UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended March 31, 2007

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 April 30, 2007: 550,439,260.

INDEX

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PART I. FINANCIAL INFORMATION

Advanced Micro Devices, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Unaudited

See accompanying notes to condensed consolidated financial statements.

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Advanced Micro Devices, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

4

See accompanying notes to condensed consolidated financial statements.

5

Advanced Micro Devices Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Unaudited

6

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

Basis of Presentation. 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 period ended March 31, 2007 shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending December 29, 2007. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary for a fair presentation 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 31, 2006.

The Company uses a 52- to -53 week fiscal year. Prior to December 31, 2006, the Company’s fiscal year ended on the last Sunday in December. Commencing in 2007, the Company began using a 52- to -53 week fiscal year ending on the last Saturday in December. The quarters ended March 26, 2006 and March 31, 2007 each consisted of 13 weeks.

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

Principles of Consolidation

Principles of Consolidation. The consolidated financial statements include the Company’s accounts and those of its majority-owned subsidiaries, including the operations of ATI Technologies ULC (ATI) from October 25, 2006. Upon consolidation, all significant intercompany accounts and transactions are eliminated, and amounts pertaining to the noncontrolling ownership interests held by third parties in the operating results and financial position of the Company’s majority owned subsidiaries, are reported as minority interest.

Due to the initial public offering (IPO) of Spansion Inc. on December 21, 2005 and the resulting dilution of the Company’s ownership interest in Spansion, the Company has used the equity method of accounting to reflect its share of Spansion’s net income (loss) from December 21, 2005 through March 31, 2007. Also, included in the financial statements, under the equity method of accounting, is the Company’s percentage equity share of certain other investees’ operating results, where the Company has the ability to exercise significant influence over the operations of the investee.

Recently Issued Accounting Pronouncements. In June 2006, the EITF reached a final consensus on EITF Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences (EITF 06-2). Under this consensus, sabbatical leave or other similar benefits provided to an employee are considered to accumulate, as that term is used in Statement of Financial Accounting Standards (SFAS) No 43, provided that (a) the employee is required to complete a minimum service period to be entitled to the benefit, (b) there is no increase to the benefit if the employee provides additional years of service, (c) the employee continues to be a compensated employee during his or her absence, and (d) the employer does not require the employee to perform any duties during his or her absence. If these conditions are met, companies are required to accrue for sabbatical leave or other similar benefits as they are earned. The accounting required under this consensus was effective for fiscal years beginning after December 15, 2006. Upon adoption, companies had the option to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented, or (b) a change in accounting principle through a cumulative effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The Company adopted the new accounting requirement on January 1, 2007, and recorded a cumulative effect adjustment of approximately $23 million to its beginning retained earnings balance. Prior to adoption of EITF 06-2, the Company accrued for sabbatical leave expense only when employees are fully vested in this benefit.

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In June 2006, the Financial Accounting Standards Board issued Interpretation No.48, Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. AMD adopted FIN 48 as of January 1, 2007, as required.

In February 2007, FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an Amendment of FASB Statement No. 115.” This statement allows entities to voluntarily choose to measure many financial assets and financial liabilities as well as certain nonfinancial instruments that are similar to financial instruments (collectively “eligible items”) at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Earlier adoption of the statement is permitted as of the beginning of an entity’s fiscal year, provided the choice to early adopt is made within 120 days of the beginning of the fiscal year of adoption and the entity has not yet issued financial statements for any interim period of that fiscal year. Upon initial adoption, this statement provides entities with a one-time chance to elect the fair value options for the eligible items. The effect of the first measurement to fair value should be reported as a cumulative-effect adjustment to the opening balance of retained earnings in the year the statement is adopted. The Company is currently evaluating the impact, if any, of this statement upon its adoption.

2. Stock-Based Incentive Compensation Plans

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 Stock Purchase Plan under SFAS No.123R (revised 2004), Share-Based Payments (SFAS 123R) for the specified fiscal quarters, which was allocated in the condensed consolidated statements of operations as follows (in millions):

Stock Options. The weighted-average assumptions used in the lattice-binomial model the Company uses to value employee stock options are as follows:

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For the quarters ended March 31, 2007 and March 26, 2006, the Company granted 377,000 and 440,000 employee stock options, respectively, with average estimated grant date fair values of $5.93 and $15.70.

Restricted Stock Units and Awards. For the fiscal quarters ended March 31, 2007 and March 26, 2006, the Company granted 1,708,000 and 1,166,000 shares of restricted stock and restricted stock units, respectively, with an average grant date fair value of $14.83 and $36.84.

Employee Stock Purchase Plan. The Company issued 607,000 shares and 336,000 shares under the Employee Stock Purchase Plan (“ESPP”) during the fiscal quarters ended March 31, 2007 and 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-Merton model.

3. Investment in Spansion Inc.

During the first quarter of 2007, the Company sold 984,799 shares of its Spansion Inc. Class A common stock under Rule 144 of the Securities Act of 1933. The Company received $13 million in net proceeds from the sales and realized a gain of $0.6 million which was included in the caption, “Equity in net loss of Spansion, Inc. and other,” on the Company’s condensed consolidated statements of operations. As of March 31, 2007, the Company owned a total of 26,544,604 shares, or approximately 19.8 percent, of Spansion’s outstanding common stock. The Company continues to use the equity method of accounting to reflect its share of Spansion’s results of operations because the Company continues to have the ability to exercise significant influence over Spansion.

To the extent that the Company’s ownership in Spansion decreases in the future whether it is caused by disposal of its ownership interest or by Spansion’s issuance of additional common stock, the Company would record either a gain or a loss on such further dilution depending on the carrying value and fair value of the Company’s net equity investment in Spansion at that time, which could have a material effect on the Company’s results of operations in the period in which this ownership dilution occurs.

As of March 31, 2007, the carrying net book value of the Company’s net equity investment in Spansion, which includes the Company’s proportionate share of Spansion’s accumulated other comprehensive income (loss), was approximately $334 million. The fair value of this investment was approximately $324 million based on closing market price of Spansion’s common stock on March 30, 2007, the last trading day of the quarter. As of May 7, 2007, the fair value of this investment was approximately $267 million based on the closing market price of Spansion’s common stock on May 7, 2007. Based on the review performed by management, the Company believes that the decline in the fair value of Spansion’s investment in the first quarter of 2007 is not other than temporary.

Summarized Financial Information

The following table presents summarized unaudited consolidated financial information for Spansion Inc., which the Company obtained from Spansion’s press release announcing its financial results for the quarter ended April 1, 2007, as furnished with its Form 8-K filed on April 18, 2007. This financial information was the basis for applying the equity method in the Company’s condensed consolidated financial statements:

Spansion Inc.

(In millions)

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4. Goodwill and Acquisition Related Intangible Assets

In October 2006, the Company acquired ATI. All of the Company’s goodwill and acquisition-related intangible assets are as a result of the ATI acquisition. As of March 31, 2007, the primary areas of purchase price allocation that have not been finalized consist of certain legal matters and tax-related contingencies. The changes in the carrying amount of goodwill by operating segment for the quarter ended March 31, 2007, were as follows:

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The changes in the balances of acquisition related intangible assets for the quarter ended March 31, 2007, and the net book value of acquisition related intangible assets at March 31, 2007 were as follows:

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Estimated future amortization expense related to acquisition related intangible assets is as follows:

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 potentially dilutive common shares outstanding. Potentially dilutive 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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Potentially dilutive common shares totaling approximately 53 million for the quarter ended March 31, 2007 were not included in the net loss per common share calculation as their inclusion would have been anti-dilutive. There were no potentially dilutive common shares that were not included in the net income per common share calculation for the quarter ended March 26, 2006.

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

From December 26, 2005 through October 24, 2006, the Company had two reportable segments:

As a result of the acquisition of ATI, from October 25, 2006 through December 31, 2006, the Company had four reportable segments:

Starting in the first quarter of 2007, in conjunction with the integration of ATI’s operations, the CODM began reviewing and assessing operating performance using the following three reportable segments:

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In addition to the reportable segments, the All Other category includes certain operating expenses and credits that are not allocated to any of the operating segments because the CODM does not consider these operating expenses and credits in evaluating the operating performance of the operating segments. Also, following the ATI acquisition, the Company began including employee stock-based compensation expense, profit sharing expense, and ATI acquisition-related and integration charges 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 revenue and operating income (loss) by segment with reconciliations to net income (loss) for the quarters ended March 31, 2007 and March 26, 2006:

7. Comprehensive Income (Loss)

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

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8. Commitments and Contingencies

Guarantees

Guarantees of Indebtedness Recorded on the Company’s Condensed Consolidated Balance Sheet

The following table summarizes the principal guarantees issued as of March 31, 2007 related to underlying liabilities that are already recorded on the Company’s condensed consolidated balance sheet as of March 31, 2007 and their expected expiration dates by year. No incremental liabilities are recorded on the Company’s condensed consolidated balance sheet for these guarantees:

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

The following table summarizes the principal guarantees issued as of March 31, 2007, for which the related underlying liabilities are not recorded on the Company’s condensed consolidated balance sheet as of March 31, 2007 and their expected expiration dates.

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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 $161 million revolving credit facility and a $100 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 31, 2007, the Company guaranteed up to $43 million plus interest and expenses under the revolving loan, and up to $20 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 $97 million. As of March 31, 2007, $92 million was drawn under the revolving credit facility, and $52 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 and Operating Lease Guarantee

The Company guaranteed certain capital and operating leases entered into by Spansion and its subsidiaries totaling $4 million as of March 31, 2007. The amounts guaranteed are reduced by the actual amount of lease payments paid by Spansion over the lease terms.

No liability has been recognized for these guarantees related to Spansion under the provisions of FIN 45 because the Company concluded the fair value of the guarantees is not significant after considering various factors including Spansion’s 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 warrants that microprocessor products sold to its customers will, at the time of shipment, be free from defects in workmanship and materials and conform to its approved specifications. Subject to certain exceptions, the Company generally offers a three-year limited warranty to end users for microprocessor

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products that are commonly referred to as “processors in a box,” a one-year limited warranty to direct purchasers of 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 and/or embedded markets.

The Company generally warrants that its graphics and chipset products and products for consumer electronics devices will be free from defects in material and workmanship under normal use and service for a period of one year, beginning on the date first sold to an end user but not later than 90 days after shipment of such products to its customers. The Company generally warrants that ATI-branded PC workstation products will be free from defects in material and workmanship under normal use and service for a period of three years, beginning on the date first sold to an end user but not later than 90 days after shipment of such products to its customers.

Changes in the Company’s potential liability for product warranty during the quarters ended March 31, 2007 and March 26, 2006 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.

9. Restructuring 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

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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 31, 2006 were $67 million. During the first quarter of 2007, the Company paid an aggregate amount of $4 million related to facility exit costs. As a result, the accruals at March 31, 2007 were $63 million.

As of March 31, 2007 and December 31, 2006, $44 million and $48 million of the total restructuring accruals of $63 million and $67 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 31, 2007 and December 31, 2006 consisted of:

11. Income Taxes

The Company recorded an income tax provision of $23 million, or -4% on pre-tax losses in the first quarter of 2007 and an income tax provision of $35 million, or 15% of pre-tax income for the first quarter of 2006.

The income tax provision recorded in the first quarter of 2007 was primarily for deferred U.S. taxes related to indefinite-lived goodwill and foreign current taxes. The income tax provision in the first quarter of 2006 was for taxes on income generated in both the U.S. and foreign jurisdictions.

On January 1, 2007, upon adoption of FIN 48, the cumulative effect of applying FIN 48 was reported as a reduction of the beginning balance of retained earnings of $6 million and a decrease to goodwill of $3 million.

As of the date of adoption, the Company’s total gross unrecognized tax benefits were $178 million, of which $49 million, if recognized, would affect the effective tax rate. The recognition of the remaining unrecognized tax benefits would be reported as an adjustment to goodwill to the extent of pre-acquisition unrecognized tax benefits.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively. The Company had accrued interest and penalties of $59 million as of the date of adoption of FIN 48.

As of the date of adoption of FIN 48, tax years 1994 – 2006 remain subject to examination in the U.S., tax years 1999 – 2006 remain subject to examination in Canada and tax years 1999 – 2006 remain subject to examination in various foreign jurisdictions.

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The Company does not currently anticipate that its unrecognized tax benefits will significantly change within the next 12 months.

As of March 31, 2007 substantially all of the Company’s U.S. deferred tax assets, net of deferred tax liabilities, continue to be subject to a 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 31, 2007 in management’s estimate, is not more likely than not to be achieved.

As a result of the implementation of FIN 48 the Company has recognized $56 million of current and long-term deferred tax assets, previously under a valuation allowance, and $56 million of current and non-current tax contingencies as of March 31, 2007.

The total gross unrecognized tax benefits increased by $4 million in the first quarter of 2007. Interest and penalties incurred in the first quarter of 2007 were immaterial.

12. Subsequent Events

Issuance of 6.00% Convertible Senior Notes due 2015 and Purchase of Capped Call

On April 27, 2007, the Company issued $2.2 billion aggregate principal amount of 6.00% Convertible Senior Notes due 2015 (the 6.00% Notes). The 6.00% Notes bear interest at 6.00% per annum. Interest is payable on May 1 and November 1 of each year beginning November 1, 2007 until the maturity date of May 1, 2015. The terms of the 6.00% Notes are governed by an Indenture (the “Indenture”), dated as of April 27, 2007, by and between the Company and Wells Fargo Bank, National Association, as Trustee.

Upon the occurrence of certain events described in the Indenture, the 6.00% Notes will be convertible into cash up to the principal amount, and if applicable, into shares of common stock of the Company issuable upon conversion of the 6.00% Notes (“Conversion Shares”) in respect of any conversion value above the principal amount, based on an initial conversion rate of 35.6125 shares of common stock per $1,000 principal amount of 6.00% Notes, which is equivalent to an initial conversion price of $28.08 per share. This initial conversion price represents a premium of 100% relative to the last reported sale price of the Company’s common stock on April 23, 2007 (the trading date preceding the date of pricing of the 6.00% Notes) of $14.04 per share. The conversion rate will be adjusted for certain anti-dilution events. In addition, the conversion rate will be increased in the case of corporate events that constitute a fundamental change (as defined in the Indenture) of the Company under certain circumstances. Holders of the 6.00% Notes may require the Company to repurchase the 6.00% Notes for cash equal to 100% of the principal amount to be repurchased plus accrued and unpaid interest upon the occurrence of a fundamental change (as defined in the Indenture) or a termination of trading (as defined in the Indenture). Additionally, an event of default (as defined in the Indenture) may result in the acceleration of the maturity of the 6.00% Notes.

The 6.00% Notes rank equally with the Company’s existing and future senior debt and senior to all of its future subordinated debt. The 6.00% Notes rank junior to all of the Company’s existing and future senior secured debt to the extent of the collateral securing such debt and are structurally subordinated to all existing and future debt and liabilities of the Company’s subsidiaries.

In connection with the issuance and sale of the 6.00% Notes, the Company also entered into a Registration Rights Agreement (the “Registration Rights Agreement”), dated April 27, 2007, between the Company and Morgan Stanley & Co. Incorporated, as representative of the several initial purchasers of the 6.00% Notes pursuant to which, the Company has agreed that it will file a shelf registration statement with the Securities and Exchange commission for the resale by holders of the 6.00% Notes and the Conversion Shares, use its reasonable best efforts to cause the registration statement to be declared effective and keep the registration statement effective for the period described in the Registration Rights Agreement. The Company could be subject to paying additional interest on the 6.00% Notes for the period during which a default under the Registration Rights Agreement exists.

In connection with the issuance of the 6.00% Notes, on April 24, 2007, the Company purchased the Capped Call. The Capped Call has an initial strike price of $28.08 per share, subject to certain adjustment, which matches the initial

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conversion price of the 6.00% Notes, and a cap price of $42.12 per share. The Capped Call is intended to reduce the potential common stock dilution to then existing stockholders upon conversion of the 6.00% Notes because the call option allows the Company to receive shares of common stock from the counterparty generally equal to the number of shares of common stock issuable upon conversion of the 6.00% Notes. The Company does not anticipate experiencing an increase in the number of shares outstanding from the conversion of the 6.00% Notes unless the price of our common stock appreciates above $42.12 per share. If, however, the market value per share of the Company’s common stock, as measured under the terms of the Capped Call, exceeds the cap price of the Capped Call, there would be dilution to the extent that the then market value per share of the common stock exceeds the cap price. The Company has analyzed the Capped Call under EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock,” and determined that it meets the criteria for classification as an equity transaction. As a result, it will record the purchase of the Capped Call as a reduction in additional paid-in capital and it will not recognize subsequent changes in its fair value through earnings.

The net proceeds from the offering, after deducting discounts and commissions and the estimated offering expenses payable by the Company, were approximately $2,169 million. The Company used approximately $182 million of the net proceeds to purchase the Capped Call and applied $500 million of the net proceeds to repay a portion of the amount outstanding under the October 2006 Term Loan. In connection with this repayment, the Company will record a charge of approximately $5 million which represents the pro-rata unamortized debt issuance costs associated with the October 2006 Term Loan.

Increase in Authorized Share Capital

On May 3, 2007, the stockholders of the Company approved an amendment to its Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 750 million to 1.5 billion shares.

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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 cost reduction efforts; the timing of new product releases; the growth and competitive landscape of the markets in which we participate; our supply chain; our revenues; our capital expenditures; our operating expenses; our stock-based compensation expenses; our aggregate contractual obligations; availability of external financing; the adequacy of resources to fund operations and capital expenditures; the timing of manufacturing process technology transitions; the impact of our acquisition of ATI on us; and our exposure to interest rate risk. Material factors and assumptions that were applied in making these forward-looking statements include, without limitation, the following: (1) the expected rate of market growth and demand for our products and technologies (and the mix thereof); (2) our expected market share; (3) our expected product and manufacturing costs and average selling prices; (4) our overall competitive position and the competitiveness of our current and future products; (5) our ability to effect transitions to more advanced manufacturing process technologies, consistent with our current plans in terms of timing and capital expenditures; (6) our ability to raise sufficient capital on favorable terms; and (7) our ability to make additional investment in research and development and that such opportunities will be available. Material factors that could cause actual results to differ materially from current expectations include, without limitation, the following: (1) that Intel Corporation’s pricing, marketing and rebating programs, product bundling, standard setting, new product introductions or other activities may negatively impact sales; (2) that we may be unable to realize all of the anticipated benefits of our recent acquisition of ATI because, among other things, the revenues, cost savings, growth prospects and any other synergies expected from the transaction may not be fully realized or may take longer to realize than expected; (3) that we may be unable to raise sufficient capital, on favorable terms or at all; (4) that there may be unexpected variations in market growth and demand for our products and technologies in light of the product mix that we may have available at any particular time or even a decline in demand; (5) that we may be unable to transition to advanced manufacturing process technologies in a timely and effective way, consistent with planned capital expenditures; (6) that we may be unable to develop, launch and ramp new products and technologies in the volumes and mix required by the market at mature yields and on a timely basis; (7) that we may be unable to maintain the level of investment in research and development and capacity that is required to remain competitive; (8) that we may be unable to obtain sufficient manufacturing capacity (either in our own facilities or at foundries) or components to meet demand for our products; (9) that we may under-utilize our microprocessor manufacturing facilities; (10) the effect of political or economic instability, domestically or internationally, on our sales or production; (11) that our cost reduction plans may not be effective; (12) that we may be unable to improve the efficiency of our supply chain; and (13) that we may be unable to increase sales to the distribution channel.

For a discussion of the factors that could cause actual results to differ materially from the forward-looking statements, see “Part II, Item 1A—Risk Factors” 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.

AMD, the AMD Arrow logo, AMD Athlon, AMD Opteron, AMD Sempron, AMD Turion, AMD LIVE!, Geode, and combinations thereof, ATI and the ATI logo and ATI Avivo, TV Wonder, Fire, Imageon, Radeon, Xilleon, Crossfire and AMD PowerNow! are trademarks of Advanced Micro Devices, Inc. Spansion and MirrorBit are trademarks of Spansion Inc. Microsoft, Windows and Windows Vista are either registered trademarks or 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.

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In this section, we will describe the general financial condition and the results of operations for Advanced Micro Devices, Inc. and its consolidated subsidiaries, including a discussion of our results of operations for the first quarter of 2007 compared to the first quarter of 2006 and the fourth quarter of 2006, an analysis of changes in our financial condition and a discussion of our contractual obligations and off balance sheet arrangements.

Our results of operations for the first quarter of 2007 include sales of graphics, video, multimedia and chipset products and products for consumer electronics devices attributable to our Computing Solutions, Consumer Electronics and Graphics segments. However, we are not able to provide any comparative information for sales of these products for the first quarter of 2006 because prior to the ATI acquisition in October 2006, we did not sell these products. Also, our results of operations for the fourth quarter of 2006 include sales of these products only from October 25, 2006 through December 25, 2006.

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 31, 2006 and December 25, 2005, and for each of the three years in the period ended December 31, 2006 as filed in our Annual Report on Form 10-K for the year ended December 31, 2006.

Overview

We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:

The first quarter of 2007 was a challenging quarter marked by a strong competitive environment. In particular, we experienced an increasingly competitive product environment for both our microprocessors and GPUs. Aggressive pricing by our competitor of its mainstream microprocessor products significantly negatively impacted our operating results. We also experienced internal challenges related to our supply chain, which adversely impacted operating results. Sales through our distributors were adversely impacted in the first quarter of 2007 because of our inability to adequately meet their demand in the second half of 2006. Decreased demand from some of our OEM customers also adversely impacted our operating results. We expect the market to continue to be extremely competitive.

Net revenue in the first quarter of 2007 was $1.2 billion, a seven percent decrease from the first quarter of 2006 and a 30 percent decrease compared to the fourth quarter of 2006. Gross margins as a percentage of net sales for the first quarter of 2007 decreased to 28 percent compared to 58 percent in the first quarter of 2006 and 36 percent in the fourth quarter of 2006. Significantly lower microprocessor unit sales and average selling prices significantly impacted our revenue and gross margin. Our gross margin for the first quarter of 2007 was also adversely impacted by the consolidation of ATI’s operations, increased depreciation expenses associated with the ramp of Fab 36 and higher unit costs resulting from the shift in our product mix to higher-end microprocessors. Results for first quarter of 2007 included ATI acquisition-related charges of $113 million, share-based compensation charges of $28 million and a tax expense of $23 million primarily due to the need for a deferred tax liability related to the large tax deductions we receive for the amortization of goodwill from the acquisition of ATI, which is not amortized through earnings for financial reporting purposes. Our cash, cash equivalents and marketable securities as of March 31, 2007 were $1.2 billion, a decrease of $374 million compared to December 31, 2006.

For the remainder of 2007, we plan to undertake a number of actions in order to improve operational efficiency and reduce our expenses. We anticipate that these actions will include headcount reductions, which

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would result in a charge to operations, a reduction in operating expenses, particularly marketing, general and administrative expenses, and a $500 million reduction in capital expenditures. Our planned reduction in capital expenditures will reduce the rate at which we plan to convert Fab 30 to a 300-millimeter manufacturing facility.

Also, on April 27, 2007 we issued $2.2 billion aggregate principal amount of 6.00% Convertible Senior Notes due 2015 (the 6.00% Notes). The net proceeds from this offering were approximately $2,169 million, after deducting discounts and commissions and estimated offering expenses payable by us to the initial purchasers of the 6.00% Notes. We used approximately $182 million of the net proceeds to pay the cost of a capped call transaction (the Capped Call) with respect to our common stock that we entered into with an affiliate of one of the initial purchasers. The Capped Call is intended to reduce the potential common stock dilution to our then existing stockholders upon conversion of the 6.00% Notes. We also used $500 million of the remaining net proceeds to repay a portion of the term loan that we entered into to finance the acquisition of ATI (the October 2006 Term Loan). In connection with this repayment we will record a charge to operations of approximately $5 million which represents the pro-rata unamortized debt issuance costs associated with the October 2006 Term Loan. We expect to use the remaining net proceeds for general corporate purposes, including working capital and capital expenditures.

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 our 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 31, 2007 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 year ended December 31, 2006.

Upon adoption of FIN 48 as required at January 1, 2007, we elected to recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively.

Results of Operations

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

From December 21, 2005 through October 24, 2006, we had two reportable segments:

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As a result of the acquisition of ATI, effective October 25, 2006 through December 31, 2006, we had four reportable segments. In addition to the Computation Products segment and the Embedded Products segment we also had:

Starting in the first quarter of 2007, in conjunction with the integration of ATI’s operations, our CODM began reviewing and assessing operating performance using the following three reportable segments:

In addition to the reportable segments, the All Other category includes certain operating expenses and credits that are not allocated to any of the operating segments because the CODM does not consider these operating expenses and credits in evaluating the operating performance of the operating segments. Also, following the ATI acquisition, we began including employee stock-based compensation expense, profit sharing expense and ATI acquisition-related and integration charges 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. Prior to December 31, 2006, our fiscal year ended on the last Sunday in December. Commencing in 2007, our fiscal year ends on the last Saturday in December. The quarters ended March 26, 2006, December 31, 2006 and March 31, 2007 each included 13 weeks. The quarter ended March 26, 2006 did not include any sales of products attributable to our Consumer Electronics and Graphics segments or any revenues from sales of chipsets sold by ATI prior to the acquisition. Because the acquisition of ATI was completed effective October 25, 2006, the quarter ended December 31, 2006 only included nine weeks of sales of these products.

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