Form: 10-K

Annual report pursuant to Section 13 and 15(d)

March 7, 1995

Documents

SELECTED PORTIONS OF '94 A/R.

Published on March 7, 1995



MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

RESULTS OF OPERATIONS

Net sales of $2.1 billion in 1994 rose by approximately 30 percent from
1993. This increase was primarily attributable to substantial growth in
Am486(R) microprocessor sales.

1993 net sales increased by 9 percent from 1992, due to an increase in
flash memory device sales and higher sales in most other product lines partially
offset by a decline in Am386(R) microprocessor sales.

Revenues of Am486 microprocessors have grown significantly since its
introduction in the second quarter of 1993. While average selling prices of
Am486 products have declined due to competitive pressures, unit shipments have
grown significantly. As a result, a significant portion of the company's 1994
revenues, profits, and margins were attributable to Am486 products. Price
declines are anticipated to continue in 1995. The company anticipates that
microprocessor revenues will continue to represent a significant portion of the
company's sales, profits, and margins in 1995.

The future outlook for AMD's microprocessor business is highly dependent
upon microprocessor market conditions, which are subject to price elasticity and
changes in demand. The company anticipates that any growth in existing and
future generation microprocessor products will depend on market demand and the
company's ability to meet this demand.

Sales of flash memory devices decreased in 1994 from 1993 primarily due to
pricing pressures caused by increased competition, and secondarily due to the
company's inability to increase production due to limited capacity. The company
plans to meet projected long-term demand for flash memory devices through a
manufacturing joint venture, Fujitsu AMD Semiconductor Limited (FASL), which is
presently scheduled to begin volume production in the second half of 1995.

EPROM sales increased in 1994 from 1993 mainly because of higher unit
shipments in the first half of 1994. The company anticipates that EPROM sales
may decline in 1995.

Sales of programmable logic devices (PLDs) decreased slightly in 1994 from
1993. While sales of CMOS PLDs grew from 1993, this growth did not offset the
decline in bipolar PLD sales.

Revenues of communication products increased in 1994 from 1993. This
increase was primarily attributable to growth in Ethernet products.

International sales grew in 1994 in all geographic regions as compared to
1993. Sales to international customers were approximately 55 percent of total
sales in 1994, 54 percent in 1993, and 55 percent in 1992.

Gross margin was 54 percent in 1994 as compared to 52 percent in 1993, and
51 percent in 1992. The improvement in gross margin in 1994 was primarily
attributable to increased sales from higher margin Am486 products. Gross margin
is anticipated to decline in 1995, primarily due to pricing pressures
particularly with respect to microprocessor products. Gross margin is also
anticipated to decline due to products received from FASL, which are expected to
be purchased at higher costs compared to similar products manufactured
internally. The impact of gross margin declines, arising from purchases of
products from FASL, may be partially offset by the company's share of income
that may be generated by FASL, which is included in net income under the equity
method of accounting.

Research and development expense for 1994 increased to $280.0 million from
$262.8 million in 1993 and $227.9 million in 1992. These increases were mainly
due to higher spending in microprocessor development. The company anticipates
that this trend will continue in 1995.

Marketing, general, and administrative expense increased from 1992 through
1994. These increases were primarily due to increased legal expenses related to
litigations with Intel (which were settled in January, 1995) and microprocessor
advertising expenses.

Operating expenses as a percentage of sales were on a downward trend from
1992 through 1994. However, operating expenses as a percentage of sales are
anticipated to rise in 1995, primarily due to start-up costs and commencement of
significant depreciation expenses related to Fab 25 and purchase of product from
FASL, as well as pricing pressures, particularly with respect to microprocessor
products.

On January 11, 1995, the company and Intel Corporation reached an agreement
to settle all previously outstanding legal disputes between the two companies.
The major terms of the settlement are: (1) AMD will have a fully paid-up,
nonexclusive, world-wide, royalty-free, perpetual license to copy and distribute
the microcode and control code in the Intel287(TM), Intel386(TM) and
Intel486(TM) microprocessor product families. (2) AMD agreed that it has no
right to copy any other Intel microcode including the Pentium(TM) Processor, the
P6 microcode and the 486 of ICE (in-circuit emulation) microcode. (3) The
companies agreed to negotiate a new patent cross-license agreement to become
effective January 1, 1996. (4) AMD agreed to pay Intel $58 million in settlement
of claims for past damages related to AMD's distribution of Am486
microprocessors containing Intel's 486 ICE microcode. As ordered in a 1992
arbitration between the companies, Intel will pay AMD approximately $18 million
in damages (which includes interest) awarded by the arbitrator for breach of
contract and will not contest certain rights granted AMD in the arbitration. The
company recorded both the ICE case damages and the arbitration award in 1994.
(5) Intel and AMD will drop all cases against each other, including appeals,
currently


ADVANCED MICRO DEVICES, INC. 7


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

pending in the courts. (6) AMD will have the right to use foundries for Am486
products containing Intel microcode for up to 20 percent of annual total unit
shipments of Am486 microprocessors. (7) AMD and its customers will receive a
license for Intel's "Crawford `338" patent, covering memory management. (8) The
two companies agreed not to initiate legal action against one another for any
activity occurring prior to January 6, 1995.

The company recorded a $58 million litigation settlement in 1994 as a
result of the forgoing settlement. Also, during 1994, interest income and other,
net, included a net charge of approximately $5 million resulting from the
securities class action lawsuit and stockholders' derivative action settlements,
and damages awarded to the company in the arbitration proceeding with Intel
Corporation. Interest expense decreased in 1994 and 1993 as compared to 1992,
mainly due to lower average outstanding debt and lower interest rates.

The income tax rate increased to approximately 33 percent in 1994 from 28
percent in 1993 and 10 percent in 1992. The higher tax rate in 1994 was
primarily due to reduced benefits from low taxed foreign income and available
tax credit carryforwards. The company anticipates that the income tax rate will
be approximately 34 percent in 1995.

The company enters into foreign exchange forward contracts to buy and sell
currencies as economic hedges of the company's foreign net monetary asset
position. In 1994, these hedging transactions were denominated in lira, yen,
French franc, deutsche mark, and pound sterling. The maturities of these
contracts are generally short-term in nature. The company believes its foreign
exchange contracts do not subject the company to risk from exchange rate
movements because gains and losses on these contracts are designed to offset
losses and gains on the net monetary asset position being hedged. Net foreign
currency gains and losses have not been material. As of December 25, 1994, the
company had approximately $33 million (notional amount) in foreign exchange
forward contracts (see Notes 1, 2, and 3 to the Consolidated Financial
Statements).

In 1994, approximately 15 percent of the company's net sales were
denominated in foreign currencies. The company does not have sales denominated
in local currencies in those countries which have highly inflationary economies.
The impact on the company's operating results from changes in foreign currency
rates individually and in the aggregate has not been material.

The company has engaged in interest rate swaps primarily to reduce its
interest rate exposure by changing a portion of the company's interest rate
exposure from a floating rate to a fixed rate basis. At the end of 1994, the net
outstanding notional amount of interest rate swaps was $40 million, which will
mature in 1997. Gains and losses related to these interest rate swaps have been
immaterial (see Notes 1, 2, and 3 to the Consolidated Financial Statements).

The company primarily addresses market risk by participating as an end-user
in various derivative markets to manage its exposure to interest and foreign
currency exchange rate fluctuations. The counterparties to the company's foreign
exchange forward contracts, foreign currency options, and interest rate swaps
consist of a number of major high credit quality international financial
institutions. The company does not believe that there is significant risk of
nonperformance by these counterparties because the company continually monitors
the credit ratings of such counterparties and limits the financial exposure and
the amount of agreements entered into with any one financial institution.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

The semiconductor industry is generally characterized by a highly
competitive and rapidly changing environment in which operating results are
often subject to the effects of new product introductions, manufacturing
technology innovations, rapid fluctuations in product demand, and the
ability to maintain and secure intellectual property rights. While the
company attempts to identify and respond to these changes as soon as
possible, the rapidity of their onset makes prediction of and reaction to
such events an ongoing challenge.

The company believes that its future results of operations and financial
condition could be impacted by any of the following factors: market acceptance
and timing of new products; continued market acceptance of personal computer
industry standards applicable to the company's products; trends in the personal
computer marketplace; capacity constraints; intense price competition;
interruption in procuring needed manufacturing materials; and changes in
domestic and international economic conditions.

The company's microproccessor products, and more specifically the company's
current generation of 486 microprocessors, have significantly contributed, and
are expected to significantly contribute in 1995 to the company's revenues,
margins and profits. The company's 486 microprocessors are re-engineered
versions of 486 microprocessors originally developed by Intel, and contain and
use, under license with Intel, its 486 microcode. The company's next generation
superscalar RISC-based K86(TM) products are being designed to be Microsoft(R)
Windows(R)-compatible and compete with Intel's post-486 generations of X86
microprocessors including the Pentium and the P6.

8 ADVANCED MICRO DEVICES, INC.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

The company's K86 products will not be re-engineered versions of microprocessors
developed by Intel, and pursuant to the settlement agreement with Intel the
company does not have the right to use Intel microcodes in AMD product
generations following the 486. There can be no assurance that the company will
be able to introduce its K86 products in a timely manner to meet competition,
that these microprocessors will not face severe price competition, or that
superior competitive products will not be introduced. There can be no assurance
that the K86 products will achieve market acceptance or desired operating
results, including but not limited to profitability. Any such failure could
adversely affect the company's future operations.

The company has entered into a number of licenses and cross-licenses
relating to several of the company's products. As is common in the semiconductor
industry, from time to time the company has been notified that it may be
infringing other parties' patents or copyrights. While patent and copyright
owners in such instances often express a willingness to resolve the dispute or
grant a license, no assurance can be given that all necessary licenses will be
honored or obtained on satisfactory terms, nor that the ultimate resolution of
any material dispute concerning the company's present or future products will
not have an adverse impact on the company's future results of operations or
financial condition.

Due to the factors noted above, the company's future operations, financial
condition, and stock price may be subject to volatility. In addition, an actual
or anticipated shortfall in revenue, gross margins, or earnings from securities
analysts' expectations could have an immediate adverse effect on the trading
price of the company's common stock in any given period.

FINANCIAL CONDITION

Cash, cash equivalents, and short-term investments decreased by $110.3
million from 1993 to 1994. This decrease was primarily attributable to
investments in expanding manufacturing capacity both directly through
additional property, plant, and equipment, and indirectly through the FASL
joint venture. The company also paid $34 million in settlement of a
securities class action. The company plans to continue to make significant
capital investments in 1995.

Working capital decreased by $115.1 million from $509.6 million in 1993 to
$394.5 million in 1994. This decrease was primarily due to lower cash, cash
equivalents, and short-term investments resulting from capital acquisitions, and
secondarily due to a liability recorded for the Intel settlement. The payment of
this litigation liability is expected to be made in the first half of 1995.

In 1993, the company commenced construction of its 700,000 square-foot
submicron semiconductor manufacturing complex in Austin, Texas. Known as Fab 25,
the new facility is expected to cost approximately $1.3 billion when fully
equipped. The first phase of construction and initial equipment installation is
expected to cost approximately $700 million through 1995, of which approximately
$400 million was incurred through 1994. Volume production is presently scheduled
to begin in late 1995.

The company and Fujitsu Limited are cooperating in building and operating
an approximately $800 million wafer fabrication facility in Aizu-Wakamatsu,
Japan, through their joint venture (FASL). Each company will contribute equally
toward funding and supporting FASL. AMD is expected to contribute approximately
half of its share of funding in cash and may be required to guarantee third-
party loans made to FASL for the remaining half. However, to the extent debt
cannot be secured by FASL, AMD is required to contribute its portion in cash.
The company is also required under the terms of the joint venture to contribute
approximately one-half of any additional amounts as may be necessary to sustain
FASL's operations. At the end of 1994, the company's total cash investment in
FASL was $142.3 million as compared to $3.2 million at the end of 1993. The
company anticipates that this investment will increase to approximately $162
million by the end of 1995. Volume production is presently scheduled to commence
in the second half of 1995.

The joint venture costs are denominated in yen and therefore are subject to
change due to fluctuations of foreign exchange rates. Therefore, the company
enters into foreign currency options to hedge its firm commitments relating to
the company's FASL investment. The maturities of these currency options are
generally less than six months. As of December 25, 1994, the company held
approximately $13 million (notional amount) in foreign currency options (see
Notes 1, 2, and 3 to the Consolidated Financial Statements).

As of the end of 1994, the company had the following financing
arrangements: unsecured committed bank lines of credit of $250 million,
unutilized; long-term secured equipment lease lines of $110 million, of which
$107 million were utilized; and short-term, unsecured uncommitted bank credit in
the amount of $128 million, of which $32 million was utilized. On January 5,
1995, the company obtained a $150 million four-year term loan from a consortium
of eight commercial banks.

The company's current capital plan and requirements are based on various
product-mix, selling-price and unit-demand assumptions and are, therefore,
subject to revision due to future market conditions.

ADVANCED MICRO DEVICES, INC. 9


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

On May 25, 1994, the Securities and Exchange Commission declared effective
the company's shelf registration statement covering up to $400 million of
its securities, which may be either debt securities, preferred stock,
depositary shares representing fractions of shares of preferred stock,
common stock, warrants to purchase common stock, or any combination of the
foregoing which the company may offer from time to time in the future. The
nature and terms of the securities will be established at the time of their
sale. The company may offer the securities through underwriters to be named
in the future, through agents or otherwise. The net proceeds of any
offering will be used for general corporate purposes, which may include the
reduction of outstanding indebtedness, working capital increases and
capital expenditures. To date, the company has not offered or sold any
securities registered under the $400 million registration statement.

On February 10, 1995, the company called for redemption of all outstanding
shares of its $30.00 Convertible Exchangeable Preferred Stock (the "Preferred
Shares") on March 13, 1995 (the "Redemption Date"); and pursuant to the
provisions of a depositary agreement between the company and The First National
Bank of Boston as Depositary, the Depositary called for redemption, on the
Redemption Date, all of the outstanding Depositary Convertible Exchangeable
Preferred Shares (the "Depositary Shares"), each representing one-tenth of a
Preferred Share. The redemption price is $50.90 per Depositary Share, plus $.73
of accrued and unpaid dividends from December 15, 1994 to the Redemption Date.

Each group of ten Depositary Shares, representing one whole share of
Preferred Stock, is convertible, at the option of the holders, into 19.873
shares of common stock of the company at any time prior to 5:00 p.m. Eastern
Standard Time on the Redemption Date. No accrued dividends will be paid in
respect of any Depositary Shares which are converted. If fewer than all of the
outstanding Depositary Shares are properly surrendered for conversion, the
company has arranged for Donaldson, Lufkin & Jenrette Securities Corporation and
Salomon Brothers Inc. to purchase directly from the company up to such whole
number of shares of common stock as would have been issuable upon the conversion
of any Depositary Shares not surrendered for conversion. The proceeds from any
such sale will be used by the company to redeem the Depositary Shares which are
not surrendered for conversion.

The company believes that cash flows from operations and current cash
balances, together with current and anticipated available long-term financing,
will be sufficient to fund operations, capital investments, and research and
development projects currently planned for the foreseeable future.

Am386 and Am486 are registered trademarks of Advanced Micro Devices, Inc.

K86 is a trademark of Advanced Micro Devices, Inc.

10 ADVANCED MICRO DEVICES, INC.


CONSOLIDATED STATEMENTS OF INCOME



- - ---------------------------------------------------------------------------------------------------------------
Three years ended December 25, 1994
(Thousands except per share amounts) 1994 1993 1992
-------------------------------------------

NET SALES $ 2,134,659 $ 1,648,280 $ 1,514,489
----------- ----------- -----------
Expenses:
Cost of sales 982,306 789,564 746,486
Research and development 279,984 262,802 227,860
Marketing, general, and administrative 359,230 290,861 270,198
----------- ----------- -----------
1,621,520 1,343,227 1,244,544
----------- ----------- -----------
Operating income 513,139 305,053 269,945
Litigation settlement (58,000) - -
Interest income and other, net 16,259 16,490 18,913
Interest expense (1,844) (2,910) (17,227)
----------- ----------- -----------
Income before income taxes and equity in joint venture 469,554 318,633 271,631
Provision for income taxes 153,703 89,218 26,620
----------- ----------- -----------
Income before equity in joint venture 315,851 229,415 245,011
Equity in net income (loss) of joint venture (10,585) (634) -
----------- ----------- -----------
NET INCOME 305,266 228,781 245,011
Preferred stock dividends 10,350 10,350 10,350
----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 294,916 $ 218,431 $ 234,661
=========== =========== ===========
NET INCOME PER COMMON SHARE:
Primary $ 3.02 $ 2.30 $ 2.57
=========== =========== ===========
Fully diluted $ 2.92 $ 2.24 $ 2.49
=========== =========== ===========
Shares used in per share calculation:
Primary 97,510 95,108 91,383
Fully diluted 104,570 102,063 98,475
- - ---------------------------------------------------------------------------------------------------------------


See accompanying notes


ADVANCED MICRO DEVICES, INC. 11


CONSOLIDATED BALANCE SHEETS



- - ---------------------------------------------------------------------------------------------------------------------------
December 25, 1994, and December 26, 1993
(Thousands except share and per share amounts)
1994 1993
----------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 121,343 $ 60,423
Short-term investments 256,511 427,775
----------- -----------
Total cash, cash equivalents, and short-term investments 377,854 488,198
Accounts receivable, net of allowance for doubtful accounts
of $10,319 in 1994 and $7,492 in 1993 337,107 263,617
Inventories:
Raw materials 21,604 15,371
Work-in-process 72,632 56,504
Finished goods 34,454 32,175
----------- -----------
Total inventories 128,690 104,050
Deferred income taxes 98,675 77,922
Prepaid expenses and other current assets 44,293 30,399
----------- -----------
Total current assets 986,619 964,186
Property, plant, and equipment:
Land 28,820 26,272
Buildings and leasehold improvements 500,530 444,299
Equipment 1,442,787 1,335,251
Construction in progress 492,792 192,541
----------- -----------
Total property, plant, and equipment 2,464,929 1,998,363
Accumulated depreciation and amortization (1,200,718) (1,094,037)
----------- -----------
Property, plant, and equipment, net 1,264,211 904,326
Investment in joint venture 124,588 2,086
Other assets 70,284 58,633
----------- -----------
$ 2,445,702 $ 1,929,231
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 32,459 $ 30,994
Accounts payable 149,122 127,151
Accrued compensation and benefits 104,526 81,860
Accrued liabilities 82,570 83,982
Litigation settlement 58,000 -
Income tax payable 53,795 34,991
Deferred income on shipments to distributors 83,800 74,436
Current portion of long-term debt and capital lease obligations 27,895 21,205
----------- -----------
Total current liabilities 592,167 454,619
Deferred income taxes 42,518 42,837
Long-term debt and capital lease obligations, less current portion 75,752 79,504
Commitments and contingencies - -

Stockholders' equity:
Capital stock:
Serial preferred stock, par value $.10; 1,000,000 shares authorized; 345,000 shares
issued and 344,862 shares outstanding in 1994, and 345,000 shares issued and
outstanding in 1993 ($172,431 aggregate liquidation preference in 1994) 34 35
Common stock, par value $.01; 250,000,000 shares authorized; 95,417,383
shares issued and outstanding in 1994, and 92,443,911 in 1993 956 926
Capital in excess of par value 698,673 619,733
Retained earnings 1,035,602 731,577
----------- -----------
Total stockholders' equity 1,735,265 1,352,271
----------- -----------
$ 2,445,702 $ 1,929,231
=========== ===========
- - ---------------------------------------------------------------------------------------------------------------------------

See accompanying notes


12 ADVANCED MICRO DEVICES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS



- - ---------------------------------------------------------------------------------------------------------------------------
Three years ended December 25, 1994
(Thousands) 1994 1993 1992
------------------------------------

Cash flows from operating activities:
Net income $ 305,266 $ 228,781 $ 245,011
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 215,984 175,275 152,313
Litigation settlement 58,000 - -
Net (gain) loss on sale of property, plant, and equipment 276 (2,943) 1,325
Write-down of property, plant, and equipment 2,230 366 222
Gain realized on available-for-sale securities - - (10,689)
Compensation recognized under employee stock plans 1,971 1,313 3,039
Undistributed loss of joint venture 10,585 634 -
Changes in operating assets and liabilities:
Net increase in receivables, inventories, prepaid
expenses, and other assets (114,566) (57,269) (2,471)
Net increase in deferred income taxes (21,072) (27,021) (19,109)
Increase in income tax payable 61,910 70,502 13,386
Net increase in payables and accrued liabilities 52,589 69,750 16,212
--------- --------- ---------
Net cash provided by operating activities 573,173 459,388 399,239
--------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant, and equipment (548,742) (323,669) (222,064)
Proceeds from sale of property, plant, and equipment 2,058 4,648 1,261
Proceeds from available-for-sale securities - - 21,263
Purchase of held-to-maturity debt securities (1,245,167) (715,487) (594,801)
Proceeds from sale of held-to-maturity debt securities 1,416,431 566,773 432,590
Investment in joint venture (139,175) (3,160) -
--------- --------- ---------
Net cash used in investing activities (514,595) (470,895) (361,751)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings 42,025 10,238 8,898
Principal payments on borrowings (68,898) (22,386) (153,094)
Proceeds from issuance of stock 39,565 42,401 15,145
Payments of preferred stock dividends (10,350) (10,350) (10,350)
--------- --------- ---------
Net cash provided by (used in) financing activities 2,342 19,903 (139,401)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 60,920 8,396 (101,913)
Cash and cash equivalents at beginning of year 60,423 52,027 153,940
--------- --------- ---------
Cash and cash equivalents at end of year $ 121,343 $ 60,423 $ 52,027
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 977 $ 2,123 $ 15,136
========= ========= =========
Income taxes $ 111,704 $ 44,433 $ 32,149
========= ========= =========
Non-cash financing activities:
Equipment capital leases $ 34,202 $ 64,512 $ -
========= ========= =========
- - ---------------------------------------------------------------------------------------------------------------------------


See accompanying notes


ADVANCED MICRO DEVICES, INC. 13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 25, 1994, December 26, 1993, and December 27, 1992

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal year. Advanced Micro Devices' fiscal year ends on the last Sunday in
December, which resulted in a 52-week year ended December 25, 1994. This
compares with a 52-week fiscal year for 1993 and 1992, which ended on December
26 and 27, respectively.

Principles of consolidation. The consolidated financial statements include the
accounts of Advanced Micro Devices, Inc. and its subsidiaries. Upon
consolidation, all significant intercompany accounts and transactions are
eliminated.

Foreign currency translation. The U.S. dollar is the functional currency for the
company's wholly-owned foreign subsidiaries. Translation adjustments, resulting
from the process of translating foreign currency financial statements into U.S.
dollars, are included in operations. The functional currency of the company's
unconsolidated joint venture is the Japanese yen. Translation adjustments
relating to the translation of these statements have not been material, and
therefore, are not included as a separate component of stockholders' equity.

Cash equivalents. Cash equivalents consist of financial instruments which are
readily convertible to cash and have original maturities of three months or less
at the time of acquisition.

Investments. Effective December 27, 1993, the company adopted the Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Instruments in Debt and Equity Securities." Accordingly, the company has
classified its marketable debt and equity securities into held-to-maturity and
available-for-sale categories. Securities classified as held-to-maturity are
reported at amortized cost and available-for-sale securities are reported at
fair market value with unrealized gains and losses included in retained
earnings. Realized gains and losses and declines in value of securities judged
to be other-than-temporary are included in interest income and other, net.
Interest and dividends on all securities are included in interest income and
other, net.

Investments with maturities between three and twelve months are considered
short-term investments. Short-term investments consist of debt securities such
as commercial paper, time deposits, certificates of deposit, bankers'
acceptances, and marketable direct obligations of the United States Treasury.

Foreign exchange forward contracts. Foreign exchange forward contracts are used
to hedge the company's net monetary asset positions in its foreign subsidiaries.
Realized gains and losses from these hedges are included in operations. Premiums
and discounts, if any, are amortized over the life of the contract and included
in operations.

Foreign currency options. Foreign currency options are used to hedge firm
commitments with respect to the company's joint venture investment (FASL).
Realized gains and losses from these hedges are deferred and included in
other assets or other liabilities, respectively. They are recognized in
operations in the same period as the hedged transactions. Premiums and
discounts, if any, are amortized over the life of the contract and included
in operations.

Interest rate swaps. The company enters into interest rate swaps primarily
to reduce its interest rate exposure by changing a portion of the company's
interest rate exposure from a floating rate to a fixed rate basis.

The differential between fixed and floating rates to be paid or received is
accrued and recognized as an adjustment to interest expense. Accordingly, the
related amount payable to or receivable from counterparties is included in other
current assets or accrued liabilities.

Additional disclosures regarding financial instruments, including SFAS No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," are included in Notes 2 and 3 to the Consolidated
Financial Statements.

Inventories. Inventories are stated principally at standard cost adjusted
to approximate the lower of cost (first-in, first-out method) or market
(net realizable value).

Property, plant, and equipment. Property, plant, and equipment is stated at
cost. Depreciation and amortization are provided principally on the
straight-line method for financial reporting purposes and on accelerated
methods for tax purposes.

Investment in joint venture. In 1993, the company and Fujitsu Limited
established a joint venture, Fujitsu AMD Semiconductor Limited (FASL).
AMD's share of FASL is 49.95 percent and the investment is being accounted
for under the equity method. In 1994, the amount invested in FASL was
$139.2 million, and the company's share of net loss during 1994 was $10.6
million, offset by income tax savings of approximately $5.7 million.

Pursuant to a cross-equity provision between AMD and Fujitsu Limited, the
company purchased $12.7 million of Fujitsu Limited shares, with certain
resale restrictions. Under the same provision, Fujitsu Limited has
purchased 2 million shares of AMD common stock, and is required to purchase
an additional 2.5 million shares over the next several years, for a total
investment not to exceed $100 million.

14 ADVANCED MICRO DEVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred income on shipments to distributors. A portion of sales is made to
distributors under terms allowing certain rights of return and price protection
on unsold merchandise held by the distributors. These agreements can be canceled
by either party upon written notice, at which time the company generally
repurchases unsold inventory. Accordingly, recognition of sales to distributors
and related gross profits are deferred until the merchandise is resold by the
distributors.

Income taxes. Effective December 28, 1992, the company adopted Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes."

Net income per common share. Primary net income per common share is based upon
weighted average common and dilutive common equivalent shares outstanding using
the treasury stock method. Dilutive common equivalent shares include stock
options and restricted stock. Fully diluted net income per common share is
computed using the weighted average common and dilutive common equivalent shares
outstanding, plus other dilutive shares outstanding which are not common
equivalent shares. Other dilutive shares which are not common equivalent shares
include convertible preferred stock.

Financial presentation. Certain prior year amounts on the Consolidated Financial
Statements have been reclassified to conform to the 1994 presentation.

- - --------------------------------------------------------------------------------

2. FINANCIAL INSTRUMENTS

Financial instruments with off-balance-sheet risk.
As part of the company's asset and liability management, the company enters
into various types of transactions that involve financial instruments with
off-balance-sheet risk. These instruments are entered into in order to
manage financial market risk, including interest rate and foreign exchange
risk. The notional values, carrying amounts and fair values are tabled
below.

Foreign exchange forward contracts. The company enters into foreign
exchange forward contracts to buy and sell currencies as economic hedges of
its net monetary asset positions in its foreign subsidiaries. The hedging
transactions in 1994 were denominated in lira, yen, French franc, deutsche
mark, and pound sterling. The maturities of these contracts are generally
less than six months.

Foreign currency options. The joint venture (FASL) investments are
denominated in yen, and therefore, are subject to exposure due to
fluctuations in yen exchange rate. Thus, the company hedges its exposures
on certain firm commitments relating to the FASL investment with foreign
currency options denominated in yen. The maturities of these options are
generally less than six months.

Interest rate swaps. The company engaged in interest rate swaps primarily
to reduce its interest rate exposure on its building lease obligations.
These interest rate swaps generally involve the payment of a fixed interest
rate based on three to five year swap rates and the receipt of a floating
interest rate based on six months LIBOR without exchanges of the underlying
notional amounts. These interest rate swaps will mature in 1997.

Fair value of financial instruments with off-balance-sheet risk.
The estimates of fair value were obtained using prevailing financial market
information as of December 25, 1994. In certain instances where judgment is
required in estimating fair value, price quotes were obtained from certain
of the company's counterparty financial institutions.

- - --------------------------------------------------------------------------------



- - ---------------------------------------------------------------------------------------------------
1994 1993
- - ---------------------------------------------------------------------------------------------------
Notional Carrying Fair Notional Carrying Fair
(Thousands) amount amount value amount amount value
- - ---------------------------------------------------------------------------------------------------

Interest rate
instruments:

Swaps $40,000 $(518) $228 $40,000 $(1,122) $(3,384)

Foreign
exchange
instruments:

Foreign
exchange
forward
contracts 32,651 536 536 37,341 22 22
Foreign
currency
options 12,662 - (200) - - -
- - ---------------------------------------------------------------------------------------------------


Fair value of other financial instruments.
The carrying value of short-term debt approximates fair value due to its
short-term maturity. The fair value for long-term debt was estimated using
discounted cash flow analysis based on estimated interest rates for similar
types of borrowing arrangements.

ADVANCED MICRO DEVICES, INC. 15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying amounts and estimated fair values of the company's other
financial instruments are as follows:



- - --------------------------------------------------------------------------------
1994 1993
- - --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Thousands) amount value amount value
- - --------------------------------------------------------------------------------

Short-term debt:
Notes payable $(32,459) $(32,459) $(30,994) $(30,994)
Long-term debt (20,810) (20,132) (23,494) (24,321)
- - --------------------------------------------------------------------------------


Securities held-to-maturity and available-for-sale.
The following is a summary of held-to-maturity securities as of December
25, 1994.



- - --------------------------------------------------------------------------------

(Thousands) Cost
--------
Certificates of deposit $ 4,997
Security repurchase agreements 50,800
Commercial paper 24,760
Money market preferred stock 36,700
Other debt securities 1,672
--------
Cash equivalents 118,929
Cash 2,414
--------
Total cash and cash equivalents $121,343
========
Certificates of deposit $ 95,342
Corporate notes 101,850
Treasury notes 44,877
Commercial paper 14,442
--------
Total short-term investments $256,511
========
- - --------------------------------------------------------------------------------


Since held-to-maturity securities are short-term in nature, changes in
market interest rates would not have a significant impact on fair value of
these securities. These securities are carried at amortized cost which
approximates fair value.

As of December 25, 1994, included in other assets, the company held $9.4
million of available-for-sale equity securities with fair value of $18.5
million. The net unrealized holding gain of $9.1 million on these equity
securities is included in retained earnings since it is immaterial.

As of December 25, 1994, the company did not own any securities classified
as trading.

3. CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the company to
concentrations of credit risk consist primarily of cash equivalents, short-
term investments, trade receivables and financial instruments used in
hedging activities.

The company places its cash equivalents and short-term investments with
high credit quality financial institutions and, by policy, limits the amount of
credit exposure with any one financial institution. Investments in time deposits
and certificates of deposit are acquired from banks having combined capital,
surplus, and undistributed profits of not less than $200 million. Investments in
commercial paper of industrial firms and financial institutions are rated A1, P1
or better.

Concentrations of credit risk with respect to trade receivables are limited
because a large number of geographically diverse customers make up the company's
customer base, thus spreading the trade credit risk. The company controls credit
risk through credit approvals, credit limits and monitoring procedures. The
company performs in depth credit evaluations for all new customers and requires
letters of credit, bank guarantees and advance payments, if deemed necessary.
Bad debt expenses have not been material.

The counterparties to the agreements relating to the company's foreign
exchange and interest rate instruments consist of a number of major high credit
quality international financial institutions. The company does not believe that
there is significant risk of nonperformance by these counterparties because the
company continually monitors the credit ratings of such counterparties, and
limits the financial exposure and the amount of agreements entered into with any
one financial institution. While the notional amounts of financial instruments
are often used to express the volume of these transactions, the potential
accounting loss on these transactions if all counterparties failed to perform is
limited to the amounts, if any, by which the counterparties' obligations under
the contracts exceed the obligations of the company to the counterparties.

16 ADVANCED MICRO DEVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. STOCKHOLDERS' EQUITY

The following is a summary of the changes in the components of consolidated
stockholders' equity for the three years ended December 25, 1994.



- - ------------------------------------------------------------------------------------------------------------------------------------

Preferred Stock Common Stock
------------------------------------------
Number Number Capital in Total
of of Excess of Retained Stockholders'
(Thousands) Shares Amount Shares Amount Par Value Earnings Equity
-----------------------------------------------------------------------------------------

DECEMBER 29, 1991 345 $35 84,031 $842 $503,994 $278,485 $ 783,356
Issuance of shares:
Employee stock plans - - 4,195 43 15,102 - 15,145
Compensation recognized under
employee stock plans - - - - 3,039 - 3,039
Income tax benefits realized from
employee stock option exercises - - - - 10,539 - 10,539
Preferred stock dividends - - - - - (10,350) (10,350)
Net income - - - - - 245,011 245,011
---- ---- ------- ----- --------- ---------- -----------
DECEMBER 27, 1992 345 35 88,226 885 532,674 513,146 1,046,740
Issuance of shares:
Employee stock plans - - 3,218 31 19,408 - 19,439
Fujitsu Limited - - 1,000 10 22,952 - 22,962
Compensation recognized under
employee stock plans - - - - 1,313 - 1,313
Income tax benefits realized from
employee stock option exercises - - - - 43,386 - 43,386
Preferred stock dividends - - - - - (10,350) (10,350)
Net income - - - - - 228,781 228,781
---- ---- ------- ----- --------- ---------- -----------
DECEMBER 26, 1993 345 35 92,444 926 619,733 731,577 1,352,271
Issuance of shares:
Employee stock plans - - 1,970 19 16,911 - 16,930
Fujitsu Limited - - 1,000 10 22,625 - 22,635
Compensation recognized under
employee stock plans - - - - 1,971 - 1,971
Conversion of preferred stock to
common stock - (1) 3 1 - - -
Income tax benefits realized from
employee stock option exercises - - - - 37,433 - 37,433
Preferred stock dividends - - - - - (10,350) (10,350)
Net income - - - - - 305,266 305,266
Unrealized gain from available-for-
sale investments - - - - - 9,109 9,109
---- ---- ------- ----- --------- ---------- -----------
DECEMBER 25, 1994 345 $34 95,417 $956 $698,673 $1,035,602 $1,735,265
==== ==== ======= ===== ========= ========== ===========
- - ------------------------------------------------------------------------------------------------------------------------------------



5. SERIAL PREFERRED STOCK

In March 1987, the company sold 345,000 shares of Convertible Exchangeable
Preferred Stock, $.10 par value. Dividends at an annual rate of $30 per share
(6 percent) on the preferred stock are cumulative from the date of original
issue and are payable quarterly in arrears, when and as declared by the
company's Board of Directors. Voluntary and involuntary liquidation value of
each preferred share is approximately $500 plus unpaid dividends. The preferred
stock is convertible at any time at the option of the holder into common stock
at the initial conversion rate of 19.873 common shares for each pre-

ADVANCED MICRO DEVICES, INC. 17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ferred share. The preferred stock is exchangeable at the option of the company,
in whole but not in part, on any dividend payment date commencing March 15,
1989, for 6 percent Convertible Subordinated Debentures due 2012 at the rate of
$500 principal amount of debentures for each preferred share. If exchanged,
commencing the first March 15 following the date of initial issuance of the
debentures, the company is required to make annual payments into a sinking fund
to provide for the redemption of the debentures.

The preferred stock is redeemable for cash at any time at the option of the
company, in whole or in part, at prices declining to approximately $500 per
share at March 15, 1997, plus unpaid dividends. Holders of preferred stock are
entitled to limited voting rights under certain conditions.

The preferred stock is held by a depositary and 3,450,000 depositary
shares, which are listed on the New York Stock Exchange, have been issued and
3,448,620 shares were outstanding as of December 25, 1994. Each depositary
share represents one-tenth of a preferred share, with the holder entitled,
proportionately, to all the rights and preferences of the underlying
preferred stock.

On February 10, 1995, the company called for redemption of all outstanding
shares of its preferred stock on March 13, 1995. The redemption price is $50.90
per depositary share, plus $.73 of accrued and unpaid dividends from December
15, 1994 to the redemption date. Each group of ten depositary shares,
representing one whole share of preferred stock, is convertible into 19.873
shares of the company's common stock at any time prior to the redemption date.
If fewer than all of the outstanding depositary shares are surrendered for
conversion, the company has arranged for certain institutions to purchase
directly from the company the whole number of shares of common stock as would
have been issuable upon the conversion of any depositary shares not surrendered
for conversion. The proceeds from any such sale will be used by the company to
redeem the depositary shares which are not surrendered for conversion.

6. STOCKHOLDER RIGHTS PLAN

In February 1990, the company adopted a stockholder rights plan. In
accordance with this plan, the company declared a dividend distribution of
preferred stock purchase rights at the rate of one right for each share of
common stock held as of the close of business on February 20, 1990.

Each right entitles the registered holder to purchase from the company a
unit consisting of one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $.10 per share, at a purchase price of $65, subject
to adjustment.

The rights will not be exercisable, or transferable apart from the common
stock, until certain events occur. The rights are redeemable by the company and
expire on December 31, 2000.

At a meeting on February 16, 1995, the Board of Directors of the company
authorized and directed a committee of its members to cause the company to
redeem the preferred stock purchase rights under the Stockholders Rights Plan
at a time to be determined by the committee, subject to the right of the
committee to request that the Board reconsider its action should a change in
circumstances occur. No decision concerning the date of the planned redemption
has been announced.

7. INCOME TAXES

Provision for income taxes consists of:



- - --------------------------------------------------------------------------------
1994 1993 1992
SFAS 109 SFAS 109 SFAS 96
(Thousands) Method Method Method
-------------------------------------

Current:
U.S. Federal $154,425 $83,598 $48,161
U.S. State and Local 13,001 3,640 7,835
Foreign National and Local 7,350 2,332 1,863
Deferred:
U.S. Federal (18,239) (1,947) (31,239)
U.S. State and Local (2,820) 1,798 -
Foreign National and Local (14) (203) -
-------- ------- -------
Provision for income taxes $153,703 $89,218 $26,620
======== ======= =======
- - --------------------------------------------------------------------------------


Tax benefits resulting from the exercise of nonqualified stock options and
the disqualifying disposition of shares acquired under the company's
incentive stock option and stock purchase plans reduced taxes currently
payable as shown above by $37.4 million, $43.4 million, and $10.5 million in
1994, 1993, and 1992, respectively. Such benefits were credited to capital in
excess of par value when realized.

18 ADVANCED MICRO DEVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under SFAS No. 109, deferred income taxes reflect the net tax effects of tax
carryforwards and temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the company's deferred tax assets and
liabilities as of December 25, 1994, December 26, 1993, and December 28, 1992 as
restated under SFAS No. 109, are as follows:



- - -------------------------------------------------------------------------------------------------
(Thousands) 1994 1993 1992
-------- -------- --------

Deferred tax assets:
Deferred distributor income $31,396 $31,349 $22,402
Inventory reserves 18,809 14,935 16,690
Accrued expenses not currently deductible 39,467 21,799 33,995
Federal tax credit carryovers 2,873 30,888 52,208
Other 39,081 27,569 31,600
-------- -------- --------
Total deferred tax assets 131,626 126,540 156,895
Less: valuation allowance - (26,415) (47,427)
-------- -------- --------
Net deferred tax assets 131,626 100,125 109,468
-------- -------- --------
Deferred tax liabilities:
Depreciation (59,614) (44,886) (43,742)
Other (15,855) (20,154) (30,993)
-------- -------- --------
Total deferred tax liabilities (75,469) (65,040) (74,735)
-------- -------- --------
Net deferred tax assets $56,157 $35,085 $34,733
======== ======== ========
- - -------------------------------------------------------------------------------------------------


The 1993 and 1992 valuation allowances for deferred tax assets, attributable to
stock option deductions, were credited to equity upon realization in 1994 and
1993.

Under SFAS No. 96, the components of the deferred taxes for 1992 consisted
of:



- - -----------------------------------------------------------------------
(Thousands) 1992
--------

Deferred distributor income $(22,402)
Inventory reserves (16,690)
Accrued expenses not currently deductible (31,686)
Depreciation 41,502
Other (1,963)
--------
$(31,239)
========
- - -----------------------------------------------------------------------


Pretax income from foreign operations was $45.7 million in 1994, $40.0 million
in 1993, and $32.0 million in 1992.

The following is a reconciliation between statutory federal income
taxes and the total provision for income taxes.



- - ------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
SFAS 109 Method SFAS 109 Method SFAS 96 Method
--------------------------------------------------------------------------
(Thousands except percent) Tax Rate Tax Rate Tax Rate
--------------------------------------------------------------------------

Statutory federal income tax provision $164,344 35.0% $111,522 35.0% $92,355 34.0%
Operating losses utilized - - - - (46,534) (17.1)
State taxes net of federal benefit 6,601 1.4 3,535 1.1 5,228 1.9
Tax exempt foreign sales corporation income (8,955) (1.9) (7,236) (2.3) (6,175) (2.3)
Tax credits utilized - - (5,004) (1.5) (12,306) (4.5)
Foreign income at other than U.S. rates (9,633) (2.1) (10,398) (3.3) (5,948) (2.2)
Other 1,346 0.3 (3,201) (1.0) - -
-------- ---- -------- ---- ------- -----
$153,703 32.7% $ 89,218 28.0% $26,620 9.8%
======== ==== ======== ==== ======= =====
- - ------------------------------------------------------------------------------------------------------------------------------


ADVANCED MICRO DEVICES, INC. 19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

No provision has been made for income taxes on approximately $231.5 million of
cumulative undistributed earnings of certain foreign subsidiaries because it is
the company's intention to permanently invest such earnings. If such earnings
were distributed, additional taxes of $81.0 million would accrue.

The company's Far East assembly and test plants in Singapore and Thailand
are operated under various tax holidays which expire in whole or in part during
1996 and 1998. Possible extensions of the holiday period, as well as other tax
incentives, are anticipated to result in minimal tax liabilities in these
countries through 1998. The net impact of these tax holidays was an increase of
net income of approximately $5.2 million ($.05 per share) in 1994.

8. DEBT

The company has certain debt agreements that contain provisions regarding
restrictions on cash dividends, maintenance of specified working capital and
net worth levels, and specific financial ratio requirements. At December 25,
1994, the company was in compliance with all restrictive covenants of such
debt agreements and all retained earnings were restricted as to payments of
cash dividends on common stock.

Significant elements of uncommitted, unsecured revolving lines of credit
are:



- - -------------------------------------------------------------------------------------------------------------
(Thousands except percent) 1994 1993 1992
------------------------------------

Total lines of credit $378,182 $188,200 $100,946
Portion of lines of credit available to foreign subsidiaries 128,182 83,200 100,946
Amounts outstanding at year-end:
Short-term 32,459 30,994 40,659
Short-term borrowings:
Average daily borrowings 33,449 35,783 45,381
Maximum amount outstanding at any month-end 35,384 38,009 52,026
Weighted monthly average interest rate 4.32% 5.81% 7.84%
Average interest rate on amounts outstanding at year-end 4.42% 4.54% 6.94%
- - -------------------------------------------------------------------------------------------------------------


Interest on foreign and short-term domestic borrowings is negotiated at the
time of the borrowing.

On January 5, 1995, the company obtained a $150 million single term four-
year loan with a consortium of eight commercial banks. The loan has a variable
interest rate starting at 8.06 percent and requires quarterly interest payments
with the principal to be paid at the end of the term in 1998.

Information with respect to the company's long-term debt and capital lease
obligations at year-end is:



- - ------------------------------------------------------------------------------------------------------
(Thousands) 1994 1993
----------------------

6.88% promissory notes with principal and interest payable
annually through January 2000, secured by a partnership interest $11,946 $12,920
9.88% mortgage with principal and interest payable in monthly
installments through April 2007 2,382 2,577
Obligations under capital leases 82,714 76,392
Obligations secured by equipment 6,482 7,997
Other 123 823
-------- --------
103,647 100,709
Less: current portion (27,895) (21,205)
-------- --------
Long-term debt and capital lease obligations, less current portion $75,752 $79,504
======== ========
- - ------------------------------------------------------------------------------------------------------


20 ADVANCED MICRO DEVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For each of the next five years and beyond, long-term debt and capital lease
obligations are:



- - -------------------------------------------------------------------
Long-term
Debt Capital
(Thousands) (Principal only) Leases
---------------------------

1995 $ 3,396 $27,600
1996 3,646 21,727
1997 3,802 21,015
1998 4,033 15,447
1999 2,326 2,177
Beyond 1999 3,730 -
-------- --------
Total 20,933 87,966
Less: Amount representing interest - 5,252
-------- --------
Total at present value $20,933 $82,714
======== ========
- - -------------------------------------------------------------------


Obligations under the lease agreements are collateralized by the assets
leased. Total assets under lease were approximately $131.3 million and $97.7
million at December 25, 1994 and December 26, 1993, respectively. Accumulated
amortization of these leased assets was approximately $60.2 million and $27.1
million at December 25, 1994 and December 26, 1993, respectively.

9. INTEREST INCOME AND OTHER, NET



- - --------------------------------------------------------------------
(Thousands) 1994 1993 1992
------- ------- -------

Interest income $22,456 $15,990 $16,571
Other income (loss) (6,197) 500 2,342
------- ------- -------
$16,259 $16,490 $18,913
======= ======= =======
- - --------------------------------------------------------------------


In 1994, other income (loss) consisted of primarily the net $33 million
settlement cost related to the class action lawsuits and stockholder's
derivative action offset by an $18 million gain resulting from an award of
damages in the arbitration proceedings with Intel Corporation. Also included
in other income (loss) for all years presented is the net gain (loss) on the
sale of assets.

10. INTEREST EXPENSE



- - ----------------------------------------------------------------------------
(Thousands) 1994 1993 1992
------------------------------------

Interest expense $10,138 $9,994 $23,253
Interest capitalized (8,294) (7,084) (6,026)
------- ------ -------
$ 1,844 $2,910 $17,227
======= ====== =======
- - ----------------------------------------------------------------------------


11. FOREIGN AND DOMESTIC OPERATIONS

The company is currently engaged in a single line of business: The design,
development, manufacture, and sale of complex monolithic integrated circuits
for use by manufacturers of a broad range of electronic equipment and
systems.

Operations outside the United States include both manufacturing and sales.
Manufacturing subsidiaries are located in Malaysia, Singapore, Thailand, and the
United Kingdom. Sales subsidiaries are in Europe and Asia.

The following is a summary of operations by entities within geographic
areas for the three years ended December 25, 1994:


- - ----------------------------------------------------------------------------------------------------
(Thousands) 1994 1993 1992
---------------------------------------------------------

Sales to unaffiliated
customers:
United States $1,524,050 $1,174,410 $1,106,245
Europe 483,632 343,600 279,430
Asia 126,977 130,270 128,814
---------- ---------- ----------
$2,134,659 $1,648,280 $1,514,489
========== ========== ==========
Transfers between
geographic areas
(eliminated in
consolidation):
United States $ 563,303 $ 444,378 $ 360,844
Asia 323,050 277,496 300,773
---------- ---------- ----------
$ 886,353 $ 721,874 $ 661,617
========== ========== ==========
Operating income:
United States $ 467,131 $ 265,676 $ 235,802
Europe 15,860 8,376 5,165
Asia 30,148 31,001 28,940
Eliminations - - 38
---------- ---------- ----------
$ 513,139 $ 305,053 $ 269,945
========== ========== ==========
Identifiable assets:
United States $2,090,080 $1,647,477 $1,193,543
Europe 122,316 90,582 71,510
Asia 394,474 362,108 311,481
Eliminations (161,168) (170,936) (128,439)
---------- ---------- ----------
$2,445,702 $1,929,231 $1,448,095
========== ========== ==========
U.S. export sales:
Asia $ 436,120 $ 314,268 $ 360,357
Europe 117,811 109,226 99,635
---------- ---------- ----------
$ 553,931 $ 423,494 $ 459,992
========== ========== ==========
- - ----------------------------------------------------------------------------------------------------


ADVANCED MICRO DEVICES, INC. 21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sales to unaffiliated customers are based on the company location. Transfers
between geographic areas consist of products and services that are sold at
amounts generally above cost and are consistent with governing tax regulations.
Operating income is total sales less operating expenses. Identifiable assets are
those assets used in each geographic area. Export sales are United States
foreign direct sales to unaffiliated customers primarily in Europe and Asia.

12. EMPLOYEE BENEFIT PLANS

Stock option plans. The company has several stock option plans under which key
employees have been granted incentive (ISOs) and nonqualified (NSOs) stock
options to purchase the company's common stock. Generally, options are
exercisable within four years from the date of grant and expire five to ten
years after the date of grant. ISOs granted under the plans have exercise prices
of not less than 100 percent of the fair market value of the common stock at the
date of grant. Exercise prices of NSOs may not be less than 50 percent of the
fair market value of the common stock at the date of grant. At December 25,
1994, 2,795 employees were eligible and participating in the plans.

The following is a summary of stock option exercises.



- - ------------------------------------------------------------------------------
(Thousands) 1994 1993 1992
---------------------------------

Aggregate exercise price $10,149 $14,029 $13,803
Options exercised 1,589 2,749 3,119
- - ------------------------------------------------------------------------------


A summary of the stock option plans at December 25, 1994 is shown below.



- - --------------------------------------------------------------------------------
(Thousands except per share amounts)

Options:
Outstanding at beginning of year 10,961
Granted 2,789
Canceled (242)
Exercised (1,589)
--------
Outstanding at end of year 11,919
========
Exercisable at beginning of year 4,852
Exercisable at end of year 5,878
Available for grant at beginning of year 963
Available for grant at end of year 2,960
Aggregate exercise price of options outstanding
at end of year $193,000
Average exercise price of options outstanding
at end of year $ 16.19
- - --------------------------------------------------------------------------------


Stock appreciation rights plans. The company maintains three stock
appreciation rights plans under which stock appreciation rights (SARs) either
have been or may be granted to key employees. The number of SARs exercised
plus common stock issued under the stock option plans may not exceed the
number of shares authorized under the stock option plans. SARs may be granted
in tandem with outstanding stock options, in tandem with future stock option
grants or independently of any stock options. Generally, the terms of SARs
granted under the plans are similar to those of options granted under the
stock option plans, including exercise prices, exercise dates and expiration
dates. To date, the company has granted only limited SARs, which become
exercisable only in the event of certain changes in control of the company.

Stock purchase plan. The company has a stock purchase plan that allows
participating employees to purchase, through payroll deductions, shares of
the company's common stock at 85 percent of the fair market value at
specified dates. At December 25, 1994, 6,038 employees were eligible to
participate in the plan and 948,778 common shares remained available for
issuance under the plan. A summary of stock purchased under the plan is shown
below.



- - ------------------------------------------------------------------------------
(Thousands except employee
participants) 1994 1993 1992
-------------------------------

Aggregate purchase price $8,115 $6,413 $4,614
Shares purchased 412 387 483
Employee participants 1,941 1,684 1,349
- - ------------------------------------------------------------------------------


Profit sharing program. The company has a profit sharing program to which the
Board of Directors has authorized semiannual contributions. Profit sharing
contributions were $57.0 million in 1994, $33.9 million in 1993 and $30.0
million in 1992.

Retirement savings plan. The company has a retirement savings plan, commonly
known as a 401(k) plan, that allows participating United States employees to
contribute from 1 percent to 15 percent of their pre-tax salary subject to
I.R.S. limits. The company makes a matching contribution calculated at 50 cents
on each dollar of the first 3 percent of participant contributions, to a
maximum of 1.5 percent of eligible compensation. The company's contributions
to the 401(k) plan were $3.7 million, $3.2 million and $2.7 million for 1994,
1993 and 1992, respectively. There are four investment funds in which each
employee may invest contributions in increments of 10 percent.

22 ADVANCED MICRO DEVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted stock award plan. The company established the 1987 restricted
stock award plan under which up to two million shares of common stock may be
issued to employees, subject to terms and conditions determined at the
discretion of the Board of Directors. The company entered into agreements to
issue 180,000 and 19,000 shares in 1994 and 1992, respectively. To date,
agreements covering 210,212 shares have been canceled without issuance and
1,142,964 shares have been issued pursuant to prior agreements. At December 25,
1994, agreements covering 322,000 shares were outstanding under the plan and
535,036 shares remained available for future awards. Outstanding awards vest
under varying terms within five years.

- - --------------------------------------------------------------------------------

13. COMMITMENTS

The company leases certain of its facilities under agreements which expire at
various dates through 2001. The company also leases certain of its
manufacturing and office equipment for terms ranging from three to six years.
Rent expense was $31.9 million, $31.9 million and $29.4 million in 1994, 1993
and 1992, respectively.

For each of the next five years and beyond, noncancelable long-term
operating leases obligations and commitments to purchase manufacturing supplies
and services are as follows:



- - --------------------------------------------------------------------------------
Operating Purchase
(Thousands) Leases Commitments
----------------------------

1995 $22,296 $ 6,641
1996 19,187 6,549
1997 15,586 6,649
1998 12,752 6,489
1999 11,559 6,068
Beyond 1999 10,856 25,197
- - --------------------------------------------------------------------------------


The operating lease of the company's corporate sales and marketing facility
expires in December 1995. The company has the option of extending the lease
agreement or purchasing the building for $40 million. The company may also
consider alternative financing arrangements.

At December 25, 1994, the company had commitments of approximately $230
million for the construction or acquisition of additional property, plant, and
equipment. As of December 25, 1994, the company also had commitments to make
cash investments in FASL amounting to approximately $20 million in 1995.

14. CONTINGENCIES

I. AMD/Intel Litigations.

On January 11, 1995, the company and Intel Corporation reached an agreement to
settle all previously outstanding legal disputes between the two companies. The
major terms of the settlement are: (1) AMD will have a fully paid-up,
nonexclusive, world-wide, royalty-free, perpetual license to copy and distribute
the microcode and control code in the Intel287(TM), Intel386(TM) and
Intel486(TM) microprocessor product families. (2) AMD agreed that it has no
right to copy any other Intel microcode including the Pentium(TM) Processor, the
P6 microcode and the 486 ICE (in-circuit emulation) microcode. (3) The companies
agreed to negotiate a new patent cross-license agreement to become effective
January 1, 1996. (4) AMD agreed to pay Intel $58 million in settlement of claims
for past damages related to AMD's distribution of Am486 microprocessors
containing Intel's 486 ICE microcode. As ordered in a 1992 arbitration between
the companies, Intel will pay AMD approximately $18 million in damages (which
includes interest) awarded by the arbitrator for breach of contract and will not
contest certain rights granted AMD in the arbitration. The company recorded both
the ICE case damages and the arbitration award in 1994. (5) Intel and AMD will
drop all cases against each other, including appeals, currently pending in the
courts. (6) AMD will have the right to use foundries for Am486 products
containing Intel microcode for up to 20 percent of annual total unit shipments
of Am486 microprocessors. (7) AMD and its customers will receive a license for
Intel's "Crawford `338" patent, covering memory management. (8) The two
companies agreed not to initiate legal action against one another for any
activity occurring prior to January 6, 1995.

II. Shareholders and Securities Class Actions.

During 1994, the company reached an agreement to settle the securities class
action lawsuits and stockholder's derivative action. The net cost of the
settlements was approximately $33 million.

III. SEC Investigation.

The Securities and Exchange Commission (SEC) has notified the company that it is
conducting an informal investigation of the company concerning the company's
disclosures relating to the development of microcode for one of its Am486
products. The company is cooperating fully with the SEC.

IV. Environmental Matters.

A. Clean Up Orders. Since 1981, the company has discovered, investigated and
begun remediation of three sites where releases from underground chemical tanks
at its facilities in Santa Clara County, California adversely affected the
groundwater. The chemicals released into the groundwater were commonly in use in
the semiconductor

ADVANCED MICRO DEVICES, INC. 23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

industry in the wafer fabrication process prior to 1979. At least one of the
released chemicals (which is no longer used by the company) has been identified
as a probable carcinogen.

In 1991, the company received four Final Site Clean-up Requirements Orders
from the California Regional Water Quality Control Board, San Francisco Bay
Region ("RWQCB") relating to the three sites. The orders named the company as
well as TRW Microwave, Inc., and Philips Semiconductor, (formerly Signetics
Corporation) in various combinations and degrees of responsibility.

A notice dated October 3, 1994 was received by the company from the
Department of Ecology of the State of Washington indicating that the Department
had determined the corporation to be a potentially liable person for the release
of hazardous substances on a site located in Yakima, Washington. The company is
currently investigating this claim.

The company has not yet determined to what extent the costs of any related
remedial actions will be covered by insurance. The three sites in Santa Clara
County are on the National Priorities List (Superfund). If the company fails to
satisfy federal compliance requirements or inadequately performs the compliance
measures, the government (a) can bring an action to enforce compliance, or (b)
can undertake the desired response actions itself and later bring an action to
recover its costs, and penalties, which is up to three times the costs of clean-
up activities, if appropriate. Certain class actions related to this matter have
been settled or the statute of limitations has been tolled. It is expected that
the foregoing environmental matters or any related litigation will not have a
material adverse effect on the financial condition or results of operations of
the company.

V. Other matters.

The company is a defendant or plaintiff in various other actions which 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
financial condition or results of operations of the company.

15. SHELF REGISTRATION STATEMENT

On May 25, 1994, the Securities and Exchange Commission declared effective the
company's shelf registration statement covering up to $400 million of its
securities, which may be either debt securities, preferred stock, depositary
shares representing fractions of shares of preferred stock, common stock,
warrants to purchase common stock, or any combination of the foregoing which the
company may offer from time to time in the future. The nature and terms of the
securities will be established at the time of their sale. The company may offer
the securities through underwriters to be named in the future, through agents or
otherwise. The net proceeds of any offering will be used for general corporate
purposes, which may include the reduction of outstanding indebtedness, working
capital increases, and capital expenditures. To date, the company has not
offered or sold any securities registered under the $400 million registration
statement.

24 ADVANCED MICRO DEVICES, INC.

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders Advanced Micro Devices, Inc.

We have audited the accompanying consolidated balance sheets of Advanced
Micro Devices, Inc. at December 25, 1994 and December 26, 1993 and the
related consolidated statements of income and cash flows for each of the
three years in the period ended December 25, 1994. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Advanced
Micro Devices, Inc. at December 25, 1994 and December 26, 1993, and the
consolidated results of its operations and its cash flows for each of the
three years in the period December 25, 1994, in conformity with generally
accepted accounting principles.

/s/ Ernst & Young LLP

San Jose, California
January 5, 1995, except for the first paragraph of Note 14, as to which the date
is January 11, 1995; the fourth paragraph of Note 5, as to which the date is
February 10, 1995; and the fourth paragraph of Note 6, as to which the date is
February 16, 1995.


ADVANCED MICRO DEVICES, INC. 25

SUPPLEMENTARY FINANCIAL DATA



- - -----------------------------------------------------------------------------------------------------------------------------------
1994 and 1993 by quarter (unaudited) Dec. 25, Sept. 25, June 26, Mar. 27, Dec. 26, Sept. 26, June 27, Mar. 28,
(Thousands except per share amounts) 1994 1994 1994 1994 1993 1993 1993 1993
--------------------------------------------------------------------------------------------

Net sales $545,168 $543,114 $533,297 $513,080 $413,404 $418,351 $409,092 $407,433
Expenses:
Cost of sales 263,837 252,409 235,623 230,437 208,552 199,999 186,931 194,082
Research and development 76,115 67,759 67,889 68,221 66,747 64,905 69,323 61,827
Marketing, general, and
administrative 87,236 87,369 91,731 92,894 83,148 71,979 67,253 68,481
-------- -------- -------- -------- -------- -------- -------- --------
427,188 407,537 395,243 391,552 358,447 336,883 323,507 324,390
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 117,980 135,577 138,054 121,528 54,957 81,468 85,585 83,043

Litigation settlement (58,000) - - - - - - -
Interest income and other, net 5,317 394 6,366 4,182 4,647 4,413 4,043 3,387
Interest expense (1) (205) (899) (739) (1,391) (346) (91) (1,082)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes
and equity in joint venture 65,296 135,766 143,521 124,971 58,213 85,535 89,537 85,348
Provision for income taxes 21,548 44,803 47,362 39,990 16,300 23,949 25,072 23,897
-------- -------- -------- -------- -------- -------- -------- --------
Income before equity in
joint venture 43,748 90,963 96,159 84,981 41,913 61,586 64,465 61,451
Equity in net income (loss) of
joint venture (2,989) (4,277) (2,925) (394) (274) (248) (112) -
-------- -------- -------- -------- -------- -------- -------- --------
Net income 40,759 86,686 93,234 84,587 41,639 61,338 64,353 61,451

Preferred stock dividends 2,588 2,587 2,587 2,588 2,588 2,587 2,588 2,587
-------- -------- -------- -------- -------- -------- -------- --------
Net income applicable to
common stockholders $ 38,171 $ 84,099 $ 90,647 $ 81,999 $ 39,051 $ 58,751 $ 61,765 $ 58,864
======== ======== ======== ======== ======== ======== ======== ========

Net income per common share
-Primary $ .39 $ .86 $ .93 $ .85 $ .41 $ .61 $ .65 $ .63
======== ======== ======== ======== ======== ======== ======== ========
-Fully diluted $ .39 $ .83 $ .89 $ .82 $ .41 $ .60 $ .63 $ .61
======== ======== ======== ======== ======== ======== ======== ========
Shares used in per share
calculation -Primary 98,636 97,778 97,394 96,233 95,895 95,706 95,079 93,751
======== ======== ======== ======== ======== ======== ======== ========
-Fully diluted 105,490 104,872 104,249 103,670 102,751 102,743 101,937 100,820
======== ======== ======== ======== ======== ======== ======== ========
Common stock
market price range
-High $ 30.50 $ 31.00 $ 31.75 $ 31.75 $ 30.25 $ 32.63 $ 32.88 $ 24.50
-Low $ 22.25 $ 24.00 $ 22.63 $ 16.75 $ 17.00 $ 21.50 $ 20.38 $ 17.50
- - -----------------------------------------------------------------------------------------------------------------------------------


Advanced Micro Devices, Inc.'s common stock (symbol AMD) is listed on the New
York Stock Exchange. The company has never paid cash dividends on common stock
and has no present plans to do so. The number of stockholders of record at
January 31, 1995 was 9,465.


26 ADVANCED MICRO DEVICES, INC.


FINANCIAL SUMMARY



- - ---------------------------------------------------------------------------------------------------------------------------------
Five years ended December 25, 1994
(Thousands except per share amounts) 1994 1993 1992 1991 1990
------------------------------------------------------------------------------

Net sales $2,134,659 $1,648,280 $1,514,489 $1,226,649 $ 1,059,242
Expenses:
Cost of sales 982,306 789,564 746,486 658,824 678,507
Research and development 279,984 262,802 227,860 213,765 203,651
Marketing, general, and administrative 359,230 290,861 270,198 244,900 228,204
---------- ---------- ---------- ---------- -----------
1,621,520 1,343,227 1,244,544 1,117,489 1,110,362
---------- ---------- ---------- ---------- -----------
Operating income (loss) 513,139 305,053 269,945 109,160 (51,120)
Litigation settlement (58,000) - - - (27,738)
Interest income and other, net 16,259 16,490 18,913 57,007 33,588
Interest expense (1,844) (2,910) (17,227) (20,880) (8,282)
---------- ---------- ---------- ---------- -----------
Income (loss) before income taxes and equity
in joint venture 469,554 318,633 271,631 145,287 (53,552)
Provision for income taxes 153,703 89,218 26,620 - -
---------- ---------- ---------- ---------- -----------
Income (loss) before equity in
joint venture 315,851 229,415 245,011 145,287 (53,552)
Equity in net income (loss) of joint venture (10,585) (634) - - -
---------- ---------- ---------- ---------- -----------
Net income (loss) 305,266 228,781 245,011 145,287 (53,552)

Preferred stock dividends 10,350 10,350 10,350 10,350 10,350
---------- ---------- ---------- ---------- -----------
Net income (loss) applicable to common
stockholders $ 294,916 $ 218,431 $ 234,661 $ 134,937 $ (63,902)
========== ========== ========== ========== ===========
Net income (loss) per common share
-Primary $ 3.02 $ 2.30 $ 2.57 $ 1.53 $ (.78)
========== ========== ========== ========== ===========
-Fully diluted $ 2.92 $ 2.24 $ 2.49 $ 1.52 $ (.78)
========== ========== ========== ========== ===========
Shares used in per share calculation
-Primary 97,510 95,108 91,383 88,196 81,878
========== ========== ========== ========== ===========
-Fully diluted 104,570 102,063 98,475 95,540 81,878
========== ========== ========== ========== ===========
Long-term debt and capital
lease obligations, less current portion $ 75,752 $ 79,504 $ 19,676 $ 42,039 $ 131,307
Total assets $2,445,702 $1,929,231 $1,448,095 $1,291,758 $1,111,692
- - ---------------------------------------------------------------------------------------------------------------------------------



ADVANCED MICRO DEVICES, INC. 27