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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended March 26, 2006

OR

For the transition period from              to             

Commission File Number 001-07882

ADVANCED MICRO DEVICES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (408) 749-4000

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

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

Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of May 1, 2006: 484,104,863.

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INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Advanced Micro Devices, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

See accompanying notes to condensed consolidated financial statements.

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Advanced Micro Devices, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements.

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Advanced Micro Devices, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

See accompanying notes to condensed consolidated financial statements.

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Advanced Micro Devices, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. and subsidiaries (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 31, 2006. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary for a fair statement of the Company’s results of operations, financial position and cash flows. All such adjustments are of a normal recurring nature. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2005.

The Company uses a 52- to 53-week fiscal year ending on the last Sunday in December. The quarters ended March 26, 2006 and March 27, 2005 each consisted of 13 weeks. The quarter ending July 2, 2006 will consist of 14 weeks.

Certain prior period amounts have been reclassified to conform to the current period presentation. (See Note 6.)

Principles of Consolidation

On December 21, 2005, Spansion Inc. completed its initial public offering (IPO) of its Class A common stock. Prior to the IPO, Spansion was the Company’s majority owned subsidiary, and the Company held a 60 percent controlling ownership interest in Spansion. Consequently, Spansion’s financial position, results of operations and cash flows through December 20, 2005 were included in the Company’s consolidated statements of operations and cash flows. Following the IPO, the Company’s ownership interest in Spansion was diluted from 60 percent to 37.9 percent. As a result, the Company no longer exercises control over Spansion’s operations. Therefore, from December 21, 2005, the Company uses the equity method of accounting to record its proportionate share of Spansion’s net income (loss).

Foreign Currency Translation/Transactions

Prior to 2006, the functional currency of the Company’s foreign subsidiaries was the U.S. dollar, except for AMD Saxony Limited Liability Company & Co. KG (AMD Saxony) and AMD Fab 36 LLC & Co. KG (AMD Fab 36 KG) whose functional currency was the euro. Beginning in 2006, the functional currency of AMD Saxony and AMD Fab 36 KG is the U.S. dollar. The change in the functional currency of these subsidiaries is accounted for in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation (SFAS 52), and reflects the changed economic facts and circumstances pertaining to these subsidiaries. Under the requirements of SFAS 52, the Company assessed the various economic factors relating to AMD Saxony and AMD Fab 36 KG and concluded that due to changes in facts, circumstances, scope of operations and business practices, the U.S. dollar is now the currency of the primary economic environment in which these subsidiaries operate, and, therefore, their functional currency. Consequently, beginning in the first quarter of fiscal 2006, assets and liabilities denominated in non-U.S. dollars have been remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for non-monetary assets and liabilities. Net revenue, cost of sales and expenses have been remeasured at average exchange rates in effect during each period. Net revenues, cost of sales and expenses related to the previously noted balance sheet amounts have been, remeasured at historical exchange rates. Gains or losses resulting from foreign currency remeasurements have been included in net income. Translation adjustments from prior periods will continue to remain in accumulated other comprehensive income. The Company will continue to include its proportionate share of the translation adjustments relating to Spansion Japan, a subsidiary of Spansion Inc., whose functional currency is the Japanese yen, based on the equity method of accounting, in accumulated other comprehensive income.

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Stock-Based Compensation

On December 26, 2005, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair values. The Company adopted SFAS 123R using the modified prospective transition method. In accordance with the modified prospective transition method, the Company has not restated its consolidated financial statements for prior periods. Under this transition method, stock-based compensation expense for the first quarter of 2006 includes stock-based compensation expense for all of the Company’s stock-based compensation awards granted prior to, but not yet vested as of, December 26, 2005, based on the grant-date fair value estimated in accordance with the provision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Stock-based compensation expense for all stock-based compensation awards granted on or after December 26, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

Upon adoption of SFAS 123R, the Company changed its method of attributing the value of stock-based compensation expense from the multiple-option (i.e., accelerated) approach to the single option (i.e., straight-line) method. Compensation expense for share-based awards granted prior to December 26, 2005 will continue to be subject to the accelerated multiple option method specified in FASB Interpretation No. 28 (FIN 28), Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, while compensation expense for share-based awards granted on or after December 26, 2005 will be recognized using a straight-line, single option method.

Also, upon adoption of SFAS 123R the Company changed its method of valuation for stock option awards from the Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which was previously used for the Company’s pro forma information disclosures of stock-based compensation expense as required under SFAS 123, to a lattice-binomial option-pricing model.

SFAS 123R requires that the cash flows resulting from excess tax benefits related to stock compensation be classified as cash flows from financing activities. Prior to the adoption of SFAS 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.

In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 2 for a further discussion on stock-based compensation.

The Company’s determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS 123R and SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

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SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately expected to vest. Forfeitures were estimated based on the Company’s historical experience. In the Company’s pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred.

2. Stock-Based Incentive Compensation Plans

Stock-Based Incentive Program Description

The Company’s stock-based incentive programs are intended to attract, retain and motivate highly qualified employees. These programs are described more fully in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 25, 2005. Equity awards are made from the Company’s 2004 Equity Incentive Plan (the 2004 Plan). Under the 2004 Plan, stock options cannot be exercised until they become vested. Generally, stock options vest and become exercisable over a three to four-year period from the date of grant. Stock options expire at the times established by the Company’s Compensation Committee of the Board of Directors, but not later than 10 years after the grant date. In addition, shares that are released from or reacquired by the Company from outstanding awards under the 2004 Plan become available for grant under the 2004 Plan and may be reissued as new awards. The Company also has stock options outstanding from previous equity compensation plans. On April 29, 2004, the Company’s stockholders approved the 2004 Plan. Stock options available for grant under these prior equity compensation plans that were in effect before April 29, 2004 were consolidated into the 2004 Plan. In conjunction with the adoption of SFAS 123R, the Company reviewed its stock-based incentive programs and decided that going forward it intends to issue primarily restricted stock units in lieu of stock options.

Under the 2004 Plan, the Company can grant stock awards at, above, or below the fair market value of its common stock on the date of grant. Under the 2004 Plan, the Company can currently grant no more than nine million awards where the exercise price is less than the fair market value of its common stock on the date of grant (full value awards). These types of full value awards can consist of restricted stock and restricted stock units. The 2004 Plan also currently permits the grant of non-qualified stock options with per share exercise prices less than the fair market value of the Company’s common stock on the date of grant (but not less than 85 percent of the fair market value of the Company’s common stock on the date of grant). Following is a description of the material terms of the full value awards that may be granted under the 2004 Plan:

Restricted Stock. Restricted stock awards can be granted to any employee, director or consultant. Restricted stock based on continued service may not fully vest for three years from the date of grant. Restricted stock that is performance based may not fully vest for one year from the date of grant.

Restricted Stock Units. Restricted stock units are awards that can be granted to any employee, director or consultant and that obligate the Company to issue a specific number of shares of the Company’s common stock in the future if the vesting terms and conditions are satisfied. Restricted stock units based on continued service generally vest over three to four years from the date of grant. Restricted stock units based solely on performance conditions generally do not vest for at least one year from the date of grant.

Discount Stock Options. Discount stock options are non-qualified stock options with a fixed exercise price that is less than the fair market value of the Company’s common stock on the date of grant (but not less than 85 percent of the fair market value of the common stock on the date of grant).

Valuation and Expense Information under SFAS 123R

The following table summarizes stock-based compensation expense related to employee stock options, restricted stock and restricted stock units and employee stock purchases under the Company’s Employee

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Stock Purchase Plan under SFAS 123R for the quarter ended March 26, 2006, which was allocated in the condensed consolidated statement of operations as follows:

Stock-based compensation included as a component of:

Because the Company maintained a full valuation allowance on its U.S. deferred tax assets, the Company did not recognize any tax benefit related to stock-based compensation expense for the quarter ended March 26, 2006.

As of March 26, 2006, the Company had $35 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over the weighted average period of 1.17 years. Also, as of March 26, 2006, the Company had $43 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock awards that will be recognized over the weighted average period of 1.89 years.

Upon adoption of SFAS 123R, the Company began estimating the value of employee stock options on the date of grant using a lattice-binomial option-pricing model (lattice-binomial model). Prior to the adoption of SFAS 123R, for purposes of the pro forma disclosure information that the Company provided in accordance with SFAS 123, the value of each employee stock option was estimated on the date of grant using the Black-Scholes option-pricing model.

The Company’s employee stock options have various restrictions including vesting provisions and restrictions on transfer, and they are often exercised prior to their expiration date. The Company believes that the lattice-binomial model is more capable of incorporating the features of the Company’s employee stock options than closed-form models such as the Black-Scholes model.

The use of the lattice-binomial model requires the use of extensive actual employee exercise behavior data and the use of a number of complex assumptions including expected volatility of the Company’s common stock, risk-free interest rate, and expected dividends. The weighted-average estimated value of employee

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stock options granted during the quarter ended March 26, 2006 was $15.70 per share, using the lattice-binomial model with the following weighted-average assumptions:

The Company used a combination of the historical volatility of its common stock and the implied volatility for two-year traded options on the Company’s common stock as the expected volatility assumption required by the lattice-binomial model, which is consistent with SFAS 123R and SAB 107. The implied volatility was based upon the availability of actively traded options on the Company’s common stock. The Company believes that the use of implied volatility is more representative of future stock price trends for the two-year periods covered by the actively traded options’ maturities than simply using historical volatility alone. The Company believes that this blended approach provides a better estimate of the expected future volatility of the Company’s common stock over the expected life of its stock options. Prior to 2006, the Company had used its historical stock price volatility in accordance with SFAS 123 for purposes of its pro forma information disclosures of stock-based compensation expense.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock options. The expected dividend yield is zero as the Company does not expect to pay dividends in the future.

The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the lattice-binomial model. The expected term of employee stock options is impacted by all of the underlying assumptions and calibration of the lattice-binomial model. The lattice-binomial model assumes that employees’ exercise behavior is a function of the option’s remaining vested term and the extent to which the option is in-the-money. The lattice-binomial model estimates the probability of exercise as a function of these two variables based on the past ten year history of exercises, post-vesting cancellations, and outstanding options on all option grants other than pre-vesting forfeitures made by the Company. The expected term for option grants made during the quarter ended March 26, 2006 derived from the lattice-binomial model was 4.14 years.

The Company uses third-party analyses to assist in developing the assumptions used in, as well as calibrating, its lattice-binomial model. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards.

Restricted Stock Awards

Restricted stock and restricted stock units vest in accordance with the terms and conditions established by the Compensation Committee of the Board of Directors, and are based either on continued service or performance. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant, and the compensation expense is recognized over the service period.

Certain Company employees have been granted performance-based restricted stock and performance-based restricted stock units. The number of shares ultimately received under these awards depends on actual performance against specified performance targets. The performance period is generally one to three years from the date of grant. At the end of the performance period, the number of shares of stock received by the holder will be determined by adjusting upward or downward from the target in a range between 0% and 200% of the target.

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Employee Stock Purchase Plan (ESPP)

Under the ESPP, eligible employees may purchase the Company’s common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value at the beginning of the applicable offering period or at the end of each applicable three-month purchase period. The Company issued 336,000 shares under the ESPP during the quarter ended March 26, 2006. The ESPP compensation expense is calculated using the fair value of the employees’ purchase rights at the grant date under the Black-Scholes model.

Pro Forma Information Under SFAS 123 For Periods Prior to 2006

The following table presents the effect on net loss and earnings per share as if the Company had applied the fair-value recognition provisions of SFAS 123 to all of its share-based compensation awards for the quarter ended March 27, 2005:

The summary of the changes in stock options outstanding under the Company’s stock-based compensation plans during the quarter ended March 26, 2006 is presented below:

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The following table summarizes the ranges of the exercise prices of outstanding and exercisable options as of March 26, 2006:

As of March 26, 2006, the weighted average remaining contractual life of options exercisable was 5.38 years and their aggregate intrinsic value was $539 million. The total intrinsic value of options exercised during the quarters ended March 26, 2006 and March 27, 2005 was $283 million and $76 million, respectively.

The summary of the changes in restricted stock awards outstanding under the Company’s 2004 Plan during the quarter ended March 26, 2006 is presented below:

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The total fair value of shares vested during the quarter end March 26, 2006 was zero because no shares vested during the period.

Non-Employee Stock Options and Restricted Stock Units

In connection with Spansion’s IPO, unvested stock options and restricted stock units of the Company that are held by Spansion employees are subject to variable accounting under Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Investments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The fair value of unvested options and restricted stock units was measured by the Black-Scholes option pricing model at March 26, 2006 using prevalent market price assumptions because such awards were issued prior to the adoption of SFAS 123R.

The compensation expense for the quarter ended March 26, 2006 related to these awards was approximately $1.6 million. In accordance with EITF Issue No. 00-12, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee, the compensation expense was recorded in the Company’s condensed consolidated statements of operations in the same caption as the equity in net income (loss) of Spansion Inc. As of March 26, 2006, the number of unvested options and restricted stock units outstanding and held by Spansion employees was approximately 674,000.

3. Net Investment in and Equity Interest in Net Income (Loss) of Spansion

On December 21, 2005, Spansion Inc. completed its IPO of 47,264,000 shares of its Class A common stock as well as its offering of notes to the Company and institutional investors with an aggregate principal amount of $425 million. As a result of the IPO, the Company owns a total of 48,529,403 shares, or 37.9 percent, of Spansion’s outstanding common stock. The Company cannot transfer any shares of Spansion’s common stock, except to majority owned subsidiaries, until the earlier of December 21, 2006 or the conversion of Spansion’s Class D common stock into Class A common stock.

Following the IPO, the Company’s ownership interest was diluted from 60 percent to 37.9 percent. As a result, the Company no longer exercises control over Spansion’s operations and, from December 21, 2005, its financial position, results of operations and cash flows are no longer consolidated with the Company’s. Therefore, the Company uses the equity method of accounting to reflect its proportionate share of Spansion’s net income or loss in accordance with the provisions of APB Opinion No. 18 (As Amended), The Equity Method of Accounting for Investments in Common Stock. Under the equity method of accounting, the Company records its proportionate share of Spansion’s net income or loss based on the most recently available quarterly financial statements. For the first quarter of 2006, the Company recorded its proportionate share of Spansion’s net loss for Spansion’s quarter ended March 26, 2006 in its results of operations.

In determining the Company’s share of the net loss from Spansion under the equity method of accounting, certain adjustments, primarily related to the elimination of intercompany profits are made to Spansion’s reported results (see Note 4). These net adjustments totaled approximately $1.4 million for the quarter ended March 26, 2006 and are included in the same caption equity interest in net income (loss) of Spansion, Inc. on the Company’s condensed consolidated statements of operations. In addition, the Company also reflects its proportionate share of the change in Spansion’s accumulated other comprehensive income (loss) on its condensed consolidated balance sheet. The amount of this change for the first quarter of 2006 was not material.

As of March 26, 2006, the carrying value of the Company’s net equity investment in Spansion amounted to approximately $700 million, and the fair value of this investment was approximately $729 million based on the closing price of Spansion’s Class A common stock on March 24, 2006, the last trading day of the fiscal quarter.

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4. Related-Party Transactions

The following table represents the significant account balances receivable from or payable to Spansion as of March 26, 2006 and December 25, 2005, of which none had the legal right of offset:

In connection with the IPO, the Company entered into various amended and restated service agreements, a non-compete agreement and a patent cross-license agreement with Spansion. Under the amended services agreements, the Company agreed to provide, among other things, information technology, facilities, logistics, tax, finance, human resources, and environmental health and safety services to Spansion for a specified period. Under the amended patent cross-license agreement, Spansion will pay royalties to the Company based on a percentage of Spansion’s net sales.

In addition, the Company entered into an agency agreement with Spansion pursuant to which the Company agreed to ship products to and invoice Spansion’s customers in the Company’s name on behalf of Spansion until Spansion has the capability to do so on its own which will be in the second quarter of 2006. Prior to shipping the product to Spansion’s customers, the Company purchases the applicable product from Spansion and pays Spansion the same amount that it invoices Spansion’s customers. In performing these services, the Company acts as Spansion’s agent for the sale of Spansion’s Flash memory products, and the Company does not receive a commission or fees for these services. Under the agreement, Spansion assumes full responsibility for its products and these transactions, including establishing the pricing and determining product specifications. Spansion also assumes credit and inventory risk related to these product sales.

Pursuant to the agency agreement and in accordance with EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company records sales of Spansion’s Flash memory products sold by the Company on behalf of Spansion and the related cost of sales on a net basis on its condensed consolidated statements of operations. As a result, the net impact to the Company’s net sales and cost of sales is zero.

With respect to the Company’s balance sheet, sales to Spansion’s customers are reflected in the Company’s “Accounts Receivable” line item whereas the payables to Spansion that relate to the products the Company purchased from Spansion are reflected in its “Accounts Payable to Spansion” line item. These amounts are recorded separately on the balance sheet because there is no legal right of offset in accordance with FIN 39, Offsetting of Amounts Related to Certain Contracts.

Prior to Spansion’s IPO, Fujitsu was a related party of the Company as a result of the formation of Spansion LLC effective June 30, 2003, in which the Company held a 60 percent interest and Fujitsu held a 40 percent interest. The following table represents certain transactions between the Company (including through Spansion) and Fujitsu for the quarter ended March 27, 2005:

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5. Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed using the weighted-average number of common shares outstanding. Diluted net income (loss) per common share is computed using the weighted-average number of common shares outstanding plus any dilutive potential common shares outstanding. Dilutive potential common shares include stock options, restricted stock awards, and shares issuable upon the conversion of convertible debt. The following table sets forth the components of basic and diluted income (loss) per common share:

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There were no dilutive potential common shares that were not included in the net income per common share calculation for the quarter ended March 26, 2006. Dilutive potential common shares of 62 million for the quarter ended March 27, 2005 were not included in the net loss per common share calculation, as their inclusion would have been antidilutive.

6. Segment Reporting

Management, including the Chief Operating Decision Maker (CODM), who is the Company’s Chief Executive Officer, reviews and assesses operating performance using segment revenues and operating income (loss) before interest, other income (loss), equity in net income (loss) of Spansion Inc., income taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on management’s judgment.

Prior to December 21, 2005, the Company had the following three reportable segments:

As a result of Spansion’s IPO, the Company’s financial results of operations include Spansion’s financial results of operations as a consolidated subsidiary through December 20, 2005. From December 21, 2005, Spansion’s operating results and financial position are not consolidated as part of the Company’s financial results. Instead, the Company applied the equity method of accounting to reflect its proportionate share of Spansion’s net income (loss) from December 21, 2005 through March 26, 2006. Accordingly, as of December 21, 2005 the Company no longer has the Memory Products segment, and the operating results for the quarter ended March 26, 2006 are not fully comparable with the results for the quarter ended March 27, 2005.

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

As of December 21, 2005, the Company has two reportable segments: the Computation Products segment and the Embedded Products segment, which prior to the first quarter of 2006, the Company referred to as the Personal Connectivity Solutions segment. In the first quarter of 2006, the Company changed the name of the Personal Connectivity Solutions segment to the Embedded Products segment. In addition to its two current reportable segments, the Company also has the All Other category. This category includes the Personal Internet Communicator (PIC) operating segment, which was reviewed separately by the CODM beginning in the third quarter of 2005, as well as certain operating expenses and credits that are not allocated to any of the reportable segments because the CODM does not consider these operating expenses and credits in evaluating the operating performance of the Company’s operating segments.

The PIC is not a reportable segment because it does not meet the threshold criteria for a reportable segment as required by SFAS 131, Disclosures about Segments of an Enterprise and Related Information. Revenue from sales of PIC products has not been material.

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Also as a result of Spansion’s IPO and the deconsolidation of Spansion’s operating results effective December 21, 2005, the Company allocated profit sharing and bonus expenses to specific operating segments that earned them. Therefore, these expenses are no longer included in the All Other category. Prior period segment information has been reclassified to conform to the current period’s presentation.

The following table is a summary of net sales and operating income (loss) by segment with reconciliations to net income (loss) for the quarters ended March 26, 2006 and March 27, 2005:

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7. Comprehensive Income (Loss)

The following are the components of comprehensive income (loss):

The change in other comprehensive income (loss) in the first quarter of 2006 compared to the first quarter of 2005 was primarily due to the decrease in net change in cumulative translation adjustments as a result of the change in functional currency in certain of the Company’s subsidiaries. See Note 1.

8. Commitments and Contingencies

Guarantees

The Company accounts for and discloses 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 Condensed Consolidated Balance Sheet

The following table summarizes the principal guarantees issued as of March 26, 2006 related to underlying liabilities that are already recorded on the Company’s condensed consolidated balance sheet as of March 26, 2006 and their expected expiration dates by year. No incremental liabilities are recorded on the Company’s condensed consolidated balance sheet for these guarantees:

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Guarantees of Indebtedness Not Recorded on the Company’s Condensed Consolidated Balance Sheet

The following table summarizes the principal guarantees issued as of March 26, 2006, for which the related underlying liabilities are not recorded on the Company’s condensed consolidated balance sheet as of March 26, 2006 and their expected expiration dates.

AMTC and BAC 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 an advanced photomask facility in Dresden, Germany. In April 2005, DuPont Photomasks, Inc. was acquired by Toppan Printing Co., Ltd. and became a wholly owned subsidiary of Toppan, named Toppan Photomasks, Inc. The Company procures advanced photomasks from AMTC and uses them in manufacturing its microprocessors. To finance the project, BAC and AMTC entered into a $144 million revolving credit facility and a $90 million term loan in December 2002. 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, as of March 26, 2006, the Company guaranteed up to $39 million plus interest and expenses under the revolving loan, and up to $19 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 is $114 million. As of March 26, 2006, $84 million was drawn under the revolving credit facility, and $58 million was drawn under the term loan. The Company has not recorded any liability in its consolidated financial statements associated with the guarantees because they were issued prior to December 31, 2002, the effective date of FIN 45.

Spansion Capital Lease Guarantee

The Company guaranteed certain capital leases entered into by Spansion and its subsidiaries totaling $23 million as of March 26, 2006. The amounts guaranteed are reduced by the actual amount of lease payments made by Spansion over the terms of the leases.

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Spansion Operating Lease Guarantees

The Company guaranteed certain operating leases entered into by Spansion and its subsidiaries totaling $6 million as of March 26, 2006. The amounts guaranteed are reduced by the actual amount of lease payments made by Spansion over the terms of the leases.

The Company has not recognized any liability for these guarantees under the provisions of FIN 45 because the Company concluded the fair values of the guarantees are not significant. In making the decision, the Company considered various factors including the recent IPO of Spansion, its credit rating, the ability of Spansion to make the payments on these obligations and the short maturity of the indebtedness.

Warranties and Indemnities

The Company generally offers a three-year limited warranty to end users for microprocessor products that are commonly referred to as “processors in a box”, a one-year limited warranty to direct purchasers for all other microprocessor products that are commonly referred to as “tray” microprocessor products, and a one-year limited warranty to direct purchasers of embedded processor products. The Company has offered extended limited warranties to certain customers of “tray” microprocessor products who have written agreements with the Company and target their computer systems at the commercial market. Prior to Spansion’s IPO and the related deconsolidation, the Company also offered a one-year limited warranty to direct purchasers for all Flash memory products. Under limited circumstances, the Company also offered an extended limited warranty to direct purchasers of Flash memory products that were intended for systems targeted at the embedded end market.

Changes in the Company’s potential liability for product warranty during the quarters ended March 26, 2006 and March 27, 2005 are as follows:

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 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 a 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 indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, payments made by the Company under these obligations have not been material.

Contingencies

The Company is a defendant or plaintiff in various actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial condition or results of operations.

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9. Restructuring and Other Special Charges

2002 Restructuring Plan

In December 2002, the Company began implementing a restructuring plan (the 2002 Restructuring Plan) to further align its cost structure to the industry conditions at that time, including weak customer demand and industry-wide excess inventory. With the exception of the exit costs consisting primarily of remaining lease payments on abandoned facilities, net of estimated sublease income that are payable through 2011, the Company has completed the activities associated with the 2002 Restructuring Plan.

The accruals under the 2002 Restructuring Plan at December 25, 2005 were $85 million. During the first quarter of 2006, the Company paid an aggregate amount of $5 million related to facility exit costs. As a result, the accruals at March 26, 2006 were $80 million.

As of March 26, 2006 and December 25, 2005, $61 million and $66 million of the total restructuring accruals of $80 million and $85 million were included in other long-term liabilities on the condensed consolidated balance sheets. See Note 10.

10. Other Long-Term Liabilities

The Company’s other long-term liabilities at March 26, 2006 and December 25, 2005 consisted of:

11. Equity Offering

On January 27, 2006, the Company closed the offering of 14,096,000 shares of its common stock. The net proceeds from this equity offering, after deducting underwriting commissions, discounts and offering expenses, were $495 million. The Company used $231 million of the net proceeds from this offering to fund the redemption of 35 percent (or $210 million) of the aggregate principal amount outstanding of its 7.75% Notes, including a 7.75% redemption premium and accrued interest. See Note 12.

12. Debt

Conversion of 4.75% Convertible Senior Debentures

In February 2006, holders of the Company’s 4.75% Convertible Senior Debentures due 2022 (4.75% Debentures) elected to convert their debentures into 21,378,605 shares of the Company’s common stock pursuant to the original terms of the 4.75% Debentures. Upon conversion, the principal amount of the debentures of $500 million plus $12 million of unamortized finance costs were reclassified and reflected in stockholders’ equity.

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Partial Redemption of 7.75% Senior Notes

In February 2006, the Company redeemed 35 percent (or $210 million) of the aggregate principal amount outstanding of its 7.75% Senior Notes due 2012. The holders of the 7.75% Senior Notes received 107.75 percent of the principal amount of the 7.75% Senior Notes plus accrued interest. In connection with this redemption, the Company recorded an expense of approximately $16 million, which represents the 7.75% redemption premium paid by the Company, and a charge of $4 million, which represents 35 percent of the unamortized issuance costs incurred in connection with the original issuance of the 7.75% Senior Notes. The Company included these charges in the other income (expense), net line on the condensed consolidated statement of operations for the quarter ended March 26, 2006.

13. Income Taxes

The Company recorded an income tax provision of $35 million at a projected annual effective tax rate of 15 percent of pre-tax income in the first quarter of 2006 and an income tax benefit of $2 million, or nine percent of pre-tax loss, in the first quarter of 2005.

The income tax provision recorded in the first quarter of 2006 was for taxes on income generated in both the U.S. and foreign jurisdictions. The U.S. income tax in the first quarter 2006 projected annual effective tax rate estimate arose because the net operating losses and federal tax credits available to reduce the tax provision are less than the total net operating losses and federal tax credits available, as a result of deductions under the Company’s stock option plans that will increase capital in excess of par value when realized. Realization of the benefits associated with these equity related deductions has not yet occurred and is dependent upon generating sufficient future taxable income. The projected annual effective tax rate of 15 percent of pre-tax income in the first quarter of 2006 was less than the expected U.S. statutory rate primarily as a result of deferred tax assets under valuation allowances being available to reduce the estimated current year tax provision.

The income tax benefit recorded in the first quarter of 2005 was primarily for foreign tax benefits on losses in certain foreign jurisdictions. The income tax benefit in the first quarter of 2005 differed from the expected U.S. statutory tax rate primarily as a result of the tax benefit of foreign losses associated with Spansion Japan off-setting foreign income taxes in other jurisdictions and the use of U.S. valuation allowance to reduce the projected U.S. tax provision.

As of March 26, 2006 all of the Company’s U.S. deferred tax assets, net of deferred tax liabilities, continue to be subject to a full valuation allowance that was initially established in the fourth quarter of 2002. The realization of these assets is dependent on substantial future taxable income which at March 26, 2006, in management’s estimate, is not more likely than not to be achieved.

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

The statements in this report include forward-looking statements. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things: our sales; capital expenditures; depreciation and amortization expenses; the adequacy of resources to fund operations and capital expenditures; operating expenses; tax rate; the development and timing of the introduction of new products and technologies; customer and market acceptance of our microprocessors; our ability to remain competitive and maintain or increase our market position; our ability to maintain and develop key relationships with our existing and new customers and suppliers; the ability to produce our products in the volumes and mix required by the market either in our own facilities or at foundries, at mature yields and on a timely basis; our ability to maintain the level of investment in research and development and capacity that is required to remain competitive; our ability to transition to advanced manufacturing process technologies in a timely and effective way; the process technology transitions in our wafer fabrication facilities; and our ability to gain market share in high-growth global markets such as China, Latin America, India and Eastern Europe.

For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements, see the “Financial Condition” and “Risk Factors” sections set forth below and such other risks and uncertainties as set forth below in this report or detailed in our other Securities and Exchange Commission (SEC) reports and filings. We assume no obligation to update forward-looking statements.

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 25, 2005 and December 26, 2004, and for each of the three years in the period ended December 25, 2005 as filed in our Annual Report on Form 10-K for the year ended December 25, 2005.

AMD, the AMD Arrow logo, AMD Athlon 64, AMD Opteron, AMD Sempron, AMD Turion 64 and AMD Geode are trademarks of Advanced Micro Devices, Inc. Spansion, MirrorBit and ORNAND are trademarks of Spansion. Microsoft and Windows are registered trademarks of Microsoft Corporation in the United States and/or other jurisdictions. Other names are for informational purposes only and used to identify companies and products and may be trademarks of their respective owners.

Overview

We design, manufacture and market microprocessor solutions for the computing, communications and consumer electronics markets. These solutions include embedded microprocessors for personal connectivity devices and other consumer markets. Prior to the closing of the initial public offering, or IPO, of Spansion Inc. on December 21, 2005, we also manufactured and sold Flash memory devices through our formerly consolidated, majority owned subsidiary, Spansion LLC.

The first quarter of 2006 was characterized by continued solid execution of our corporate strategy. This quarter was also our first full quarter after the completion of Spansion’s IPO, and therefore, does not include the results of operations of what was formerly called our Memory Products segment. During this quarter, Computation Products net sales of $1.3 billion increased by 73 percent compared to the first quarter of 2005 due to increased unit shipments and average selling prices. Computation Products net sales of $1.3 billion were relatively flat compared to the fourth quarter of 2005 because lower overall unit

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shipments were offset by increased blended average selling prices. Moreover, gross margin as a percentage of net sales for the first quarter of 2006 improved from comparable gross margin percentage in the first quarter of 2005 and the fourth quarter of 2005 due to the fact that during the first quarter of 2006, we did not consolidate Spansion’s results of operations with ours.

Our balance sheet as of March 26, 2006 also improved. Cash, cash equivalents and short-term investments at March 26, 2006 were $2.6 billion, an increase of $838 million from December 25, 2005. The increase was primarily due to $566 million of cash flow from operations and net proceeds of $495 million from the sale of 14,096,000 shares of our common stock in a public equity offering. We also decreased our debt-to-capital ratio due to the conversion of $500 million of our outstanding 4.75% Convertible Senior Debentures due 2022 (4.75% Debentures) and our redemption of $210 million of the aggregate principal amount outstanding of our 7.75% Senior Notes due 2012 (7.75% Notes).

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

Critical Accounting Policies

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

Management believes there have been no significant changes during the quarter ended March 26, 2006 to the items that we disclosed as our critical accounting policies and estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the fiscal year ended December 25, 2005.

Results of Operations

We review and assess operating performance using segment revenues and operating income (loss) before interest, other income (loss), equity in net income (loss) of Spansion Inc., income taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on management’s judgment.

Prior to December 21, 2005, we had the following three reportable segments:

As a result of the completion of Spansion’s IPO on December 21, 2005, our financial results of operations include Spansion’s financial results of operations as a consolidated subsidiary through December 20, 2005. From December 21, 2005, Spansion’s operating results and financial position are not consolidated as part of our financial results. Instead, we applied the equity method of accounting to reflect our proportionate

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share of Spansion’s net income (loss) from December 21, 2005 through March 26, 2006. Accordingly, as of December 21, 2005 we no longer have the Memory Products segment, and our operating results for the quarter ended March 26, 2006 are not fully comparable with our results for the quarter ended December 25, 2005 or the quarter ended March 27, 2005.

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

As of December 21, 2005, we have two reportable segments: the Computation Products segment and the Embedded Products segment, which prior to the first quarter of 2006, we referred to as our Personal Connectivity Solutions segment. In the first quarter of 2006, we changed the name of our Personal Connectivity Solutions segment to the Embedded Products segment. In addition to our two reportable segments, we also have the All Other category. This category includes our Personal Internet Communicator (PIC) operating segment, which was reviewed separately by our Chief Operating Decision Maker, or CODM beginning in the third quarter of 2005, as well as certain operating expenses and credits that are not allocated to any of our reportable segments because our Chief Executive Officer, who is our CODM, does not consider these operating expenses and credits in evaluating the operating performance of our reportable segments. The PIC is not a reportable segment because it does not meet the threshold criteria for a reportable segment as required by SFAS 131, Disclosures about Segments of an Enterprise and Related Information. Revenue from sales of PIC products has not been material.

Also as a result of Spansion’s IPO and the deconsolidation of Spansion’s operating results effective December 21, 2005, we allocated profit sharing and bonus expenses to the specific operating segments that earned them. Therefore, these expenses are no longer included in the All Other category. Prior period segment information has been reclassified to conform to the current period’s presentation.

We use a 52- to 53-week fiscal year ending on the last Sunday in December. The quarters ended March 26, 2006, December 25, 2005 and March 27, 2005 each included 13 weeks. The quarter ending July 2, 2006 will include 14 weeks.

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

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Computation Products

Computation Products net sales of $1.3 billion in the first quarter of 2006 increased 73 percent compared to net sales of $750 million in the first quarter of 2005 primarily as a result of a 44 percent increase in unit shipments and a 21 percent increase in average selling prices. Unit shipments increased due to greater demand for desktop, mobile and server products across all geographic regions. The increase in average selling prices was primarily due to increased sales of our higher priced, high-performance AMD64-based processors, including dual-core processors, which contributed to a richer product mix. Moreover, our introduction of AMD Turion 64 processors for notebook PCs in March 2005, AMD Opteron dual-core processors for servers and workstations in April 2005 and AMD Athlon 64 dual-core processors for desktop PCs in May 2005 helped drive increasing customer adoption of our products in the first quarter of 2006.

Computation Products net sales of $1.3 billion in the first quarter of 2006 were relatively flat compared to the fourth quarter of 2005. An increase of seven percent in average selling prices was offset by a seven percent decrease in unit shipments.

Computation Products operating income of $284 million in the first quarter of 2006 improved from $82 million in the first quarter of 2005 and was relatively flat compared to the fourth quarter of 2005. The improvement from the first quarter of 2005 was primarily due to a 73 percent increase in net sales, while operating expenses increased 54 percent. Operating expenses increased for the reasons set forth below under “Expenses.”

Embedded Products

Embedded Products net sales of $38 million in the first quarter of 2006 increased 27 percent compared to net sales of $30 million in the first quarter of 2005 primarily due to an $8 million increase in net sales of one of our embedded processor product lines, which increased due to increased unit shipments for this product line, while net sales of our other embedded processor product lines remained relatively flat. Embedded Products net sales of $38 million in the first quarter of 2006 decreased 9 percent compared to net sales of $41 million in the fourth quarter of 2005 primarily as a result of a $2 million decrease in net sales of one of our embedded processor product lines, which decreased due to decreased unit shipments for this product line, while net sales of our other embedded processor product lines remained relatively flat.

Embedded Products operating loss of $11 million in the first quarter of 2006 improved compared to operating loss of $14 million in the first quarter of 2005 primarily due to an increase in net sales of $8 million, partially offset by an increase in cost of sales of $4 million and an increase in research and development expenses of $3 million. Embedded Products operating loss of $11 million in the first quarter of 2006 improved compared to an operating loss of $15 million in the fourth quarter of 2005 primarily due to a decrease in cost of sales of $10 million, partially offset by a decrease in net sales of $3 million and an increase in marketing, sales and administrative expenses of $3 million.

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All Other Category

All Other net sales in the first quarter of 2006 decreased $8 million from $3 million in the fourth quarter of 2005 primarily due to returns of PIC products. We did not generate sales from PIC products in the first quarter of 2005.

All Other operating loss of $14 million in the first quarter of 2006 increased from an operating loss of $4 million in the first quarter of 2005 and $4 million in the fourth quarter of 2005 primarily due to an increase in cost of sales primarily due to an inventory write off and a decrease in net sales.

Memory Products Group

As a result of Spansion’s IPO, we no longer have a Memory Products segment.

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

The following is a summary of certain consolidated statement of operations data for the periods indicated:

Gross Margin

Gross margin as a percentage of net sales increased to 58 percent in the first quarter of 2006 compared to 34 percent in the first quarter of 2005 and 46 percent in the fourth quarter of 2005 primarily due to the fact that during the first quarter of 2006, we did not consolidate Spansion’s results of operations with ours.

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Gross margin as a percentage of net sales, excluding the Memory Products segment, was 53 percent in the first quarter of 2005 and 57 percent in the fourth quarter of 2005. The improvement in gross margin percentage, excluding the Memory Products segment, from the first quarter of 2005 was primarily due to an increase of 21 percent in average selling prices for our microprocessor products, partially offset by increased manufacturing costs caused by the shift in our product mix to higher-end microprocessor products. The improvement in gross margin, excluding the Memory Products segment, from the fourth quarter of 2005 was primarily due to an increase of seven percent in average selling prices for our microprocessor products due to an improvement in the mix of microprocessors sold and manufacturing efficiencies at Fab 30.

We record grants and allowances that we receive from the State of Saxony and the Federal Republic of Germany for Fab 30 or Fab 36 as long-term liabilities on our financial statements. We amortize these amounts as they are earned as a reduction to operating expenses. We record the amortization of the production related grants and allowances as a credit to cost of sales. The credit to cost of sales totaled $26 million in the first quarter of 2006, $17 million in the fourth quarter of 2005 and $18 million in the first quarter of 2005. The fluctuations in the recognition of these credits have not significantly impacted our gross margins.

In 2005 and 2004 we capitalized construction, equipment and facilitization costs related to Fab 36. In the first quarter of 2006, we produced revenue-generating products in Fab 36, and we began recognizing depreciation expense on Fab 36-related production assets to cost of sales. At the beginning of the second quarter of 2006, we began shipping and recognizing revenue on products produced in Fab 36.

Expenses

Research and Development Expenses

Research and development expenses of $264 million in first quarter of 2006 increased four percent from $253 million in the first quarter of 2005 due to an increase in research and development expenses attributable to our Computation Products segment. Partially offsetting this increase in research and development expenses is the fact that during the first quarter of 2006, we did not consolidate Spansion’s results of operations into ours. In the first quarter of 2005, Spansion’s research and development expenses were $70 million.

Computation Products research and development expenses in the first quarter of 2006 increased 47 percent compared to the first quarter of 2005 primarily as a result of a $35 million increase in product design and process improvement costs for new generations of our microprocessors and a $24 million increase in corporate bonus and profit sharing expenses.

Research and development expenses of $264 million in first quarter of 2006 decreased 20 percent from $329 million in the fourth quarter of 2005 due primarily to the fact that during the first quarter of 2006, we did not consolidate Spansion’s results of operations into ours. In the fourth quarter of 2005, the amount of Spansion’s research and development expenses that we consolidated was $73 million.

Computation Products research and development expenses in the first quarter of 2006 were relatively flat compared to the fourth quarter of 2005. Research and development expenses associated with the Fab 36 project decreased $12 million in the first quarter of 2006 compared to the fourth quarter of 2005 because we produced revenue-generating products in Fab 36 during the first quarter of 2006. Therefore, certain expenses that were previously classified as research and development expenses were captured in inventory or classified as cost of sales during the first quarter of 2006.

We also apply for and obtain subsidies from the State of Saxony, the Federal Republic of Germany and the European Union for certain research and development projects. We record the amortization of the research and development related grants and allowances as well as the research and development subsidies as a reduction of research and development expenses when all conditions and requirements set forth in the subsidy grant are met. The credit to research and development expenses totaled $6 million in the first quarter of 2006, $11 million in the fourth quarter of 2005 and $14 million in the first quarter of 2005.

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Marketing, General and Administrative Expenses

Marketing, general and administrative expenses of $256 million in first quarter of 2006 increased 21 percent from $212 million in the first quarter of 2005 due to an increase in marketing, general and administrative expenses attributable to our Computation Products segment. Partially offsetting this increase in marketing, general and administrative expenses is the fact that during the first quarter of 2006 we did not consolidate Spansion’s results of operations into ours. In the first quarter of 2005, Spansion’s marketing, general and administrative expenses were $48 million.

Computation Products marketing, general and administrative expenses in the first quarter of 2006 increased 61 percent compared to the first quarter of 2005 primarily as a result of an increase of $51 million in sales and cooperative advertising and marketing expenses associated with our AMD 64-based processors, an increase of $15 million in corporate bonus and profit sharing expenses and an increase of $9 million in stock compensation expense in connection with the adoption of SFAS No. 123R, Share-Based Payment, which we are required to record beginning in the first quarter of 2006.

Marketing, general and administrative expenses of $256 million in first quarter of 2006 decreased 19 percent from $317 million in the fourth quarter of 2005 due primarily to the fact that during the first quarter of 2006, we did not consolidate Spansion’s results of operations into ours. In the fourth quarter of 2005, the amount of Spansion’s marketing, general and administrative expenses that we consolidated was $68 million.

Computation Products marketing, general and administrative expenses in the first quarter of 2006 increased two percent compared to the fourth quarter of 2005 primarily as a result of the stock compensation expense discussed above and an increase of $8 million in cooperative advertising and marketing expenses in the first quarter of 2006 compared with the fourth quarter of 2005.

Interest Income

Interest income of $28 million in the first quarter of 2006 increased from $7 million in the first quarter of 2005 and $14 million in the fourth quarter of 2005. The increase from the first quarter of 2005 and the fourth quarter of 2005 was due to an increase in average interest rates as well as increased average cash and short-term investment balances.

Interest Expense

Interest expense of $23 million in the first quarter of 2006 decreased from $24 million in the first quarter and the fourth quarter of 2005.

Interest expense decreased $1 million from the first quarter of 2005 for the following reasons: During the first quarter of 2006 we did not consolidate Spansion’s results of operations with ours, and, therefore, interest expense on Spansion’s third party debt was not included. In the first quarter of 2005, Spansion’s third party interest expense was $6 million. Moreover, interest expense incurred on our 4.75% Debentures decreased by $3 million because holders of the 4.75% Debentures converted their debentures into shares our common stock by February 3, 2006. Also, interest expense incurred on our 7.75% Notes decreased by $2 million because we redeemed $210 million of the aggregate principal amount outstanding of the 7.75% Notes on February 26, 2006. These factors were offset by a decrease of $7 million of capitalized interest expense related to Fab 36 in the first quarter of 2006 compared to the first quarter of 2005.

Interest expense decreased $1 million from the fourth quarter of 2005 for the following reasons: During the first quarter of 2006 we did not consolidate Spansion’s results of operations with ours, and, therefore, interest expense on Spansion’s third party debt was not included. In the fourth quarter of 2005, the amount of Spansion’s third party interest expense that we consolidated was $5 million. Moreover, interest expense incurred on our 4.75% Debentures decreased by $3 million because holders of the 4.75% Debentures

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converted their debentures into shares our common stock by February 3, 2006. Interest expense incurred on our 7.75% Notes decreased by $2 million because we redeemed $210 million of the aggregate principal amount outstanding of the 7.75% Notes on February 26, 2006. These factors were offset by a decrease of $10 million of capitalized interest expense related to Fab 36, in the first quarter of 2006 compared to the fourth quarter of 2005.

Other Income (Expense), Net

Other income (expense), net, of $19 million expense in the first quarter of 2006 consisted primarily of a redemption premium charge of $16 million, or 7.75%, and a charge of $4 million, which represents 35 percent of the unamortized issuance costs incurred in connection with our redemption of 35 percent of the principal outstanding amount, or $210 million, of our 7.75% Notes.

Other income (expense), net, of $13 million expense in the fourth quarter of 2005 consisted primarily of a loss of approximately $10 million from the mark-to-market to earnings of certain foreign currency forward contracts which became ineffective in hedging against certain forecasted foreign currency transactions that did not occur due to the change of functional currency for AMD Fab 36 KG from the euro to the U.S. dollar on December 26, 2005, the beginning of our first quarter of 2006.

Other income (expense), net, of net expense of $3 million in the first quarter of 2005 consisted primarily of approximately $3 million of commitment and guarantee fees incurred in connection with the Fab 36 Loan Agreements, which are described in more detail below.

Income Taxes

We recorded an income tax provision of $35 million at a projected annual effective tax rate of 15 percent of pre-tax income in the first quarter of 2006, an income tax benefit of $1 million, or -1 percent of pre-tax income, in the fourth quarter of 2005 and an income tax benefit of $2 million, or 9 percent of pre-tax loss in the first quarter of 2005.

The income tax provision recorded in the first quarter of 2006 was for taxes on income generated in both the U.S. and foreign jurisdictions. The U.S. income tax in the first quarter 2006 projected annual effective tax rate estimate arose because the net operating loss and federal tax credits available to reduce the provision are less than the total net operating loss and federal tax credits available as a result of deductions under our stock option plans that will increase capital in excess of par value when realized. Realization of the benefits associated with these equity related deductions has not yet occurred and is dependent upon generating sufficient future taxable income. The projected annual effective tax rate of 15 percent of pre-tax income in the first quarter of 2006 was less than the expected U.S. statutory rate primarily as a result of deferred tax assets under valuation allowances being available to reduce the estimated current year tax provision.

The income tax benefit recorded in the fourth quarter of 2005 primarily reflects foreign tax benefits generated in certain jurisdictions. The income tax benefit in the fourth quarter of 2005 differed from a tax provision at the expected U.S. statutory tax rate primarily as a result of deferred tax assets under valuation allowances being available to reduce the tax provision on income generated in the quarter.

The income tax benefit recorded in the first quarter of 2005 was primarily for foreign tax benefits on losses in certain foreign jurisdictions. The income tax benefit in the first quarter of 2005 differed from the expected U.S. statutory tax rate primarily as a result of the tax benefit of foreign losses associated with Spansion Japan off-setting foreign income taxes in other jurisdictions and the use U.S. valuation allowance to reduce the projected U.S. tax provision.

As of March 26, 2006 all of our U.S. deferred tax assets, net of deferred tax liabilities, continue to be subject to a full valuation allowance that was initially established in the fourth quarter of 2002. The realization of these assets is dependent on substantial future taxable income which at March 26, 2006, in management’s estimate, is not more likely than not to be achieved.

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Stock-Based Compensation Expense

On December 26, 2005, we adopted SFAS 123R, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to our Employee Stock Purchase Plan, based on estimated fair values. We adopted SFAS 123R using the modified prospective transition method. The following table summarizes our stock-based compensation expense related to employee stock options, restricted stock, restricted stock units and employee stock purchases under the Employee Stock Purchase Plan under SFAS 123R for the quarter ended March 26, 2006, which was allocated in our condensed consolidated results of operations as follows:

Stock-based compensation included as a component of: