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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 29, 2008

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, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 28, 2008: 606,597,043.

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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

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See accompanying notes to condensed consolidated financial statements.

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Advanced Micro Devices Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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 29, 2008 shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending December 27, 2008. 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 29, 2007.

The Company uses a 52 to 53 week fiscal year ending on the last Saturday in December. The quarters ended March 29, 2008 and March 31, 2007 each consisted of 13 weeks.

Principles of Consolidation. The consolidated financial statements include the Company’s accounts and those of its majority-owned subsidiaries. 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.

Fair Value Measurements. In September 2006, the Financial Accounting Standard Board (FASB) issued Statement No. 157, Fair Value Measurements (SFAS 157). This statement does not require any new fair value measurements but clarifies the fair value definition, establishes a fair value hierarchy that prioritizes the information used to develop assumptions for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 clarifies that the fair value is the exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the market. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 input), then to quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable for the asset or liability, and inputs that are not directly observable, but that are corroborated by observable market data for the asset or liability (Level 2 input), then the lowest priority to unobservable inputs, for example, the Company’s own data about the assumptions that market participants would use in pricing an asset or liability (Level 3 input). It emphasizes that fair value is a market-based measurement, not an entity-specific measurement and a fair value measurement should therefore be based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-1 to exclude SFAS 13, Accounting for Leases, and its related interpretive accounting pronouncements that address leasing transactions. Also in February 2008, the FASB issued FASB Staff Position No. FAS 157-2 to defer the effective date of SFAS 157 for one year for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis at least annually, which are deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.

The Company adopted SFAS 157 at the beginning of its fiscal year 2008 on December 30, 2007.

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In order to determine the implications of adopting SFAS 157, the Company reviewed all the assets and liabilities recorded on its balance sheet. Based on the results of its review, the Company determined that a majority of its assets and liabilities are either not required to be measured at fair value in its financial statements, are outside the scope of SFAS 157, or are subject to the deferred implementation FSP No 157-2. Therefore, the only assets and liabilities in the Company’s financial statements subject to SFAS 157 (i.e. measured at fair value on a recurring basis) at December 30, 2007 included the Company’s investment portfolio and derivative contracts.

Recently Issued Accounting Pronouncements. In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (SFAS 161). This statement requires enhanced disclosures about an entity’s derivative and hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Company will adopt SFAS 161 in the first fiscal quarter of 2009. Since SFAS 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS 161 will not have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

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 plans for the specified fiscal quarters, which was allocated in the condensed consolidated statements of operations as follows:

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 29, 2008 and March 31, 2007, the Company granted 9,533,876 and 377,000 employee stock options, respectively, with average estimated grant date fair values of $3.03 and $5.93, respectively.

Restricted Stock Units and Awards. For the fiscal quarters ended March 29, 2008 and March 31, 2007, the Company granted 490,784 and 1,708,000 shares of restricted stock and restricted stock units, respectively, with an average grant date fair value of $6.40 and $14.83, respectively.

Employee Stock Purchase Plan. Beginning with the November 2007 purchase period the Company suspended its employee stock purchase plan (“ESPP”). Therefore, the Company did not issue any shares under the ESPP during the fiscal quarter ended March 29, 2008. The Company issued 607,000 shares under the ESPP during the fiscal quarter ended March 31, 2007.

3. Goodwill and Acquisition Related Intangible Assets

The carrying amounts of goodwill by operating segment as of March 29, 2008 and December 29, 2007, were as follows:

The changes in the balances of acquisition related intangible assets for the quarter ended March 29, 2008 and the net book value of acquisition related intangible assets at March 29, 2008 were as follows:

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

4. 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. 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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Potential dilutive common shares totaling approximately 60 million for the quarter ended March 29, 2008 were not included in the net loss per common share calculation as their inclusion would have been anti-dilutive. Potential 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.

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

The CODM reviews and assesses operating performance using the following three reportable segments:

In addition to the reportable segments, the Company has an All Other category, which is not a reportable segment. This category includes certain expenses and credits that are not allocated to any of the operating segments because the CODM does not consider these expenses and credits in evaluating the performance of the operating segments. These expenses and credits include employee stock-based compensation expense, amortization of acquired intangible assets and integration charges and charges for goodwill and intangible asset impairment.

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The following table provides a summary of the Company’s net revenue and operating income (loss) by segment with reconciliations to net income (loss) for the quarters ended March 29, 2008 and March 31, 2007:

6. Comprehensive Income (Loss)

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

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7. Other Long-Term Liabilities

The Company’s other long-term liabilities balances at March 29, 2008 and December 29, 2007 were $615 million and $633 million, respectively. Included in these balances were deferred grants and subsidies related to the Fab 30 and Fab 36 projects in the amounts of $405 million and $401 million as of March 29, 2008 and December 29, 2007, respectively.

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 29, 2008 related to underlying liabilities that are already recorded on the Company’s condensed consolidated balance sheet as of March 29, 2008 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

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 (Infineon) and DuPont Photomasks, Inc. (Dupont) for the purpose of constructing and operating an advanced photomask facility in Dresden, Germany. The Company procures advanced photomasks from AMTC and uses them in manufacturing its microprocessors. In April 2005, DuPont was acquired by Toppan Printing Co., Ltd. and became a wholly owned subsidiary of Toppan, named Toppan Photomasks, Inc. In December 2007, Infineon entered into an assignment agreement to transfer its interest in AMTC and BAC to Qimonda AG, with the exception of certain AMTC/BAC related payment guarantees. The assignment became effective in January 2008.

In December 2002, BAC obtained a $118 million term loan to finance the construction of the photomask facility. At the same time, AMTC and BAC, as lessor, entered into a lease agreement. The term of the lease agreement is ten years, which coincides with the repayment by BAC of the $118 million term loan. Each joint venture partner guaranteed a specific percentage of AMTC’s rental payments. Pursuant to an agreement between AMTC, BAC and DuPont (now Toppan), AMTC may exercise a “step-in” right, in which it would assume Toppan’s remaining rental payments in connection with the rental agreement between Toppan and BAC. As of March 29, 2008, the Company’s guarantee of AMTC’s portion of the rental obligation was approximately $11 million and its maximum liability in the event AMTC exercises its “step-in” right and the other joint venture partners default under the guarantee was approximately $103 million. These estimates are based upon forecasted rents to be charged in the future and are subject to change based upon the actual usage of the facility by the tenants and foreign currency exchange rates.

In December 2002, AMTC obtained a $189 million revolving credit facility to finance its operations. In December 2007, AMTC entered into a new $107 million revolving credit facility, of which $95 million was outstanding as of March 29, 2008. The proceeds were used to repay all amounts outstanding under the existing $189 million revolving credit facility and to provide additional financing for the acquisition of new tools. Subject to certain conditions under the revolving credit facility, AMTC may request that the loan amount be increased by an additional $63 million. The term of the revolving credit facility is three years.

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Upon request by AMTC and subject to certain conditions, the term of the revolving credit facility may be extended by two additional one-year periods. Pursuant to a guarantee agreement, each joint venture partner guaranteed one third of AMTC’s outstanding loan balance under the revolving credit facility. As of March 29, 2008, the Company’s liability under this guarantee was $32 million plus its portion of accrued interest and expenses. The Company’s maximum liability under this guarantee is $36 million plus its portion of accrued interest and expenses. Under the terms of the guarantee, if the Company’s group consolidated cash (which is defined as cash, cash equivalents and marketable securities less the aggregate amount outstanding under any revolving credit facility) is less than or expected to be less than $500 million, the Company will be required to provide cash collateral equal to one third of the balance outstanding under the revolving credit facility. The Company evaluated whether it should account for its guarantee under the provisions of FIN 45 and concluded it was immaterial to its financial position or results of operations.

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 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, chipsets and certain products for consumer electronics devices will conform to the Company’s approved specifications and be free from defects in material and workmanship under normal use and service for a period of one year beginning on shipment of such products to its customers. The Company generally warrants that ATI-branded PC workstation products will conform to the Company’s approved specifications and be free from defects in material and workmanship under normal use and service for a period of three years, beginning on shipment of such products to its customers.

Changes in the Company’s estimated liability for product warranty during the quarters ended March 29, 2008 and March 31, 2007 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

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parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited number 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. Income Tax

The Company recorded an income tax provision of less than $1 million in the first quarter of 2008 and an income tax provision of $23 million for the first quarter of 2007.

The income tax provision recorded in the first quarter of 2008 was less than $1 million due to foreign taxes in profitable locations offset by discrete tax benefits. The income tax provision in the first quarter of 2007 was primarily for deferred U.S. taxes related to indefinite-lived goodwill and foreign taxes in profitable locations.

As of March 29, 2008 substantially all of the Company’s U.S. deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which at March 29, 2008 in management’s estimate, is not more likely than not to be achieved.

The Company’s gross unrecognized tax benefits increased by $38 million during the quarter due to the receipt of certain proposed tax adjustments in foreign locations. As a result, the Company has now recognized $99 million of current and long-term deferred tax assets, previously under a valuation allowance, with $99 million of liabilities for unrecognized tax benefits as of March 29, 2008. The impact on the effective tax rate of the increase in the gross unrecognized tax benefits in the first quarter of 2008 was not material because the increase is offset by a change in valuation allowance.

During the first quarter of 2008, the IRS notified the Company that it intends to include 2006 in its audit of tax years 2004 and 2005. The audit is scheduled to commence in May 2008.

During the 12 months beginning March 30, 2008 the Company expects to reduce its unrecognized tax benefits by approximately $85 million as a result of the expiration of certain statutes of limitation and audit resolutions. The Company does not believe it is reasonably possible that other unrecognized tax benefits will materially change in the next 12 months.

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10. Fair Value Measurements

Assets and liabilities measured at fair value are summarized below (in millions):

The Company measures its cash equivalents, marketable securities and foreign currency derivative contracts at fair value, which does not materially differ from the carrying values of these instruments in the financial statements. Cash equivalents and marketable securities are primarily classified within Level 1 or Level 2, with the exception of auction rate security (ARS) investments. This is because cash equivalents and marketable securities are valued primarily using quoted market prices or alternative pricing sources and models utilizing market observable inputs, as provided to the Company by its brokers. The ARS investments are classified within Level 3 because they are valued using a discounted cash flow model. Some of the inputs to this model are unobservable in the market and are significant. Our foreign currency derivative contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in inactive markets.

The Company’s investments in ARS include approximately $142 million of student loan ARS, $38 million of municipal and corporate ARS and $22 million ARS in preferred shares of closed end mutual funds. Approximately 96 percent of the Company’s ARS holdings are AAA rated investments and all the $142 million student loan ARS are guaranteed by the Federal Family Educational Loan Program. Until the first quarter of 2008, the fair values of the Company’s ARS were determinable by reference to frequent successful Dutch auctions of such securities, which settled at par. Therefore, at the adoption date the Company had categorized its investments in ARS as Level 2.

The recent uncertainties in the credit markets have affected all of the Company’s ARS and auctions for these securities have failed to settle on their respective settlement dates. As a result, reliable Level 1 or Level 2 pricing is not available for these ARS. However, $7.5 million of the municipal and corporate ARS were called at par by the issuer during the first quarter of 2008. In addition, in April 2008, $10 million of the ARS in preferred shares of closed end mutual funds were called at par by the issuers. In light of these developments, to determine the fair value for its ARS, the Company obtained broker reports, discussed

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with brokers the critical inputs that they used in their proprietary models to determine fair value, which included liquidity, rating, and discounted cash flows associated with these ARS, and considered factors such as the fact that historically, these securities had identical par and fair value, the fact that rating agencies see these as AAA or near AAA securities, and the fact that approximately $17.5 million of the ARS were called at par subsequent to the auction failures. Based on these factors, the Company concluded that the fair value of its ARS did not materially differ from par at March 29, 2008. As of March 29, 2008, the Company classified its investments in ARS as current assets because it reasonably expects that it will be able to sell these securities at par, and have the proceeds available for use in its operations within the next twelve months through a future successful auction or sale to a buyer found outside the auction process, or through a redemption by which issuers establish a different form of financing to replace these securities. However, the Company is not dependant on liquidating its ARS in the next twelve months in order to meet its short-term liquidity needs.

Reconciliation of the financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

Total financial assets at fair value classified within Level 3 were 1.8% of total assets on the Company’s condensed consolidated balance sheet as of March 29, 2008. There are no gains or losses for the period included in earnings attributable to the change in unrealized gains or losses related to these financial assets still held as of March 29, 2008.

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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: the demand for our new products; the growth and competitive landscape of the markets in which we participate; our revenues; our cost reduction efforts and related restructuring charge; our ability to achieve profitability in the second half of 2008; our ability to liquidate our auction rate securities in the next twelve months; our capital expenditures; our operating expenses; our depreciation and amortization expense; our acquisition-related charges; our income tax expense; our aggregate contractual obligations; and availability of external financing. Material factors

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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 introduce new products and 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; (7) our ability to make additional investment in research and development and that such opportunities will be available; and (8) the expected demand for computers and consumer electronics products. 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 our substantial indebtedness could adversely affect our financial position and prevent us from implementing our strategy or fulfilling our contractual obligations; (3) that we will require additional funding and may be unable to raise sufficient capital, on favorable terms, or at all; (4) that we may be unable to realize the anticipated benefits of our 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; (5) that we may be unable to maintain the level of investment in research and development and capacity that is required to remain competitive; (6) that we may be unable to develop, launch and ramp new products and technologies in the volumes that is required by the market at mature yields on a timely basis; (7) that we may be unable to transition to advanced manufacturing process technologies in a timely and effective way, consistent with planned capital expenditures; (8) 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 a decline in demand; (9) that demand for computers and consumer electronics products will be lower than currently expected; (10) 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; (11) that we may under-utilize our microprocessor manufacturing facilities; and (12) the effect of political or economic instability, domestically or internationally, on our sales or production.

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” section beginning on page 42 and the “Financial Condition” section beginning on page 27 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 Opteron, and combinations thereof, ATI and the ATI logo are trademarks of Advanced Micro Devices, Inc. Microsoft is a registered trademark of Microsoft Corporation in the United States and other jurisdictions. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners.

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 2008 compared to the first quarter of 2007 and the fourth quarter of 2007, an analysis of changes in our financial condition and a discussion of our contractual obligations and off balance sheet arrangements.

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 29, 2007 and December 31, 2006, and for each of the three years in the period ended December 29, 2007 as filed in our Annual Report on Form 10-K for the year ended December 29, 2007.

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Overview

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

The first quarter of 2008 was a seasonally weak quarter, amplified by a challenging global economic environment for consumers and declining demand for our previous generation products. As a result, we experienced lower than expected revenues across each of our business segments.

Net revenue in the first quarter of 2008 was $1.5 billion, a 15 percent decrease compared to the fourth quarter of 2007 and a 22 percent increase from the first quarter of 2007. Gross margin, as a percentage of net revenue, for the first quarter of 2008 was 42 percent, a decrease of two percentage points compared to 44 percent in the fourth quarter of 2007 and a 14 percent increase compared to 28 percent in the first quarter of 2007. Net revenue and gross margin in the first quarter of 2008 compared to the fourth quarter of 2007 decreased primarily due to lower microprocessor unit shipments. The increase in net revenue and gross margin from the first quarter of 2008 compared to the first quarter of 2007 was primarily due to higher microprocessor unit shipments.

The operating loss for the first quarter of 2008 was $264 million, compared to an operating loss of $1.7 billion in the fourth quarter of 2007 and an operating loss of $504 million in the first quarter of 2007. The improvement in operating performance in the first quarter of 2008 compared to the fourth quarter of 2007 was primarily due to the impairment charges taken for goodwill and acquired intangible assets in the fourth quarter of 2007, which did not recur in the first quarter of 2008. The operating loss improvement in the first quarter of 2008 compared to the first quarter of 2007 was primarily due to higher revenue driven by higher microprocessor unit shipments. We closed the first quarter of 2008 with cash, cash equivalents and marketable securities of $1.8 billion, a decrease of $136 million compared to fiscal 2007 year end.

In light of the challenging first quarter and the uncertain economic environment, we plan to undertake certain cost reduction actions, including a reduction in headcount of approximately 10 percent by the third quarter of 2008. We expect that this action will result in a charge to operations in the second quarter of 2008 and a reduction in operating expenses in subsequent periods. We also intend to reduce capital expenditures for the entire fiscal year 2008 from $1.1 billion to approximately $900 million. More generally, we intend to closely review all of our business operations, with the goal of reducing overall expenses and achieving profitability in the second half of 2008. Also, we believe that the new Graphics and Computing Solutions products we introduced towards the end of the first quarter will assist us in increasing sales and improving our financial performance.

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 period to period, 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.

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Management believes there have been no significant changes during the quarter ended March 29, 2008 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 29, 2007.

Results of Operations

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

We review and assess operating performance using the following three reportable segments:

In addition to the reportable segments, we have an All Other category, which is not a reportable segment. This category includes certain expenses and credits that are not allocated to any of the operating segments because we do not consider these expenses and credits in evaluating the performance of the operating segments. Those expenses and credits include employee stock-based compensation expense, amortization of acquired intangible assets and integration charges and charges for goodwill and intangible asset impairment.

The following table provides a summary of our net revenue and operating income (loss) by segment for the quarters ended March 29, 2008, December 29, 2007, and March 31, 2007:

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Computing Solutions

Computing Solutions net revenue of $1.2 billion in the first quarter of 2008 increased 30 percent compared to net revenue of $918 million in the first quarter of 2007. Net revenue increased primarily as a result of a 21 percent increase in unit shipments and a 7 percent increase in average selling prices of products included in our Computing Solutions segment in first quarter of 2008 as compared to the first quarter of 2007. Unit shipments increased mainly due to increased shipments of our microprocessors including our quad core microprocessors. The increase in average selling prices in first quarter of 2008 as compared to the first quarter of 2007 was primarily caused by a change in product mix, with lower unit shipments of chipsets, which generally carry lower average selling prices than our microprocessors. Average selling prices of our microprocessors were relatively flat in the first quarter of 2008 as compared to the first quarter of 2007.

Computing Solutions net revenue of $1.2 billion in the first quarter of 2008 decreased 15 percent compared to net revenue of $1.4 billion in the fourth quarter of 2007 primarily as a result of an 11 percent decrease in unit shipments and a 4 percent decrease in average selling prices of products included in our Computing Solutions segment in the first quarter of 2008 as compared to the fourth quarter of 2007. The decrease in unit shipments was mainly attributable to decreased demand for previous generation microprocessor products and a highly competitive market environment. The decrease in average selling prices in first quarter of 2008 as compared to the fourth quarter of 2007 was primarily caused by a change in product mix, with higher unit shipments of our embedded processors, which generally carry lower average selling prices than our microprocessors. Average selling prices of our microprocessors were relatively flat in the first quarter of 2008 as compared to the fourth quarter of 2007.

Computing Solutions operating loss was $160 million in the first quarter of 2008 compared to an operating loss of $321 million in the first quarter of 2007. The improvement in operating results was primarily due to a $276 million increase in net revenue and a $3 million decrease in marketing, general and administrative expenses, partially offset by an increase of $69 million in research and development expenses and a $49 million increase in cost of sales. Net revenue increased for the reasons set forth above. Research and development expenses increased and marketing, general and administrative expenses decreased for the reasons set forth under “Expenses” below. Cost of sales increased mainly due to increased unit shipments.

Computing Solutions operating loss was $160 million in the first quarter of 2008 compared to operating income of $21 million in the fourth quarter of 2007. The decline in operating results was primarily due to a $208 million decrease in net revenues for the reasons set forth above, a $17 million increase in marketing, general and administrative expenses and a $12 million increase in research and development expenses, partially offset by a $56 million decrease in cost of sales. Research and development expenses and marketing, general and administrative expenses increased for the reasons set forth under “Expenses,” below. Cost of sales decreased mainly due to lower unit shipments.

Graphics

Graphics net revenue of $230 million in the first quarter of 2008 increased 17 percent compared to net revenue of $197 million in the first quarter of 2007 as a result of a 16 percent increase in unit shipments. The increase in unit shipments was primarily due to increased demand for our lower-end graphics processing unit, or GPU, products. Despite the introduction of new products in the first quarter of 2008, average selling prices remained relatively flat compared with the first quarter of 2007 primarily due to increased sales of lower-end GPU products.

Graphics net revenue of $230 million in the first quarter of 2008 decreased 11 percent compared to net revenue of $259 million in the fourth quarter of 2007 as a result of a 13 percent decrease in average selling prices, partially offset by 3 percent increase in unit shipments. Average selling prices decreased because of the shift in product mix, with higher unit shipments of our lower-priced GPU products. Unit shipments increased primarily due to an increase in demand for these products driven by customer preference and the fact that we launched lower priced value and mainstream products during the first quarter.

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Graphics operating loss was $11 million in the first quarter of 2008 compared to operating loss of $35 million in the first quarter of 2007. The improvement in operating results was primarily due to the $33 million increase in net revenue described above, partially offset by a $9 million increase in marketing, general and administrative expenses. Marketing, general and administrative expenses increased for the reasons set forth under “Expenses,” below.

Graphics operating loss of $11 million in the first quarter of 2008 was relatively flat compared to an operating loss of $12 million in the fourth quarter of 2007. A $35 million decrease in cost of sales was partially offset by the $29 million decrease in net revenue described above and a $5 million increase in marketing, general and administrative expenses. Cost of sales decreased primarily due to lower average cost of sales per unit. Marketing, general and administrative expenses increased for the reasons set forth under “Expenses,” below.

Consumer Electronics

Consumer Electronics net revenue of $81 million in the first quarter of 2008 decreased 31 percent compared to net revenue of $118 million in the first quarter of 2007 as a result of a 56 percent decrease in unit shipments, partially offset by a 10 percent increase in average selling prices of products used in handheld devices and digital televisions and an $18 million increase in royalties from sales of game console systems that incorporate our technology. The decrease in unit shipments of products used in handheld devices and digital televisions was primarily due to significantly lower demand from a key OEM customer for each of the handheld and digital television categories. The increase in average selling prices was primarily due to a change in product mix, with increased sales of higher-end products used in handheld devices. The increase in royalties was due to increased market penetration of latest generation game consoles.

Consumer Electronics net revenue of $81 million in the first quarter of 2008 decreased 26 percent as compared to $109 million in the fourth quarter of 2007 as a result of a 39 percent decrease in unit shipments of our products used in handheld devices and digital televisions and a $5 million decrease in royalties from sales of game console systems that incorporate our products, partially offset by an 11 percent increase in average selling prices of our products used in handheld devices and digital televisions. The decrease in unit shipments and the decrease in royalties were primarily attributable to seasonality. The increase in average selling prices was primarily due to a shift in product mix, with increased unit shipments of next generation products used in handheld devices and digital televisions, which generally carried higher average selling prices.

Consumer Electronics operating loss was $8 million in the first quarter of 2008 compared to operating loss of $4 million in the first quarter of 2007. The decline in operating results was primarily due to the $37 million decrease in net revenue described above, partially offset by a $33 million decrease in cost of sales due to lower unit shipments.

Consumer Electronics operating loss was $8 million in the first quarter of 2008 compared to operating income of $12 million in the fourth quarter of 2007. The decline in operating results was primarily due to the $28 million decrease in net revenue described above and a $6 million increase in research and development expenses, partially offset by a $14 million decrease in cost of sales. Research and development expenses increased for the reasons set forth under “Expenses,” below. Cost of sales decreased due to lower unit shipments.

All Other Category

All Other operating loss of $85 million in the first quarter of 2008 decreased by $59 million compared to an operating loss of $144 million in the first quarter of 2007. The improvement in operating results was primarily attributable to a decrease of $63 million in ATI acquisition-related charges in the first quarter of 2008 compared to the first quarter of 2007. First quarter of 2007 charges included $29 million of fair value adjustments to acquired inventory and $13 million of integration charges, which did not recur in the first quarter of 2008. Furthermore, amortization of acquired intangible assets in the first quarter of 2008 decreased by $21 million compared to the first quarter of 2007 as a result of the write-down of the acquired intangible assets and revised amortization schedule for these assets following the impairment analysis conducted in the fourth quarter of 2007.

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All Other operating loss of $85 million in first quarter of 2008 improved by $1.6 billion compared to an operating loss of $1.7 billion in the fourth quarter of 2007. The improvement in operating results was primarily attributable to the fourth quarter of 2007 impairment charge of $1.6 billion, which included a goodwill write-down of $1.3 billion and a write-down of specific intangible assets of $349 million in the fourth quarter of 2007. There was no corresponding impairment charge in the first quarter of 2008.

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 revenue increased to 42 percent in the first quarter of 2008 compared to 28 percent in the first quarter of 2007. The improvement in gross margin was primarily due to lower cost of sales per unit due to higher unit shipments of products included in our Computing Solutions and Graphics segments and the shift in product mix from single core processors to dual core processors. Moreover, gross margin was negatively impacted by approximately two percentage points in the first quarter of 2007 due to fair value adjustments related to the inventory we acquired through the ATI acquisition, which did not recur in the first quarter of 2008.

Gross margin as a percentage of net revenue decreased to 42 percent in the first quarter of 2008 compared to 44 percent in the fourth quarter of 2007. The decrease in gross margin was primarily due to higher cost of sales per unit due to lower microprocessor unit shipments.

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 $18 million in the first quarter of 2008, $37 million in the fourth quarter of 2007, and $33 million in the first quarter of 2007. The fluctuations in the recognition of these credits have not significantly impacted our gross margins. The decrease in the credit to cost of sales in the first quarter of 2008 compared to the fourth quarter of 2007 was due to the fact that we have fully amortized the grants and allowances related to Fab 30.

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Expenses

Research and Development Expenses

Research and development expenses of $501 million in the first quarter of 2008 increased 16 percent from $432 million in the first quarter of 2007 primarily as a result of a $69 million increase in product design costs for our next generation microprocessor products and start-up costs for Fab 38.

Research and development expenses of $501 million in the first quarter of 2008 increased 6 percent from $473 million in the fourth quarter of 2007 primarily as a result of a $12 million increase attributable to our Computing Solutions segment and a $6 million increase attributable to our Consumer Electronics segment. Research and development expenses for our Computing Solutions and Consumer Electronics segments increased due to higher product engineering and design costs.

From time to time, 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 was $7 million in the first quarter of 2008, $6 million in the fourth quarter of 2007 and $4 million in the first quarter of 2007.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses of $341 million in the first quarter of 2008 increased 2 percent from $335 million in the first quarter of 2007 primarily as a result of a $9 million increase attributable to our Graphics segment, partially offset by a $3 million decrease attributable to our Computing Solutions segment. Expenses for the Graphics segment increased due to increased spending for marketing and advertising programs related to the launch of new products. Expenses for the Computing Solutions segment decreased primarily due to lower employee bonus accruals.

Marketing, general and administrative expenses of $341 million in the first quarter of 2008 increased 6 percent from $321 million in the fourth quarter of 2007 primarily as a result of a $17 million increase attributable to our Computing Solutions segment and a $5 million increase attributable to our Graphics segment. Marketing, general and administrative expenses attributable to our Computing Solutions and Graphics segments increased mainly due to increases in spending for marketing and advertising programs related to the launch of new products.

Amortization of acquired intangible assets, integration charges and impairment of goodwill and acquired intangible assets.

Amortization of acquired intangible assets and integration charges were $50 million in the first quarter of 2008 compared to $84 million in the first quarter of 2007. The decrease was primarily due to a decrease of $21 million in amortization of acquired intangible assets. The lower amortization of acquired intangible assets was due to the write-down of the acquired intangible assets and revised amortization schedule for these assets following the impairment analysis conducted in the fourth quarter of 2007. In addition, we incurred a charge of $13 million in the first quarter of 2007 related to costs incurred to integrate the operations of AMD and ATI, which did not recur in the first quarter of 2008.

Amortization of acquired intangible assets, integration charges and impairment of goodwill and acquired intangible assets were $50 million in the first quarter of 2008 as compared with $1.7 billion in the fourth quarter of 2007. The decrease was primarily due to an impairment charge of $1.6 billion associated with our goodwill and acquired intangible assets, and $8 million lower amortization of acquired intangible assets in the first quarter of 2008 compared to the fourth quarter of 2007. The lower amortization of acquired intangible assets was due to the write-down of the acquired intangible assets and revised amortization schedule for these assets following the impairment analysis conducted in the fourth quarter of 2007.

Interest Income

Interest income of $15 million in the first quarter of 2008 decreased by $1 million from $16 million in the first quarter of 2007. The impact of lower weighted-average interest rates partially offset the impact of higher average cash balances in the first quarter of 2008 compared to the first quarter of 2007.

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Interest income of $15 million in the first quarter of 2008 decreased by $4 million from $19 million in the fourth quarter of 2007 due to lower weighted-average interest rates.

Interest Expense

Interest expense of $95 million in the first quarter of 2008 increased by $17 million from $78 million in the first quarter of 2007 primarily due to interest expense of $34 million and $23 million incurred on our 6.00% Notes and our 5.75% Notes. These notes were not outstanding in the first quarter of 2007. These increases were partially offset by the fact that our October 2006 term loan with Morgan Stanley (October 2006 Term Loan) was not outstanding during the first quarter of 2008. During the first quarter of 2007, $2.2 billion was outstanding under this loan, which resulted in $43 million of interest expense during the first quarter of 2007.

Interest expense of $95 million in the first quarter of 2008 was flat compared to the fourth quarter of 2007. The amount of debt outstanding remained constant. Moreover a substantial portion of our debt has a fixed interest rate. The interest rate on our variable debt did not change significantly from quarter to quarter.

In September 2007, the FASB issued for comment a proposed FASB Staff Position (FSP) No. APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (including partial cash settlement). This proposed FSP would change the accounting for certain convertible debt instruments, including our 6.00% Notes. Under the proposed new rules, for convertible debt instruments that may be settled entirely or partially in cash upon conversion, an entity should separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The effect of the proposed new rules for our 6.00% Notes is that the equity component would be included in the paid-in-capital portion of stockholders’ equity on our balance sheet and the value of the equity component would be treated as an original issue discount for purposes of accounting for the debt component of our 6.00% Notes. Higher interest expense would result by recognizing accretion of the discounted carrying value of our 6.00% Notes to their face amount as interest expense over the term of our 6.00% Notes.

In March 2008, the FASB reaffirmed the scope and the guidance of this proposed FSP and directed its staff to proceed to draft a final FSP for vote by written ballot. The final FSP will now be effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.

If the final FSP is issued as affirmed by the FASB, we expect to have higher interest expense beginning in our first fiscal quarter of 2009 due to the interest expense accretion, and the interest expense associated with our 6.00% Notes for prior periods would be higher than previously reported due to the retrospective application of the FSP.

Equity in net loss of Spansion Inc. and other

There was no charge recorded for equity in net loss of Spansion Inc. and other in the first quarter of 2008. On March 29, 2008, the market value of our investment in the common stock of Spansion was lower than our carrying value by approximately $19 million. Based on the assessment of various factors, including latest market developments and the recent stock price trend of Spansion common stock, we concluded such decline was temporary, and therefore, we recorded an unrealized loss within “Accumulated other comprehensive income”, a component of stockholders’ equity on our condensed consolidated balance sheet.

In the fourth quarter of 2007, we recorded a charge of $69 million to earnings for an other than temporary impairment of our investment in Spansion after giving consideration to Spansion’s operating results, its stock price changes in the preceding six months and our intention to liquidate our investment. In the first quarter of 2007 we recorded a charge of $16 million to reflect our share of Spansion’s losses under the equity method of accounting utilized at that time.

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Income Taxes

We recorded an income tax provision of less than $1 million in the first quarter of 2008 and an income tax provision of $23 million for the first quarter of 2007.

The income tax provision recorded in the first quarter of 2008 was less than $1 million due to foreign taxes in profitable locations offset by discrete tax benefits. The income tax provision in the first quarter of 2007 was primarily for deferred U.S. taxes related to indefinite-lived goodwill and foreign taxes in profitable locations.

As of March 29, 2008 substantially all of our U.S. deferred tax assets, net of deferred tax liabilities, continue to be subject to a valuation allowance. The realization of these assets is dependent on substantial future taxable income which at March 29, 2008, in management’s estimate, is not more likely than not to be achieved.

Stock-Based Compensation

The following table summarizes stock-based compensation expense related to employee stock options, restricted stock and restricted stock units and employee stock purchases under our employee stock plans for the specified fiscal quarters, which we allocated in the condensed consolidated statements of operations as follows:

Stock-based compensation expenses of $21 million in the first quarter of 2008 decreased $7 million compared to $28 million in the first quarter of 2007 primarily due to the suspension of our employee stock purchase plan in late 2007, which resulted in no corresponding charges in the first quarter of 2008, and the reversal of previously recognized stock-based compensation expense related to certain performance based restricted stock unit grants because we concluded that the performance criteria is now deemed not achievable.

International Sales

International sales as a percent of worldwide net sales were 88 percent in the first quarter of 2008, 87 percent in the fourth quarter of 2007 and 87 percent in the first quarter of 2007. We expect that international sales will continue to be a significant portion of total sales in the foreseeable future. Our net sales were primarily denominated in the U.S. dollar.

FINANCIAL CONDITION

Our cash, cash equivalents and marketable securities at March 29, 2008 totaled $1.8 billion, and our debt and capital lease obligations totaled $5.3 billion. On April 1, 2008 we exercised a call option to purchase the limited partnership and silent partnership interests in AMD Fab 36, held by one of the

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unaffiliated partners, Fab 36 Beteiligungs GmbH & Co. KG. The purchase price paid to Fab 36 Beteiligungs was approximately $133 million, of which $95 million was for the limited partnership interests and $38 million was for the silent partnership interests. See “Part I, Item 2 – MD&A – Liquidity – Contractual Obligations,” for additional information.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $16 million in the first quarter of 2008. Net loss of $358 million was adjusted for non-cash charges consisting primarily of $317 million of depreciation and amortization expense and stock-based compensation expense of $21 million. These charges were offset by an amortization of foreign grants and subsidies of $22 million and a gain on disposal of property, plant and equipment of $7 million. The net changes in operating assets at March 29, 2008 compared to December 29, 2007 included: a decrease in accounts receivable of $104 million primarily due to the decline in revenues during the first quarter of 2008; an increase in prepaid expenses and other current assets of $44 million, primarily due to additional receivables from foreign hedging activities and foreign grants and subsidies; a decrease in inventories of $36 million, primarily due to the reduction in our Computing Solutions segment inventories, and a decrease in accounts payable and accrued liabilities of $30 million, primarily due to lower bonus and payroll accruals.

Net cash provided by operating activities was $41 million in the first quarter of 2007. Net loss of $611 million was adjusted for non-cash charges consisting primarily of $314 million of depreciation and amortization expense, stock-based compensation expense of $28 million and $16 million related to our share of Spansion’s net loss. These charges were offset by amortization of foreign grants and subsidies of $41 million. The net changes in operating assets at March 31, 2007 compared to December 31, 2006 included: a decrease in accounts receivable of $479 million, due to lower revenues during the first quarter of 2007; an increase in inventories of $124 million, due to lower unit shipments; an increase in prepaid and other assets of $118 million, and an increase in accounts payable and other accrued liabilities of $74 million. The increase in prepaid and other assets was primarily due to purchases of new technology licenses and the increase in accounts payable and accrued liabilities was primarily related to liabilities for future payments for technology licenses.

Net Cash Used in Investing Activities

Net cash used in investing activities was $198 million in the first quarter of 2008, primarily as a result of $323 million used to purchase property, plant and equipment and a payment of $34 million for a technology license. This was partially offset by a net cash inflow of $89 million in proceeds from sales and maturities of available-for-sale securities, $53 million from sales of certain 200-millimeter wafer fabrication equipment and an $18 million deposit from a buyer for future sales of our 200-millimeter wafer fabrication equipment.

Net cash used in investing activities was $592 million in the first quarter of 2007, primarily as a result of $586 million used to purchase property, plant and equipment, and a net cash outflow of $16 million from purchases and maturities of available-for-sale securities. This was partially offset by $13 million in proceeds from the sale of part of our investment in Spansion.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $154 million in the first quarter of 2008. This amount included proceeds from capital investment grants and allowances from the Federal Republic of Germany and the State of Saxony for the Fab 36 project of $96 million and for the Fab 38 project of $45 million.

Net cash provided by financing activities was $162 million in the first quarter of 2007, and consisted of proceeds from capital investment grants and allowances from the Federal Republic of Germany and the State of Saxony for the Fab 36 project of $153 million and proceeds from the issuance of stock under our Employee Stock Purchase Plan and the exercise of employee stock options of $30 million. These amounts were partially offset by $21 million in payments on debt and capital lease obligations.

During the first quarter of 2008 and the first quarter of 2007, we realized no excess tax benefits related to stock-based compensation and, therefore, did not record any financing cash flows due to our net operating loss carryforward and the 100 percent valuation allowance on our U.S. deferred tax assets.

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Liquidity

We believe that our current cash, cash equivalents and marketable securities balances at March 29, 2008, anticipated cash flow from operations and available external financing will be sufficient to fund our operations and capital investments in the next twelve months and over the longer term, including the approximately $577 million we plan to spend for capital expenditures during the remainder of fiscal 2008. Over the long term, should additional funding be required, such as to meet payment obligations of our long-term debt when due, we may need to raise the required funds through borrowings or public or private sales of debt or equity securities, which may be issued from time to time under an effective registration statement, through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933, or a combination of one or more of the foregoing.

We believe that in the event additional funding is required, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives. However, given the possibility of changes in market conditions or other occurrences, there can be no certainty that such funding will be available on terms favorable to us or at all.

Auction Rate Securities. At March 29, 2008, we had a total of approximately $1.8 billion in cash and cash equivalents and short-term investments, which included approximately $202 million of investments in auction rate securities (ARS). Our ARS included approximately $142 million student loan ARS, $38 million municipal and corporate ARS and $22 million ARS in preferred shares of closed end mutual funds. Approximately 96 percent of our ARS are AAA rated investments, and all the $142 million student loan ARS are guaranteed under the Federal Family Education Loan Program. Until the first quarter of fiscal 2008, the fair value of our ARS was determinable by reference to frequent, successful auctions of such securities, which settled at par.

The recent uncertainties in the credit markets have affected all of our ARS and auctions for these securities have failed to settle on their respective settlement dates. However, $7.5 million of the municipal and corporate ARS were called by the issuer during the first quarter of 2008. In addition, in April 2008, $10 million of the ARS in preferred shares of closed end mutual funds were called at par by the issuers. In light of these developments, to determine the fair value for our ARS, we obtained broker reports, discussed with brokers the critical inputs that they used in their proprietary models to determine fair value, which included liquidity, rating and discounted cash flows associated with these ARS, and considered factors such as the fact that historically, these securities had identical par and fair value, the fact that rating agencies see these as AAA or near AAA securities, and the fact that approximately $17.5 million of the ARS were called at par subsequent to the auction failures. Based on these factors, we concluded that the fair value of our ARS did not materially differ from par at March 29, 2008. As of March 29, 2008, we classified our investments in ARS as current assets because we reasonably expect that we will be able to sell these securities at par and have the proceeds available for use in our operations within the next twelve months through a future successful auction or sale to a buyer found outside of the auction process, or through a redemption by which the issuers establish a different form of financing to replace these securities. However, we are not dependent on liquidating our ARS in the next twelve months in order to meet our short-term liquidity needs.

We believe that the current lack of liquidity relating to our ARS investments will not have a material effect on our ability to fund our on-going operations. At this time, we believe that the current illiquidity of these investments is temporary. Because of the unprecedented events in the ARS market, we cannot predict with certainty when liquidity in the ARS market will return. We will continue to monitor and assess the situation by considering factors including the success or continued failure of future auctions,

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possible failure of the investments to be redeemed, deterioration of the credit ratings of the investments, market risk and other factors. Such a reassessment may change the classification of these investments to long-term or result in a conclusion that these investments are impaired. If we determine that the fair value of our ARS is temporarily impaired, we would record a temporary impairment within other comprehensive income, a component of our stockholders’ equity. If we determine that the fair value of our ARS is other than temporarily impaired, we would record a loss in our consolidated statements of operations, which could materially adversely impact our result of operations.

Contractual Obligations

The following table summarizes our principal contractual cash obligations at March 29, 2008, and is supplemented by the discussion following the table: