeds from equipment sale-leaseback

   244,647   —   

Payments on debt and capital lease obligations

   (85,481)  (280,611)

Proceeds from foreign grants and subsidies

   142,029   50,253 

Proceeds from issuance of stock

   17,149   23,606 
   


 


Net cash provided by financing activities

   365,694   528,891 

Effect of exchange rate changes on cash and cash equivalents

   33,994   13,850 
   


 


Net increase in cash and cash equivalents

   597,237   106,101 

Cash and cash equivalents at beginning of period

   397,698   427,288 
   


 


Cash and cash equivalents at end of period

  $994,935  $533,389 
   


 


Non-cash financing activities: Equipment acquired under capital leases

  $284,297  $—   
   


 


(Unaudited)

(Thousands)
   
Nine Months Ended

 
   
September 29, 2002

   
September 30, 2001

 
Cash flows from operating activities:          
Net loss  $(448,272)  $(44,739)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation   541,987    457,619 
Amortization   14,315    14,770 
Provision for doubtful accounts   3,354    2,798 
Net change in deferred income taxes   (200,364)   (14,453)
Foreign grant and subsidy income   (47,965)   (38,199)
Net loss on disposal of property, plant and equipment   12,372    22,812 
Net realized gain on sale of available-for-sale securities   (4,829)   —   
Undistributed income of joint venture   (6,148)   (19,296)
Recognition of deferred gain on sale of building   (1,261)   (1,261)
Net compensation recognized under employee stock plans   2,195    3,552 
Restructuring and other special charges   —      89,305 
Changes in operating assets and liabilities:          
Decrease (increase) in accounts receivable   227,834    (44,416)
Increase in inventories   (39,603)   (112,954)
Decrease in prepaid expenses   2,798    19,888 
Increase in other assets   (1,435)   (47,723)
Decrease (increase) in tax refund receivable   33,692    (37,369)
Increase in tax payable   (18,146)   (25,217)
Refund of customer deposits under purchase agreements   (30,000)   (39,000)
Decrease in payables and accrued liabilities   (21,992)   (67,113)
Decrease in accrued compensation and benefits   (9,374)   (62,926)
   


  


Net cash provided by operating activities   9,158    56,078 
Cash flows from investing activities:          
Purchases of property, plant and equipment   (567,182)   (541,891)
Proceeds from sale of property, plant and equipment   5,162    1,715 
Cash paid for the acquisition of Alchemy, net of cash acquired   (26,509)   —   
Purchases of available-for-sale securities   (3,294,538)   (3,149,900)
Proceeds from sales/maturities of available-for-sale securities   3,437,269    3,346,085 
Investment in joint venture   —      (122,356)
   


  


Net cash used in investing activities   (445,798)   (466,347)
Cash flows from financing activities:          
Proceeds from borrowings and equipment financing, net of issuance costs   735,643    319,090 
Payments on debt and capital lease obligations   (280,611)   (90,305)
Proceeds from foreign grants   50,253    23,312 
Proceeds from issuance of stock   23,606    38,252 
Repurchase of common stock   —      (68,837)
   


  


Net cash provided by financing activities   528,891    221,512 
Effect of exchange rate changes on cash and cash equivalents   13,850    (5,277)
   


  


Net increase (decrease) in cash and cash equivalents   106,101    (194,034)
Cash and cash equivalents at beginning of period   427,288    591,457 
   


  


Cash and cash equivalents at end of period  $533,389   $397,423 
   


  


Supplemental disclosures of cash flow information:          
Cash paid for (refunded):          
Interest  $25,274   $38,120 
   


  


Income taxes  $(18,324)  $58,088 
   


  


Supplemental disclosures of non-cash financing activities:          
Redemption of convertible debt  $—     $516,860 
   


  


See accompanying notes.

-5-


ADVANCED MICRO DEVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.Basis of Presentation

September 28, 2003

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending December 29, 2002.28, 2003. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. The interim financial statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 30, 2001.29, 2002, as amended. Certain prior period amounts have been reclassified to conform to the current period presentation.

The Company uses a 52- to 53-week53- week fiscal year ending on the last Sunday in December. The Company’s current fiscal year will end on December 29, 2002. The quarters ended September 29, 200228, 2003 and September 30, 200129, 2002 each included 13 weeks. The nine monthsnine- month periods ended September 28, 2003 and September 29, 2002 and September 30, 2001 each included 39 weeks.

2.New Accounting Pronouncements

2. Summary of Significant Accounting Policies

Principles of Consolidation.The consolidated financial statements include the Company’s accounts and those of its majority and wholly owned subsidiaries (see Note 6FASL LLC). Upon consolidation, all significant intercompany accounts and transactions are eliminated and amounts pertaining to the noncontrolling ownership interests in the operating results and financial position of the majority owned subsidiary, FASL LLC, are reported as “minority interest.” Also included in the financial statements, under the equity method of accounting, are the Company’s percentage equity share of certain investees’ operating results, where the Company adopted Statementhas the ability to exercise significant influence over the operations of the investee.

Product Warranties.At the time revenue is recognized, the Company provides for estimated costs that may be incurred under product warranties, with the corresponding expense recognized in cost of sales. Estimates of warranty expense are based on historical experience. Remaining warranty accruals are evaluated periodically and are adjusted for changes in experience.

New Accounting Pronouncements.In January 2003, the Financial Accounting Standards Board issued Interpretation No. 141, “Business Combinations” (SFAS 141), Statement46, “Consolidation of Variable Interest Entities” (FIN 46). Variable interest entities often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Accounting Standards No. 142, “GoodwillStatements,” defines what these variable interest entities are and Other Intangible Assets” (SFAS 142)provides guidelines on identifying them and Statementassessing an enterprise’s interests in a variable interest entity to decide whether to consolidate that entity. Generally, FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For existing variable interest entities in which an enterprise holds a variable interest that it acquired before

-6-


February 1, 2003, the provisions of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) atthis interpretation will apply no later than the beginning of the 2002 fiscal year.first interim or annual reporting period beginning after June 15, 2003. The adoption of these standardsFIN 46 did not have a material impact on the Company’s results of operations or financial statements.

condition.

In July 2002,May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146150, “Accounting for Costs AssociatedCertain Financial Instruments with ExitCharacteristics of both Liabilities and Equity” (SFAS 150), which addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity – as either debt or Disposal Activities” (SFAS 146).equity in the balance sheet. The requirements apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (EITF 94-3). The principal difference between SFAS 146 and EITF 94-3 relates to SFAS 146’s timing for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3 a liability for an exit cost as generally defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan.

-6-


SFAS 146150 is effective for exitfinancial instruments entered into or disposal activities that are initiatedmodified after DecemberMay 31, 2002, with early adoption encouraged. The Company will adopt SFAS 146 prospectively as of December 30, 2002,2003, and otherwise is effective at the beginning of fiscal year 2003, and, therefore, itsthe first interim period beginning after June 15, 2003. The adoption isof SFAS 150 did not expected to have anya material impact on the Company’s current financial position or results of operations.
3.Available-For-Sale Securities
operations or financial condition.

3. Stock-Based Incentive Compensation Plans

The Company uses the intrinsic value method to account for stock options issued to its employees under its stock option plans and amortizes deferred compensation, if any, over the vesting period of the options. Compensation expense resulting from the issuance of fixed term stock option awards is measured as the difference between the exercise price of the option and the fair market value of the underlying share of company stock subject to the option on the award’s grant date. For purposes of pro forma disclosures, the Company estimates the fair value of its stock-based awards to employees using a Black-Scholes option pricing model. The pro forma effect on net loss and net loss per share are as follows for the quarters and nine-month periods ended September 28, 2003 and September 29, 2002.

   Quarter Ended

  Nine Months Ended

 

(Thousands except per share amounts)


  

September 28,

2003


  

September 29,

2002


  

September 28,

2003


  

September 29,

2002


 

Net loss—as reported

  $(31,231) $(254,171) $(317,683) $(448,272)

Plus: intrinsic value compensation expense recorded

   366   541   1,361   2,195 

Less: fair value compensation expenses

   (19,148)  (32,299)  (58,307)  (119,978)
   


 


 


 


Net loss—pro forma

  $(50,013) $(285,929) $(374,629) $(566,055)
   


 


 


 


Basic net loss per share—as reported

  $(0.09) $(0.74) $(0.92) $(1.31)

Diluted net loss per share—as reported

  $(0.09) $(0.74) $(0.92) $(1.31)

Basic net loss per share—pro forma

  $(0.14) $(0.83) $(1.08) $(1.66)

Diluted net loss per share—pro forma

  $(0.14) $(0.83) $(1.08) $(1.66)

On June 27, 2003, the Company filed a Tender Offer Statement with the SEC and made an offer, which was approved by the Company’s stockholders, to exchange certain stock options to purchase shares of the Company’s common stock, outstanding under eligible option plans and held by

-7-


eligible employees, for replacement options to be granted no sooner than six months and one day from the cancellation of the surrendered options. The offer to exchange expired on July 25, 2003. Options to purchase approximately 19.0 million shares of the Company’s common stock were tendered for exchange and cancelled on July 28, 2003. Subject to the terms of the offer to exchange, the Company will grant replacement options to purchase approximately 13.4 million shares of its common stock at fair market value on the date of grant on or after January 29, 2004, in exchange for the options cancelled. The Company does not expect to record compensation expense as a result of the exchange.

4. Financial Instruments

The following is a summary of the available-for-sale securities held by the Company as of September 29, 2002:

(Thousands)
  
Cost

  
Fair Market Value

Cash equivalents:        
Commercial paper  $226,774  $226,886
Money market funds   19,137   19,152
Federal agency notes   2,212   2,212
   

  

Total cash equivalents  $248,123  $248,250
   

  

Short-term investments:        
Bank notes  $9,513  $9,789
Corporate notes   77,478   78,766
Money market auction rate preferred stocks   127,715   127,785
Federal agency notes   114,413   116,095
   

  

Total short-term investments  $329,119  $332,435
   

  

Long-term investments:        
Equity investments  $11,571  $8,414
Commercial paper   10,000   10,000
Federal agency notes   2,473   2,473
   

  

Total long-term investments (included in other assets)  $24,044  $20,887
   

  

28, 2003:

(Thousands)


  Cost

  

Fair Market

Value


Cash equivalents:

        

Federal agency notes

  $5,469  $6,221

Money market funds

   764,435   764,737
   

  

Total cash equivalents

  $769,904  $770,958
   

  

Short-term investments:

        

Corporate notes

  $13,807  $13,461

Federal agency notes

   5,487   5,552

Auction rate preferred stocks

   59,000   59,027

Bank notes

   2,727   2,964
   

  

Total short-term investments

  $81,021  $81,004
   

  

Long-term investments:

        

Equity investments

  $7,765  $13,784
   

  

Total long-term investments (included in other assets)

  $7,765  $13,784
   

  

Long-term equity investments consist of marketable equity securities that, while available for sale, are not intended to be used to fund current operations.

The amortized cost and estimated fair value of available-for-sale marketable debt securities (short-term investments) at September 28, 2003, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

(Thousands)


  Amortized
Cost


  

Estimated

Fair Value


Due in one year or less

  $13,717  $13,687

Due after one year

   67,304  $67,317
   

  

Total

  $81,021  $81,004
   

  

Available-for-sale securities with maturities greater than twelve months are classified as short-term when they include investments of cash that are intended to be used in current operations. The Company realized a net gain ongains from the sale of available-for-sale securities of $4.8 million in the first nine months of 2003 of $3.7 million, which were included in interest and other income, net.

-8-


At September 28, 2003 and December 29, 2002, the Company had approximately $12 million and $13 million of investments classified as held to maturity, consisting of commercial paper and treasury notes used for long-term workers compensation and leasehold deposits that were included in other assets. The fair value of the investments approximated cost at September 28, 2003 and December 29, 2002.

Included in cash and cash equivalents is a compensating balance of $101$201 million, which represents the next semi-annual principal payment due under the terms ofAMD Saxony is required to keep at all times through June 29, 2005 in an account with Dresdner Bank AG in connection with the Dresden Loan Agreements. Also includedAgreements (see Note 11Guarantees). Included in cashprepaid and cash equivalentsother assets is $31$28 million of restricted cash associated with the advance receipt of interest subsidies from the Federal Republic of Germany and the State of Saxony.Saxony in connection with the Dresden Loan Agreements. Restrictions over the Company’s access to thisthe restricted cash will lapse as the Company incurs qualifying interest expense on the Dresden Term Loansterm loan over the next four quarters.

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4.Net Loss Per Common Share
Basic net loss per common share is computed using the weighted-average common shares outstanding.

5. Net Loss Per Common Share

Potential diluted number of common shares is computed as though such dilutive common shares wereinclude shares issuable upon the exercise of outstanding foremployee stock options and the whole period for which loss per share is presented.conversion of outstanding convertible notes and debentures. As the Company incurred net losses for all periods presented, diluted net loss per common share is the same as basic net loss per common share. Potential dilutive common shares of approximately 78 million and 22 million for the three months ended September 28, 2003 and September 29, 2002 and 77 million and 20 million for the three-month and nine-month periodsnine months ended September 28, 2003 and September 29, 2002 and 6 million and 22 million for the three-month and nine-month periods ended September 30, 2001, respectively, were not included in the net loss per common share calculation, as their inclusion would have been anti-dilutive.

5.Investment in Joint Venture
antidilutive.

6. FASL LLC

In 1993, AMDorder to respond more quickly to changes in market trends and improve efficiencies in the production, marketing and product design of their Flash memory products, the Company and Fujitsu Limited formed FASL LLC effective June 30, 2003. FASL LLC is headquartered in Sunnyvale, California and its manufacturing, research and assembly operations are in the U.S. and Asia. As the Company has a joint venture, Fujitsu AMD Semiconductor Limited (FASL),60% controlling equity interest in FASL LLC, it began consolidating the results of FASL LLC’s operations on June 30, 2003, the effective date of the transaction. The Company is accounting for the developmentFASL LLC transaction as a partial step acquisition and manufacturepurchase business combination under the provisions of non-volatileSFAS 141,Business Combinations, and EITF Consensus No. 01-02,Interpretations of APB Opinion No. 29, [Accounting for Nonmonetary Transactions].

Both the Company and Fujitsu contributed their respective investments in the former Manufacturing Joint Venture (formerly referred to as FASL). As a result of this transaction, the Company acquired an incremental 10.008% controlling interest in the net assets of the Manufacturing Joint Venture (the difference between the Company’s 60% ownership of these net assets after their contribution to FASL LLC and its previous 49.992% ownership in these same net assets prior to their contribution to FASL LLC). Accordingly, the Company recorded its acquired incremental 10.008% interest in the Manufacturing Joint Venture’s contributed net assets based on the assets’ fair value on the effective

-9-


date of the transaction. The remaining 89.992% interest in the Manufacturing Joint Venture’s net assets was recorded at its historical carrying value.

The Company also contributed its Flash memory devices. FASL operates advanced integrated circuit (IC)inventory, its manufacturing facility located in Austin, Texas (Fab 25), its Flash memory research and development facilities in Aizu-Wakamatsu, Japan,Sunnyvale, California, and its Flash memory assembly and test operations in Thailand, Malaysia and China. The Company recorded its continuing 60% interest in these net assets at their historical carrying values. The remaining 40% interest in these net assets was deemed to have been sold to Fujitsu and, accordingly, 40% of the carrying values of these net assets were adjusted to and recorded based on the net assets’ fair value on the effective date of the transaction. The excess of the fair value of the net assets treated as sold over their historical carrying value, approximately $44.7 million, was not recorded as a gain because the fair value of the consideration received by the Company in the form of the Company’s 60% equity interest in Fujitsu’s contributions and the incremental 10.008% interest in the former Manufacturing Joint Venture’s net assets less direct costs of the transaction, did not exceed the 40% interest in book value of the net assets contributed by the Company.

To form FASL LLC, Fujitsu also contributed its Flash memory division, including related inventory, cash, and its Flash memory assembly and test operations in Malaysia. The Company is deemed to have acquired a 60% interest in the net assets contributed by Fujitsu and, accordingly, 60% of the carrying values of these net assets were adjusted to and recorded based on the net assets’ fair value. The remaining 40% interest in these net assets was recorded at the historical carrying value.

As part of the transaction, the Company and Fujitsu entered into various service contracts with FASL LLC. The Company will continue to provide, among other things, certain information technology, facilities, logistics, legal, tax, finance, human resources and environmental, health and safety services to FASL LLC. These contracts continue to be evaluated by the parties to ensure accuracy and efficiency in the manner in which the services are provided and allocated to FASL LLC.

The Company also loaned FASL LLC $120 million pursuant to a promissory note. The note has a term of three years and bears interest at LIBOR plus 4%, but is eliminated in the Company’s consolidated financial statements. Fujitsu also loaned FASL LLC $40 million pursuant to a promissory note. The note has a term of three years, with four equal principal payments due on September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006. The note bears interest at LIBOR plus 4% to be paid quarterly.

The following table summarizes the preliminary purchase price allocation to the assets and liabilities of FASL LLC at June 30, 2003, the effective date of the transaction, including the fair values of the assets and liabilities attributable to the Manufacturing Joint Venture, AMD’s contributions and Fujitsu’s contributions. Upon consolidation, all amounts pertaining to Fujitsu’s interest in FASL LLC are reported as minority interest. Management considered a number of factors, including independent appraisals and valuations, in determining the preliminary purchase allocation.

(In millions)


  Manufacturing
Joint Venture


  AMD’s
Contributions


  Fujitsu’s
Contributions


  Total

 

Cash

  $—    $122  $189  $311 

Inventory

   55   220   128   403 

Fixed assets

   960   1,010   33   2,003 

Intangible assets

   21   —     —     21 

Debt and capital lease obligations

   (148)  (609)  (40)  (797)

Other assets (liabilities), net

   (100)  (2)  (1)  (103)
   


 


 


 


Fair value of net assets exchanged/acquired

   788   741   309   1,838 

Percent of fair value recorded in the purchase business combination

   10.008%  40%  60%    
   


 


 


 


Fair value recorded

  $79  $296  $186  $561 
   


 


 


 


Net book value of contributions on acquisition date

   762   629   293   1,684 

Percent of book value recorded in the purchase business combination

   89.992%  60%  40%    
   


 


 


 


Historical carrying value recorded

  $686  $377  $117  $1,180 
   


 


 


 


Initial purchase combination basis of net assets acquired

  $765  $673  $303  $1,741 
   


 


 


 


-10-


The intangible assets in the table above consist of the estimated fair value of the manufacturing and product distribution contracts among FASL LLC and AMD and Fujitsu which are determined to have an estimated useful life of four years. No value was assigned to in-process research and development because AMD and Fujitsu performed all research and development activities for the productionManufacturing Joint Venture and AMD and Fujitsu did not convey in-process technology rights to FASL LLC. Additionally, FASL LLC pays intellectual property royalties to AMD and Fujitsu for technological know-how used in its business operations at royalty rates deemed to approximate fair market values. No additional intangible assets were identified in connection with the transaction.

The Company’s acquisition cost was approximately $264 million, which includes 40% of the net book value of the Company’s contributions and other direct acquisition costs incurred by the Company. The acquisition cost approximated the fair values of the incremental net assets and equity interests acquired. Accordingly, there was no goodwill associated with the business combination.

The following pro forma financial information includes the combined results of operations of AMD and the Manufacturing Joint Venture as though the Manufacturing Joint Venture had been consolidated by AMD at the beginning of the nine-month periods ended September 28, 2003 and September 29, 2002 and for the quarter ended September 29, 2002. The historically reported operating results of the Manufacturing Joint Venture do not include Flash memory devices.sales recorded by Fujitsu’s former Flash memory operations in periods preceding June 29, 2003 because the information is not available to the Company. Depreciation and amortization expenses were estimated for the pro forma periods based on the amounts at which fixed and intangible assets were recorded at the acquisition date. Pro forma interest income and expense are not material and are not included in the pro forma financial information. Had the transaction occurred at the beginning of fiscal 2003, revenue, net loss and net loss per share would have been $2,536 million, $322 million and $0.93 for the nine-month period ended September 28, 2003. As the effective date of the transaction was June 30, 2003, no pro forma information is necessary for the three months ended September 28, 2003. Had the transaction occurred at the beginning of 2002, revenue, net loss and net loss per share would have been $627 million, $257 million, and $0.75, respectively, for the three-month period ended September 29, 2002 and $2,297 million, $446 million, and $1.30 for the nine-month periods ended September 29, 2002. These pro forma results are not necessarily indicative of the operating results that would have occurred if the transaction had been completed at the beginning of the periods indicated. The Company’s sharepro forma results are not necessarily indicative of future operating results.

In addition, the Manufacturing Joint Venture provided a defined benefit pension plan and a lump-sum retirement benefit plan to certain employees. These plans were and are administered by Fujitsu and cover FASL is 49.992 percent,LLC employees formerly assigned from Fujitsu and employees hired directly by the Manufacturing Joint Venture. A full actuarial valuation has not been completed for the specific portion of the plans that relate to the Manufacturing Joint Venture employees. As a result, the Company estimated FASL LLC’s proportionate allocation of pension obligations, pension assets and elements of pension expensed based on information provided by the actuaries to determine the amounts to be recorded on its consolidated financial statements. For the quarter ended September 28, 2003, the Company recorded an estimated pension cost charge of approximately $3 million and has recorded an estimated pension benefit obligation liability of approximately $25 million. As of September 28, 2003, the estimated projected benefit obligations were approximately $27 million and the estimated total pension plan assets were approximately $4 million. Although the Company believes that the estimates and assumptions used by the Company are reasonable, the actual amounts recorded could vary when a full actuarial valuation is completed as of Fujitsu’s fiscal year ended March 31, 2004. However, the Company does not expect any such difference will have a material impact on its consolidated financial statements.

-11-


The following tables present the significant related party transactions between the Company and the Manufacturing Joint Venture for the periods in which the investment iswas accounted for under the equity method. At September 29, 2002, the cumulative adjustment related to the translation of the FASL financial statements into U.S. dollars resulted in a decrease in the Company’s investment in FASL of $36.8 million.

The following are the significant FASL related-party transactions and balances:
   
Quarter Ended

  
Nine Months Ended

(Thousands)
  
September 29, 2002

  
September 30, 2001

  
September 29, 2002

  
September 30, 2001

Royalty income  $9,789  $10,975  $25,330  $36,675
Purchases   107,832   146,766   283,713   435,520
(Thousands)
  
September 29, 2002

  
December 30, 2001

      
Royalty receivable  $15,754  $6,962        
Accounts receivable   25,686   —          
Accounts payable   233   37,957        

-8-
method:


   

Quarter Ended


  Nine Months Ended

(Thousands)


  

September 28,

2003


  

September 29,

2002


  

September 28,

2003


  September 29,
2002


Royalty income

    $9,789  $24,611  $25,330

Purchases

     107,832   356,595   283,713

Sales to the Manufacturing Joint Venture

     —     222,570   —  

(Thousands)


September 28,
2003


December 29,
2002


Royalty receivable

$11,551

Accounts receivable

96,814

Accounts payable

108,890

The following is condensed unaudited financial data of FASL:

   
Quarter Ended

   
Nine Months Ended

(Thousands)
  
September 29, 2002

   
September 30, 2001

   
September 29, 2002

  
September 30, 2001

Net sales  $235,986   $241,812   $577,167  $808,573
Gross profit (loss)   1,429    (18,864)   45,133   73,669
Operating income (loss)   (2,673)   (20,172)   38,209   69,822
Net income (loss)   (1,559)   (11,798)   18,130   40,494
for the Manufacturing Joint Venture:

   Quarter Ended

  Nine Months Ended

(Thousands)


  September 28,
2003


  September 29,
2002


  September 28,
2003


  September 29,
2002


Net sales

    $235,986  $565,037  $577,167

Gross (loss) profit

     1,429   (12,955)  45,133

Operating (loss) income

     (2,673)  (14,958)  38,209

Net loss

     (1,559)  (9,618)  18,130

(Thousands)


  September
28, 2003


  December
29, 2002


Current assets

    $287,050

Non-current assets

     1,056,107

Current liabilities

     549,015

The Company’s share of FASLthe Manufacturing Joint Venture’s net income (loss) set forth above differsdiffered from the equity in net income (loss) of joint venturepreviously reported on the condensed consolidated statements of operations. The difference iswas due to adjustments resulting from intercompany profit eliminations and differences in U.S. and Japanese tax treatment of the Manufacturing Joint Venture’s income, which arewere reflected on the Company’s consolidated statements of operations. The Company has never received cash dividends from its investment in FASL.

the Manufacturing Joint Venture.

-12-


7. Foundry Arrangement Guarantee

In 2000, FASLthe Manufacturing Joint Venture further expanded its production capacity through a foundry arrangement with Fujitsu Microelectronics, Inc. (FMI), a wholly owned subsidiary of Fujitsu Limited. In connection with FMI equipping its wafer fabrication facility in Gresham, Oregon (the Gresham Facility), to produce Flash memory devices for sale to FASL,the Manufacturing Joint Venture, the Company agreed to guarantee (the Guarantee) the repayment of up to $125 million to Fujitsu in connection withof Fujitsu’s obligationobligations as a co-signer with FMI under its global multicurrency revolving credit facility (the Credit Facility) with a third-party bank. On November 30,bank (the Guarantee). In 2001, Fujitsu announced that it was closingclosed the Gresham Facility due to athe downturn of the Flash memory market. On March 26, 2002, theThe Company received notice from Fujitsu that FMI requested an advance of funds from Fujitsu to avoid default under the Credit Facility, which notice is required as a condition to the Company’s obligations under the Guarantee. However, to date, the Company has not received a demand for payment under the terms of the Guarantee from Fujitsu. Furthermore, the Company continues to disagreedisagreed with Fujitsu as to the amount if any, ofowed under this Guarantee and reached a settlement, resulting in a cash payment by the Company to Fujitsu. The settlement amount is immaterial to the Company’s obligations underfinancial statements, and was recorded in the Guarantee. WhileCompany’s statement of operations for the second quarter ended June 29, 2003 and paid in the third quarter ended September 28, 2003.

8. Segment Reporting

Prior to the third quarter of 2003, the Company continues to discuss this matter with Fujitsu, the Company cannot at this time reasonably predict its outcome including any amounts the Company might be required to pay Fujitsu, and therefore, has not recorded any liability in its consolidated financial statements associated with the Guarantee.

6.Segment Reporting
For purposes of disclosures required by Statement of Financial Accounting Standards No. 131 (SFAS 131), AMD operates inhad two reportable segments:segments, the Core Products segment, which reflects the aggregationand Foundry Services segments. Primarily as a result of the PC processorformation of FASL LLC, the Company re-evaluated its reportable segments under SFAS 131. Management reviews and memory productsassesses operating performance using segment revenues and operating income before interest, taxes and minority interest. These performance measures include the allocation of expenses to the operating segments and the Foundry Services segment. The aggregation of the Company’s operating segments into the Company’ reporting segments was made pursuant to the aggregation criteria set forth in SFAS 131. The Core Products segment includes microprocessors, Flash memory devices, Erasable Programmable Read-Only Memory (EPROM) devices, embedded processors, platform products, personal connectivity solutions products and networking products. The Foundry Services segment includes fees for services provided to Legerity and Vantis. The Company terminated its Foundry Service arrangements with Legeritybased on management judgment.

Beginning in the third quarter of 2002.2003, the Company changed its reportable segments to: the Computation Products segment, which includes x86 microprocessors for servers, workstations, desktop and notebook PCs and chipset products, and the Memory Products segment, which includes the Flash memory products of AMD and FASL LLC. The Company

-9-
believes that separate reporting of these operating segments, given the Company’s new focus on FASL LLC as a separate operating company and FASL LLC’s separate market brand, provides more useful information.


evaluates performance

The All Other category comprises other small operating segments (Personal Connectivity Solutions Products, which includes low power MIPS and allocates resources based on these segments’ reporting income (loss). x86 solutions, and Foundry Services, which included fees from our former voice communications and programmable logic products subsidiaries) that are neither individually nor in the aggregate material. This category also includes certain operating expenses and credits that are not allocated to the operating segments. Prior period segment information has been restated to conform to the current period presentation. However, as the Company’s results of operations for prior periods did not include the consolidation of FASL LLC’s operations the segment operating information for the Memory Products segment for the quarter ended September 28, 2003 is not comparable to the restated segment information for all prior periods presented.

The following table is a summary of sales and operating income (loss) by segment and category with a reconciliation to net loss for the quarters and nine months ended September 29, 200228, 2003 and September 30, 2001:

   
Quarter Ended

   
Nine Months Ended

 
(Thousands)
  
September 29, 2002

   
September 30, 2001

   
September 29, 2002

   
September 30, 2001

 
Segment net sales:                    
Core Products segment  $494,386   $741,320   $1,978,375   $2,843,915 
Foundry Services segment   13,841    24,550    32,224    95,966 
   


  


  


  


Total segment net sales  $508,227   $765,870   $2,010,599   $2,939,881 
   


  


  


  


Segment operating income (loss):                    
Core Products segment  $(330,856)  $(123,947)  $(632,602)  $70,053 
Foundry Services segment   5,672    (9,441)   (2,789)   (14,761)
   


  


  


  


Total segment operating income (loss)   (325,184)   (133,388)   (635,391)   55,292 
Restructuring and other special charges   —      (89,305)   —      (89,305)
Additional inventory provision   —      (6,901)   —      (6,901)
Interest income and other, net   12,941    (11,220)   31,140    19,911 
Interest expense   (21,166)   (9,946)   (49,053)   (51,790)
Income tax benefit   73,350    65,018    198,884    8,758 
Equity in net income (loss) of joint venture   5,888    (1,187)   6,148    19,296 
   


  


  


  


Net loss  $(254,171)  $(186,929)  $(448,272)  $(44,739)
   


  


  


  


7.Comprehensive Loss
29, 2002:

   Quarter Ended

  Nine Months Ended

 

(Thousands)


  

September 28,

2003


  

September 29,

2002


  

September 28,

2003


  

September 29,

2002


 

Computation Products

                 

Revenue

  $503,461  $263,727  $1,379,190  $1,334,560 

Operating income (loss)

  $19,290  $(316,553) $(85,881) $(503,308)

Memory Products

                 

Revenue

   423,815   188,589   852,707   524,200 

Operating loss

   (49,455)  (14,261)  (186,826)  (100,641)

All Other

                 

Revenue

   26,483   55,911   81,678   151,839 

Operating income (loss)

   (64)  5,630   (6,492)  (31,442)

Total AMD

                 

Revenue

   953,759   508,227   2,313,575   2,010,599 

Operating income (loss)

   (30,229)  (325,184)  (279,199)  (635,391)

Interest income and other, net

   493   12,941   12,203   31,140 

Interest expense

   (26,848)  (21,166)  (79,017)  (49,053)

Minority interest

   25,353   —     25,353   —   

(Provision) benefit for income taxes

   —     73,350   (2,936)  198,884 

Equity in net income of Manufacturing Joint Venture

   —     5,888   5,913   6,148 
   


 


 


 


Net loss

  $(31,231) $(254,171) $(317,683) $(448,272)
   


 


 


 


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9. Comprehensive Income (Loss)

The following are the components of comprehensive loss:

   
Quarter Ended

   
Nine Months Ended

 
(Thousands)
  
September 29, 2002

   
September 30, 2001

   
September 29, 2002

   
September 30, 2001

 
Net loss  $(254,171)  $(186,929)  $(448,272)  $(44,739)
Net change in cumulative translation adjustments   (20,483)   59,525    80,873    18,585 
Net change in unrealized gains (losses) on cash flow hedges   (1,307)   20,060    32,111    8,412 
Net change in unrealized gains (losses) on available-for-sale securities   (3,400)   2,668    (4,477)   (7,824)
   


  


  


  


Other comprehensive income (loss)   (25,190)   82,253    108,507    19,173 
   


  


  


  


Comprehensive loss  $(279,361)  $(104,676)  $(339,765)  $(25,566)
   


  


  


  


-10-
income (loss):


   Quarter Ended

  Nine Months Ended

 

(Thousands)


  September 28,
2003


  

September 29,

2002


  

September 28,

2003


  

September 29,

2002


 

Net loss

  $(31,231) $(254,171) $(317,683) $(448,272)

Net change in cumulative translation adjustments

   51,504   (20,483)  154,494   80,873 

Net change in unrealized gain (loss) on cash flow hedges

   (8,086)  (1,307)  (19,713)  32,111 

Net change in minimum pension liabilities

   (3,874)  —     (3,874)  —   

Net change in unrealized gain (loss) on available-for-sale securities

   3,865   (3,400)  3,682   (4,477)
   


 


 


 


Other comprehensive income (loss)

   43,409   (25,190)  134,589   108,507 
   


 


 


 


Comprehensive income (loss)

  $12,178  $(279,361) $(183,094) $(339,765)
   


 


 


 


The components of accumulated other comprehensive lossincome are as follows:

(Thousands)
  
September 29, 2002

   
December 30, 2001

 
Cumulative translation adjustments  $(54,046)  $(134,919)
Net unrealized gains (losses) on cash flow hedges   28,712    (3,399)
Unrealized gain on available-for-sale securities   594    5,071 
   


  


Accumulated other comprehensive loss  $(24,740)  $(133,247)
   


  


8.Senior Convertible Debt

(Thousands)


  September 28,
2003


  December 29,
2002


Net unrealized gain on available-for-sale securities, net of taxes of $2,104 in 2003 and $1,250 in 2002

  $5,762  $2,152

Net unrealized gain on cash flow hedges, net of taxes of $13,739 in 2003 and $17,511 in 2002

   9,366   29,079

Minimum pension liability

   (3,874)  —  

Cumulative translation adjustments

   153,384   18,674
   


 

   $164,638  $49,905
   


 

10. Long-term Debt and Capital Lease Obligations

   Payments Due By Period

(In Thousands)


  Total

  2003

  2004

  2005

  2006

  2007

  2008 and beyond

4.75% Convertible Senior Debentures Due 2022

  $500,000  $—    $—    $—    $—    $—    $500,000

4.50% Convertible Senior Notes Due 2007

   402,500   —     —     —     —     402,500   —  

Dresden term loans

   612,740       34,424   309,813   268,503   —     —  

July 2003 FASL term loan

   89,375   16,875   27,500   27,500   17,500   —     —  

Manufacturing Joint Venture term loan

   160,923   —     42,913   42,913   42,913   32,184   —  

Fujitsu cash note

   40,000   —     —     10,000   30,000   —     —  

Capital lease obligations

   276,038   19,616   91,970   85,600   74,526   4,326   —  
   

  

  

  

  

  

  

Total debt and capital lease obligations

  $2,081,576  $36,491  $196,807  $475,826  $433,442  $439,010  $500,000
   

  

  

  

  

  

  

-14-


On January 29, 2002,July 7, 2003, the Company issued $500amended and restated its 1999 Loan and Security Agreement with a consortium of banks led by a domestic financial institution. It was further amended on October 3, 2003 (the July 2003 Loan Agreement). See Note 14Subsequent Events. The following describes the July 2003 Loan Agreement as of September 28, 2003, before it was amended on October 3, 2003. The July 2003 Loan Agreement provided for a secured revolving line of credit of up to $200 million that expired in July of 2007. The Company could borrow, subject to amounts that were set aside by the lenders, up to 85 percent of its 4.75% Convertible Senior Debentures Due 2022 (the Debentures)eligible accounts receivable from OEMs and 50 percent of its eligible accounts receivable from distributors. The Company had to comply with, among other things, the following financial covenants if the level of net domestic cash (as defined in a private offering pursuant to Rule 144A and Regulation S of the Securities Act.

July 2003 Loan Agreement) it held declined below $200 million:

The interest rate payablerestrictions on the Debentures will be resetCompany’s ability to pay cash dividends on each of August 1, 2008, August 1, 2011its common stock;

maintain an adjusted tangible net worth (as defined in the Amended and August 1, 2016 to a rate per annum equal to the interest rate payable 120 days prior to the reset dates on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4.75 percent and will not exceed 6.75 percent. The Debentures are convertible at any time by the holders into the Company’s common stock at a conversion price of $23.38 per share, subject to adjustment. At this conversion price, each $1,000 principal amount of the Debentures will be convertible into approximately 43 shares of the Company’s common stock.
Beginning on February 5, 2005, the Debentures are redeemable by the Company for cash at specified prices expressedRestated Loan Agreement) as a percentage of the outstanding principal amount plus accrued and unpaid interest at the Company’s option, provided that the Company may not redeem the Debentures prior to February 1, 2006 unless the last reported sale price of the Company’s common stock is at least 130 percent of the then effective conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date of the redemption notice.follows:
The redemption prices are as follows for Debentures to be redeemed during the periods set forth below:

PeriodMeasurement Date


  
PriceAmount

September 30, 2003

$1.25 billion

December 31, 2003

$1.25 billion

Last day of each fiscal quarter in 2004

$1.425 billion

Last day of each fiscal quarter in 2005

$1.85 billion

Last day of each fiscal quarter thereafter

$2.0 billion

achieve EBITDA (earnings before interest, taxes, depreciation and amortization) according to the following schedule:

Period


  Amount

Beginning on February 5, 2005 through February 4, 2006

Four fiscal quarters ending September 30, 2003

  102.375$%150 million
Beginning on February 5, 2006 through February 4, 2007

Four fiscal quarters ending December 31, 2003

  101.583$%400 million
Beginning on February 5, 2007 through February 4, 2008

Four fiscal quarters ending March 31, 2004

  100.792$%550 million
Beginning on February 5, 2008

Four fiscal quarters ending June 30, 2004

  100.000$%750 million

Four fiscal quarters ending September 30, 2004

$850 million

Four fiscal quarters ending December 31, 2004

$950 million

Four fiscal quarters ending March 31, 2005 and on each fiscal quarter thereafter

$1,050 million

-11-


HoldersAt September 28, 2003, net domestic cash, as defined, totaled $429 million.

The Company’s obligations under the July 2003 Loan Agreement were secured by all of its accounts receivable, inventory, general intangibles (excluding intellectual property) and the Debentures will haverelated proceeds. FASL LLC’s assets, accounts receivable, inventory and general intangibles were not pledged as security for the ability to requireCompany’s obligations. As of September 28, 2003, no amount was outstanding under the July 2003 Loan Agreement.

On July 11, 2003, the Company to repurchase the Debentures at 100 percent of par in $1,000 increments, in whole or in part, on February 1, 2009, February 1, 2012 and February 1, 2017. The holders of the Debentures will also have the ability to require the Company to repurchase the Debentures in the event that the Company undergoes specified fundamental changes, including a change of control. In each such case, the repurchase price would be 100 percent of the principal amount of the Debentures plus accrued and unpaid interest.

9.Term Loan and Security Agreement
On September 27, 2002, the Company entered into a term loan and security agreement with a domestic financial institution (the September 2002 Loan Agreement). Under the agreement, the Company can borrow up to $155 million to be secured by certain property, plant and equipment located at the Company’s Fab 25 semiconductor manufacturing facility in Austin, Texas. Amounts borrowed under theamended its September 2002 Loan Agreement and assigned it to FASL LLC. Under the Amended and Restated Term Loan Agreement (the July 2003 FASL Term Loan), amounts borrowed bear interest at a variable rate of LIBOR plus four percent, which was 5.85.14 percent at September 29, 2002.28, 2003. Repayment occurs in equal, consecutive, quarterly principal and interest payments beginning December 2002 andinstallments ending onin September 2006. As of September 29, 2002, $11028, 2003, approximately $89 million was outstanding under the September 2002July 2003 FASL Term Loan, Agreement. Theof which 60 percent is guaranteed by the Company and 40 percent is guaranteed by Fujitsu.

FASL LLC must also comply with certainadditional financial covenants if its net domestic cash balance as(as defined in the agreement, dropsJuly 2003 FASL Term Loan) declines below $130 million through the first quarter of 2004, $120 million from the second quarter of 2004 and the end of 2005 and $100 million during 2006. At any time that net domestic cash falls below these thresholds, FASL LLC must comply with, among other things, the following financial covenants:

maintain an adjusted tangible net worth (as defined in the July 2003 FASL Term Loan) of not less than $850 million.

achieve EBITDA according to anthe following schedule:

Period


Amount

Quarter ending September 2003

$(40 million)

For the six months ending December 2003

$75 million

For the nine months ending March 2004

$170 million

For the four quarters ending June 2004

$285 million

For the four quarters ending September 2004

$475 million

For the four quarters ending December 2004

$550 million

For the four quarters ending in 2005

$640 million

For the four quarters ending in 2006

$800 million

maintain a Fixed Charge Coverage Ratio (as defined in the July 2003 FASL Term Loan) according to the following schedule:

Period


Ratio

Third Fiscal Quarter of 2003

-0.6 to 1.00

Fourth Fiscal Quarter of 2003

0.2 to 1.00

First Fiscal Quarter of 2004

0.25 to 1.00

Period ending June 2004

0.4 to 1.00

Period ending September 2004

0.8 to 1.00

Period ending December 2004

1.0 to 1.00

Full Fiscal Year 2005

1.0 to 1.00

Full Fiscal Year 2006

0.9 to 1.00

At September 28, 2003, FASL LLC’s net domestic cash totaled $202 million.

Manufacturing Joint Venture Loan Refinancing

As a result of the FASL LLC transaction, the Manufacturing Joint Venture’s third party loans were refinanced from the proceeds of a term loan in the aggregate principal amount of $30018 billion yen (approximately $161 million on September 28, 2003) entered into between a wholly owned subsidiary of FASL LLC and a Japanese financial institution. Fujitsu has guaranteed 100 percent of the amounts outstanding under this facility. Under the agreement, the

-15-


amounts borrowed bear an interest rate of TIBOR plus a spread that is determined by Fujitsu’s current debt rating. The current interest rate is 1.06%. Repayment occurs in equal, consecutive, quarterly principal installments ending in June 2007. The Company has agreed to pay Fujitsu 60 percent of any amount paid by Fujitsu under its guarantee of this loan.

Capital Lease and Leaseback Transactions

On July 16, 2003, a wholly owned subsidiary of FASL LLC entered into a sale-leaseback transaction for certain equipment with a third party financial institution in the amount of 12 billion yen (approximately $100 million on July 16, 2003) of cash proceeds. Upon execution of the agreement, the equipment had a net book value of approximately $168 million. As the term on the leaseback is more than 75 percent of the remaining estimated economic lives of the equipment, the Company is accounting for the transaction as a capital lease. The Company recognized an immediate loss of $16 million on the transaction due to the fact that the fair market value of the equipment was less than their net book value at the time of the transaction. The Company also recorded approximately $52 million of deferred loss which will be amortized in proportion to the leased assets over their average estimated remaining lives, which is approximately 3 years. The Company guaranteed 50 percent or up to approximately $50 million of the outstanding obligations under the lease arrangement. As of September 28, 2003, the outstanding lease obligation under this agreement was approximately $91 million. FASL LLC and its subsidiaries also entered into other capital lease transactions during the third quarter of 2003, which resulted in additional capital lease obligations of $152 million as of September 28, 2003.

The Company has guaranteed approximately $156 million of the total $276 million outstanding obligations under capital lease arrangements of FASL LLC as of September 28, 2003.

11. Guarantees

The Company accounts for guarantees in accordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

Guarantees of indebtedness recorded on the Company’s consolidated balance sheets

The following table summarizes the principal guarantees issued as of September 28, 2003 related to underlying liabilities that are already recorded on the Company’s consolidated balance sheets as of September 28, 2003:

      Amounts of guarantee expiration per period

(Thousands)


  Amounts
Guaranteed *


  2003

  2004

  2005

  2006

  2007

  2008 and
Beyond


Dresden term loan guarantee

  $306,369  $—    $—    $—    $306,369  $—     $—  

July 2003 FASL term loan guarantee (see Note 10)

   53,625   10,125   16,500   16,500   10,500   —     —  

FASL capital lease guarantees (see Note 10)

   155,812   10,587   47,998   51,128   43,397   2,702   —  
Manufacturing Joint Venture term loan guarantee (see Note 10)   96,554   —     25,748   25,748   25,748   19,310   —  
   

  

  

  

  

  

  

Total guarantees

  $612,360  $20,712  $90,246  $93,376  $386,014  $22,012  $0
   

  

  

  

  

  

  


*Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses.

-16-


Dresden Term Loan Agreements and Dresden Term Loan Guarantee

AMD Saxony Limited Liability Company & Co. KG, (AMD Saxony, formerly known as AMD Saxony Manufacturing GmbH), an indirect wholly owned German subsidiary of AMD, continues to facilitize Fab 30, which began production in the third quarter of 2000. AMD, the Federal Republic of Germany, the State of Saxony and a consortium of banks are providing financing for the project.

In March 1997, AMD Saxony entered into a loan agreement and other related agreements (the Dresden Loan Agreements) with a consortium of banks led by Dresdner Bank AG, a German financial institution, in order to finance the project.

Because most of the amounts under the Dresden Loan Agreements were denominated in deutsche marks (converted to euros), the dollar amounts discussed below are subject to change based on applicable conversion rates. The Company used the exchange rate that was permanently fixed on January 1, 1999, of 1.95583 deutsche marks to one euro for the conversion of deutsche marks to euros, and then used the exchange rate of 0.87 euro to one U.S. dollar as of September 28, 2003, to translate the amounts denominated in deutsche marks into U.S. dollars.

The Dresden Loan Agreements, as amended, provide for the funding of the construction and facilitization of Fab 30 and also require that the Company guarantee up to 50 percent of AMD Saxony’s obligations under the Dresden Loan Agreements, which guarantee must not be less than $128 million or less. more than $344 million, until the bank loans are repaid in full. As of September 28, 2003, the amount outstanding under the guarantee was $306 million.

As AMD Saxony’s obligations under the Dresden Loan Agreements are included in the Company’s consolidated financial statements, no incremental liability is recorded under the Dresden guarantee.

Guarantees of indebtedness not recorded on the Company’s consolidated balance sheets

The following table summarizes the principal guarantees issued as of September 28, 2003 for which the underlying liabilities are not recorded on the Company’s consolidated balance sheets as of September 28, 2003. These guarantees are described below the following table:

      Amounts of guarantee expiration per period

 

(Thousands)


  

Amounts*

Guaranteed


  2003

  2004

  2005

  2006

  2007

  

2008 and

beyond


 

FASL LLC operating lease guarantees

  $29,386  $7,647  $21,739  $  $  $—    $—   

BAC payment guarantee

   28,686   —     —           —     28,686 

AMTC payment guarantee

   36,718   —     —           36,718   —   

AMTC rental guarantee

   130,036   —     —           —     130,036**
   

  

  

  

  

  

  


Total

  $224,826  $7,647  $21,739  $  $  $36,718  $158,722 
   

  

  

  

  

  

  


*Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses.
**Amounts outstanding will diminish until the expiration of the guarantee.

FASL LLC Operating Lease Guarantees

The Company intends to usehas guaranteed certain operating leases entered into by FASL LLC and its subsidiaries totaling approximately $29 million as of September 28, 2003. The amount of the guarantees will be reduced by the actual amount of lease payments paid by FASL LLC over the lease term.

-17-


Advanced Mask Technology Center and Maskhouse Building Administration Guarantees

The Advanced Mask Technology Center GmbH & Co. KG (AMTC), and Maskhouse Building Administration GmbH & Co., KG (BAC), are joint ventures formed by AMD, Infineon Technologies AG and DuPont Photomasks, Inc. for the purpose of constructing and operating a new advanced photomask facility in Dresden, Germany. To finance the project, BAC entered into an $86 million bridge loan in June 2002, and BAC and AMTC entered into a $138 million revolving credit facility and an $86 million term loan in December 2002. In September 2003, the outstanding amounts borrowed under the bridge loan were repaid with proceeds from the term loan. Also in December 2002, in order to occupy the photomask facility, AMTC entered into a rental agreement with BAC. With regard to these commitments by BAC and AMTC, the Company guaranteed up to approximately $29 million plus interest and expenses under the term loan, up to approximately $37 million plus interest and expenses under the revolving loan, and up to approximately $16 million, initially, under the rental agreement. The obligations under the rental agreement guarantee diminish over time through 2011 as the term loan is repaid. However, under certain circumstances of default by the other tenant of the photomask facility under its rental agreement with BAC and certain circumstances of default by more than one joint venture partner under its rental agreement guarantee obligations, the maximum potential amount of the Company’s obligations under the rental agreement guarantee would be approximately $130 million. As of September 28, 2003, $12 million was drawn under the revolving credit facility, and $75 million was drawn under the term loan and are subject to the aforementioned guarantees.

The Company has not recorded any liability in its consolidated financial statements associated with these guarantees because they were issued prior to the effective date of FIN 45.

Warranties and Indemnities

The Company generally offers a three-year limited warranty to end users for certain of its boxed microprocessor products, and a one-year limited warranty only to direct purchasers for all other products.

Changes in the Company’s potential liability for product warranty during the nine months ended September 28, 2003 were as follows:

(Thousands)


    

Balance at December 29, 2002

  $19,369 

New warranties issued during the period

   28,437 

Settlements during the period

   (21,003)

Changes in liability for pre-existing warranties during the period, including expirations

   (4,520)
   


Balance at September 28, 2003

  $22,283 
   


In addition to product warranties, the Company, from time to time, in its normal course of business, indemnifies other parties with whom it enters into contractual relationships, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against specified losses, such as those arising

-18-


from a breach of representations or covenants, third party claims that the Company’s products when used for their intended purpose(s) infringe the intellectual property rights of such third party or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, payments made by the Company under these obligations have not been material.

12. Restructuring and Other Special Charges

2002 Loan Agreement for capital expenditures, working capital and general corporate purposes.

10.Business Acquisition
On February 19,Restructuring Plan

In December 2002, the Company completed the acquisition of Alchemy Semiconductor, Inc. (Alchemy), a privately held company, for approximately $30 million in cash consideration to Alchemy stockholders. Alchemy designed, developed and marketed low-power, high performance microprocessors for personal connectivity devices such as personal digital assistants (PDAs), web tablets and portable and wired Internet access devices and gateways.

The Company accounted for the acquisition using the purchase method and the assets and operations acquired were combined with the Company’s Core Products segment. Approximately $2.9 million of the purchase price represented acquired in-process research and development (IPR&D) that had not yet reached technological feasibility and had no alternative future use. The $2.9 million was expensed upon the acquisition of Alchemy. In addition, the Company recorded $18.7 million of goodwill based on the residual difference between the amount paid and the fair values assigned to identified tangible and intangible assets using an independent valuation.

-12-


11.Restructuring and Other Special Charges
In fiscal 2001 the Company announcedbegan implementing a restructuring plan (the 20012002 Restructuring Plan), due to further align its cost structure to industry conditions resulting from weak customer demand and industry-wide excess inventory.

As part of this plan, and as a slowdown in the semiconductor industry and a resulting decline in revenues. In connection with the plan, the Company closed Fabs 14 and 15 in Austin, Texas in June 2002. These facilities supported certainresult of the Company’s older products and its Foundry Service operations, which were discontinued as parttechnology agreement with IBM to develop future generations of the plan.Company’s logic process technology, the Company has ceased its silicon processing associated with logic research and development in its Submicron Development Center (SDC) in Sunnyvale, California and has eliminated most of those related resources, including the sale or abandonment of certain equipment used in the SDC.

The 2002 Restructuring Plan has resulted in the consolidation of facilities, primarily at the Company’s Sunnyvale, California site and at sales offices worldwide. The Company has vacated, and is attempting to sublease, certain facilities currently occupied under long-term operating leases. The Company has also reorganized related manufacturing facilitiesterminated the implementation of certain partially completed enterprise resource planning (ERP) software and reduced relatedother information technology implementation activities, primarilyresulting in Penang, Malaysia along with associated administrative support.

the abandonment of certain software, hardware and capitalized development costs.

Pursuant to the 20012002 Restructuring Plan, the Company recorded restructuring costs and other special charges of $89.3$330.6 million in the fourth quarter of 2002, consisting primarily of $34.1$68.8 million of anticipated severance and fringe benefit costs, $13.0an asset impairment charge of $32.5 million relating to a license that had no future use because of its association with discontinued logic development activities, asset impairment charges of $30.6 million resulting from the abandonment of equipment previously used in logic process development and $3.2 million ofmanufacturing activities, anticipated exit costs of $138.9 million primarily related to closevacating and consolidating the Company’s facilities and $55.5 million resulting from the abandonment of partially completed ERP software and other information technology implementation activities.

In the third quarter ended September 28, 2003, the Company revised its estimates of the number of positions to be eliminated pursuant to the 2002 Restructuring Plan from 2,000 to 1,800 in Austin and Asia, mostly in Penang, and $28.7 million and $10.3response to the additional resources required due to the FASL LLC transaction. As a result, the Company reversed $8 million of non-cashthe estimated severance and fringe benefit accrual due to the decision to reduce the number of positions to be eliminated by 200. Therefore, the 2002 Restructuring Plan will result in the reduction of approximately 1,800 positions or 14 percent of the Company’s employees, affecting all levels of its workforce in almost every organization. As of September 28, 2003, 1,512 employees had been terminated pursuant to the 2002 Restructuring Plan resulting in cumulative cash payments of $50 million for severance and

-19-


employee benefit costs. The Company expects to substantially complete the activities associated with the 2002 Restructuring Plan by the end of December 2003.

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

The following table summarizes activities under the 2002 Restructuring Plan through September 28, 2003:

(Thousands)


  

Severance and

Employee

Benefits


  

Asset

impairment


  

Exit and

Equipment

Decommission

Costs


  Other Restructuring
Charges


  Total

 

2002 provision

  $68,770  $118,590  $138,900  $4,315  $330,575 

Q4 2002 non-cash charges

   —     (118,590)  —     —     (118,590)

Q4 2002 cash charges

   (14,350)  —     (795)  —     (15,145)
   


 


 


 


 


Accruals at December 29, 2002

   54,420   —     138,105   4,315   196,840 

Q1 2003 provision

   —     7,791   3,314   —     11,105 

Q1 2003 non-cash charges

   —     (7,791)  —     —     (7,791)

Q1 2003 cash charges

   (17,820)  —     (751)  (4,223)  (22,794)
   


 


 


 


 


Accruals at March 30, 2003

   36,600   —     140,668   92   177,360 

Q2 2003 cash charges

   (14,922)  —     (8,309)  (77)  (23,308)
   


 


 


 


 


Accruals at June 29, 2003

   21,678   —     132,359   15   154,052 
   


 


 


 


 


Q3 2003 non-cash adjustment

   (8,000)  —     —     —     (8,000)

Q3 2003 cash charges

   (2,568)  —     (5,934)  —     (8,502)
   


 


 


 


 


Accruals at September 28, 2003

   11,110   —     126,425   15   137,550 
   


 


 


 


 


2001 Restructuring Plan

In 2001, the Company announced a restructuring plan (the 2001 Restructuring Plan) due to the slowdown in the semiconductor industry and Asia, primarily Penang.a resulting decline in revenues. The asset impairment charges related primarilyCompany has substantially completed its execution of the 2001 Restructuring Plan, with the exception of the facilities and equipment decommission activities, which are expected to buildingsbe completed by the end of 2003. During the first quarter of 2003, the Company reduced the estimated accrual of the facility and production equipment that were incurreddecommission costs by $7.4 million based on the most current information available. During the first quarter, the Company also realized a recovery of approximately $1.6 million from the sale of equipment impaired as a result of the Company’s decision to implement the 2001 Restructuring Plan. Management determined thePlan, previously held-for-sale at amounts in excess of its initially estimated fair value of the affected equipment based on market data and conditions.

As of September 29, 2002, 2,209 employees had been terminated resulting in cash payments of approximately $35.8 million in severance and employee benefit costs, of which $1.7 million wasvalue. Both amounts were included in current year results of operations. 720 of these positions were associated with closing Fabs 14restructuring and 15 in Austin. The balance of the reductions resulted from reorganizing activities primarily in Penang, Malaysia, along with associated administrative support. While the planned facilities closures had been completed as of September 29, 2002, related de-commissioning costs are expected to be incurred over the next nine months.
other special charges (recoveries) net.

-20-


The following table summarizes activityactivities under the 2001 Restructuring Plan through September 29, 2002:

(Thousands)
  
Severance and Employee Benefits

   
Facilities and equipment impairment

   
Facility and equipment decommission costs

   
Other facility exit costs

   
Total

 
Q3 2001 charges  $34,105   $39,000   $15,500   $700   $89,305 
Non-cash charges   —      (39,000)   —      —      (39,000)
Cash charges   (7,483)   —      —      (54)   (7,537)
   


  


  


  


  


Accruals at December 30, 2001   26,622    —      15,500    646    42,768 
Cash charges   (26,622)   —      (439)   —      (27,061)
   


  


  


  


  


Accruals at September 29, 2002  $—     $—     $15,061   $646   $15,707 
   


  


  


  


  


For information concerning the Company’s 2002 Restructuring Plan, see Note 13.
12.Foreign grants and subsidies
In August 2002, the Subsidy Agreement with the Federal Republic of Germany and the State of Saxony was amended to increase the maximum amount of investment grants and allowances available to the Company from $251 million to $407 million. Interest subsidies available to the Company amounting to $146 million remain unchanged. The Subsidy

-13-


Agreement imposes conditions on AMD Saxony, including the requirement to attain certain employment levels by December 2003 and to maintain those levels until December 2008. Noncompliance with the conditions of the grants and subsidies could result in the forfeiture of all or a portion of the future amounts to be received, as well as the repayment of all or a portion of the amounts received to date. There have been no conditions of noncompliance through September 29, 2002 that would result in forfeiture of any of the subsidies. The investment grants and allowances and subsidies are being recognized as a reduction of related operating expenses ratably over the life of the agreement.
Of the interest subsidies received induring the nine months ended September 28, 2003:

(Thousands)


  

Facilities

and Equipment

Decommission

Costs


  

Other

Facilities

Exit

Costs


  Total

 

Accrual at December 29, 2002

  $15,055  $646  $15,701 

Q1 2003 cash charges

   (630)  —     (630)

Q1 2003 non-cash adjustment

   (7,400)  —     (7,400)
   


 

  


Accruals at March 30, 2003

   7,025   646   7,671 

Q2 2003 cash charges

   (226)  —     (226)
   


 

  


Accruals at June 29, 2003

   6,799   646   7,445 

Q3 2003 cash charges

   (596)  —     (596)
   


 

  


Accruals at September 28, 2003

  $6,203  $646  $6,849 
   


 

  


As of September 28, 2003 and December 29, 2002, approximately $25$100 million is restrictedand $113 million of the total restructuring accruals of $144 million and $213 million were included in other liabilities (long-term) on the balance sheets. (See Note 13.)

13. Other Liabilities

The Company’s other long-term liabilities at September 28, 2003 and December 29, 2002 consisted of:

(Thousands)


  

September 28,

2003


  

December 29,

2002


Dresden deferred grants and subsidies

  $257,818  $146,346

Restructuring accrual

   100,499   112,567

Customer deposits

   17,500   38,000

Deferred gain on building

   23,908   25,169

FASL LLC pension liabilities

   24,704   —  

Other

   853   —  
   

  

   $425,282  $322,082
   

  

14. Subsequent Events

Amendment of Note Payable to Bank

On July 7, 2003, the Company amended and restated its 1999 Loan and Security Agreement with a consortium of banks led by a domestic financial institution. It was further amended on October 3, 2003. The July 2003 Loan Agreement currently provides for a secured revolving line of credit of up to $125 million that expires in July of 2007. The Company can borrow, subject to amounts that were set aside by the lenders, up to 85 percent of its eligible accounts receivable from OEMs and 50 percent of its eligible accounts receivable from distributors. The Company has to comply with, among other things, the following financial covenants if the level of net domestic cash (as defined in the July 2003 Loan Agreement) it holds declines below $125 million:

restrictions on the Company’s access for more than one year, and is therefore included in Other Assets.
13.    Recent Developments
On November 7, 2002, the Company announced that it was formulating a restructuring plan (the 2002 Restructuring Plan)ability to address the continuing industry-wide weaknesspay cash dividends on its common stock;

maintain an adjusted tangible net worth (as defined in the semiconductor industry and to adjust its cost structure. Pursuant to the 2002 Restructuring Plan, the Company intends to reduce its fixed costsJuly 2003 Loan Agreement) as a percentage of total costs over time from approximately 80 percent to approximately 70 percent. The Company also expects to reduce its expenses by approximately $100 million per quarter by the second quarter of 2003. As a result, the Company expects total expenses in 2003 to be reduced by $350 million based on current product demand forecasts. The Company cannot, however, be sure that the goals of the 2002 Restructuring Plan will be realized. The 2002 Restructuring Plan is expected to result in pre-tax restructuring and related charges to earnings of several hundred million dollars in the fourth quarter of 2002. The Company also expects approximately one-third of the restructuring and related charges to consist of cash payments.follows:

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ITEM 2.Measurement Date


  Amount

September 30, 2003

$1.25 billion

December 31, 2003

$1.25 billion

Last day of each fiscal quarter in 2004

$1.425 billion

Last day of each fiscal quarter in 2005

$1.85 billion

Last day of each fiscal quarter thereafter

$2.0 billion

achieve EBITDA (earnings before interest, taxes, depreciation and amortization) according to the following schedule:

Period


Amount

Four fiscal quarters ending September 30, 2003

$150 million

Four fiscal quarters ending December 31, 2003

$400 million

Four fiscal quarters ending March 31, 2004

$550 million

Four fiscal quarters ending June 30, 2004

$750 million

Four fiscal quarters ending September 30, 2004

$850 million

Four fiscal quarters ending December 31, 2004

$950 million

Four fiscal quarters ending March 31, 2005 and on each fiscal quarter thereafter

$1,050 million

At September 28, 2003, net domestic cash, as defined, totaled $429 million. The Company’s obligations under the July 2003 Loan Agreement are secured by all of its accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds. FASL LLC’s assets, accounts receivable, inventory and general intangibles are not pledged as security for the Company’s obligations.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

TheThis report includes forward-looking statements. These forward-looking statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations that are forward-looking are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including, “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. The forward-looking statements in this report relate to, among other things: operating results; anticipated cash flows; capital expenditures; gross margins; adequacy of resources to fund operations and capital investments; our ability to achieve cost reductions in the amounts and in the timeframes anticipated; normal seasonality in the sale of our products in the fourth quarter of 2003; our ability to transition to new product introductions effectively; our ability to produce microprocessorsproducts and technologies in the volume required by customers on a timely basis; our ability to maintain average selling prices of microprocessors despite aggressive marketing and pricing strategies of our competitors; our ability to achieveeffective way; and customer and market acceptance of our AMD Opteron and AMD Athlon 64 microprocessors including those based on Hammer technology, on a timely basis and produce them in the volumes required by the market at acceptable yields; our ability, and the ability of third parties, to provide timely infrastructure solutions, such as motherboards and chipsets, to support our microprocessors; a recovery in the economy leading to increased demand for our microprocessor products; a recovery in the communication and networking industries leading to an increase in the demand for Flash memory products; the effect of foreign currency hedging transactions; the process technology transition in our submicron integrated circuit manufacturing and design facility in Dresden, Germany (Dresden Fab 30); and the financing and further construction of the Fujitsu AMD Semiconductor Limited (FASL) manufacturing facilities. See “Financial Condition” and “Risk Factors” below, as well as such other risks and uncertainties as are detailed in our other Securities and Exchange Commission reports and filings forMirrorBit products. For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements.statements, see the “Financial Condition” and “Risk Factors” sections set forth below beginning on page 31 and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission reports and filings.

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes included in this report and our Audited Consolidated Financial Statements and related notes as of December 30, 200129, 2002 and December 31, 200030, 2001 and for each of the three years in the period ended December 30, 200129, 2002 as filed in our Annual Report on Form 10-K.10-K, as amended.

AMD, the AMD Arrow logo, and combinations thereof, Advanced Micro Devices, AMD Athlon, AMD Duron and AMD Opteron and MirrorBit are either trademarks or registered trademarks of Advanced Micro Devices, Inc. in the United States and/or other jurisdictions. Vantis is a trademark of Lattice Semiconductor Corporation. Legerity is a trademark of Legerity, Inc. MicrosoftSpansion and WindowsMirrorBit are either registered trademarks or trademarks of Microsoft CorporationFASL LLC in the United States and/or other jurisdictions. Pentium is a registered trademarkMicrosoft and Windows are trademarks of IntelMicrosoft Corporation in the United States and/or other jurisdictions. Other terms used to identify companies and products may be trademarks of their respective owners.

-15-

-22-



CRITICAL ACCOUNTING POLICIESRESULTS OF OPERATIONS

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our investments, allowance for doubtful accounts, revenues, inventories, asset impairments, income taxes, commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies relate to those policies that are most important

Prior to the presentationthird quarter of our financial statements and require the most difficult, subjective and complex judgments.

Investments in Debt and Equity Securities.    We hold minority interests in companies having operations or possessing technology primarily in areas within our strategic focus, some of which are publicly traded and have highly volatile stock prices. We also make investments in marketable equity and debt securities. We record an investment impairment charge when2003, we believe an investment has experienced a decline in value that is other-than-temporary. In determining if a decline in market value below cost for a publicly traded security or debt instrument is other-than-temporary, we evaluate the relevant market conditions, offering prices, trends of earnings, price multiples and other key measures providing an indication of the instrument’s fair value. For private equity investments, we evaluate the financial condition of the investee, market conditions, trends of earnings and other key factors that provide indicators of the fair market value of the investment. When a decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period to the extent of the decline below the carrying value of the investment. Adverse changes in market conditions or poor operating results of underlying investments could result in additional other-than-temporary losses in future periods.
Allowance for Doubtful Accounts.    We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. If the financial condition of our customers were to deteriorate or if economic conditions worsened, additional allowances may be required in the future.
Revenue Reserves.    We record a provision for estimated sales returns and allowances on product sales in the same period as the related revenues are recorded. We base these estimates on historical sales returns and other known factors. Actual returns could be different from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.

-16-


Inventory Valuation.    At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. Inventories on hand, in excess of forecasted demand, generally six months or less, are not valued. In addition, we write off inventories that are considered obsolete. Remaining inventory balances are adjusted to approximate the lower of our standard manufacturing cost or market value. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made.
Impairment of Long-Lived Assets.    We consider no less frequently than quarterly whether indicators of impairment of long-lived assets are present. If such indicators are present, we determine whether the sum of the estimated undiscounted cash flows attributable to the assets in question is 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 assets determined to be impaired are to be held and used, we recognize an impairment charge to the extent the present value of anticipated net cash flows attributable to the asset are less than the asset’s carrying value. The fair value of the asset then becomes the asset’s new carrying value, which we depreciate over the remaining estimated useful life of the asset. We may incur impairment losses in future periods if factors influencing our estimates change.
Deferred Income Taxes.    We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event that we determine that we are more likely than not to be unable to realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed. Our current valuation allowance also includes the tax benefit from the exercise of employee stock options. In the event tax benefits arising from the exercise of stock options are realized, the valuation allowance would be reversed and credited to capital in excess of par value with no effect on our statement of operations.
Commitments and Contingencies.    From time to time, we are a defendant or plaintiff in various legal actions, which arise in the normal course of business. We are also a party to environmental matters, including local, regional, state and federal governed clean-up activities at or near locations where we currently or have in the past conducted our business. We are also a guarantor of various third-party obligations and commitments. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses, or the likelihood of the guarantees being called. A determination of the amount of reserves required for these contingencies, if any, which would be charged to earnings, is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. Changes in required reserves could increase or decrease our earnings in the period the changes are made.

-17-



RESULTS OF OPERATIONS
We operated inhad two reportable segments:segments, the Core Products and Foundry Services segments. Primarily as a result of the formation of FASL LLC, we re-evaluated our reportable segments. We review and assess operating performance using segment revenues and operating income before interest, taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on management judgment.

Beginning in the third quarter of 2003, we changed our reportable segments to: the Computation Products segment, which includes x86 microprocessors for servers, workstations, desktop and notebook PCs and chipset products, and the Foundry Services segment. Our CoreMemory Products segment, which includes our PC processorthe Flash memory products Memory productsof AMD and Other IC products. PC processorFASL LLC. Microprocessor products include our seventh-generation microprocessors, theAMD OpteronTM, AMD AthlonTM XP and AMD DuronTM microprocessors. Memory products include Flash memory devices and Erasable Programmable Read-Only Memory, (EPROM)or EPROM devices. We believe that separate reporting of these operating segments, given our new focus on FASL LLC as a separate operating company and its separate market brand - SpansionTM, provides more useful information.

The All Other IC products include embedded processors, networking products, personal connectivitycategory comprises other small operating segments (Personal Connectivity Solutions Products, which includes low power MIPS and x86 solutions, products and platform products, which primarily consist of chipsets used in PCs. Our Foundry Services, segment consists of servicewhich included fees from Legerity, Inc.our former voice communications and Vantis Corporation.

programmable logic products subsidiaries) that are neither individually nor in the aggregate material. This category also includes certain operating expenses and credits that are not allocated to the operating segments. Prior period segment information has been restated to conform to the current period presentation. However, as the results of operations for prior periods do not include the consolidation of FASL LLC’s operations, the restated information for the Memory Products segment for the current periods are not comparable to those in prior periods.

We use a 52- to 53-week fiscal year ending on the last Sunday in December. The quarters ended September 29, 2002, June 30, 200228, 2003 and September 30, 200129, 2002 each included 13 weeks. The nine months ended September 29, 200228, 2003 and September 30, 200129, 2002 each included 39 weeks.

In order to respond more quickly to changes in market trends and improve efficiencies in the production, marketing and product design of our Flash memory products, we and Fujitsu formed FASL LLC effective June 30, 2003. As we have a 60% controlling equity interest in FASL LLC.

Both we and Fujitsu contributed our respective investments in the Manufacturing Joint Venture (formerly referred to as FASL). We also contributed Flash memory inventory, our manufacturing facility located in Austin, Texas (Fab 25), our Flash memory research and development facilities in Sunnyvale, California, and our Flash memory assembly and test operations in Thailand, Malaysia and China. In addition, Fujitsu contributed its Flash memory division, including related inventory, cash, and its Flash memory assembly and test operations in Malaysia.

As a result of the transaction, we began consolidating the results of FASL LLC’s operations on the first day of the quarter ended September 28, 2003. The results of operations for prior periods do not include the consolidation of FASL LLC’s operations. Accordingly, the results of operations during the third quarter of 2003 are not comparable to the results of operations in prior periods.

The following is a summary of our net sales by segment and category for the periods presented below:

     
Quarter Ended

    
Nine Months Ended

     
September 29,
2002

  
June 30,
2002

    
September 30,
2001

    
September 29,
2002

    
September 30,
2001

(Millions)
                       
Core Products segment:                            
PC Processors    $262  $380    $467    $1,326    $1,717
Memory Products     189   175     210     524     937
Other IC Products     43   39     64     128     190
     

  

    

    

    

      494   594     741     1,978     2,844
Foundry Services segment     14   6     25     32     96
     

  

    

    

    

     $508  $600    $766    $2,011    $2,940
     

  

    

    

    

   Quarters Ended

  Nine Months Ended

(Millions)  September 28,
2003


  

June 29,

2003


  September 29,
2002


  September 28,
2003


  September 29,
2002


Computation Products

  $503  $406  $264  $1,379  $1,334

Memory Products

   424   211   188   853   524

All Other

   27   28   56   82   152
   

  

  

  

  

   $954  $645  $508  $2,314  $2,010
   

  

  

  

  

-23-


Net Sales Comparison of Quarters Ended September 29, 200228, 2003 and June 30,29, 2003

Net sales of $954 million for the third quarter of 2003 increased 48 percent compared to the net sales of $645 million for the second quarter of 2003.

Computation Products net sales of $503 million increased 24 percent in the third quarter of 2003 compared to the second quarter of 2003. The increase in net sales was due to growth in Europe and Asia. Microprocessor unit shipments and average selling prices increased by 8 percent and 14 percent during the quarter. In the fourth quarter of 2003, we expect microprocessor sales to increase due to normal seasonality and the availability of a richer mix of products.

Memory products net sales of $424 million increased 101 percent in the third quarter of 2003 compared to the second quarter of 2003. The increase in net sales was primarily attributable to the effect of consolidating the operating results of FASL LLC, which includes FASL LLC sales to Fujitsu, and increased demand for Flash memory products. Further quantification of the breakdown in the sales increase is not practical due to the reorganization of geographical sales territories between AMD and Fujitsu. In the fourth quarter of 2003, we expect our reported Flash memory device sales to increase primarily due to normal seasonality and increasing customer acceptance of MirrorBitTM technology.

Net Sales Comparison of Quarters Ended September 28, 2003 and September 29, 2002

Net sales of $954 million for the third quarter of 2003 increased 88 percent compared to net sales of $508 million for the third quarter of 2002.

Computation Products net sales of $503 million increased 91 percent in the third quarter of 2003 compared to the third quarter of 2002 decreaseddue to a 55 percent increase in microprocessor unit shipments and a 21 percent increase in microprocessor average selling prices.

Memory products net sales of $424 million increased 125 percent in the third quarter of 2003 compared to the third quarter of 2002. The increase in net sales was primarily attributable to the effect of consolidating the operating results of FASL LLC, which includes FASL LLC sales to Fujitsu, and increased demand for Flash memory products. Further quantification of the breakdown in the sales increase is not practical due to the reorganization of customers and geographical sales territories between AMD and Fujitsu.

Net Sales Comparison of Nine Months Ended September 28, 2003 and September 29, 2002

Net sales of $2,314 million for the first nine months of 2003 increased by 15 percent compared to net sales of $600$2,010 million for the second quarterfirst nine months of 2002.

During the third quarter of 2002, PC processors

Computation Products net sales of $262$1,379 million decreased by 31increased 3 percent in the first nine months of 2003 compared to the second quarter of 2002. This decrease was due to declines in both average selling prices and unit sales, reflecting industry-wide weakness in PC sales. This decrease also reflected our decision not to accept orders from certain customers, not to ship to certain customers and our receipt of product returns from certain customers, each as part of our efforts to reduce excess PC processor inventory in the overall supply chain. In the fourth quarter of 2002, we expect unit shipments of PC processors to follow seasonal patterns, which generally show increases from third quarter levels. Our ability to increase PC processor revenue in the fourth quarter of 2002 depends upon customer demand for the newest versions of the AMD Athlon processors, an increase of average selling prices and an increase in unit shipments of our PC processors.

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Memory products net sales of $189 million increased by eight percent in the third quarter of 2002 compared to the second quarter of 2002 due primarily to an increase in overall average selling prices as a result of the continued strength of demand in the high-end mobile phone market, which resulted in a shift in the relative mix of products sold to higher density flash products. We expect sales of Flash memory devices to increase in the fourth quarter of 2002.
Other IC products net sales of $43 million increased by 10 percent in the third quarter of 2002 compared to the second quarterfirst nine months of 2002 primarily due to an increase in salesmicroprocessor unit shipments of embedded processors.
Foundry Services segment service fees of $14 million13 percent, offset by a 9 percent decrease in the third quarter of 2002 increased from $6 million in the second quarter of 2002 due to an increase in service fees from Legerity. We expect Foundry Services segment service fees to decrease significantly in the fourth quarter of 2002 due to the termination of our Foundry Service arrangements with Legerity, which occurred in the third quarter of 2002. We also expect Foundry Services segment service fees to continue to decrease through the third quarter of 2003, when our agreement with Vantis ends.
Net Sales Comparison of Quarters Ended September 29, 2002 and September 30, 2001
Net sales of $508 million for the third quarter of 2002 decreased by 34 percent compared to net sales of $766 million for the third quarter of 2001.
PC processors net sales of $262 million decreased by 44 percent in the third quarter of 2002 compared to the same quarter of 2001. This decrease was due to declines in bothmicroprocessor average selling prices and unit sales, reflecting industry-wide weakness in PC sales. This decrease also reflected our decision in the third quarter of 2002 not to accept orders from certain customers, not to ship to certain customers and our receipt of product returns from certain customers, each as part of our efforts to reduce excess PC processor inventory in the overall supply chain.
prices.

-24-


Memory products net sales of $189$853 million decreased by 10 percent in the third quarter of 2002 compared to the same quarter of 2001 due to a decline in average selling prices, partially offset by an increase in unit shipments.

Other IC products net sales of $43 million in the third quarter of 2002 decreased by 33 percent compared to the same quarter of 2001 primarily due to decreased net sales from platform products.
Foundry Services segment service fees of $14 million in the third quarter of 2002 decreased by 44 percent compared to the same quarter of 2001 due to a decrease in service fees from Legerity and Vantis.
Net Sales Comparison of Nine Months Ended September 29, 2002 and September 30, 2001
Net sales of $2,011 million for the first nine months of 2002 decreased by 32 percent compared to net sales of $2,940 million for the first nine months of 2001.

-19-


PC processors net sales of $1,326 million decreased 23increased 63 percent in the first nine months of 2002 compared2003. The increase in net sales was primarily attributable to the same periodeffect of 2001. This decrease wasconsolidating the operating results of FASL LLC, which includes FASL LLC sales to Fujitsu, and increased demand for Flash memory products. Further quantification of the breakdown in the sales increase is not practical due to declines in both average selling pricesthe reorganization of geographical sales territories between AMD and unit sales, reflecting industry-wide weakness in PC sales. This decrease also reflected our decision in the third quarter of 2002 not to accept orders from certain customers, not to ship to certain customers and our receipt of product returns from certain customers, each as part of our efforts to reduce excess PC processor inventory in the overall supply chain.
Memory products net sales of $524 million decreased by 44 percent in the first nine months of 2002 compared to the same period of 2001 due to a decline in both unit shipments and average selling prices as a result of sustained weakness in the overall market.
The Other IC products net sales of $128 million decreased by 33 percent in the first nine months of 2002 compared to the same period of 2001 primarily due to decreased net sales of embedded processors, networking products and platform products.
Foundry Services segment service fees of $32 million in the first nine months of 2002 decreased by 67 percent compared to the same period of 2001 due to a decrease in service fees from Legerity and Vantis.
Fujitsu.

Comparison of Expenses, Gross Margin Percentage and Interest

The following is a summary of expenses, gross margin percentage and interest and other income, net for the periods presented below:

     
Quarter Ended

     
Nine Months Ended

 
     
September 29,
2002

   
June 30,
2002

     
September 30,
2001

     
September 29,
2002

     
September 30,
2001

 
(Millions except for gross margin percentage)
                            
Cost of sales    $454   $558     $594     $1,599     $1,945 
Gross margin percentage     11%   7%     22%     20%     34%
Research and development    $221   $178     $161     $571     $490 
Marketing, general and administrative     159    160      151      476      456 
Restructuring and other special charges     —      —        89      —        89 
Interest and other income, net     13    9      (11)     31      20 
Interest expense     21    16      10      49      52 
We operate in an industry characterized by intense competition and high fixed costs due to capital-intensive manufacturing processes, particularly the costs to build and maintain state-of-the-art wafer production facilities required for PC processors and memory devices. As a result, our

   Quarters Ended

  Nine Months Ended

 
(Millions except for gross margin percentage)  

September 28,

2003


  June 29,
2003


  

September 29,

2002


  

September 28,

2003


  

September 29,

2002


 

Cost of sales

  $627  $425  $454  $1,549  $1,599 

Gross margin percentage

   34%  34%  11%  33%  20%

Research and development

  $214  $209  $221  $626  $571 

Marketing, general and administrative

   151   135   159   425��  476 

Restructuring and other special charges, net

   (8)  —     —     (6)  —   

Interest and other income, net

   0.5   5   13   12   31 

Interest expense

   27   26   21   79   49 

The gross margin percentage is significantly affected by fluctuations in unit sales and average selling prices.

On November 7, 2002, we announced that we were formulating the 2002 Restructuring Plan to address the continuing industry-wide weaknessof 34 percent in the semiconductor industry and to adjust our cost structure. Pursuant to the 2002 Restructuring Plan, we intend to reduce our fixed costs as a percentagethird quarter of total costs over time2003 remained flat from approximately 80 percent to approximately 70 percent. We also expect to reduce our expenses by approximately $100 million per quarter by the second quarter of 2003. As a result, we expect total expenses in 2003 to be reduced by $350 million based on current product demand forecasts. We cannot, however, be sure that the goals of the

-20-


2002 Restructuring Plan will be realized. The 2002 Restructuring Plan is expected to result in pre-tax restructuring and related charges to earnings of approximately several hundred million dollars in the fourth quarter of 2002. We also expect approximately one-third of the restructuring and related charges to consist of cash payments.
The gross margin percentage ofincreased from 11 percent in the third quarter of 20022002. The gross margin percentage of 33 percent for the first nine months of 2003 increased from seven20 percent for the first nine months of 2002. Gross margins in the third quarter of 2003 remained flat from the second quarter of 2003 due to an 8 percent increase in microprocessor average selling prices, offset by the absence of an approximate $20 million benefit from the second quarter sale of microprocessor products that had previously been written off. In addition, we incurred a $16 million loss on the sale-leaseback of certain manufacturing equipment. The increase from the third quarter of 2002 is a result of a 21% increase in the average selling price of microprocessors, offset by a $16 million loss on the sale-leaseback of certain manufacturing equipment. Gross margins for the first nine months of 2003 increased from the first nine months of 2002 due primarily to a more favorable mixcost savings realized from our 2002 Restructuring Plan and other cost reductions. Gross margin for the three and nine month periods ended September 28, 2003 was also impacted by an increase in unit shipments of Flash memory products sold, aof 192 percent and 64 percent. Further quantification of this effect is not practical due to the consolidation of FASL LLC’s operating results beginning in the third quarter of 2003.

Research and development expenses in the third quarter of 2003 were relatively flat compared to the second quarter of 2003 and to the third quarter of 2002. Research and development expenses of $626 million for the first nine months of 2003 increased nine percent from the first nine months of

-25-


2002 due to the reallocation of manufacturing resources, previously included in costscost of goods sold, to increased research and development activities for our upcoming eighth-generation microprocessors based on Hammer technology,microprocessors.

We amortize the foreign capital grants, interest subsidies and cost savings realized from the closure of our facilities pursuant to the 2001 Restructuring Plan described below. This increase was partially offset by a decline in the unit shipments and average selling prices of our PC processors as well as our decision not to accept orders from certain customers, not to ship to certain customers and our receipt of product returns from certain customers, each as part of our efforts to reduce excess PC processor inventory in the overall supply chain. The gross margin percentage of 11 percent in the third quarter of 2002 decreased from 22 percent in the third quarter of 2001. The gross margin percentage of 20 percent for the first nine months of 2002 decreased from 34 percent for the same period in 2001. These declines were primarily due to a decline in both average selling prices and unit shipments of our PC processors.

Research and development expenses of $221 million in the third quarter of 2002 increased 24 percent compared to the second quarter of 2002 and 37 percent compared to the same quarter in 2001. Research and development expenses of $571 million in the first nine months of 2002 increased 17 percent compared to the first nine months of 2001. The increase in research and development expenses was primarily due to the reallocation of manufacturing resources, previously included in costs of goods sold, to increased research and development activities for our upcoming eighth-generation microprocessors based on Hammer technology.
Research and development expenses and cost of sales in the third quarter of 2002 reflected the recognition of $5.2 million and $13.9 million, respectively, of deferred credits on foreign research and development subsidies and investment grants/allowances and interest subsidies that werewe received from the State of Saxony for Dresden Fab 30.30 as they are earned. The amortization of these grants and subsidies is recognized as credits to research and development expenses and cost of sales. These credits totaled $5.8 and $12.4 million in the third quarter of 2003, $4.7 and $11.1 million in the second quarter of 2003 and $9.5 and $9.6 million in the third quarter of 2002. In the first nine months of 2003, these credits totaled $16 and $34.3 million. In the first nine months of 2002, these credits totaled $12.8 million$19.9 and $35.1 million, respectively. In the first nine months of 2001, these credits totaled $11.2 million and $31.7 million, respectively.
$28.1 million.

Marketing, general and administrative expenses of $159 million in the third quarter of 2002 were flat compared to $160 million in the second quarter of 2002 and increased five percent compared to $151 million in the third quarter of 2001.2003 increased 12 percent compared to the second quarter of 2003. The increase was due primarily to incremental administrative expenses due to the FASL LLC transaction. Marketing, general and administrative expenses in the third quarter of $476 million for2003 decreased 5 percent compared to the third quarter of 2002, and decreased 11 percent in the first nine months of 2003 compared to the first nine months of 2002. The decreases were primarily a result of cost savings realized as a result of the 2002 Restructuring Plan.

Interest and other income, net, of approximately $0.5 million in the third quarter of 2003 decreased from $5 million in the second quarter of 2003, and decreased from $13 million in the third quarter of 2002. Interest and other income, net, of $12 million in the first nine months of 2003 decreased from $31 million in the first nine months of 2002. In each case, the decrease was primarily due to lower short-term investment balances resulting in lower investment income and approximately $2.3 million in charges in 2003 for other than temporary declines in our equity investments.

Interest expense of $27 million in the third quarter of 2003 was relatively flat compared to the second quarter of 2003 and increased four27 percent compared to the third quarter of 2002 due primarily to the effect of the 4.50% Convertible Senior Notes due 2007 sold in November 2002 and the $110 million term loan drawn at the end of September 2002. Interest expense of $79 million in the first nine months of 2003 increased 61 percent compared to the first nine months of 2001 primarily due to increased marketing activities associated with our AMD Athlon microprocessor family.

In the third quarter of 2002, interest and other income, net of $13 million increased $4 million compared to the second quarter of 2002 and increased $24 million compared to the third quarter of 2001. The increase from the second quarter of 2002 was primarily due to the gains realized from the sales or maturities of short-term investments. The increase from the third quarter of 2001

-21-


was primarily due to $22 million in charges for other-than-temporary declines in the fair value of our investments incurred during the third quarter of 2001. In the first nine months of 2002, interest and other income, net of $31 million increased $11 million compared to the first nine months of 2001.2002. The increase was primarily due to $22 million in charges for other-than-temporary declines in the fair value of our equity investments incurred during the first nine months of 2001, partially offset by lower interest rates and investment balances during the first nine months of 2002.
Interest expense of $21 million in the third quarter of 2002 increased 31 percent comparedprimarily to the second quartereffect of the 4.50% notes sold in November 2002 primarily due to a decrease inand the amount of capitalized interest during the third quarter of 2002. Interest expense for the third quarter of 2002 increased $11$110 million compared to the same quarter of 2001 primarily due to interest expense incurred on our $500 million 4.75% Convertible Senior Debentures Due 2022, issuedterm loan drawn at the end of January 2002 and a decrease in the amount ofSeptember 2002. In addition, we capitalized interest incurred during the third quarter of 2002. Interest expense of $49$8.8 million in the first nine months of 2002 decreased six percenton continued expansion and facilitization of Fabs 25 and 30 compared to $1.5 million in the first nine months of 20012003.

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 technology agreement with IBM to develop future generations of our logic process technology, we have ceased silicon processing associated with logic research and development in our Submicron Development Center (SDC) and have eliminated most of those related resources, including the sale or abandonment of certain equipment used in the SDC.

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

-26-


sublease, certain facilities currently occupied under long-term operating leases. We have 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 logic development activities, asset impairment charges of $30.6 million resulting from the abandonment of equipment previously used in logic process development and manufacturing activities, anticipated exit costs of $138.9 million primarily related to vacating and consolidating our facilities and $55.5 million resulting from the abandonment of partially completed ERP software and other information technology implementation activities.

In the third quarter ended September 28, 2003, we revised our estimates of the number of positions to be eliminated pursuant to the 2002 Restructuring Plan from 2,000 to 1,800 in response to the additional resources required due to the FASL LLC transaction. As a larger amountresult, we reversed $8 million of capitalized interest duringthe estimated severance and fringe benefit accrual due to the decision to reduce the number of positions to be eliminated by 200. Therefore, the 2002 Restructuring Plan will result in the reduction of approximately 1,800 positions or 14 percent of our employees, affecting all levels of our workforce in almost every organization. As of September 28, 2003, 1,512 employees had been terminated pursuant to the 2002 Restructuring Plan resulting in cumulative cash payments of $50 million in severance and employee benefit costs. We expect to substantially complete the activities associated with the 2002 Restructuring Plan by the end of December 2003.

During the first nine monthsquarter of 2003, management approved the sale of additional equipment, primarily equipment used in the SDC, that has been 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 equipment’s sale.

The following table summarizes activities under the 2002 offset by additional interestRestructuring Plan through September 28, 2003:

(Thousands)  Severance and
Employee
Benefits


  Asset
impairment


  Exit and
Equipment
Decommission
Costs


  Other
Restructuring
Charges


  Total

 

2002 provision

  $68,770  $118,590  $138,900  $4,315  $330,575 

Q4 2002 non-cash charges

   —     (118,590)  —     —     (118,590)

Q4 2002 cash charges

   (14,350)  —     (795)  —     (15,145)
   


 


 


 


 


Accruals at December 29, 2002

   54,420   —     138,105   4,315   196,840 

Q1 2003 provision

   —     7,791   3,314   —     11,105 

Q1 2003 non-cash charges

   —     (7,791)  —     —     (7,791)

Q1 2003 cash charges

   (17,820)  —     (751)  (4,223)  (22,794)
   


 


 


 


 


Accruals at March 30, 2003

   36,600   —     140,668   92   177,360 

Q2 2003 cash charges

   (14,922)  —     (8,309)  (77)  (23,308)
   


 


 


 


 


Accruals at June 29, 2003

   21,678   —     132,359   15   154,052 

Q3 2003 non-cash adjustment

   (8,000)  —     —     —     (8,000)

Q3 2003 cash charges

   (2,568)  —     (5,934)  —     (8,502)
   


 


 


 


 


Accruals at September 28, 2003

   11,110   —     126,425   15   137,550 
   


 


 


 


 


-27-


As a result of the 2002 Restructuring Plan, we expect to realize cost reductions of approximately $150 million in 2003. As of September 28, 2003, the actions taken to date pursuant to the 2002 Restructuring Plan resulted in actual expense on our $500 million 4.75% Convertible Senior Debentures Due 2022.

reduction of approximately $108 million. We have also implemented other cost reduction initiatives that are incremental to the specific expense reductions resulting from the 2002 Restructuring Plan.

In fiscal 2001, we announced a restructuring plan (the 2001 Restructuring Plan), due to athe continued slowdown in the semiconductor industry and a resulting decline in revenues. In connectionWe have substantially completed our execution of the 2001 Restructuring Plan, with the plan, we closed Fabs 14 and 15 in Austin, Texas in June 2002. These facilities supported certainexception of our older products and Foundry Service operations, which have been discontinued as part of our plan. We also reorganized related manufacturing facilities and equipment decommission activities which are expected to be completed by the end of 2003. During the first quarter of 2003, we reduced relatedthe estimated accrual of the facility and equipment decommission costs by $7.4 million based on the most current information available. During the first quarter, we also realized a recovery of approximately $1.6 million from the sale of equipment impaired as a result of the 2001 Restructuring Plan, previously held-for-sale at amounts in excess of its initially estimated fair value. Both amounts were included in restructuring and other special charges (recoveries) net.

The following table summarizes activities primarily in Penang, Malaysia, along with associated administrative support.

Pursuant tounder the 2001 Restructuring Plan during the first nine months ended September 28, 2003:

(Thousands)  Facilities and
Equipment
Decommission
Costs


  Other
Facilities
Exit Costs


  Total

 

Accrual at December 29, 2002

  $15,055  $646  $15,701 

Q1 2003 cash charges

   (630)  —     (630)

Q1 2003 non-cash adjustment

   (7,400)  —     (7,400)
   


 

  


Accruals at March 30, 2003

   7,025   646   7,671 

Q2 2003 cash charges

   (226)  —     (226)
   


 

  


Accruals at June 29, 2003

   6,799   646   7,445 

Q3 2003 cash charges

   (596)  —     (596)
   


 

  


Accruals at September 28, 2003

  $6,203  $646  $6,849 
   


 

  


As a result of the 2001 Restructuring Plan, we recorded restructuring costs and other special charges of $89.3 million, consisting of $34.1 million of anticipated severance and fringe benefit costs, $13.0 million and $3.2 million of anticipated exit costs to close facilities in Austin and Asia, mostly in Penang, and $28.7 million and $10.3 million of non-cash asset impairment charges in Austin and Asia, primarily Penang. The asset impairment charges related primarily to buildings and production equipment that were incurred as a result of our decision to implement the restructuring plan. Management determined the fair value of the affected equipment based on market data and conditions.

As of September 29, 2002, 2,209 employees were terminated pursuant to the 2001 Restructuring Plan, resulting in cash payments of approximately $35.8 million in severance and employee benefit costs, of which $1.7 million was included in current year results of operations. 720 of these positions were associated with closing Fabs 14 and 15 in Austin. The balance of the reductions resulted from reorganizing activities primarily in Penang, Malaysia, along with associated administrative support. While the planned facilities closures had been completed as of September 29, 2002, related de-commissioning costs are expected to be incurred over the next nine months.

-22-


We recorded an additional charge of $6.9 million during the third quarter of 2001 for the impairment of inventories associated with product lines to be discontinued as part of our 2001 Restructuring Plan. This amount was recorded in cost of sales in our statement of operations.
The table in Note 11 of the Condensed Consolidated Financial Statements summarizes activity under the 2001 Restructuring Plan through September 29, 2002. As a result of this restructuring plan, we expect to realize overall cost reductions of $129 million on an annualized basis. The actions taken to date have resulted in actual savings of approximately $30$83 million in 2002, and additional savings of approximately $96 million in the first nine months of 2003.

Income Taxes

We recorded no income tax benefit against our pre-tax losses in the third quarter of 2002.

Income Tax
We recorded2003 and an income tax benefit of $73 million in the third quarter of 2002 and an2002. The income tax provision for the nine months ended September 28, 2003 was $3 million, and reflects the netting of U.S. federal tax refunds and taxes due on income generated in certain states and foreign tax jurisdictions. No net tax benefit of $65 millionwas recorded in the third quarterfirst nine months of 2001. 2003 on pre-tax losses due to continuing operating losses.

-28-


The effective tax benefit rates for the quarter and nine months ended September 29, 2002 were 22 percent and 30 percent, respectively, reflecting a valuation allowance against certain deferred tax assets. The effective tax benefit rates for the quarter and nine months ended September 30, 2001 were 26 percent and 12 percent, respectively, reflecting the provision of U.S. taxes on certain previously undistributed earnings of low-taxed foreign subsidiaries. The tax benefit on the restructuring chargesassets in the quarter ended September 30, 2001form of tax credit carryforwards where we believed it was $21 million or 24 percent, reflectingmore likely than not that the allocation of the charge between U.S. and foreign low-taxed jurisdictions.

credits would not be utilized prior to their expiration.

Other Items

International sales as a percent of net sales were 79 percent in the third quarter of 2003 compared to 73 percent in the second quarter of 2003 and 75 percent in the third quarter of 2002. International sales as a percent of net sales were 75 percent in the third quarterfirst nine months of 2002 compared to 72 percent in the second quarter of 20022003 and 68 percent in the third quarter of 2001. International sales as a percent of net sales were 69 percent in the first nine months of 2002 compared to 64 percent in the first nine months of 2001.2002. During the third quarter of 2002,2003, approximately one21 percent of our net sales were denominated in foreign currencies other than the sameU.S. dollar, primarily the yen, as incompared to one percent during the secondthird quarter of 2002. We doThis was due to the consolidation of FASL LLC. Our foreign exchange risk exposure resulting from these sales is partially mitigated as a result of our yen denominated die purchases. The impact on our operating results from changes in foreign currency rates individually and in the aggregate has not have sales denominated in local currencies in countries that have highly inflationary economies.

been material, principally as a result of our foreign currency hedging activities.

Comparison of Segment Income (Loss)

For a comparison of segment net sales, refer

Prior to the previous discussionsthird quarter of 2003, we had two reportable segments, the Core Products and Foundry Services segments. Primarily as a result of the formation of FASL LLC, we re-evaluated our reportable segments. We review and assess operating performance using segment revenues and operating income before interest, taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on net sales by product group.

-23-
management judgment.


Beginning in the third quarter of 2003, we changed our reportable segments to: the Computation Products segment, which includes x86 microprocessors for servers, workstations, desktop and notebook PCs and chipset products, and the Memory Products segment, which includes the Flash memory products of AMD and FASL LLC. Microprocessor products include our AMD OpteronTM, AMD AthlonTM and AMD DuronTM microprocessors. Memory products include Flash memory devices and Erasable Programmable Read-Only Memory, or EPROM devices. We believe that separate reporting of these operating segments, given our new focus on FASL LLC as a separate operating company and its separate market brand—Spansion, provides more useful information.

The All Other category comprises other small operating segments (Personal Connectivity Solutions Products, which includes lower power MIPS and x86 solutions, and Foundry Services, which included fees from our former voice communications and programmable logic products subsidiaries) that are neither individually nor in the aggregate material. This category also includes certain operating expenses and credits that are not allocated to the operating segments. Prior period segment information has been restated to conform to the current period presentation. However, as the results of operations for prior periods do not include the consolidation of FASL LLC’s operations, the restated information for the Memory Products segment for the current periods are not comparable to those in prior periods.

The following is a summary of operating income (loss)loss by segment and category for the periods presented below:

     
Quarter Ended

     
Nine Months Ended

 
     
September 29,
2002

   
June 30,
2002

     
September 30,
2001

     
September 29,
2002

     
September 30,
2001

 
(Millions)
                            
Core Products    $(331)  $(289)    $(124)    $(632)    $70 
Foundry Services     6    (7)     (9)     (3)     (15)
     


  


    


    


    


Total segment operating income (loss)    $(325)  $(296)    $(133)    $(635)    $55 
     


  


    


    


    


Core Products’

   Quarters Ended

  Nine Months Ended

 
(Millions)  

September 28,

2003


  

June 29,

2003


  

September 29,

2002


  

September 28,

2003


  

September 29,

2002


 

Computation Products

  $19  $(52) $(317) $(86) $(503)

Memory Products

   (49)  (73)  (14)  (187)  (101)

All Other

   —     2   6   (6)  (31)
   


 


 


 


 


Total segment operating income (loss)

  $(30) $(123) $(325) $(279) $(635)
   


 


 


 


 


-29-


Computation Products operating resultsincome of $19 million for the third quarter of 2002 decreased $422003 improved $71 million compared tofrom the second quarter of 20022003 and $207$336 million comparedfrom the third quarter of 2002. The increases were due to the sameincrease in revenue over the second quarter of 2001. Core Products’2003 and the third quarter of 2002. Computation Products operating resultsloss of $86 million for the nine months ended September 28, 2003 improved $417 million from the nine months ended September 29, 2002. The improvement was due to cost reduction efforts, including cost savings realized pursuant to our 2002 Restructuring Plan.

Memory products operating loss of $49 million for the third quarter of 2003 decreased by $24 million from the second quarter of 2003, and increased by $35 million from the third quarter of 2002. Memory Products operating loss of $187 million for the nine months ended September 28, 2003 increased $86 million from the nine months ended September 29, 2002. Further quantification of the changes is not practical due to the reorganization of geographical sales territories between AMD and Fujitsu.

-30-



FINANCIAL CONDITION

Net cash used by operating activities was $93 million in the first nine months of 2002 decreased $7022003, primarily as a result of our year-to-date net loss of $318 million compared to the first nine monthsand other uses of 2001. The changecash in operating results was primarilyactivities of approximately $436 million due to net changes in operating assets and liabilities, offset by non-cash charges, including $708 million of depreciation and amortization, non-cash credits of $49 million from foreign grant and subsidy income, and $20 million of net loss on disposal of property, plant and equipment. The net changes in operating assets and liabilities included a decline in both average selling pricespayment of $90 million for technology licenses, approximately $27 million refund of customer deposits under long-term purchase agreements, and unit shipmentsapproximately $35 million of our PC processors.

-24-
severance payment under the 2002 Restructuring Plan.



FINANCIAL CONDITION

Net cash provided by operating activities was $9 million in the first nine months of 2002 as a result of non-cash charges, including $556 million of depreciation and amortization, $12 million of net loss on disposal of property, plant and equipment and other cash provided by operating activities of approximately $144 million of other cash due to net changes in operating assets and liabilities. This wasliabilities, offset by our nine-monthyear-to-date net losses of $448 million and non-cash credits of $248 million from net changes of $200 million in deferred income taxes and $48 million of foreign grant and subsidy income.

Net cash provided by operating activities was $56 million in the first nine months of 2001 as a result of non-cash charges, including of $472 million from depreciation and amortization, $23 million of net loss on disposal of property, plant and equipment and a nonrecurring $89 million from restructuring and other special charges. This was offset by our nine-month 2001 losses of $45 million, a reduction to operating cash flows from net changes in deferred income taxes and foreign grant and subsidy incomeincome.

Net cash provided by investing activities was $291 million during the first nine months of $532003, primarily as a result of $148 million as a result of the acquisition of a controlling interest in FASL LLC and a$530 million net decreasecash inflow from purchases and sales of $417available-for-sale securities, offset by $408 million from changes in operating assetsused for the purchases of property, plant and liabilities.

equipment.

Net cash used inby investing activities was $446 million in the first nine months of 2002, primarily due to $567 million used for the purchases of property, plant and equipment, $30 million, net of cash acquired, to purchase Alchemy Semiconductor, offset by $143 million of net cash inflow from purchases and sales of available-for-sale securities and $5 million of proceeds from the sale of property, plant and equipment.

Net cash used in investingprovided by financing activities was $466$366 million induring the first nine months of 20012003, primarily due to $542$245 million used for the purchasesreceived from equipment sale-leaseback transactions, $7 million in borrowings under our July 2003 Loan Agreement, $40 million cash note from Fujitsu as part of property, plant and equipment and $122FASL LLC transaction, $142 million of additional equity investments in FASL,capital investment grants received from the German government as part of the Dresden Fab 30 loan agreements, and $17 million of proceeds primarily from sale of stock under our Employee Stock Purchase Plan, offset by $196$85 million of net cash inflow from the purchasesin payments on debt and sales of available-for-sale securities.

capital lease obligations.

Net cash provided by financing activities was $529 million in the first nine months of 2002, primarily due to $486 million in proceeds, net of $14 million in debt issuance costs, from issuing our 4.75% Convertible Senior Debentures Due 2022,convertible senior debentures, $108 million in proceeds from our September 2002 Loan Agreement (currently the July 2003 FASL Term Loan), net of $2 million in debt issuance costs, $120 million in borrowings under our July 1999 Loan Agreement (currently the July 2003 Loan Agreement), $13 million in proceeds from equipment lease financing, $24 million in proceeds from the issuance of stock in connection with stock option exercises and employee purchases under our Employee Stock Purchase Plan and $50 million of capital investment grants and interest subsidies from the German government as part of the Dresden Fab 30 loan agreements, offset by $281 million in payments on debt and capital lease obligations.

Net cash provided by financing activities was $222 million during the first nine months of 2001 primarily due to $319 million from borrowing activities, $23 million of capital investment grants from the German government as part of the Dresden Fab 30 loan agreements, and $38 million in proceeds from issuance of stock in connection with stock option exercises and employee

-25-

-31-


purchases under our Employee Stock Purchase Plan, offset by $90 million in payments on debt and capital lease obligations and $69 million from our repurchase of our common stock.

Contractual Cash Obligations and Guarantees

The following tables summarize our principal contractual cash obligations and principal guarantees at September 29, 200228, 2003, and are supplemented by the discussion following the tables:

tables.

Principal Contractual Cash Obligations:Obligations at September 28, 2003 were:

   Payments Due By Period

(In Thousands)


  Total

  2003

  2004

  2005

  2006

  2007

  2008 and
beyond


4.75% Convertible Senior Debentures Due 2022

  $500,000  $—    $—    $—    $—    $—    $500,000

4.50% Convertible Senior Notes Due 2007

   402,500   —     —     —     —     402,500   —  

Dresden term loans

   612,740   —     34,424   309,813   268,503   —     —  

July 2003 FASL term loan

   89,375   16,875   27,500   27,500   17,500   —     —  

Manufacturing Joint Venture loan

   160,923   —     42,913   42,913   42,913   32,184   —  

Fujitsu cash note

   40,000   —     —     10,000   30,000   —     —  

Capital lease obligations

   276,038   19,616   91,970   85,600   74,526   4,326   —  

Operating leases

   475,259   18,258   69,764   58,728   47,429   39,733   241,347

Unconditional purchase commitments

   127,988   13,033   52,030   52,022   3,176   2,591   5,136
   

  

  

  

  

  

  

Total contractual cash obligations

  $2,684,823  $67,782  $318,601  $586,576  $484,047  $481,334  $746,483
   

  

  

  

  

  

  

Principal Guarantees at September 28, 2003 were:

Guarantees of indebtedness recorded on our consolidated balance sheets

(Thousands)
  
Total

  
2002

  
2003

  
2004

  
2005

  
2006

  
2007 and
Beyond

Notes payable to banks  $48,981  $48,981  $—    $—    $—    $—    $—  
September 2002 term loan   110,000   6,875   27,500   27,500   27,500   20,625   —  
Dresden term loans   551,636   101,321   213,900   157,610   78,805   —     —  
Convertible Senior Debentures   500,000   —     —     —     —     —     500,000
Capital lease obligations   44,043   3,748   15,838   15,600   5,508   3,349   —  
Operating leases   452,267   15,487   51,371   47,066   42,120   38,408   257,815
Unconditional purchase commitments   41,020   2,380   9,520   9,424   9,424   2,568   7,704
   

  

  

  

  

  

  

Total contractual cash obligations  $1,747,947  $178,792  $318,129  $257,200  $163,357  $64,950  $765,519
   

  

  

  

  

  

  

Guarantees:
                        
   
Amounts of guarantee expiration per period

(Thousands)
  
Total amounts
guaranteed

  
2002

  
2003

  
2004

  
2005

  
2006

  
2007 and
Beyond

Dresden guarantee  $300,000  $—    $—    $—    $300,000  $—    $—  
BAC guarantee   24,465   —     24,465   —     —     —     —  
FASL guarantee   127,000   —     —     —     —     —     127,000
Fujitsu guarantee   125,000   —     125,000   —     —     —     —  
   

  

  

  

  

  

  

Total guarantees  $576,465  $—    $149,465  $—    $300,000  $—    $127,000
   

  

  

  

  

  

  

Notes Payable

The following table summarizes the principal guarantees issued as of September 28, 2003 related to Banksunderlying liabilities that are already recorded on our consolidated balance sheets as of September 28, 2003:

      Amounts of guarantee expiration per period

(Thousands)


  Amounts*
Guaranteed


  2003

  2004

  2005

  2006

  2007

  2008 and
Beyond


Dresden term loan guarantee

  $306,369  $—    $—    $—    $306,369  $—    $—  

July 2003 FASL term loan guarantee

   53,625   10,125   16,500   16,500   10,500   —     —  

FASL capital lease guarantees

   155,812   10,587   47,998   51,128   43,397   2,702   —  

Manufacturing Joint Venture term loan guarantee

   96,554   —     25,748   25,748   25,748   19,310   —  
   

  

  

  

  

  

  

Total guarantees

  $612,360  $20,712  $90,246  $93,376  $386,014  $22,012  $0
   

  

  

  

  

  

  

*Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses.

-32-


Guarantees of indebtedness not recorded on our consolidated balance sheets

The following table summarizes the principal guarantees issued as of September 28, 2003 for which the related underlying liabilities are not recorded on our consolidated balance sheets as of September 28, 2003:

      Amounts of guarantee expiration per period

 

(Thousands)


  Amounts
Guaranteed*


  2003

  2004

  2005

  2006

  2007

  2008 and
beyond


 

FASL LLC operating lease guarantees

  $29,386  $7,647  $21,739  $—    $—    $—    $—   

BAC payment guarantee

   28,686   —     —     —     —     —     28,686 

AMTC payment guarantee

   36,718   —     —     —     —     36,718   —   

AMTC rental guarantee

   130,036   —     —     —     —     —     130,036**
   

  

  

  

  

  

  


Total

  $224,826  $7,647  $21,739  $—    $—    $36,718  $158,722 
   

  

  

  

  

  

  


*Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses.
**Amounts outstanding will diminish until the expiration of the guarantee.

July 2003 Loan Agreement

On July 7, 2003, we amended and restated our 1999 Loan and Security Agreement

We entered into a Loan and Security Agreement (the July 1999 Loan Agreement) with a consortium of banks led by a domestic financial institutioninstitution. We further amended it on October 3, 2003 (the July 13, 1999.2003 Loan Agreement). The July 19992003 Loan Agreement currently provides for a four-year secured revolving line of credit of up to $200 million.$125 million that expires in July of 2007. We can borrow, subject to amounts that may bewere set aside by the lenders, up to 85 percent of our eligible accounts receivable from original equipment manufacturersOEMs and 50 percent of our eligible accounts receivable from distributors. We musthave to comply with, certainamong other things, the following financial covenants if the level ofour net domestic cash (as defined in the July 19992003 Loan Agreement) we hold declines to $200 million or the amount of borrowings under the July 1999 Loan Agreement rises to 50 percent of available credit. Under these circumstances the July 1999 Loan Agreement restrictsbelow $125 million:

restrictions on our ability to pay cash dividends on ourits common stock.stock;

maintain an adjusted tangible net worth (as defined in the July 2003 Loan Agreement) as follows:

Measurement Date


Amount

September 30, 2003

$1.25 billion

December 31, 2003

$1.25 billion

Last day of each fiscal quarter in 2004

$1.425 billion

Last day of each fiscal quarter in 2005

$1.85 billion

Last day of each fiscal quarter thereafter

$2.0 billion

achieve EBITDA (earnings before interest, taxes, depreciation and amortization) according to the following schedule:

Period


Amount

Four fiscal quarters ending September 30, 2003

$150 million

Four fiscal quarters ending December 31, 2003

$400 million

Four fiscal quarters ending March 31, 2004

$550 million

Four fiscal quarters ending June 30, 2004

$750 million

Four fiscal quarters ending September 30, 2004

$850 million

Four fiscal quarters ending December 31, 2004

$950 million

Four fiscal quarters ending March 31, 2005 and on each fiscal quarter thereafter

$1,050 million

At September 28, 2003, net domestic cash, as defined, totaled $429 million. Our obligations under the July 19992003 Loan Agreement are secured by a pledge of all of our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds from the realization of these assets. As of September 29, 2002, $45 million was outstanding under the July 1999 Loan Agreement, which we have subsequently repaid.

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As of September 29, 2002, we had approximately $18 million in lines of credit available to our foreign subsidiaries under other financing agreements, of which approximately $4 million was outstanding.
September 2002 Term Loan
On September 27, 2002, we entered into a term loan and security agreement with a domestic financial institution (the September 2002 Loan Agreement). Under the agreement, we can borrow up to $155 million to be secured by certain property, plant and equipment located at our Fab 25 semiconductor manufacturing facility in Austin, Texas. Amounts borrowed under the September 2002 Loan Agreement bear interest at a rate of LIBOR plus four percent, which was 5.8 percent at September 29, 2002. Repayment occurs in equal, consecutive, quarterly principal and interest payments beginning December 2002 and ending on September 2006. As of September 29, 2002, $110 million was outstanding under the September 2002 Loan Agreement. We must also comply with certain financial covenants if our net domestic cash balance (as defined in the September 2002 Loan Agreement) drops to an amount of $300 million or less. We intend to use the amounts borrowed under the September 2002 Loan Agreement for capital expenditures, working capital,proceeds. FASL LLC’s assets, accounts receivable, inventory and general corporate purposes.
intangibles are not pledged as security for our obligations.

4.75% Convertible Senior Debentures Due 2022

On January 29, 2002, we issued $500 million of our 4.75% Convertible Senior Debentures Due 2022 (the 4.75% Debentures) in a private offering pursuant to Rule 144A and Regulation S of the Securities Act.

The interest rate payable on the 4.75% Debentures will be reset on each of August 1, 2008, August 1, 2011 and August 1, 2016 to a rate per annum equal to the interest rate payable 120 days prior to the reset dates on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4.75 percent and will not exceed 6.75 percent. Holders of the Debentures will also have the right to require us to repurchase all or a portion of theirour 4.75% Debentures on February 1, 2009, February 1, 2012, and

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February 1, 2017, at2017. The holders of the 4.75% Debentures will also have the ability to require us to repurchase the Debentures in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price equal towould be 100 percent of the principal amount of the 4.75% Debentures plus accrued and unpaid interest. The 4.75% Debentures are convertible by the holders into our common stock at a conversion price of $23.38 per share at any time. At this conversion price, each $1,000 principal amount of the 4.75% Debentures will be convertible into approximately 43 shares of our common stock.

Issuance costs incurred in the amount of approximately $14 million are being amortized ratably, which approximates the interest method over the term of the 4.75% Debentures as interest expense.

Beginning on February 5, 2005, the 4.75% Debentures are redeemable by us for cash at specified prices expressed as a percentage of the outstanding principal amount plus accrued and unpaid interest at our option, provided that we may not redeem the 4.75% Debentures prior to February 1,5, 2006 unless the last reported sale price of our common stock is at least 130 percent of the then effective conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date of the redemption notice.

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The redemption prices are as follows for Debentures to be redeemed during the periods set forth below:

specified periods:

Period


  
Price


 

Beginning on February 5, 2005 through February 4, 2006

  102.375%

Beginning on February 5, 2006 through February 4, 2007

  101.583%

Beginning on February 5, 2007 through February 4, 2008

  100.792%

Beginning on February 5, 2008

  100.000%
Holders of the Debentures will have the ability to require us to repurchase the Debentures at 100 percent of par in $1,000 increments, in whole or in part, on February 1, 2009, February 1, 2012 and February 1, 2017. The holders of the Debentures will also have the ability to require us to repurchase the Debentures in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price would be 100 percent of the principal amount of the Debentures plus accrued and unpaid interest.

We may elect to purchase or otherwise retire our bonds with cash, stock or assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries where we believe that market conditions are favorable to do so. Such purchases may have a material effect on our liquidity, financial condition and results of operations.

4.50% Convertible Senior Notes Due 2007

On November 25, 2002, we sold $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 is 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 are redeemable by us at our option for cash at specified prices expressed as a percentage of the outstanding principal amount plus accrued and unpaid interest provided that we may not redeem the 4.50% Notes unless the last reported sale price of our common stock is at least 150 percent of the then effective conversion price for at least 20 trading days within a period of thirty trading days, ending within 5 trading days of the date of the redemption notice.

The redemption prices are as follows for the specified periods:

Period


Price

Beginning on December 4, 2005 through November 30, 2006

101.8%

Beginning on December 1, 2006 through November 30, 2007

100.9%

On December 1, 2007

100.0%

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The 4.50% Notes are convertible at the option of the holder at any time prior to the close of business on the business day immediately preceding the maturity date of December 1, 2007, unless previously redeemed or repurchased, into shares of common stock at a conversion price of $7.37 per share, subject to adjustment in certain circumstances. At this conversion price, each $1,000 principal amount of the 4.50% Notes will be convertible into approximately 135 shares of our common stock. Issuance costs incurred in the amount of approximately $12 million are being amortized ratably, which approximates the interest method, over the term of the 4.50% Notes as interest expense.

Holders have the right to require us to repurchase all or a portion of our 4.50% Notes in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price would be 100 percent of the principal amount of the 4.50% Notes plus accrued and unpaid interest.

Dresden Term Loans and Dresden Term Loan Guarantee

AMD Saxony, Limited Liability Company & Co. KG (formerly known as AMD Saxony Manufacturing GmbH) (AMD Saxony), an indirect wholly-ownedwholly owned German subsidiary of AMD, continues to facilitize Dresden Fab 30, which began production in the third quarter of 2000. AMD, the Federal Republic of Germany, the State of Saxony, and a consortium of banks are providing financing for the project.We currently estimate that the construction and facilitization costs of Dresden Fab 30 will be $2.6$2.7 billion when it is fully equipped by the end of 2005. As of September 29, 2002,28, 2003, we had invested $2.1$2.2 billion in AMD Saxony.

In March 1997, AMD Saxony entered into a loan agreement and other related agreements (the Dresden Loan Agreements) with a consortium of banks led by Dresdner Bank AG a German financial institution, in order to finance the project. The Dresden Loan Agreements were amended in February 1998, June 1999, February 2001 and June 2002.

Because most of the amounts under the Dresden Loan Agreements are denominated in deutsche marks (converted to euros), the dollar amounts set forth below are subject to change based on applicable conversion rates. We used the exchange rate that was permanently fixed on January 1, 1999, of 1.95583 deutsche marks to 1.00one euro for the conversion of deutsche marks to euros, and then used exchange rate of 1.020.87 euro to 1.00one U.S. dollar as of September 29, 2002,28, 2003, to valuetranslate the amounts denominated in deutsche marks.

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marks into U.S. dollars.


The Dresden Loan Agreements, as amended, provide for the funding of the construction and facilitization of Dresden Fab 30. The funding consists of:

equity contributions, subordinated and revolving loans and loan guarantees from, and full cost reimbursement through, AMD;

loans from a consortium of banks; and
equity contribution, subordinated and revolving loans and loan guarantees from and full cost reimbursement through AMD;

grants, subsidies and loan guarantees from the Federal Republic of Germany and the State of Saxony.
loans from a consortium of banks; and
grants, subsidies and loan guarantees from the Federal Republic of Germany and the State of Saxony.

The Dresden Loan Agreements require that we partially fund Dresden Fab 30 project costs in the form of subordinated and revolving loans to, or equity investments in, AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, as of September 29, 2002, we had invested $14828, 2003, the balances were $168 million in the form of subordinated loans, $257$66 million in the form of revolving loans and $286 million in the form of equity

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investments in AMD Saxony.Saxony, net of repayments. These amounts have been eliminated in our consolidated financial statements.

In addition to support from AMD, the consortium of banks referred to above had made available up to $751$880 million in loans to AMD Saxony to help fund Dresden Fab 30 project costs. The loans have been fully drawn and a portion has been repaid. AMD Saxony had $552$613 million of such loans outstanding as of September 29, 2002,28, 2003, which are included in our consolidated balance sheets. Please refer to the Contractual Cash Obligation table, above, for repayment schedule.

Finally, pursuant to a Subsidy Agreement, as amended in August 2002, the Federal Republic of Germany and the State of Saxony are supporting the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in the form of:

guarantees equal to 65 percent of AMD Saxony’s outstanding bank debt, or $398 million;

capital investment grants and allowances totaling $477 million; and
guarantees equal to the lesser of 65 percent of AMD Saxony bank debt or $751 million;

interest subsidies totaling $176 million.
capital investment grants and allowances totaling $407 million; and
interest subsidies totaling $146 million.

Of these amounts, AMD Saxony had received approximately $284$412 million in capital investment grants and allowances, and $146$122 million in interest subsidies. Of theIn addition, AMD Saxony received advanced payments for interest subsidies received, approximately $25 million is restricted from our access for more than one year, and are therefore included in Other Assets. In additionamounting to the above-mentioned subsidies,$28 million. AMD Saxony had also received $25$44 million in research and development subsidies through September 29, 2002. These amounts28, 2003. Amounts received under the Subsidy Agreement are included inrecorded as a long-term liability on our consolidated financial statements.statements and are being amortized to operations ratably over the contractual life of the Subsidy Agreement as a reduction to operating expenses through December of 2008. The historical rates were used to translate the amounts denominated in deutsche marks (converted to euros) into U.S. dollars.

The Subsidy Agreement, as amended, imposes conditions on AMD Saxony, including the requirement to attain a certain employment levelsemployee headcount by December 2003 and to maintain those levelssuch headcount until December 2008. Noncompliance with the conditions of the grants, allowances and subsidies could result in the forfeiture of all or a portion of the future amounts to be received, as well as the repayment of all or a portion of amounts received to date. In December 2002, AMD Saxony reduced its anticipated December 2003 employment levels as a result of the 2002 Restructuring Plan (see Note 9 of the Condensed Consolidated Financial Statements). Consequently, the anticipated headcount is below the level required to be maintained by the Subsidy Agreement. Based on these revised headcount estimates, the maximum amount of capital investment grants and allowances available under the Subsidy Agreement would be reduced from $477 million to $418 million. We adjusted the quarterly amortization of these amounts accordingly. There have been no conditions of noncompliance through September 29, 200228, 2003 that would result in forfeiture of any of the grants and allowances.

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The Dresden Loan Agreements, as amended, also require that we:

provide interim funding to AMD Saxony if either the remaining capital investment grants and allowances or the remaining interest subsidies are delayed, such funding to be repaid to AMD as AMD Saxony receives the investment grants and allowances or subsidies from the State of Saxony;

fund shortfalls in government subsidies resulting from any default under the subsidy agreements caused by AMD Saxony or its affiliates; and
provide interim funding to AMD Saxony if either the remaining capital investment subsidies or the remaining interest subsidies are delayed, such funding to be repaid to AMD as AMD Saxony receives the grants or subsidies from the State of Saxony;

-36-


fund shortfalls in government subsidies resulting from any default under the Subsidy Agreement caused by AMD Saxony or its affiliates; and
guarantee up to 35guarantee up to 50 percent of AMD Saxony’s obligations under the Dresden Loan Agreements, which guarantee must not be less than $109 million or more than $300 million, until the bank loans are repaid in full.
The Dresden Loan Agreements, also require AMD Saxony to maintainwhich guarantee must not be less than $128 million or more than $344 million, until the bank balancesloans are repaid in an amount equal tofull. As of September 28, 2003, the amount ofoutstanding under the installment of principal next due for repayment. guarantee was $306 million.

As AMD Saxony’s obligations under the Dresden Loan Agreements are included in our consolidated financial statements, no incremental liability is recorded under the Dresden guarantee.

AMD Saxony would be in default under the Dresden Loan Agreements if we, AMD Saxony, or AMD Saxony Holding GmbH (AMD Holding) fail, AMD Saxony Admin GmbH or AMD Saxony LLC failed to comply with certain obligations thereunder or upon the occurrence of certain events, including:

our failure to fund equity contributions or loans or otherwise comply with our obligations relating to the Dresden Loan Agreements;

the sale of shares in AMD Saxony, AMD Holding, AMD Saxony Admin GmbH or AMD Saxony LLC;
material variances from the approved plan and specifications;

the failure to pay material obligations;
our failure to fund equity contributions or loans or otherwise comply with our obligations relating to the Dresden Loan Agreements;

the occurrence of a material adverse change or filings or proceedings in bankruptcy or insolvency with respect to us, AMD Saxony, AMD Holding, AMD Saxony Admin GmbH or AMD Saxony LLC;
the sale of shares in AMD Saxony or AMD Holding;

the occurrence of a default under the July 2003 Loan Agreement; and
the failure to pay material obligations;

AMD Saxony’s noncompliance with certain financial covenants, including a minimum tangible net worth covenant, a minimum interest cover ratio, an asset cover ratio and a minimum liquidity covenant.
the occurrence of a material adverse change or filings or proceedings in bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding; and
the occurrence of a default under the July 1999 Loan Agreement or the September 2002 Loan Agreement.

Generally, any default with respect to borrowings made or guaranteed by AMD that results in recourse to us of more than $2.5 million, and that is not cured by us, would result in a cross-default under the Dresden Loan Agreements, the July 1999 Loan Agreement and the September 2002 Loan Agreement.Agreements. As of September 29, 2002,28, 2003, we were in compliance with all conditions of the Dresden Loan Agreements.

In the event we are unable to meet our obligations to AMD Saxony as required under the Dresden Loan Agreements, we will be in default under the Dresden Loan Agreements, the July 1999 Loan Agreement and the September 2002 Loan Agreement, which would permit acceleration of certain indebtedness which could haveof approximately $613 million. The occurrence of a material adverse effect on us.default under the Dresden Loan Agreements would likely result in a cross-default under the Indentures governing our 4.75% Debentures and 4.50% Notes. We cannot assure that we will be able to obtain the funds necessary to fulfill these obligations. Any such failure would have a material adverse effect on us.

Advanced Mask Technology Center Guarantee and BAC Guarantee

The Advanced Mask Technology Center GmbH & Co. KG (AMTC), and Maskhouse Building Administration GmbH & Co., KG (BAC), are joint ventures formed by AMD,us, Infineon Technologies AG and DuPont Photomasks, Inc. for the purpose of constructing and operating a new advanced photomask facility in Dresden, Germany. InTo finance the project, BAC entered into an $86 million bridge loan in June 2002, and BAC and AMTC entered into a $138 million revolving credit facility and an $86 million term loan in connectionDecember 2002. In September 2003, the outstanding amounts under the bridge loan were repaid with proceeds from the financing ofterm loan. Also in December 2002, in order to occupy the construction of thisphotomask facility, AMDAMTC entered into a rental agreement with BAC. With regard to these commitments by BAC and AMTC, we guaranteed the payment obligations of BAC, in an amount not

-30-


up to exceed $24.5approximately $29 million plus interest and expenses. We expect that AMTCexpenses under the term loan, up to approximately $37 million plus interest and BAC will obtain additional financing forexpenses under the constructionrevolving loan, and facilitizationup to approximately $16 million, initially, under the rental

-37-


agreement. The obligations under the rental agreement guarantee diminish over time through 2011 as the term loan is repaid. However, under certain circumstances of default by the other tenant of the photomask facility under its rental agreement with BAC and that we may be required to enter into additional guarantee arrangements in connection with this financing.

FASL Facilities and Guarantees
FASL, acertain circumstances of default by more than one joint venture formed by AMD and Fujitsu Limited in 1993, operates advanced wafer fabrication facilities in Aizu-Wakamatsu, Japan (FASL JV1, FASL JV2 and FASL JV3), for the production of Flash memory devices, which are sold to us and Fujitsu. FASL is continuing the facilitization of FASL JV2 and FASL JV3. We expect FASL JV2 and JV3, including equipment, to cost approximately $2.1 billion when fully equipped. As of September 29, 2002, approximately $1.6 billion of these costs had been funded by cash generated from FASL operations. These costs are incurred in Japanese yen and are, therefore, subject to change due to foreign exchange rate fluctuations. We used the exchange rate on September 29, 2002 of 122.83 yen to 1.00 U.S. dollar to translate the amounts denominated in yen into U.S. dollars.
In 2000, FASL further expanded its production capacity through a foundry arrangement with Fujitsu Microelectronics, Inc. (FMI), a wholly owned subsidiary of Fujitsu Limited. In connection with FMI equipping its wafer fabrication facility in Gresham, Oregon (the Gresham Facility) to produce Flash memory devices for sale to FASL, we agreed to guarantee (the Guarantee) the repayment of up to $125 million to Fujitsu in connection with Fujitsu’s obligation as a co-signer with FMIpartner under its global multicurrency revolving credit facility (the Credit Facility) with a third-party bank. On November 30, 2001, Fujitsu announced that it was closingrental agreement guarantee obligations, the Gresham Facility, due to a downturn of the Flash memory market. On March 26, 2002, we received notice from Fujitsu that FMI requested an advance of funds from Fujitsu to avoid default under the Credit Facility, which notice is required as a condition to our obligations under the Guarantee. However, to date we have not received a demand for payment under the terms of the Guarantee from Fujitsu. Furthermore, we continue to disagree with Fujitsu as to themaximum potential amount if any, of our obligations under the Guarantee. While we continuerental agreement guarantee is approximately $130 million. As of September 28, 2003, $12 million was drawn under the revolving credit facility, and $75 million was drawn under the term loan and are subject to discuss this matter with Fujitsu, we cannot at this time reasonably predict its outcome including any amounts we might be required to pay Fujitsu, and, therefore,the aforementioned guarantees.

We have not recorded any liability in our consolidated financial statements associated with the Guarantee.

A significant portion of FASL’s capital expenditures in 2002 will continue to be funded by cash generated from FASL’s operations. However,guarantees because they were issued prior to the extenteffective date of FIN 45.

Capital Lease Obligations

As of September 28, 2003, we had capital lease obligations of approximately $276 million. Obligations under these lease agreements are collateralized by the assets leased and are payable through 2007. Leased assets consist principally of machinery and equipment.

Operating Leases, Unconditional Purchase Commitments and Other Operating Commitments

We lease certain of our facilities, including our executive offices in Sunnyvale, California, under lease agreements that expire at various dates through 2018. We lease certain of our manufacturing and office equipment for terms ranging from one to five years. Total future lease obligations as of September 28, 2003, were approximately $475 million, of which $130 million was recorded as a liability for certain facilities pursuant to our 2002 Restructuring Plan.

We enter into purchase commitments for manufacturing supplies and services. Total purchase commitments as of September 28, 2003, were approximately $128 million for periods through 2009. $90 million of the amount relates to the remaining payments for a three-year service contract. As the services are being performed ratably over the life of the arrangement, we expense the payments as incurred. As a result, we do not carry any liabilities relating to this agreement. The remaining $38 million consists of miscellaneous purchase agreements for raw materials and office supplies.

FASL LLC Debt and Guarantees

July 2003 FASL Term Loan

On July 11, 2003, we amended our September 2002 Loan Agreement and assigned it to FASL LLC. Under the Amended and Restated Term Loan Agreement (the July 2003 FASL Term Loan), amounts borrowed bear interest at a variable rate of LIBOR plus four percent, which was 5.14% percent at September 28, 2003. Repayment occurs in equal, consecutive, quarterly principal and interest installments ending in September 2006. As of September 28, 2003, $89 million was outstanding under the July 2003 FASL Term Loan, of which 60 percent is guaranteed by the Company and 40 percent is guaranteed by Fujitsu.

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FASL LLC must also comply with additional fundsfinancial covenants if its net domestic cash balance (as defined in the July 2003 FASL Term Loan) declines below $130 million through the first quarter of 2004, $120 million from the second quarter of 2004 and the end of 2005 and $100 million during 2006. At any time that net domestic cash falls below these thresholds, FASL LLC must comply with, among other things, the following financial covenants:

maintain an adjusted tangible net worth (as defined in the July 2003 FASL Term Loan) of not less than $850 million.

achieve EBITDA according to the following schedule:

Period


Amount

Quarter ending September 2003

(40 million)

For the six months ending December 2003

$75 million

For the nine months ending March 2004

$170 million

For the four quarters ending June 2004

$285 million

For the four quarters ending September 2004

$475 million

For the four quarters ending December 2004

$550 million

For the four quarters ending in 2005

$640 million

For the four quarters ending 2006

$800 million

maintain a Fixed Charge Coverage Ratio (as defined in the July 2003 FASL Term Loan) according to the following schedule:

Period


Ratio

Third Fiscal Quarter of 2003

-0.6 to 1.00

Fourth Fiscal Quarter of 2003

0.2 to 1.00

First Fiscal Quarter of 2004

0.25 to 1.00

Period ending June 2004

0.4 to 1.00

Period ending September 2004

0.8 to 1.00

Period ending December 2004

1.0 to 1.00

Full Fiscal Year 2005

1.0 to 1.00

Full Fiscal Year 2006

0.9 to 1.00

At September 28, 2003, FASL LLC’s net domestic cash totaled $202 million.

FASL Leases and Guarantees

On July 16, 2003, a wholly owned subsidiary of FASL LLC entered into a sale-leaseback transaction for certain equipment with a third party financial institution in the amount of 12 billion yen (approximately $100 million on July 16, 2003) in cash proceeds. Upon execution of the agreement, the equipment had a net book value of approximately $168 million. As the term on the leaseback is more than 75 percent of the remaining estimated economic lives of the equipment, we are requiredaccounting for the full facilitizationtransaction as a capital lease. We recognized an immediate loss of FASL JV2 and FASL JV3, we$16 million on the transaction due to the fact that the fair market value of the equipment was less than their net book value at the time of the transaction. We also recorded approximately $52 million of deferred loss which will be required to contribute cash or guarantee third-party loansamortized in proportion to the leased assets over their average estimated remaining lives, which is approximately 3 years. We guaranteed 50 percent or up to approximately $50 million of the outstanding obligations, under the lease arrangement. As of September 28, 2003, the outstanding lease obligation under this agreement was approximately $91 million. FASL LLC and its subsidiaries also entered into other capital lease transactions during the third quarter of 2003, which resulted in additional capital lease obligations of $152 million as of September 28, 2003.

We have guaranteed approximately $156 million of the total $276 million outstanding obligations under capital lease arrangements of FASL LLC as of September 28, 2003.

We also guaranteed certain operating leases entered into by FASL LLC and its subsidiaries totaling approximately $29 million as of September 28, 2003.

Fujitsu Cash Note

As a result of the FASL LLC transaction, Fujitsu also loaned to FASL LLC $40 million pursuant to a promissory note. The note has a term of three years, with four equal principal payments on September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006.

Manufacturing Joint Venture Loan and Guarantee

As a result of the FASL LLC transaction agreements with Fujitsu, the Manufacturing Joint Venture’s third party loans were refinanced from the proceeds of a term loan in the aggregate principal amount of 18 billion yen (approximately $161 million on September 28, 2003) entered into between a wholly owned subsidiary of FASL LLC and a Japanese financial institution. Under the agreement, the amounts borrowed bear an interest rate of TIBOR plus a spread that is determined by Fujitsu’s current debt rating. The current interest rate is 1.06%. Repayment occurs in equal, consecutive, quarterly principal installments ending in June 2007. Fujitsu has guaranteed 100 percent of the amounts outstanding under this facility. We have agreed to pay Fujitsu 60 percent of any amount paid by Fujitsu under its guarantee of this loan.

In addition, during the four-year period commencing on June 30, 2003, we are obligated to provide FASL LLC with additional funding to finance operations shortfall. Generally, FASL LLC is first

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required to seek any required financing from external sources. However, if such third party financing is not available, we must provide funding to FASL LLC equal to our 49.992 percentpro-rata ownership interest in FASL upLLC, which is currently 60 percent.

Other Financing Activities

We expect capital expenditures for 2003 to 25 billion yen ($204 million). Asbe approximately $600 million. The capital expenditures for the first six months of September 29, 2002, we had $127 million in loan guarantees outstanding with respect to FASL’s outstanding third-party loans.

UMC
On January 31, 2002, we entered into a memorandum of understanding with United Microelectronics Corporation (UMC) to establish a joint venture to operate a state-of-the-art, 300-mm wafer fabrication facility in Singapore for high-volume production of PC processors and

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other logic products. We remain in discussions with UMC as to2003 did not include expenditures made by the structure and timing of this proposed alliance. We have not to date executed any binding definitive joint venture agreement, and we cannot be sure that an agreement will be reached. To date no investments have been made in the proposed alliance.
Other
We plan to make capital investments of approximately $200 million during the remainder of 2002, including amounts related to the continued facilitization of Dresden Fab 30. We regularly assess markets for external financing opportunities including capital leases, equity and debt.Manufacturing Joint Venture. We believe that cash flows from our operations and current cash balances,together with available external financing activities,and the extension of existing facilities, will be sufficient to fund our operations and capital investments currently plannedin the short- and long-term. Should additional funding be required such as to meet the payment obligation of our long term debts 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 additional 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.

Supplementary Stock-Based Incentive Compensation Disclosures

Section I. Option Program Description

Our stock option programs are intended to attract, retain and motivate highly qualified employees. We have several stock option plans under which key employees have been granted incentive (ISOs) and nonqualified (NSOs) stock options to purchase our common stock. Generally, options vest and become exercisable over four years from the date of grant and expire five to ten years after the date of grant. ISOs granted under the plans have exercise prices of not less than 100 percent of the fair market value of the common stock on the date of grant. Exercise prices of NSOs range from $0.01 to the fair market value of the common stock on the date of grant.

Section II. General Option Information

The following is a summary of stock option activity for the next 12 months.

nine months ended September 28, 2003 and year ended December 29, 2002:

   

Nine Months Ended

September 28, 2003


  

Year Ended

December 29, 2002


   

Number of

Shares


  

Weighted-Average

Exercise Price


  

Number

of Shares


  Weighted-Average
Exercise Price


Options:

              

Outstanding at beginning of period

  60,408,754  $18.58  52,944,339  $20.44

Granted

  4,253,320   7.67  11,828,688   5.62

Canceled

  (22,122,447)  27.75  (3,413,705)  20.34

Exercised

  (629,311)  6.12  (950,568)  6.23
   

 

  

 

Outstanding at end of period

  41,910,316  $12.82  60,408,754  $18.58
   

 

  

 

Exercisable at end of period

  28,388,967  $13.60  33,806,970  $19.55

Available for grant at beginning of period

  13,018,643      21,145,854    

Available for grant at end of period

  30,434,693      13,018,643    

-40-


In-the-money and out-of-the-money stock option information as of September 28, 2003, was as follows:

As of September 28, 2003

    (Shares in thousands)


  Exercisable

  Unexercisable

  Total

  Shares

  Weighted
Average
Exercise
Price


  Shares

  Weighted
Average
Exercise
Price


  Shares

  Weighted
Average
Exercise
Price


In-the-Money

  16,890,031  $8.15  7,849,871  N/A (3) 24,739,902  $7.89

Out-of-the-Money(1)

  11,498,936  $21.61  5,671,478  N/A (3) 17,170,414  $19.93
   
      
     

   

Total Options Outstanding

  28,388,967      13,521,349     41,910,316 (2)   
   
      
     

   

(1)Out-of-the-money stock options have an exercise price equal to or above $10.87, the market value of AMD’s common stock, on the last trading day of the third quarter of 2003, September 26, 2003.
(2)Includes 422,603 shares granted from treasury stock as non-plan grants.
(3)Weighted average exercise price information for unexercisable options is not available.

Section III. Distribution and Dilutive Effect of Options

Options granted to employees, including officers, and non-employee directors were as follows:

   2003 YTD

  2002

  2001

 

Net grants(1) during the period as % of outstanding shares(2)

  (5.14%) 2.44% 3.71%

Grants to listed officers(3) during the period as % of total options granted

  10.63% 14.33% 7.88%

Grants to listed officers(3) during the period as % of outstanding shares

  0.13% 0.49% 0.33%

Cumulative options held by listed officers(3) as % of total options outstanding

  26.87% 17.93% 16.51%

(1)Options grants are net of options canceled.
(2)Outstanding shares as of September 28, 2003, December 29, 2002 and December 30, 2001.
(3)The “listed officers” are those listed in our proxy statement filed with our notice of annual meeting dated March 8, 2002 and March 25, 2003.

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Section IV. Executive Options

Options granted to listed officers for the nine months ended September 28, 2003 were as follows:

Name(1)


  2003 Option Grants

  

Potential Realizable Value at

Assumed Annual Rates of Stock

Price Appreciation for Option Term


  

Number of

Securities

Underlying

Options Per

Grant


  

Percent of Total

Options Granted

to Employees as of

September 28, 2003


  Exercise Price
Per Share


  Expiration
Date


  
                 0%        

  5%

  10%

W. J. Sanders III

  —    —     —    —     —     —     —  

Hector de J. Ruiz

  125,000  2.98% $7.36  5/1/2013  $—    $578,583  $1,466,243
   125,000  2.98% $7.16  8/1/2013  $—    $562,861  $1,426,399

Robert R. Herb

  19,791  0.47% $7.36  5/1/2013  $—    $91,606  $232,147
   19,791  0.47% $7.16  8/1/2013  $—    $89,117  $225,839

Robert J. Rivet

  31,250  0.75% $7.36  5/1/2013  $—    $144,646  $366,561
   31,250  0.75% $7.16  8/1/2013  $—    $140,715  $356,600

William T. Siegle

  18,750  0.45% $7.36  5/1/2013  $—    $86,787  $219,936
   18,750  0.45% $7.16  8/1/2013  $—    $84,429  $213,960

Thomas M. McCoy

  31,250  0.75% $7.36  5/1/2013  $—    $144,646  $366,561
   31,250  0.75% $7.16  8/1/2013  $—    $140,715  $356,600

(1)The “listed officers” are those listed in our proxy statement filed with out notice of annual meeting dated March 25, 2003.

Option exercises during 2003 and option values for listed officers(1) for the nine months ended September 28, 2003 were as follows:

Name


  

Shares

Acquired

on Exercise


  Value Realized (2)

  

Number of Securities
Underlying Unexercised

Options at 9/28/03


  

Values of Unexercised In-the

Money Options at 9/28/03


      Exercisable

  Unexercisable

  Exercisable

  Unexercisable

W. J. Sanders III

  —    $—  �� 3,550,000  250,000  $7,678,000  $—  

Hector de J. Ruiz

  —    $—    1,600,000  2,350,000  $—    $1,066,250

Robert R. Herb

  —    $—    962,509  327,075  $984,108  $474,083

Robert J. Rivet

  10,000  $71,500.00  377,780  284,720  $186,964  $470,661

William T. Siegle

  9,000  $64,260.00  532,666  110,834  $526,348  $420,095

Thomas M. McCoy

  —    $—    647,360  270,140  $368,176  $465,886

(1)The “listed officers” are those listed in our proxy statement filed with our notice of annual meeting dated March 25, 2003.
(2)Value for these purposes is based solely on the difference between market value of underlying shares on the applicable date (i.e., date of exercise or fiscal year-end) and exercise price of options.

Section V. Equity Compensation Plan Information

The number of shares issuable upon exercise of outstanding options granted to employees and non-employee directors, as well as the number of shares remaining available for future issuance, under our equity compensation plans as of September 28, 2003, are summarized in the following table:

  Nine Months Ended September 28, 2003

 

Plan category


 

Number of Securities to

be Issued Upon Exercise

of Outstanding Options


  

Weighted-Average

Exercise Price of

Outstanding Options


 

Number of Securities Remaining

Available for Future Issuance Under

Equity Compensation Plans (Excluding

Securities Reflected in Column (a)


 
  (a)  (b) (c) 

Equity compensation plans approved by shareholders

 23,383,135  $14.96 17,629,863 

Equity compensation plans not approved by shareholders

 18,527,181(1) $10.11 12,804,830(2)
  

 

 

TOTAL

 41,910,316     30,434,693 
  

 

 

(1)Includes 422,603 shares granted from treasury stock as non-plan grants.
(2)Of these shares, approximately 1,677,767 shares can be issued as restricted stock under the 1998 Stock Incentive Plan.

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On June 27, 2003, we filed a Tender Offer Statement with the SEC and made an offer, which was approved by our stockholders to exchange certain stock options to purchase shares of our common stock, outstanding under eligible option plans and held by eligible employees, for replacement options to be granted no sooner than six months and one day from the cancellation of the surrendered options. The offer to exchange expired on July 25, 2003. Options to purchase approximately 19 million shares of our common stock were tendered for exchange and cancelled on July 28, 2003. Subject to the terms of the offer to exchange, we will grant replacement options to purchase approximately 13.4 million shares of its common stock at fair market value on the date of grant on or after January 29, 2004, in exchange for the options cancelled. We do not expect to record compensation expense as a result of the exchange.

Recently Issued Accounting Pronouncements

We adopted Statement of

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 141, “Business Combinations” (SFAS 141), Statement46, “Consolidation of Variable Interest Entities” (FIN 46). Variable interest entities often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Accounting Standards No. 142, “GoodwillStatements,” defines what these variable interest entities are and Other Intangible Asset” (SFAS 142)provides guidelines on identifying them and Statementassessing an enterprise’s interests in a variable interest entity to decide whether to consolidate that entity. Generally, FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For existing variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003, the provisions of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) atthis interpretation will apply no later than the beginning of the 2002 fiscal year.first interim or annual reporting period beginning after June 15, 2003. The adoption of these standardsFIN 46 did not have a material impact on our results of operations or financial statements.

condition.

In July 2002,May 2003, the FASBFinancial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146150, “Accounting for Costs AssociatedCertain Financial Instruments with ExitCharacteristics of both Liabilities and Equity” (SFAS 150), which addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity – as either debt or Disposal Activities” (SFAS 146).equity in the balance sheet. The requirements apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” (EITF 94-3). The principal difference between SFAS 146 and EITF 94-3 relates to SFAS 146’s timing for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3 a liability for an exit cost as generally defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146150 is effective for exitfinancial instruments entered into or disposal activities that are initiatedmodified after DecemberMay 31, 2002, with early adoption encouraged. The Company will adopt SFAS 146 prospectively as of December 30, 2002,2003, and otherwise is effective at the beginning of fiscal yearthe first interim period beginning

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after June 15, 2003. The adoption of SFAS 150 did not have a material impact on our results of operations or financial condition.

Risk Factors

We must achieve market acceptance for our AMD Opteron and AMD Athlon 64 microprocessors, or we will be materially adversely affected. We introduced our AMD Opteron processors in April 2003 and therefore, its adoptionwe introduced our AMD Athlon 64 processors in September 2003. These processors are designed to provide high performance for both 32-bit and 64-bit applications in servers and workstations and in desktop and mobile PCs. The success of these processors is not expectedsubject to risks and uncertainties including market acceptance of our new 64-bit technology and our ability to produce them in a timely manner on new process technologies, including silicon-on-insulator technology, in the volume and with the performance and feature set required by customers; their market acceptance; the availability, performance and feature set of motherboards and chipsets designed for our eighth-generation processors; and the support of the operating system and application program providers for our 64-bit instruction set.

We cannot be certain that our substantial investments in research and development of process technologies will lead to improvements in technology and equipment used to fabricate our products or that we will have any impact onsufficient resources to invest in the Company’s current financial positionlevel of research and development that is required to remain competitive. We make substantial investments in research and development of process technologies in an effort to improve the technologies and equipment used to fabricate our products. For example, the successful development and implementation of silicon-on-insulator technology is critical to our AMD Opteron and AMD Athlon 64 microprocessors. In addition, we have an agreement with a partner to develop future generations of logic process technology. However, we cannot be certain that we will be able to develop or resultsobtain or successfully implement leading-edge process technologies needed to fabricate future generations of operations.

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our products profitably. Further, we cannot assure you that we will have sufficient resources to maintain the level of investment in research and development that is required for us to remain competitive or that our partnerships will be successful.


RISK FACTORS

We have recently experienced substantial fluctuations in revenues since 2001, and we may experience declines in revenues and increases in operating losses and we may experience additional declines in revenues and operating losses.the future.
Our historical financial results have been, and our future financial results are anticipated to be, subject to substantial fluctuations. Our total revenues for the first nine months of 2002 were $2,011$2,697 million compared to $2,940$3,892 million for the first nine months of 2001. This decline was due primarily to reduced demand for our products resulting from the current economic slowdown and our decision primarily in the third quarterand fourth quarters of 2002 notto limit shipments and to accept orders from certain customers, not to ship to certain customers and our receipt of product returns from certain customers, each as part of our efforts to reduce excess PC processor inventory in the overall supply chain. We incurred a net loss of $448$318 million for the first nine months ofended September 28, 2003, and $1.3 billion for 2002 compared to a net loss of $45$61 million for the first nine months of 2001. Reduced end-userend user demand, underutilization of our manufacturing capacity and other factors could adversely affect our business in the near termfuture and we may experience additional declines in revenue and operating losses. We cannot assure you that we will be able to return to profitability or that, if we do, we will be able to sustain it.

The semiconductor industry is highly cyclical and is currently experiencinghas been in a severe downturn which isthat adversely affecting,affected, and may continue to adversely affect, our business.

The highly cyclical semiconductor industry has experienced significant downturns, often in connection with maturing product cycles, manufacturing overcapacity and declines in general economic conditions. The most recent downturn, which began in the fourth quarter of 2000, and continues today, has beenwas severe and prolonged, and future downturns may also be severe and prolonged. Our financial performance has been negatively affected by these downturns, including the incurrence of substantial losses during the currentmost recent downturn, as a result of:

the cyclical nature of the supply/demand imbalances in the semiconductor industry;

a decline in demand for end-user products that incorporate our semiconductors;
the cyclical nature of the supply/demand imbalances in the semiconductor industry;

excess inventory levels in the channels of distribution, including our customers;
a decline in demand for end-user products that incorporate our semiconductors;

excess production capacity; and
excess inventory levels in the channels of distribution, including our customers;

accelerated declines in average selling prices.
excess production capacity; and
accelerated declines in average selling prices.

If current conditions do not significantly improve in the near term, or if these conditions in the semiconductor industry occur in the future, as they likely will to a lesser or greater degree, our business will continue to be adversely affected.

Fluctuations in the personal computer market may continue to materially adversely affect us.

Our business is, and particularly our PC processor product lines are, closely tied to the personal computer industry. Industry-wide fluctuations in the PC marketplace including the current industry downturn which commenced in 2001 and has continued throughout 2002, have materially adversely affected us in the past and may materially adversely affect us in the future. If we experience a sustained reduction inDepending on the growth rate of PCs sold,

-33-


sales of our microprocessors may decrease. If market conditions do not improve, shipments to our customers could be limited until customer demand increasesgrow and supply chain inventories are fully balanced with end user demand.
may even decrease.

-44-


In addition, current trends of consolidation within the personal computer industry, as recently evidenced by the Hewlett-Packard/Compaq merger, as well as potential market share increases by customers who exclusively purchase microprocessors from Intel corporation,Corporation, such as Dell, Corporation,Inc., could further materially adversely affect us.

We plan for significant capital expenditures in 2003 and beyond and if we cannot generate the capital required for these capital expenditures and other ongoing operating expenses through operating cash flow and external financing activities, we may be materially adversely affected.

We plan to continue to make significant capital expenditures to support our microprocessor and Flash memory products both in the near and long term, including approximately $200$192 million during the remainder of 2002. Our2003. The capital expenditure planexpenditures projected for 2003 is approximately $650 million. These capital expenditures include those relating to the continued facilitization of our manufacturing facilities known as Dresden Fab 30 in Dresden, Germany, and Fab 25, in Austin, Texas.those relating to FASL LLC. These capital expenditures, together with ongoing operating expenses, willmay be a substantial drain on our cash flow and may also decrease our cash balances. In addition, our July 1999 Loan Agreement is scheduled to expire in July 2003. The timing and amount of our capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for products, product mix, changes in semiconductor industry conditions and competitive factors. We regularly assess markets for external financing opportunities, including debt and equity. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. Our inability to obtain needed debt and/or equity financing would have a material adverse effect on us.

In March 1997, AMD Saxony entered into the Dresden Loan AgreementAgreements and other related agreements. These agreements require that we partially fund Dresden Fab 30 project costs in the form of subordinated and revolving loans to, or equity investments in, AMD Saxony. We currently estimate that the maximum construction and facilitization costs to us of Dresden Fab 30 will be $2.6$2.7 billion when fully equipped.equipped by the end of 2005. We had invested $2.1$2.2 billion as of September 29, 2002.28, 2003. If we are unable to meet our obligations to AMD Saxony as required under these agreements, we will be in default under the Dresden Loan Agreement,Agreements, which would permit acceleration of $552$613 million of indebtedness, as well as acceleration bya cross-default ofunder the indentures governing our obligations under4.75% Debentures and 4.50% Notes.

FASL LLC, our other borrowing arrangements.

Ourmajority owned joint venture with Fujitsu Limited, FASL,subsidiary, continues to facilitize its manufacturing facilities in Aizu-Wakamatsu, Japan, known as FASL JV2 and FASL JV3.JV3 and in Austin, Texas, known as Fab 25. We expect FASL JV2 and FASL JV3, including equipment, to cost approximately $2.1 billion when fully equipped. As of September 29, 2002, approximately $1.6 billion of this cost had been funded. Tothat the extent that additional funds are required for the fullmaximum facilitization costs of FASL JV2 and FASL JV3, weto FASL LLC, will be $1.8 billion when fully equipped, a decrease from $2.2 billion as a result of cost cutting measures. As of September 28, 2003, approximately $1.7 billion has been funded.

In addition, during the four-year period commencing on June 30, 2003, we are obligated to provide FASL LLC with additional funding to finance operational cash flow needs. Generally, FASL LLC is first required to contribute cash or guarantee third-party loans in proportionseek any required financing from external sources. However, if such third party financing is not available, we must provide funding to FASL LLC equal to our 49.992 percentpro-rata ownership interest in FASL.

-34-
FASL LLC, which is currently 60 percent.


We have a substantial amount of debt and debt service obligations, and may incur additional debt, that could adversely affect our financial position.

We have a substantial amount of debt and we may incur additional debt in the future. At September 29, 2002,28, 2003, our total debt was $1.3$2.1 billion and stockholders’ equity was $3.2$2.3 billion. In addition, at September 28, 2003, we had $95 up to $125

-45-


million of availability under our July 19992003 Loan Agreement (subject to our borrowing base). We had also guaranteed approximately $455$225 million of debt, and we are currently in disagreement as to the amount we owe, if any, under our additional guarantee to repay up to $125 million to Fujitsu in connection with a closed wafer fabrication facility in Gresham, Oregon. None of these amounts arewhich is not reflected as debt on our balance sheet.

Our high degree of leverage may:

limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes;

require a substantial portion of our cash flow from operations to make debt service payments;
limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes;

limit our flexibility to plan for, or react to, changes in our business and industry;
require a substantial portion of our cash flow from operations to make debt service payments;

place us at a competitive disadvantage compared to our less leveraged competitors; and
limit our flexibility to plan for, or react to, changes in our business and industry;

increase our vulnerability to the impact of adverse economic and industry conditions.
place us at a competitive disadvantage compared to our less leveraged competitors; and
increase our vulnerability to the impact of adverse economic and industry conditions and, to the extent of our outstanding debt under our July 1999 Loan Agreement, the impact of increases in interest rates.

Our ability to make payments on and to refinance our debt or our guarantees of other parties’ debts will depend on our financial and operating performance, which may fluctuate significantly from quarter to quarter and is subject to prevailing economic conditions and to financial, business and other factors beyond our control.

We cannot assure you that we will continue to generate sufficient cash flow or that we will be able to borrow funds under our credit facilities in amounts sufficient to enable us to service our debt, or meet our working capital and capital expenditure requirements. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, due to borrowing base restrictions or otherwise, we may be required to sell assets or equity, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or equity, or borrow more funds on terms acceptable to us, if at all.

If we are not successful in integrating the operations of our new majority owned subsidiary, FASL LLC, we could be materially adversely affected. Effective June 30, 2003, we and Fujitsu Limited executed several agreements which resulted in the integration of our and Fujitsu’s Flash memory operations in the third quarter. We contributed our Flash memory group, our Fab 25 in Austin, Texas, our Submicron Development Center in Sunnyvale, California, and our assembly and test operations in Thailand, Malaysia and China. Fujitsu contributed its Flash memory business division and its Flash memory assembly and test operations in Malaysia. We, together with Fujitsu, contributed our Manufacturing Joint Venture, which became a wholly owned subsidiary of FASL LLC.

Any benefits of this proposed transaction are subject to, among other things, the following risks:

the possibility that FASL LLC will not be successful because of problems integrating the operations and employees of the two companies or achieving the efficiencies and other advantages intended by the transaction; and

the possibility that global business and economic conditions will worsen, resulting in lower than currently expected demand for Flash memory products.

We cannot assure you that we will be able to successfully integrate these operations or that we will be able to achieve and sustain any benefit from FASL LLC’s creation.

-46-


Intel Corporation’s dominance of the PC processor market may limit our ability to compete effectively in that market. Intel has dominated the market for microprocessors used in PCs for many years. As a result, Intel has been able to control x86 microprocessor and PC system standards and dictate the type of products the market requires of Intel’s competitors. In addition, the financial strength of Intel allows it to market its product 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 us 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 its:

pricing and allocation strategies and actions;

product mix and introduction schedules;

product bundling, marketing and merchandising strategies;

control over industry standards, PC manufacturers and other PC industry participants, including motherboard, chipset and basic input/output system (BIOS) suppliers; and

user brand loyalty.

We expect Intel to maintain its dominant position in the marketplace as well as 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 expends substantially greater amounts on research and development than we do.

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

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 AMD Opteron and AMD Athlon 64 microprocessors will depend on our ability to ensure that PC platforms are designed to support our microprocessors. A failure of the designers and producers of motherboards, chipsets and other system components to support our microprocessor offerings would have a material adverse effect on us.

If we are unable to develop, produce and successfully market higher-performing microprocessor products, we may be materially adversely affected. The microprocessor market is characterized by short product life cycles and migration to ever-higher performance microprocessors. To compete successfully, we must transition to new process technologies at a fast pace and offer higher-performance microprocessors in significantly greater volumes. If we fail to achieve yield and

-47-


volume goals or to offer higher-performance microprocessors in significant volume on a timely basis and at competitive prices, we could be materially adversely affected.

To be successful, we must increase sales of our x86 microprocessor products to existing customers and develop new customers in both consumer and commercial markets, particularly the latter. Our production and sales plans for microprocessors are subject to other risks and uncertainties, including:

our ability to introduce and create successful marketing positions for the AMD Opteron and AMD Athlon 64 microprocessors, which rely in part on market acceptance and demand for our 64-bit technology (AMD 64 technology);

our ability to maintain the marketing position of the AMD Athlon XP microprocessor;

our ability to successfully market the AMD Athlon XP, AMD Opteron and AMD Athlon 64 processors, which rely in part on market acceptance of a metric based on overall processor performance versus processor clock speed (measured in megahertz frequency);

our ability to fund the acquisition of 300 mm wafer fabrication capacity and develop associated process technologies that will be required for long-term competitiveness, and our ability to penetrate the enterprise market with Tier One OEM customers in order to have the volume of demand necessary to utilize the capacity of a 300 mm wafer fab;

the pace at which we expect to be able to convert production in Fab 30 to 90 nanometer process;

our ability to maintain adequate selling prices of microprocessors despite increasingly aggressive Intel pricing strategies, marketing programs, new product introductions and product bundlings of microprocessors, motherboards and chipsets;

our ability, on a timely basis, to produce microprocessors in the volume and with the performance and feature set required by customers;

our ability to attract and retain engineering and design talent;

our ability to expand system design capabilities; and

the availability and acceptance of motherboards and chipsets designed for our microprocessors.

Our ability to increase microprocessor product revenues and benefit fully from the substantial investments we have made and continue to make related to microprocessors depends on the continuing success of our AMD Athlon XP microprocessors and the success of future generations of microprocessors, most immediately the AMD Opteron processor, and the AMD Athlon 64 processor. If we fail to achieve continued and expanded market acceptance of our microprocessors, we may be materially adversely affected.

-48-


If we were to lose Microsoft Corporation’s support for our products, our ability to market our processors would be materially adversely affected. Our ability to innovate beyond the x86 instruction set controlled by Intel depends on support from Microsoft in its operating systems. If Microsoft does not continue to provide support in its operating systems for our x86 instruction sets, including our 64-bit technology introduced with our AMD Opteron and AMD Athlon 64 processors, independent software providers may forego designing their software applications to take advantage of our innovations. If we fail to retain the support of Microsoft, our ability to market our processors could be materially adversely affected.

The completion and impact of our restructuring program and cost reductions could adversely affect us. We formulated the 2002 Restructuring Plan to address the continuing industry-wide weakness in the semiconductor industry by adjusting our cost structure to industry conditions. Pursuant to the 2002 Restructuring Plan, we plan to reduce our fixed costs as a percentage of total costs over time from approximately 80 percent to approximately 70 percent. We have reduced our expenses in the third quarter of 2003 by approximately $38 million compared to the fourth quarter of 2002. As a result of the 2002 Restructuring Plan, we expect total expenses in 2003 to be reduced by approximately $150 million compared to 2002. We cannot, however, be sure that the goals of the 2002 Restructuring Plan will be realized. If we do not execute the 2002 Restructuring Plan well, the ultimate effects of it could prove to be adverse.

The loss of a significant customer for our Spansion Flash memory products in the high-end mobile telephone market, or a lack of market acceptance of MirrorBit technology may have a material adverse effect on us. Since the third quarter of 2002, our Flash memory product sales growth was almost entirely based on strength in the high-end mobile phone market. To date, our sales in that market have been concentrated in a few customers. In addition, we expect competition in the market for Flash memory devices to continue to increase as competing manufacturers introduce new products and industry-wide production capacity increases. We may be unable to maintain or increase our market share in Flash memory devices as the market develops and other competitors introduce new competing products. A decline in unit sales of our Flash memory devices, lower average selling prices, or a loss of a significant customer in the high-end mobile phone market, would have a material adverse effect on us.

In July 2002, we commenced production shipments of the first product with MirrorBit technology. MirrorBit technology is a new memory cell architecture that enables Flash memory products to hold twice as much data as standard flash memory devices. A lack of customer or market acceptance or

-49-


any substantial difficulty in transitioning Flash memory products to any future process technology could reduce FASL LLC’s ability to be competitive in the market and could have a material adverse effect on us.

Spansion memory products are based on the NOR architecture and a significant market shift to the NAND architecture could materially adversely affect us. Spansion memory products are based on the Boolean logic-based NOR (Not Or) architecture, which is typically used for code execution. Any significant shift in the marketplace to products based on NAND (Not And) architecture, which typically offers greater storage capacity, or other architectures will reduce the total market available to us and therefore reduce our market share, which could have a materially adverse affect on us.

Worldwide economic and political conditions may affect demand for our products and slow payment by our customers. The economic slowdown in the United States and worldwide, exacerbated by the occurrence and threat of terrorist attacks and consequences of sustained military action in the Middle East, adversely affected demand for our products. A decline of the worldwide semiconductor market or a significant decline in economic conditions in any significant geographic area would likely decrease the overall demand for our products, which could have a material adverse effect on us. If the economic slowdown returns as a result of terrorist activities, military action or otherwise, it could adversely impact our customers’ ability to pay us in a timely manner.

Manufacturing capacity utilization rates may adversely affect us.At times we underutilize our manufacturing facilities as a result of reduced demand for certain of our products. We are substantially increasing our and FASL LLC’s manufacturing capacity by making significant capital investments in Fab 30, Fab 25, FASL JV2, FASL JV3 and the test and assembly facility in Suzhou, China. If the increase in demand for our products is not consistent with our expectations, we may underutilize our manufacturing facilities, and we could be materially adversely affected. This has in the past had, and in the future may have, a material adverse effect on our earnings and cash flow.

There may also be situations in which our manufacturing facilities are inadequate to meet the demand for certain of our products. Our inability to obtain sufficient manufacturing capacity to meet demand, either in our own facilities or through foundry or similar arrangements with others, could have a material adverse effect on us.

Further, during periods when we are implementing new process technologies, our or FASL LLC’s manufacturing facilities may not be fully productive. A substantial delay in the technology transitions in Fab 30 to smaller process technologies employing silicon-on-insulator technology could have a material adverse effect on us.

At this time, the most significant risk is manufacturing capacity constraint.

Unless we maintain manufacturing efficiency, our future profitability could be materially adversely affected. Manufacturing semiconductor components involves highly complex processes that require advanced equipment. We and our competitors continuously modify these processes in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. Our manufacturing efficiency will be an important factor in our future profitability, and we cannot be sure that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors.

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We cannot be sure that we will not experience manufacturing problems in achieving acceptable yields or product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, which could result in a loss of future revenues. Our results of operations could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately.

External factors, such as the SARS virus and potential terrorist attacks and other acts of violence or war, may materially adversely affect us. Earlier this year the severe acute respiratory syndrome (SARS) virus had an adverse effect upon the Asian economies and affected demand for our products in Asia. A new outbreak of the virus could have a similar impact on demand for our products in Asia. In addition, if there were to be a case of SARS discovered in any of our operations in Asia, the measures to prevent the spread of the virus could disrupt our operations at that location. There have been no cases of SARS affecting our operations to date.

Terrorist attacks may negatively affect our operations directly or indirectly and such attacks or related armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks may make travel and the transportation of our products more difficult and more expensive and ultimately affect our sales.

Also as a result of terrorism, the United States may be involved in armed conflicts that could have a further impact on our sales, our supply chain, and our ability to deliver products to our customers. Political and economic instability in some regions of the world may also result and could negatively impact our business. The consequences of armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment.

More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility to the United States economy and worldwide financial markets. They also could result in or exacerbate economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results and financial condition, and also may result in the volatility of the market price for our securities and on the future prices of our securities.

Intense competition in the integrated circuit industry may materially adversely affect us.us

In general, the. The integrated circuit 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. After a product is introduced, costs and average selling prices normally decrease over time as production efficiency improves, competitors enter the market and successive generations of products are developed and introduced for sale. Failure to reduce our costs on existing products or to develop and introduce, on a cost-effective and timely basis, new products or enhanced versions of existing products with higher margins, would have a material adverse effect on us.

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Intel Corporation’s dominance of the PC processor market may limit our ability to compete effectively in that market.
Intel has dominated the market for microprocessors used in PCs for many years. As a result, Intel has been able to control x86 microprocessor and PC system standards and dictate the type of products the market requires of Intel’s competitors. In addition, the financial strength of Intel allows it to market its product aggressively, to target our customers and our channel partners with special incentives and to provide disincentives to customers who do business with us. These aggressive activities can result in lower unit sales and average selling prices for us 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 its:
pricing and allocation strategies and actions;
product mix and introduction schedules;
product bundling, marketing and merchandising strategies;
control over industry standards, PC manufacturers and other PC industry participants, including motherboard, chipset and basic input/output system (BIOS) suppliers; and
user brand loyalty.
We expect Intel to maintain its dominant position in the marketplace as well as 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 expends substantially greater amounts on research and development than we do.
In marketing our microprocessors to OEMs and dealers, 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. Over the years, many of these third-party designers and manufacturers have lost significant market share to Intel or exited the business. In addition, these companies produce chipsets, motherboards, BIOS software and other components to support each new generation of Intel’s microprocessors, and Intel has significant leverage over their business opportunities.
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 seventh-generation and eighth-generation microprocessors will depend on our ability to ensure that PC platforms are designed to support our microprocessors. A failure of the designers and producers of motherboards, chipsets and other system components to support our microprocessor offerings would have a material adverse effect on us.

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If we are unable to develop, produce and successfully market higher-performing microprocessor products, we may be materially adversely affected.
The microprocessor market is characterized by short product life cycles and migration to ever-higher performance microprocessors. To compete successfully, we must transition to new process technologies at a fast pace and offer higher-performance microprocessors in significantly greater volumes. If we fail to achieve yield and volume goals or to offer higher-performance microprocessors in significant volume on a timely basis and at competitive prices, we could be materially adversely affected.
To be successful, we must increase sales of our microprocessor products to existing customers and develop new customers in both consumer and commercial markets, particularly the latter. Our production and sales plans for microprocessors are subject to other risks and uncertainties, including:
our ability to continue offering new higher performance microprocessors competitive with Intel’s product offerings;
our ability to maintain and improve the successful marketing position of the AMD Athlon XP microprocessor, which relies in part on market acceptance of a metric based on overall processor performance versus processor clock speed (measured in megahertz frequency);
our ability to maintain adequate selling prices of microprocessors despite increasingly aggressive Intel pricing strategies, marketing programs, new product introductions and product bundlings of microprocessors, motherboards and chipsets;
our ability, on a timely basis, to produce microprocessors in the volume and with the performance and feature set required by customers;
the pace at which we expect to be able to convert production in Dresden Fab 30 to 90-nanometer copper interconnect process technology, a process we will begin in late 2003;
our ability to expand system design capabilities; and
the availability and acceptance of motherboards and chipsets designed for our microprocessors.
Our ability to increase microprocessor product revenues and benefit fully from the substantial investments we have made and continue to make related to microprocessors depends on the continuing success of our AMD Athlon microprocessors and the success of future generations of microprocessors. If we fail to achieve continued and expanded market acceptance of our seventh-generation microprocessors, we may be materially adversely affected.

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We must introduce in a timely manner, and achieve market acceptance for, our eighth-generation microprocessors, or we will be materially adversely affected.
We plan to ship our eighth-generation 64-bit processors, formerly code-named “Hammer” in the first half of 2003. These processors are designed to provide high performance for both 32-bit and 64-bit applications in servers and in desktop and mobile PCs. The success of our eighth-generation processors are subject to risks and uncertainties including our ability to produce them in a timely manner on new process technologies, including silicon on insulator technology, in the volume and with the performance and feature set required by customers; their market acceptance; the availability, performance and feature set of motherboards and chipsets designed for our eighth-generation processors; and the support of the operating system and application program providers for our 64-bit instruction set.
If we were to lose Microsoft Corporation’s support for our products, our ability to market our processors would be materially adversely affected.
Our ability to innovate beyond the x86 instruction set controlled by Intel depends on support from Microsoft in its operating systems. If Microsoft does not provide support in its operating systems for our x86 instruction sets, including our x86-64 technology that will be introduced with our eighth-generation AMD Athlon and AMD Opteron processors, independent software providers may forego designing their software applications to take advantage of our innovations. If we fail to retain the support and certification of Microsoft, our ability to market our processors could be materially adversely affected.
The completion and impact of our restructuring program and cost reductions could adversely affect us.
On November 7, 2002, we announced that we were formulating the 2002 Restructuring Plan to address the continuing industry-wide weakness in the semiconductor industry and to adjust our cost structure. Pursuant to the 2002 Restructuring Plan, we intend to reduce our fixed costs as a percentage of total costs over time from approximately 80 percent to approximately 70 percent. We also expect to reduce our expenses by approximately $100 million per quarter by the second quarter of 2003. As a result, we expect total expenses in 2003 to be reduced by $350 million based on current product demand forecasts. We cannot, however, be sure that the goals of the 2002 Restructuring Plan will be realized. The 2002 Restructuring Plan is expected to result in pre-tax restructuring and related charges to earnings of approximately several hundred million dollars in the fourth quarter of 2002. We also expect approximately one-third of the restructuring and related charges to consist of cash payments.

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Weak market demand for our Flash memory products, the loss of a significant customer in the high-end mobile telephone market, or any difficulty in our transition to MirrorBit technology may have a material adverse effect on us.
The demand for Flash memory devices has been weak due to the sustained downturn in the communications and networking equipment industries and excess inventories held by our customers. In the third quarter of this year, our Flash memory product sales grew almost entirely based on strength in the high-end mobile phone market. Our sales in that market are concentrated in a few customers. In addition, we expect competition in the market for Flash memory devices to continue to increase as competing manufacturers introduce new products and industry-wide production capacity increases. We may be unable to maintain or increase our market share in Flash memory devices as the market develops and Intel and other competitors introduce new competing products. A decline in unit sales of our Flash memory devices, lower average selling prices, or a loss of a significant customer in the high-end mobile phone market would have a material adverse effect on us.
In July 2002 we commenced production shipments of our first product with MirrorBit technology. Our MirrorBit technology is a new memory cell architecture that enables Flash memory products to hold twice as much data as standard Flash memory devices. A lack of customer acceptance, any substantial difficulty in transitioning our Flash memory products to MirrorBit technology or any future process technology could reduce our ability to be competitive in the market and could have a material adverse effect on us.
Worldwide economic and political conditions may affect demand for our products and slow payment by our customers.
The economic slowdown in the United States and worldwide, exacerbated by the occurrence and threat of terrorist attacks and consequences of sustained military action, has adversely affected demand for our microprocessors, Flash memory devices and other integrated circuits. A continued decline of the worldwide semiconductor market or a significant decline in economic conditions in any significant geographic area would likely decrease the overall demand for our products, which could have a material adverse effect on us. If the economic slowdown continues or worsens as a result of terrorist activities, military action or otherwise, it could adversely impact our customers’ ability to pay us in a timely manner.
Our inability to adapt quickly to significant fluctuations in demand for our products relative to the capacity of our manufacturing facilities could have a material adverse effect on us.
Because we cannot quickly adapt our manufacturing capacity to rapidly changing market conditions, at times we underutilize our manufacturing facilities as a result of reduced demand for certain of our products. We are substantially increasing our manufacturing capacity by making significant capital investments in Dresden Fab 30, Fab 25, FASL JV3 and our test and assembly facility in Suzhou, China. If the increase in demand for our products is not consistent with our expectations, we may underutilize our manufacturing facilities, and we could be

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materially adversely affected. This has in the past had, and in the future may have, a material adverse effect on our earnings and cash flow.
There may also be situations in which our manufacturing facilities are inadequate to meet the demand for certain of our products. Our inability to obtain sufficient manufacturing capacity to meet demand, either in our own facilities or through foundry or similar arrangements with others, could have a material adverse effect on us.
At this time, the most significant risk is that the ramp of production in Fab 25 of Flash memory products will not be successful or that demand for Flash memory products will be weaker than expected.
Further, during periods when we are implementing new process technologies, our manufacturing facilities may not be fully productive. A substantial delay in the technology transitions in Dresden Fab 30 to smaller than 130-nanometer process technologies employing silicon on insulator technology could have a material adverse effect on us.
Unless we maintain manufacturing efficiency, our future profitability could be materially adversely affected.
Manufacturing semiconductor components involves highly complex processes that require advanced equipment. We and our competitors continuously modify these processes in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. Our manufacturing efficiency will be an important factor in our future profitability, and we cannot be sure that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors.
From time to time, we have experienced difficulty in beginning production at new facilities, transferring production to other facilities, and in effecting transitions to new manufacturing processes that have caused us to suffer delays in product deliveries or reduced yields. We cannot be sure that we will not experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, transferring production to other facilities, upgrading or expanding existing facilities or changing our process technologies, which could result in a loss of future revenues. Our results of operations could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately.
We cannot be certain that our substantial investments in research and development of process technologies will lead to 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.
We make substantial investments in research and development of process technologies in an effort to improve the technologies and equipment used to fabricate our products. For example, the successful development and implementation of silicon on insulator technology is critical to

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our eighth-generation family of microprocessors. However, we cannot be certain that we will be able to develop or obtain or successfully implement leading-edge process technologies needed to fabricate future generations of our products. Further, we cannot assure you that we will have sufficient resources to maintain the level of investment in research and development that is required for us to remain competitive.
If our microprocessors are not compatible with some or all industry-standard software and hardware, we could be materially adversely affected.
Our microprocessors may not be fully compatible with some or all industry-standard software and hardware. Further, we may be unsuccessful in correcting any such compatibility problems in a timely manner. If our customers are unable to achieve compatibility with software or hardware after our products are shipped in volume, we could be materially adversely affected. In addition, the mere announcement of an incompatibility problem relating to our products could have a material adverse effect on us.

Our debt instruments impose restrictions on us that may adversely affect our ability to operate our business.

Our July 19992003 Loan Agreement, and our September 2002 Loan Agreement containas amended, contains restrictive covenants and also requirerequires us to maintain specified financial ratios and satisfy other financial condition tests when our net domestic cash is below specified amounts, and the Dresden Loan Agreement imposesAgreements impose restrictive covenants on AMD Saxony, including a prohibition on its ability to pay dividends.
The July 2003 FASL Term Loan contains restrictive covenants, including a prohibition on its ability to pay dividends and also requires FASL LLC to maintain specified financial ratios and satisfy other financial condition tests when its net domestic cash is below specified amounts.

Our ability to satisfy the covenants, financial ratios and tests of our debt instruments and FASL LLC’s ability to satisfy the covenants, financial ratios and tests of the July 2003 FASL Term Loan can be affected by events beyond our or FASL LLC’s control. We cannot assure you that we or

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FASL LLC will meet those requirements. A breach of any of these covenants, financial ratios or tests could result in a default under our July 19992003 Loan Agreement, our September 2002the July 2003 FASL Term Loan Agreement and/or the Dresden Loan Agreement.Agreements. In addition, these agreements contain cross-default provisions whereby a default under one agreement would likely result in cross-default under agreements covering other borrowings. For example, the occurrence of a default under the July 2003 FASL Term Loan would cause a cross-default under the July 2003 Loan Agreement and a default under the July 2003 Loan Agreement or under the indentures governing our 4.75% Debentures and our 4.50% Notes would cause a cross-default under the Dresden Loan Agreements. The occurrence of an event ofa default under any of these agreements or under the indenture governing our Debentures would likely result in a cross-default under the agreements covering the other borrowings andborrowing arrangements would permit the applicable lenders or noteholdersnote holders to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable and permittingwould permit the lenders to terminate all commitments to extend further credit. If we or FASL LLC were unable to repay those amounts, the lenders under the July 19992003 Loan Agreement, the September 2002July 2003 FASL Term Loan Agreement and the Dresden Loan AgreementAgreements could proceed against the collateral granted to them to secure that indebtedness. We have pledgedgranted a security interest in substantially all of our personal property, including inventory and accounts receivable as security under our July 19992003 Loan Agreement, andFASL LLC has granted a security interest in certain property, plant and equipment as security under our September 2002the July 2003 FASL Term Loan Agreement, and AMD Saxony has pledged substantially all of its property as security under the Dresden Loan Agreement.Agreements. If the lenders under any of the credit facilities or the noteholdersnote holders or the trustee under the indentureindentures governing our 4.75% Debentures and our 4.50% Notes accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings and our other indebtedness.

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Costs related to defective products could have a material adverse effect on us.

One or more of our products may be found to be defective after the product has been shipped to customers in volume. The cost of a recall, software fix, product replacements and/or product returns may be substantial and could have a material adverse effect on us. In addition, modifications needed to fix the defect may impede performance of the product.

If essential raw materials are not available to manufacture our products, we could be materially adversely affected.

Certain raw materials we use in the manufacture of our products are available from a limited number of suppliers. 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 might have to reduce our manufacturing operations. Such a reduction could have a material adverse effect on us.

Our operations in foreign countries are subject to political and economic risks, which could have a material adverse effect on us.

Nearly all product assembly and final testing of our microprocessor products are performed at our manufacturing facilities in Malaysia Thailand, China, Japan and Singapore; or by subcontractors in the United States and Asia. Nearly all product assembly and final testing of Spansion products are performed at FASL LLC’s manufacturing facilities in Malaysia, Thailand, China and Japan. We manufacture our microprocessors in Germany. We also depend on foreign foundry suppliers and joint ventures for the manufacture of a portion of our finished silicon wafers and have international sales operations.

The political and economic risks associated with our operations in foreign countries include:

expropriation;

changes in a specific country’s or region’s political or economic conditions;
expropriation;

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trade protection measures and import or export licensing requirements;
changes in a specific country’s or region’s political or economic conditions;

difficulty in protecting our intellectual property;
trade protection measures and import or export licensing requirements;

changes in foreign currency exchange rates and currency controls;
difficulty in protecting our intellectual property;

changes in freight and interest rates;
changes in foreign currency exchange rates and currency controls;

disruption in air transportation between the United States and our overseas facilities; and
changes in freight and interest rates;

loss or modification of exemptions for taxes and tariffs;
disruption in air transportation between the United States and our overseas facilities; and
loss or modification of exemptions for taxes and tariffs;

any of which could have a material adverse effect on us.

As part of our business strategy, we are continuing to seek expansion of product sales in emerging overseas markets. We recently signed a research and development joint venture agreement with China Basic Education Software Company, Ltd. to develop hardware platforms

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using our products for computer equipment to be sold in the Chinese IT education market. Expansion into emerging overseas markets presents similar political and economic risks as described above, and we may be unsuccessful in our strategy to penetrate these emerging overseas markets.

Our inability to continue to attract and retain key personnel may hinder our product development programs.

Our future success depends upon the continued service of numerous key engineering, manufacturing, marketing, sales and executive personnel. If we are not able to continue to attract, retain and motivate qualified personnel necessary for our business, the progress of our product development programs could be hindered, and we could be otherwise adversely affected.

Our operating results are subject to substantial seasonal fluctuations.

Our operating results tend to vary seasonally. For example, our revenues are generally higher in the fourth quarter than the third quarter of each year. This seasonal pattern is largely a result of decreased demand in Europe during the summer months and higher demand in the retail sector of the PC market during the winter holiday season. In recent quarters, a substantial portion of our quarterly sales havehas been made in the last month of the quarter.

Uncertainties involving the ordering and shipment of, and payment for, our products could materially adversely affect us.

Our sales are typically made pursuant to individual purchase orders, and we generally do not have long-term supply arrangements with our customers. Generally, our customers may cancel orders 30 days prior to shipment without incurring a significant penalty. We base our inventory levels on customers’ estimates of demand for their products, which is difficult to predict. This difficulty may be compounded when we sell to original equipment manufacturers indirectly through distributors, as our forecasts for demand are then based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to failure of anticipated orders to materialize could result in excess or obsolete inventory, which could result in write-downs of inventory.
During 2002, the markets in which our customers operate were characterized by a decline in end-user demand which reduced visibility of future demand for our products and resulted in high levels of

While we believe inventories in the PC industry supply chain. In some cases, this led to delays in payments for our products. We believe thatchain are currently at reasonable levels, market conditions are uncertain and these and other factors could continue to materially adversely affect our revenues in the near term.

revenues.

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Our price protection obligations and return rights under specific provisions in our agreements with distributors may adversely affect us.

Distributors typically maintain an inventory of our products. In most instances, our agreements with distributors protect their inventory of our products against price reductions, as well as

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products that are slow moving or have been discontinued. These agreements, which may be canceled by either party on a specified notice, generally allow for the return of our products. The price protection and return rights we offer to our distributors could materially adversely affect us if distributors exercise these rights as a result of an unexpected significant decline in the price of our products or otherwise.

If we cannot adequately protect our technology or other intellectual property, in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses.

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

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

Failure to comply with any of the applicable environmental regulations could subject us toresult in a range of consequences including fines, suspension of production, alteration of our manufacturing process, cessation of operations or regulatory action.sales, and criminal and civil liabilities.

Our business involves the use of hazardous materials. If we fail to comply with governmental regulations related to the use, storage, handling, discharge Existing or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process, we may be subject to fines, suspension of production, alteration of our manufacturing processes or cessation of our operations. Suchfuture regulations could require us to procure expensive pollution abatement or remediation equipmentequipment; to modify product designs; or to incur other expenses to complyassociated with compliance with environmental regulations. Any failure to control the use of, disposal or storage of, or adequately restrict the discharge of, hazardous substances could subject us to future liabilities and could have a material adverse effect on us. Violations of environmental laws may result in criminal and civil liabilities.
Terrorist attacks, such as the attacks that occurred in New York and Washington, DC on September 11, 2001, and other acts of violence or war may materially adversely affect us.
Terrorist attacks may negatively affect our operations. These attacks or armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks may make travel and the transportation of our products more difficult and more expensive and ultimately affect our sales.

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Also as a result of terrorism, the United States may be included in armed conflicts that could have a further impact on our sales, our supply chain, and our ability to deliver products to our customers. Political and economic instability in some regions of the world may also result and could negatively impact our business. The consequences of armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment.
More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They also could result in or exacerbate economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may result in the volatility of the market price for our securities and on the future prices of our securities.

Our corporate headquarters assembly and research and development activitiesFASL LLC’s manufacturing facilities in Japan are located in an earthquake zone and these operations could be interrupted in the event of an earthquake.

Our corporate headquarters assembly operations in California and research and development activities related to process technologies are located near major earthquake fault lines.lines in California and FASL LLC’s manufacturing facilities are located near major earthquake fault lines in Japan. In the event of a major earthquake, we and FASL LLC could experience business interruptions, destruction of facilities and/or loss of life, all of which could materially adversely affect us.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 29, 2002, we issued $500 million of our 4.75% Convertible Senior Debentures Due 2022 (the Debentures) in a private offering pursuant to Rule 144A and Regulation S of the Securities Act. The interest rate will be reset on each of August 1, 2008, August 1, 2011 and August 1, 2016 to a rate per annum equal to the interest rate payable 120 days prior to the reset dates on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4.75 percent and will not exceed 6.75 percent. Holders of the Debentures will also have the right to require us to repurchase all or a portion of their Debentures on February 1, 2009, February 1, 2012, and February 1, 2017, at a price equal to 100 percent of the principal amount plus accrued and unpaid interest. The Debentures are convertible by the holders into our common stock at a conversion price of $23.38 per share at any time. At this conversion price, each $1,000 principal amount of the Debentures will be convertible into approximately 43 shares of our common stock.
On September 27, 2002, we entered into a term loan and security agreement with a domestic financial institution (the September 2002 Loan Agreement). Under the agreement, we can borrow up to $155 million to be secured by certain property, plant and equipment located at our Fab 25 semiconductor manufacturing facility in Austin, Texas. Amounts borrowed under the September 2002 Loan Agreement bear interest at a rate of LIBOR plus four percent, which was 5.8 percent at September 29, 2002, and repayment occurs in equal, consecutive, quarterly principal and interest payments beginning December 2002 and ending on September 2006. As of September 29, 2002, $110 million was outstanding under the September 2002 Loan Agreement. We must also comply with certain financial covenants if its net domestic cash, as defined in the agreement, drops to an amount of $300 million or less. We intend to use the net proceeds for capital expenditures, working capital, and general corporate purposes.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form

10-K for the fiscal year ended December 30, 2001.

ITEM 4.    CONTROLS AND PROCEDURES
29, 2002. During the third quarter of 2003, approximately 21 percent of our net sales were denominated in currencies other than the U.S. dollar, primarily the yen, as compared to one percent during the third quarter of 2002. This was due to the consolidation of FASL LLC. Our foreign exchange risk exposure resulting from these sales is partially mitigated as a result of our yen denominated die purchases. As a result of our euro denominated net asset position at AMD Saxony, we had an increase in accumulated other comprehensive income due to the appreciation of the euro during the second quarter of 2003. In addition, as a result of the our yen denominated net asset position in FASL LLC’s manufacturing subsidiary in Japan, we also had an increase in accumulated other comprehensive income due to the appreciation of the yen during the third quarter of 2003. However, we cannot give any assurance as to the effect that future changes in foreign currency rates will have on our consolidated financial position, results of operations or cash flows.

ITEM 4.CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizedrecognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily wasis required to apply its judgment in evaluating the cost-benefit relationship of possible

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controls and procedures. Also, we have investments in certain unconsolidated entities.

As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

Within 90 days prior toof September 28, 2003, the dateend of the quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
effective at the reasonable assurance level.

There havehas been no significant changeschange in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, theour internal controls subsequent to the date we completed our evaluation.

over financial reporting.

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PART II. OTHER INFORMATION

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

(a)Exhibits

10.44 (a-4) Fourth 10.44(a-1) First Amendment to Amended and Restated Loan and Security Agreement, dated as of September 3, 2002,July 7, 2003, among AMD, AMD International Sales and& Service, Ltd. and Bank of America N.A. (formerly Bank of America NT&SA), & SA, as agent.

10.44 (a-5) Fifth Amendment to *10.63Loan and Security Agreement, dated as of September 27, 2002,25, 2003, among AMD, AMD International Sales and Service, Ltd. andFASL Japan Limited, Mizuho Corporate Bank, of America N.A. (formerly Bank of America NT&SA), as agent.
*10.53         Term Loan and Security Agreement, dated as of September 27, 2002, among AMD, AMD International Sales and Service, Ltd., and General Electricthe bank party thereto.

*10.64Master Rental Agreement, dated July 16, 2003 among GE Capital Leasing Corporation, as agent.Lessor, FASL Japan Limited, as Lessee, and Advanced Micro Devices, Inc. as Guarantor.

  31.1Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  32.1Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  32.2Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*To be filed by amendment.

(b)Reports on Form 8-K

A Current Report on Form 8-K dated July 17, 200214, 2003 reporting under Item 5—5 – Other Events and Item 7 – Financial Statements, Pro Forma Financial Information and Exhibits, was filedfurnished announcing our second quarter results.

A Current Report on Form 8-K dated August 13, 2002 reporting under Item 9—Regulation FD Disclosure, was filed reporting that our President and Chief Executive Officer, Hector de J. Ruiz, and Senior Vice President and Chief Financial Officer, Robert J. Rivet, submitted sworn statements to the SEC certifying the SEC filings made by the company in 2002.
A Current Report on Form 8-K dated August 28, 2002 reporting under Item 9—Regulation FD Disclosure, was filed reporting that our President and Chief Executive Officer, Hector de J. Ruiz, and Senior Vice President and Chief Financial Officer, Robert J. Rivet, submitted sworn statements to the SEC certifying the Annual Report on Form 10-K/A filed by the company on August 28, 2002.
*Confidential treatment has been requested with respect to certain parts of this exhibit.
creation of FASL LLC.

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SIGNATURESIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    

ADVANCED MICRO DEVICES, INC.

Date: November 12, 20022003

   

By:

 

/s/ ROBERTRobert J. RIVET        

Rivet


        
Robert J. Rivet
Senior Vice President, Chief Financial Officer
Signing on behalf of the registrant and as
the principal accounting officer

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Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Hector de J. Ruiz, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Advanced Micro Devices, Inc.;
2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evalution as of the Evaluation Date;
5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

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b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002
/s/     HECTORDE J. RUIZ

Hector de J. Ruiz
President and Chief Executive Officer

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Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert J. Rivet, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Advanced Micro Devices, Inc.;
2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evalution as of the Evaluation Date;
5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

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b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002
/s/    ROBERT J. RIVET

Robert J. Rivet
Senior Vice President, Chief Financial Officer

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