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Spansion Inc. 2008 Proxy Statement and 2007 Annual Report on Form 10-K April 9, 2008 Dear Stockholder: On behalf of the Board of Directors, you are cordially invited to attend the 2008 Annual Meeting of Stockholders of Spansion Inc. to be held at the Four Seasons Hotel, 2050 University Avenue, East Palo Alto, California, on Tuesday, May 27, 2008 at 11:00 a.m., local time. The formal notice of the Annual Meeting appears on the following page. The attached Notice of Annual Meeting and Proxy Statement describe the matters that we expect to be acted upon at the Annual Meeting and provide additional information for stockholders. During the Annual Meeting, stockholders will hear a presentation by Spansion and have the opportunity to ask questions. Whether or not you plan to attend the Annual Meeting, it is important that your shares be represented. Please vote as soon as possible. You may vote via the Internet, by telephone or by mailing a completed proxy card as an alternative to voting in person at the Annual Meeting. Voting by any of these methods will ensure your representation at the Annual Meeting. We encourage you to sign up for electronic delivery of future proxy materials in order to conserve natural resources and help us reduce printing costs and postage fees. For more information, please see “Questions and Answers” in the Proxy Statement. We urge you to carefully review the proxy materials and to vote FOR the director nominees and FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the current fiscal year. We look forward to seeing you at the Annual Meeting. /s/ Dr. Bertrand F. Cambou Dr. Bertrand F. Cambou President and Chief Executive Officer SPANSION INC. 915 DeGUIGNE DRIVE P.O. BOX 3453 SUNNYVALE, CALIFORNIA 94088 NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS We will hold the 2008 Annual Meeting of Stockholders of Spansion Inc. at the Four Seasons Hotel, 2050 University Avenue, East Palo Alto, California, on Tuesday, May 27, 2008. The meeting will start at 11:00 a.m. local time. At the Annual Meeting, our stockholders will be asked to: 1. Elect two Class A directors to serve for a three-year term expiring at the 2011 annual meeting of stockholders; 2. Elect one Class C director to serve for a three-year term expiring at the 2011 annual meeting of stockholders; 3. Ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the current fiscal year; and 4. Transact any other business that properly comes before the meeting and any postponement or adjournment of the Annual Meeting. Only record holders of Common Stock at the close of business on March 31, 2008, the record date for the Annual Meeting, are entitled to receive notice of and to vote on all matters submitted to a vote of stockholders at the Annual Meeting. Only record holders of the Class A Common Stock are entitled to vote on the election of the Class A directors, and only record holders of Class C Common Stock are entitled to vote on the election of the Class C director. Record holders of all classes of Common Stock are entitled to vote as a single class on all other matters submitted to a vote of the stockholders. Stockholders are urged to read the attached proxy statement carefully for additional information concerning the matters to be considered at the Annual Meeting. All stockholders are cordially invited to attend the Annual Meeting in person. Stockholders who plan to attend in person are nevertheless requested to vote online, by telephone, or by signing and returning their proxy cards to make certain that their vote will be represented at the Annual Meeting should they unexpectedly be unable to attend. By Order of the Board of Directors, /s/ Robert C. Melendres ROBERT C. MELENDRES Corporate Secretary This proxy statement and accompanying proxy card are first being distributed on or about April 9, 2008. YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE URGE YOU TO VOTE ONLINE AT PROXYVOTE.COM, BY TELEPHONE, OR COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. VOTING ONLINE, BY TELEPHONE, OR BY RETURNING YOUR PROXY CARD WILL ENSURE THAT YOUR VOTE IS COUNTED IF YOU LATER DECIDE NOT TO ATTEND THE MEETING. TABLE OF CONTENTS QUESTIONS AND ANSWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 1—ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 DIRECTOR COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECURITY OWNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . 22 EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 EQUITY COMPENSATION PLAN INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ITEM 2—RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . . . 47 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 AUDIT COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ANNUAL REPORT AND FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SPANSION INC. PROXY STATEMENT 2008 ANNUAL MEETING OF STOCKHOLDERS QUESTIONS AND ANSWERS 1. 2. 3. 4. 5. Q: WHO IS SOLICITING MY VOTE? A: This proxy solicitation is being made by the Board of Directors of Spansion Inc. All expenses of soliciting proxies, including clerical work, printing and postage, will be paid by us. Our directors, officers and other employees may solicit proxies in person, by mail, by telephone, by facsimile, through the Internet or by other means of communication, but such persons will not be specifically compensated for such services. Q: WHEN WAS THIS PROXY STATEMENT MAILED TO STOCKHOLDERS? A: This proxy statement was first mailed to stockholders on or about April 9, 2008. Q: WHAT MAY I VOTE ON? A: Spansion stockholders may vote as follows: • Holders of Class A Common Stock may vote on the election of two director nominees, Dr. Bertrand F. Cambou and Mr. David E. Roberson, to serve as Class A Directors on our Board of Directors; • The holder of Class C Common Stock may vote on the election of one director nominee, Mr. Gilles Delfassy, to serve as Class C Director on our Board of Directors; and • Holders of Class A Common Stock and Class C Common Stock, voting together as a single class, may vote on the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the current fiscal year. Q: HOW DOES THE BOARD OF DIRECTORS RECOMMEND I VOTE ON THE PROPOSALS? A: The Board recommends that you vote: • FOR each of the director nominees; and • FOR ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the current fiscal year. Q: WHO IS ENTITLED TO VOTE? A: Stockholders as of the close of business on March 31, 2008, the Record Date, are entitled to vote on all items properly presented at the Annual Meeting for which they are eligible to vote. On the Record Date, 158,323,770 shares of our Class A Common Stock and one share of our Class C Common Stock were outstanding. Our Class B Common Stock and Class D Common Stock have been retired and no shares are outstanding. Consequently, the only stockholders entitled to vote are record holders of shares of Class A Common Stock and Class C Common Stock (together, the “Common Stock”). Every stockholder is entitled to one vote for each share of Common Stock held. A list of these stockholders will be available during ordinary business hours at the principal place of business of Spansion, located at 915 DeGuigne Drive, Sunnyvale, California 94085-3836, at least ten days before the Annual Meeting. The list of stockholders will also be available at the time and place of the Annual Meeting. 1 6. Q: HOW DO I VOTE BY MAIL? A: If you complete and properly sign each proxy card you receive and return it to us in the prepaid envelope, it will be voted by one of the individuals indicated on the card (your “proxy”) as you direct. If you return your signed proxy card but do not mark the boxes showing how you wish to vote, your shares will be voted FOR the election of the director nominees and FOR the ratification of the appointment of our auditors. If your shares are held by your broker, see question 12 below. 7. 8. 9. 10. 11. 12. Q: CAN I VOTE BY TELEPHONE OR ELECTRONICALLY? A: If you live in the United States or Canada, you may submit your proxy by following the Vote by Telephone instructions on the proxy card. If you have Internet access, you may submit your proxy from any location in the world by following the Vote by Internet instructions on the proxy card. Q: WHO CAN ATTEND THE ANNUAL MEETING? A: Only stockholders as of the Record Date, holders of proxies for those stockholders and other persons invited by us can attend. If your shares are held by your broker in “street name,” you must bring a letter from your broker or a copy of your proxy card to the meeting showing that you were the direct or indirect beneficial owner of the shares on the Record Date to attend the meeting. Q: CAN I VOTE AT THE MEETING? A: Yes. If you attend the meeting and plan to vote in person, we will provide you with a ballot at the meeting. If your shares are registered directly in your name, you are considered the stockholder of record and have the right to vote in person at the meeting. If your shares are held by your broker in “street name,” you are considered the beneficial owner of the shares held in street name. As a beneficial owner, if you wish to vote at the meeting, you must bring to the meeting a legal proxy from your broker showing that you were the beneficial owner of the shares on the Record Date and are authorized to vote those shares. Q: CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD OR AFTER I HAVE VOTED BY TELEPHONE OR ELECTRONICALLY? A: Yes. You may change your vote at any time before the voting concludes at the Annual Meeting by: • Sending in another proxy with a later date by mail, telephone or over the Internet; • Notifying our Corporate Secretary in writing before the Annual Meeting that you wish to revoke your proxy; or • Voting in person at the Annual Meeting. Q: HOW DO I VOTE MY SHARES IF THEY ARE HELD IN STREET NAME? A: If your shares are held by your broker in “street name,” you will receive a form from your broker seeking instruction as to how your shares should be voted. We urge you to complete this form and instruct your broker how to vote on your behalf. You can also vote in person at the Annual Meeting, but you must bring a legal proxy from the broker showing that you were the beneficial owner of your shares on the Record Date and are authorized to vote the shares. Q: WHAT IS BROKER “DISCRETIONARY” VOTING? A: If you hold your shares through a broker, your broker is permitted to vote your shares on routine “discretionary” items, such as the election of directors and ratification of our independent registered public accounting firm, if it has transmitted the proxy materials to you and has not received voting instructions from you on how to vote your shares before the deadline set by your broker. 2 13. 14. Q: WHAT IS A “QUORUM?” A: A “quorum” is a majority of the outstanding shares of Common Stock. They may be present at the Annual Meeting or represented by proxy. There must be a quorum for the Annual Meeting to be held. If you submit a properly executed proxy card, even if you abstain from voting, you will be considered part of the quorum. Broker “non-votes” are also considered a part of the quorum. Broker non-votes occur when a broker holding shares for a beneficial owner does not vote on a particular matter because the broker does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner. Q: HOW ARE MATTERS PASSED OR DEFEATED? A: The director nominees receiving the highest number of affirmative votes from holders of our Class A Common Stock and the affirmative vote of the holder of our Class C Common Stock will be elected as Class A directors and a Class C director, respectively. A properly executed proxy marked “WITHHOLD AUTHORITY” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, although it will be counted for purposes of determining whether there is a quorum. Ratification of the appointment of our independent registered public accounting firm must receive affirmative votes from more than 50 percent of the shares of Common Stock that are present in person or represented by a proxy and entitled to vote on that proposal at the Annual Meeting. In tabulating the voting results for any particular proposal, shares that constitute broker non-votes are not considered entitled to vote on that proposal. However, abstentions and broker non-votes will be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business. As a result, abstentions will have the same effect as negative votes and broker non-votes are not counted for purposes of determining whether stockholder approval of the matter has been obtained. 15. 16. 17. 18. Q: WHO WILL COUNT THE VOTES? A: Votes will be tabulated by Computershare Trust Company, N.A. Q: HOW WILL VOTING ON ANY BUSINESS NOT DESCRIBED IN THE NOTICE OF ANNUAL MEETING BE CONDUCTED? A: We do not know of any business to be considered at the Annual Meeting other than the proposals described in this proxy statement. If any other business is presented at the Annual Meeting, your signed proxy card gives authority to Dr. Bertrand F. Cambou, our President and Chief Executive Officer, and Mr. Robert C. Melendres, our Executive Vice President, Business Development, Chief Legal Officer and Corporate Secretary, to vote on such matters at their discretion. Q: HOW CAN I OBTAIN ELECTRONIC COPIES OF THE PROXY MATERIALS FOR THE 2008 ANNUAL MEETING? A: This proxy statement and Spansion’s Annual Report on Form 10-K for Fiscal 2007 are available electronically at the Investor Relations page of our website at investor.spansion.com/ 2008_Proxy_Statement. Q: HOW CAN I ELECT TO RECEIVE FUTURE PROXY MATERIALS ELECTRONICALLY? A: We strongly encourage you to elect to receive future proxy materials electronically in order to conserve natural resources and to help us reduce printing costs and postage fees. With electronic delivery, you will be notified via e-mail as soon as the proxy materials are available on the Internet, and you can submit your votes online. To sign up for electronic delivery: • Go to our website at investor.spansion.com/2008_Proxy_Statement; 3 • Click on “Electronic Proxy Statement;” and • Follow the directions provided to complete your enrollment. Once you enroll for electronic delivery, you will receive proxy materials electronically as long as your account remains active or until you cancel your enrollment. 19. Q: WHEN ARE THE STOCKHOLDER PROPOSALS FOR THE 2009 ANNUAL MEETING DUE? A: In accordance with the rules of the Securities and Exchange Commission, in order for stockholder proposals to be considered for inclusion in the proxy statement for the 2009 Annual Meeting, they must be submitted in writing to our Corporate Secretary, Spansion Inc., 915 DeGuigne Drive, P.O. Box 3453, Sunnyvale, California 94088 on or before December 10, 2008. In addition, our bylaws provide that for directors to be nominated or other proposals to be properly presented at a stockholders meeting, an additional notice of any nomination or proposal must be received by us between February 26, 2009 and March 28, 2009. However, if our 2009 Annual Meeting is not within 30 days of May 27, 2009, to be timely, the notice by the stockholder must be received by our Corporate Secretary not later than the close of business on the tenth day following the day on which the first public announcement of the date of the Annual Meeting was made or the notice of the meeting was mailed, whichever occurs first. More information on our bylaws and a description of the information that must be included in the stockholder notice is included in this proxy statement beginning on page 8 under the heading “Consideration of Stockholder Nominees for Director.” IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2008 ANNUAL STOCKHOLDERS MEETING TO BE HELD ON MAY 27, 2008. The proxy statement to security holders is available at investor.spansion.com/2008_Proxy_Statement. 4 ITEM 1—ELECTION OF DIRECTORS General Our Board of Directors currently consists of nine directors. Our Certificate of Incorporation provides that the Board of Directors consists of three classes of directors, each serving staggered three-year terms. At each annual meeting of stockholders, directors will be elected for a term of three years to succeed those directors whose terms are expiring. Our Certificate of Incorporation also provides that, subject to each holder’s aggregate ownership interest in Spansion, the holders of Class C Common Stock, voting together as a separate class, are entitled to vote for one director to the Board (the “Class C Director”). As the sole holder of our Class C Common Stock, Fujitsu Microelectronics Limited, a wholly owned subsidiary of Fujitsu Limited, has the right to elect the Class C Director. The holders of Class A Common Stock, voting together as a separate class, are entitled to vote for all other directors to the Board (the “Class A Directors”). Classified Board Our Board of Directors is currently composed of the following classes of directors: Class Expiration Member Class I 2009 David K. Chao (Class A Director) Robert L. Edwards (Class A Director) Donald L. Lucas (Class A Director) Class II 2010 Boaz Eitan (Class A Director) Patti S. Hart (Class A Director) John M. Stich (Class A Director) Class III 2008 Bertrand F. Cambou (Class A Director) Gilles Delfassy (Class C Director) David E. Roberson (Class A Director) Election of Class III Directors At the Annual Meeting, three directors will be elected for a three-year term, which expires at our 2011 Annual Meeting of Stockholders, until their successors are duly elected and qualified in accordance with our bylaws. Two of the nominees, Dr. Cambou and Mr. Roberson, are presently member of our Board of Directors and serve as Class A Directors. Mr. Delfassy, who is also a nominee and presently a member of our Board of Directors, serves as a Class C Director. Upon the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors has nominated Dr. Cambou, Mr. Delfassy and Mr. Roberson for re-election as Class III directors. See “Nominees” below. If Dr. Cambou, Mr. Delfassy or Mr. Roberson should be unable or decline to serve at the time of the Annual Meeting, the persons named as proxies on the proxy card will vote for such substitute nominee(s) as our Board of Directors recommends, or vote to allow the vacancy created thereby to remain open until filled by our Board of Directors. The Board of Directors has no reason to believe that the nominees will be unable or decline to serve as directors if elected. The Board of Directors recommends that the holders of Class A Common Stock vote in favor of the election of Dr. Cambou and Mr. Roberson as Class A Directors and that the holder of Class C Common Stock vote in favor of the election of Mr. Delfassy as a Class C Director. Proxies received will be voted “FOR” the nominees named below, unless marked to the contrary. Nominees The following director nominees are standing for election by the holders of our Class A Common Stock: Bertrand F. Cambou, age 52, has served as our President and Chief Executive Officer since July 2003. From July 2003 until November 2005, he served as a member of Spansion LLC’s Board of Managers. Since November 5 2005, he has served as a Class A Director. Beginning in January 2002 until December 2005, he served as a vice president of Advanced Micro Devices, Inc. (AMD), first as group vice president of AMD’s Memory Group, and later as an executive vice president. Dr. Cambou was chief operating officer and co-president of Gemplus International S.A. from June 1999 to January 2002. Also during this time, he was a board member of Gemplus International S.A. and of Ingenico Ltd. Dr. Cambou’s career includes a 15-year tenure at Motorola Inc., where he held various management positions including senior vice president and general manager of the Networking and Computing System Group as well as chief technical officer of the Semiconductor Sector. Dr. Cambou received his engineering degree from Supelec, Paris, and his doctorate in electrical engineering from Paris XI University. He is the author of 15 U.S. patents. David E. Roberson, age 53, has served as a Class A Director since the consummation of our initial public offering in December 2005. Since May 2007, Mr. Roberson has served as senior vice president and general manager of the StorageWorks Division of Hewlett-Packard Company. Prior to that, he served as president and chief executive officer and as a member of the board of directors of Hitachi Data Systems from April 2006 until May 2007. From April 2004 until April 2006, Mr. Roberson served as president and chief operating officer of Hitachi Data Systems, and from April 2000 until April 2004 he served as its chief operating officer. Mr. Roberson received a bachelor’s degree in Social Ecology from the University of California, Irvine and a law degree from Golden Gate University School of Law in San Francisco, California. Mr. Roberson also studied financial management at Harvard Business School. The following director nominee is standing for election by the holder of our Class C Common Stock: Gilles Delfassy, age 52, has served as a Class C Director since September 2007. Until his retirement in January 2007, Mr. Delfassy served in various senior management positions at Texas Instruments Incorporated, which he joined in 1978, most recently as a senior vice president. Mr. Delfassy is also a member of the Board of Directors of Anadigics, Inc. Mr. Delfassy received an Engineering Diploma (equivalent to master’s of science in electrical engineering) at Ecole Nationale Superieure d’Electronique et d’ Automatique de Toulouse. He also graduated in Business Administration from Institute d’Administration des Entreprises de Paris. Other Directors The following six directors whose terms of office do not expire in 2008 will continue to serve after the Annual Meeting until such time as their respective terms of office expire and their respective successors are duly elected and qualified: David K. Chao, age 41, has served as a Class A Director since the consummation of our initial public offering in December 2005. Mr. Chao is a co-founder of DCM (formerly known as Doll Capital Management), a venture capital firm based in the Silicon Valley, and has been a general partner of DCM since 1996. Prior to founding DCM, Mr. Chao was a co-founder and member of the board of directors of Japan Communications, Inc. He also worked as a management consultant at McKinsey & Company and as a marketing manager at Apple Computer. Prior to these positions, he was an account executive for Recruit, a Japanese human resources, advertising and services company. Mr. Chao serves on the boards of numerous DCM portfolio companies, including 51job, Inc., where he has served since 2000. He is a management board member of the Stanford Graduate School of Business board of trustees and a member of The Thacher School board of trustees. Mr. Chao received a bachelor’s degree in economics and East Asian studies from Brown University and a master’s degree in business administration from Stanford University. Robert L. Edwards, age 52, has served as a Class A Director since December 2006. Since March 2004, Mr. Edwards has served as executive vice president and chief financial officer of Safeway, Inc. Prior to that, he served as executive vice president and chief financial officer of Maxtor Corporation from September 2003 until March 2004. Prior to joining Maxtor, Mr. Edwards was senior vice president, chief financial officer and chief administrative officer at Imation Corporation, where he was employed from 1998 to August 2003. He is also a 6 director of Casa Ley, in which Safeway has a 49% ownership interest. Mr. Edwards holds a bachelor’s degree in accounting and a master’s degree in business administration from Brigham Young University. Boaz Eitan, age 59, has served as a Class A Director and Executive Vice President and Chief Executive Officer, Saifun since March 2008. Dr. Eitan founded Saifun Semiconductors Ltd. (Saifun) in 1996 and served as its Chief Executive Officer and Chairman of the Board of Directors from 1996 to 2008, when Spansion acquired Saifun. From 1992 to 1997, Dr. Eitan managed the Israeli design center of WaferScale Integration Inc., which he established in 1992. From 1983 to 1992, Dr. Eitan held various positions at WaferScale Integration Inc., including manager of the Device Physics group, director of memory products and Vice President of Product and Technology Development. From 1981 to 1983, Dr. Eitan served as a physicist at Intel Corporation’s research and development center in Santa Clara, California. Dr. Eitan holds a Ph.D. and an M.Sc. in Applied Physics and a B.Sc. in Mathematics and Physics from the Hebrew University, Jerusalem. He is the inventor of Saifun’s NROM technology. Dr. Eitan is named as the inventor of over 85 issued U.S. patents, over 45 pending U.S. patent applications and a number of issued non-U.S. patents and pending non-U.S. patent applications. Patti S. Hart, age 52, has served as a Class A Director since the consummation of our initial public offering in December 2005. Ms. Hart most recently served as chairman and chief executive officer of Pinnacle Systems from March 2004 until August 2005. Prior to joining Pinnacle Systems in 2004, Ms. Hart was chairman and chief executive officer of Excite@Home from April 2001 until March 2002. Prior to joining Excite@Home in 2001, Ms. Hart served as chairman, president and chief executive officer of Telocity and as a member of Telocity’s board of directors from July 1999 through its sale to DirecTV in March 2001. From 1986 to 1999, Ms. Hart worked at Sprint Corporation, most recently as president and chief operations officer of Sprint’s Long Distance Division. Ms. Hart is also a member of the board of directors for Korn Ferry International, International Game Technology and LIN TV Corp., and is a former board member of Plantronics Inc., Vantive Corporation, EarthLink, Inc. and Premisys Corporation. Ms. Hart holds a bachelor’s degree in marketing and economics from Illinois State University. Donald L. Lucas, age 77, has served as Chairman of the Board of Directors and as a Class A Director since September 2007. Since 1967, Mr. Lucas has been actively engaged in venture capital activities as a private individual. He has been a director of Oracle Corporation since 1980 and serves as chairman of their executive committee. Mr. Lucas also currently serves as chairman of the board of directors of DexCom, Inc. and 51job, Inc., and as a director of Cadence Design Systems, Inc. and Vimicro Corp. Mr. Lucas received a bachelor’s degree from Stanford University and a master’s degree from the Stanford Graduate School of Business. John M. Stich, age 66, has served as a Class A Director since December 2006. He is the Honorary Consul General of Japan at Dallas. Previously, he spent 35 years at Texas Instruments, with his most recent position as chief marketing officer in Japan. He lived and worked for Texas Instruments in Asia for a total of 24 years where he held various additional management positions such as vice president of semiconductors for Texas Instruments Asia Ltd., managing director of Texas Instruments Hong Kong Ltd., and marketing director of Texas Instruments Taiwan Limited. Mr. Stich has been active in leading various industry associations, including serving as: governor of the American Chambers of Commerce in Japan and Hong Kong, and chairman of the Semiconductor Industry Association (Japan Chapter). Currently, he is a director of Stonestreet One, Inc. and Diodes Inc. In addition, Mr. Stich is a member of the Dallas/Taipei and Dallas/Sendai Sister City Committees, a member of the Advisory Council for Southern Methodist University’s Asian Studies Program, a director of the Japan America Society of Dallas/Fort Worth, Vice-Dean of the Consular Corps of Dallas/Fort Worth, and a member of the Pastoral Council of Prince of Peace church. Mr. Stich holds a bachelor’s degree in electrical engineering from Marquette University. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSED DIRECTOR NOMINEES LISTED ABOVE. 7 CORPORATE GOVERNANCE Principles of Corporate Governance The Board of Directors has adopted Principles of Corporate Governance to address significant corporate governance issues. The Principles of Corporate Governance provide a framework for our corporate governance matters and include topics such as Board and Board Committee composition, the role and functions of the Board, the responsibilities of various Board committees and Board evaluations. The Nominating and Corporate Governance Committee is responsible for reviewing and recommending any changes on the Principles of Corporate Governance to the Board. Director Independence The Board of Directors affirmatively determines the independence of each director and nominee for election as a director in accordance with the elements of independence set forth in the NASDAQ Stock Market listing standards. On March 12, 2008, the Board conducted a review of director independence. During this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and Spansion and our subsidiaries and affiliates, including those reported under “Certain Relationships and Related Transactions” on page 49. The Board also considered whether there were any transactions or relationships between directors or any member of their immediate families (or any entity on which a director or an immediate family member is an executive officer, general partner or significant equity holder) and members of Spansion’s executive team or their affiliates. The purpose of this review was to determine whether any transactions or relationships exist that are inconsistent with a determination of director independence. As part of this review, the Board of Directors considered: (i) the ownership interest that Mr. Chao’s firm, DCM, has in Vendavo, Inc., which provides software we purchased through an agreement with SAP Inc.; (ii) Mr. Delfassy’s service on the board of directors of Discretix Inc., which licenses software to us; (iii) Mr. Lucas’ service on the board of directors of Cadence Design Systems, Inc., which provides equipment and services to us; and (iv) Mr. Roberson’s employment with Hewlett-Packard Company, which is one of our customers. The Board determined that none of these relationships violate the elements of independence set forth in the NASDAQ Stock Market listing standards and, therefore, seven of the nine members of Spansion’s Board of Directors are independent directors. More specifically, the Board of Directors affirmatively determined that each of the following non-employee directors is independent and has no relationship with Spansion, except as a director and stockholder of Spansion: • • • David K. Chao Gilles Delfassy Robert L. Edwards • • Patti S. Hart Donald L. Lucas • • David E. Roberson John M. Stich In addition, the Board affirmatively determined that Dr. Cambou is not independent because he is the President and Chief Executive Officer of Spansion and that Dr. Eitan is not independent because he is Executive Vice President and Chief Executive Officer, Saifun. Dr. Eitan joined Spansion in March 2008, when we acquired Saifun Semiconductors Limited, which is a wholly owned subsidiary of Spansion. Nominations for Directors Process for Evaluating and Selecting Potential Director Candidates Our Nominating and Corporate Governance Committee is responsible for annually identifying and recommending to the Board of Directors the nominees to be selected by the Board for each annual meeting of stockholders (or special meeting of stockholders at which directors are to be elected) and recommending candidates to fill any vacancies on the Board (whether through the resignation of any director or through the increase in the number of directors by the Board). The Nominating and Corporate Governance Committee is also 8 responsible for periodically assessing and developing the appropriate criteria to be utilized in evaluating potential director nominees, and communicating such criteria to the Board. Minimum Qualifications for Director Nominees The Nominating and Corporate Governance Committee has established the following minimum criteria for evaluating prospective candidates to be selected by the Board: • Reputation for integrity, strong moral character and adherence to high ethical standards; • Holds or has held a generally recognized position of leadership in community or chosen field of endeavor, and has demonstrated high levels of accomplishment; • Demonstrated business acumen and experience, and ability to exercise sound business judgment and common sense in matters that relate to the current and long-term objectives of Spansion; • Ability to read and understand basic financial statements and other financial information pertaining to Spansion;. • Commitment to understand our business, industry and strategic objectives; • Commitment and ability to regularly attend and participate in meetings of the Board of Directors, Board committees and stockholders (taking into account the number of other company boards on which the candidate serves), and ability to generally fulfill all responsibilities as a director; • Willingness to represent and act in the interests of all stockholders of Spansion rather than the interests of a particular group; • Good health, and ability to serve; • For prospective non-employee directors, independence under Securities and Exchange Commission rules and the NASDAQ Stock Market listing standards, and the absence of any conflict of interest (whether due to a business or personal relationship) or legal impediment to, or restriction on, the nominee serving as a director; and • Willingness to accept the nomination to serve as a director of Spansion. Other Factors for Potential Consideration The Nominating and Corporate Governance Committee will also consider the following factors in connection with its evaluation of each prospective director nominee: • Whether the prospective director nominee will foster a diversity of skills and experiences; • Whether the prospective director nominee possesses the requisite education, training and experience to qualify as “financially literate” or as an “audit committee financial expert” under applicable Securities and Exchange Commission rules and the NASDAQ Stock Market listing standards; • For incumbent directors standing for re-election, the director’s performance during his or her term, including the number of meetings attended, level of participation, and overall contribution to Spansion; • The number of other company Boards on which the prospective director nominee serves; and • Whether the prospective director nominee will add to or complement the Board’s existing strengths. Process for Identifying, Evaluating and Recommending Director Nominees • The Nominating and Corporate Governance Committee initiates the process for identifying, evaluating and recommending prospective director nominees by preparing a list of potential candidates who, based on their biographical information and other information available to the Nominating and Corporate 9 Governance Committee, appear to meet the criteria specified above and who have specific qualities, skills or experience being sought (based on input from the Board). Outside Advisors. The Nominating and Corporate Governance Committee may engage a third-party search firm or other advisors to assist in identifying prospective director nominees. Stockholder Suggestions for Potential Nominees. The Nominating and Corporate Governance Committee will consider suggestions of prospective director nominees from stockholders. Stockholders may recommend individuals for consideration in accordance with the procedures set forth below in “Consideration of Stockholder Nominees for Director.” The Nominating and Corporate Governance Committee will evaluate a prospective director nominee suggested by any stockholder in the same manner and against the same criteria as any other prospective director nominee identified by the Nominating and Corporate Governance Committee from any other source. Nomination of Incumbent Directors. The re-nomination of existing directors should not be viewed as automatic, but should be based on continuing qualification under the criteria set forth above. For incumbent directors standing for re-election, the Nominating and Corporate Governance Committee will assess the incumbent director’s performance during his or her term, including the number of meetings attended; level of participation, and overall contribution to Spansion; composition of the Board at that time; and any changed circumstances affecting the individual director which may bear on his or her ability to continue to serve on the Board. Management Directors. The number of officers or employees of Spansion serving at any time on the Board should be limited such that at all times a majority of the directors is “independent” under applicable Securities and Exchange Commission rules and the NASDAQ Stock Market listing standards. • After reviewing appropriate biographical information and qualifications, first-time candidates will be interviewed by at least one member of the Nominating and Corporate Governance Committee and by the Chief Executive Officer. • Upon completion of the above procedures, the Nominating and Corporate Governance Committee shall determine the list of potential candidates to be recommended to the Board for nomination at the annual meeting. The Board of Directors will select the slate of nominees only from candidates identified, screened and approved by the Nominating and Corporate Governance Committee. Consideration of Stockholder Nominees for Director The policy of the Nominating and Corporate Governance Committee is to consider properly submitted stockholder nominations for candidates to serve on our Board. Pursuant to our bylaws, stockholders who wish to nominate persons for election to the Board of Directors at the 2009 annual meeting must be stockholders of record when they give us notice of such nomination, must be entitled to vote at the meeting and must comply with the notice provisions in our bylaws. A stockholder’s notice must be delivered to our Corporate Secretary or the Chair of the Nominating and Corporate Governance Committee not less than 60 nor more than 90 days before the anniversary date of the immediately preceding annual meeting. For our 2009 annual meeting, the notice must be delivered between February 26, 2009 and March 28, 2009. However, if our 2009 annual meeting is not within 30 days of May 27, 2009, the notice must be delivered no later than the close of business on the tenth day following the earlier of the day on which the first public announcement of the date of the Annual Meeting was made or the day the notice of the meeting is mailed. The stockholder’s notice must include the following information for the person proposed to be nominated: • Name, age, nationality, business and residence addresses; • Principal occupation and employment; 10 • The class and number of shares of stock owned beneficially and of record by the proposed nominee; • Any other information required to be disclosed in a proxy statement with respect to the proposed nominee; and • The proposed nominee’s written consent to being a nominee and to serving as a director if elected. The stockholder’s notice must also include the following information for the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made: • Names and addresses; • The number of shares of stock owned beneficially and of record by them; • A description of any arrangements or understandings between them and each proposed nominee and any other persons (including their names) pursuant to which the nominations are to be made; • A representation that they intend to appear in person or by proxy at the Annual Meeting to nominate the person named in the notice; • A representation as to whether they are part of a group that intends to deliver a proxy statement or solicit proxies in support of the nomination; and • Any other information that would be required to be included in a proxy statement. The Chair of the Annual Meeting will announce whether the procedures in the bylaws have been followed, and if not, declare that the nomination be disregarded. If the nomination is made in accordance with the procedures in our bylaws, the Nominating and Corporate Governance Committee will apply the same criteria in evaluating the nominee as it would any other director nominee candidate and will recommend to the Board whether or not the stockholder nominee should be nominated by the Board and included in our proxy statement. These criteria are described below in the description of the Nominating and Corporate Governance Committee on page 15. The nominee and nominating stockholder must be willing to provide any information reasonably requested by the Nominating and Corporate Governance Committee in connection with its evaluation. Communications with the Board or Non-Management Directors Stockholders who wish to communicate with Spansion’s Board of Directors or with non-management directors may send their communications in writing to our Corporate Secretary, Spansion Inc., 915 DeGuigne Drive, P.O. Box 3453, Sunnyvale, California 94088 or send an email to Corporate.Secretary@spansion.com. Spansion’s Corporate Secretary will forward these communications to our independent directors except for spam, junk mail, mass mailings, product complaints or inquiries, job inquiries, surveys, business solicitations or advertisements, or patently offensive or otherwise inappropriate material. Communications will not be forwarded to the independent directors unless the stockholder submitting the communication identifies himself or herself by name and sets out the number of shares of stock he or she owns beneficially or of record. Codes of Business Conduct and Ethics The Board of Directors has adopted a code of conduct, entitled “Code of Business Conduct,” which applies to all directors and employees and which was designed to help directors and employees resolve ethical and compliance issues encountered in the business environment. The Code of Business Conduct governs matters such as conflicts of interest, compliance with laws, confidentiality of company information, encouraging the reporting of any illegal or unethical behavior, fair dealing and use of company assets. The Board of Directors has also adopted a Code of Ethics for the Chief Executive Officer, the Chief Financial Officer, the Corporate Controller and All Other Senior Finance Executives. The Code of Ethics governs matters such as financial reporting, conflicts of interest and compliance with laws, rules, regulations and Spansion’s policies. 11 You can access Spansion’s Principles of Corporate Governance, Code of Business Conduct and Code of Ethics at the Investor Relations page of our website at www.spansion.com or by writing to us at Corporate Secretary, Spansion Inc., 915 DeGuigne Drive, P.O. Box 3453, Sunnyvale, California 94088, or emailing us at Corporate.Secretary@spansion.com. We will provide you with this information free of charge. Please note that information contained on our website is not incorporated by reference in, or considered to be a part of, this document. We will post on our website any amendment to the Code of Ethics, as well as any waivers of the Code of Ethics, that are required to be disclosed by the rules of the Securities and Exchange Commission or the NASDAQ Stock Market. 12 COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS The Board of Directors The Board of Directors has Audit, Compensation, Finance and Nominating and Corporate Governance Committees. The Strategy Committee was created in March 2007 and dissolved in March 2008. The members of these committees and their chairs are recommended by the Nominating and Corporate Governance Committee and then appointed by the Board. During the 2007 fiscal year, the Board of Directors held nine regularly scheduled and special meetings, the Audit Committee held thirteen regularly scheduled and special meetings, the Compensation Committee held five regularly scheduled and special meetings, the Finance Committee held three regularly scheduled and special meetings, the Nominating and Corporate Governance Committee held six regularly scheduled and special meetings, and the Strategy Committee held five regularly scheduled and special meetings. All directors attended at least 75 percent of the meetings of the Board of Directors and Board committees during the periods that he or she served in fiscal 2007, except for Dr. Hector de J. Ruiz, who resigned as Chairman of the Board on September 20, 2007. The independent directors hold regularly scheduled sessions without any members of Spansion’s management present. Four such sessions of the independent directors were held in fiscal 2007. Spansion’s directors are strongly encouraged to attend the Annual Meeting of Stockholders. All seven members of our Board of Directors attended the 2007 Annual Meeting of Stockholders. On March 16, 2007, the Board established the position of Lead Independent Director and, upon the recommendation of our Nominating and Corporate Governance Committee, designated Mr. David E. Roberson as Lead Independent Director. The general authority and responsibilities of the Lead Independent Director are established by the Board, and include presiding at all meetings of the Board when the Chairman is not present; serving as a liaison between the independent directors and the Chairman of the Board; evaluating and approving the information, agenda and meeting schedules sent to the Board; calling and chairing meetings of the independent directors; recommending to the Nominating and Corporate Governance Committee the membership of the Board committees and selection of committee chairpersons; recommending the retention of advisors and consultants who report directly to the Board; assisting in ensuring compliance with and implementation of the Board’s corporate governance principles; and being available for consultation and communication with stockholders. On September 20, 2007, upon the appointment of an independent Chairman of the Board of Directors, Mr. Roberson resigned from his position as Lead Independent Director. Audit Committee The Audit Committee, which has been established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, currently consists of Mr. Robert L. Edwards, as Chair, Mr. John M. Stich and Mr. Roberson, each of whom was determined by the Board of Directors to be financially literate and “independent” as such term is defined for Audit Committee members by the NASDAQ Stock Market listing standards. Mr. Roberson served as Chair of the Audit Committee until Mr. Edwards was appointed as Chair on March 16, 2007, Mr. David K. Chao served as a member of the Audit Committee until September 20, 2007 and Ms. Patti S. Hart served as a member of the Audit Committee until March 12, 2008. The Board of Directors has determined that Messrs. Edwards and Roberson are each an “audit committee financial expert” as defined under the rules of the Securities and Exchange Commission. The Audit Committee assists the Board with its oversight responsibilities regarding our accounting and financial reporting processes, the audit of our financial statements, the integrity of our financial statements, our internal accounting and financial controls, our compliance with legal and regulatory requirements, the independent registered public accounting firm’s qualifications and independence and the performance of our internal audit function and the independent registered public accounting firm. The Audit Committee is also directly responsible for the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm, which reports directly to the Audit Committee. The Audit Committee meets alone with our financial and legal personnel, our internal auditor and with our independent registered public 13 accounting firm, who have free access to the Audit Committee at any time. The director of our Internal Audit Department reports directly to the Chair of the Audit Committee, confers regularly with our Chief Financial Officer and serves a staff function for the Audit Committee. Compensation Committee The Compensation Committee consists of Ms. Hart, as Chair, and Mr. Gilles Delfassy and Mr. Roberson, each of whom was determined by the Board to be “independent.” Mr. Roberson served as a member of the Compensation Committee until March 16, 2007 and then was reappointed to the Compensation Committee on December 20, 2007. Messrs. Chao, Edwards and John M. Stich each served on the Compensation Committee until September 20, 2007. The Compensation Committee assists the Board with its oversight responsibilities regarding our compensation plans, policies and benefit programs. The Compensation Committee also assists the Board in discharging its responsibilities regarding oversight of the compensation of executive officers and directors, including by designing (in consultation with management or the Board), recommending to the Board for approval and evaluating our compensation plans, policies and programs for executive officers and directors. The Compensation Committee shall ensure that compensation programs are designed to encourage high performance, promote accountability and assure that employee interests are aligned with the interests of the Company’s stockholders. In fulfilling its responsibilities, the Compensation Committee may delegate any or all of its responsibilities to a subcommittee of the Compensation Committee, except for the adoption and approval of cash- and equity-based compensation plans, matters that involve executive compensation or matters where the Compensation Committee has determined such compensation is intended to comply with Section 162(m) of the Internal Revenue Code or is intended to be exempt from Section 16(b) under the Securities Exchange Act of 1934, as amended, pursuant to Rule 16b-3. The Compensation Committee approves all equity awards granted to executive officers and the annual equity awards granted to employees following Spansion’s annual performance evaluation process. The Compensation Committee has delegated to our Grant Committee, which consists of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, authority to approve stock option and restricted stock unit awards to non-executive officers, subject to established guidelines. The purpose of this delegation is to provide administrative flexibility to recognize new hires and promotions or achievements for employees below the level of executive officer. The Compensation Committee approves all equity awards granted to non-executive officers that are not within the guidelines established for the Grant Committee. The Compensation Committee also reviews all equity awards approved by the Grant Committee. The agendas for meetings of the Compensation Committee are determined by the Chair with the assistance of members of our Human Resources and Legal Departments. Compensation Committee meetings are attended by the Chief Executive Officer, the Chief Legal Officer, the Corporate Vice President, Human Resources and other members of management in the Human Resources and Legal Departments. The Compensation Committee also meets in executive sessions without any members of management present. The Chair reports the Compensation Committee’s decisions and recommendations on executive compensation to the Board of Directors. Finance Committee The Finance Committee consists of Mr. Donald L. Lucas, as Chair, and Messrs. Chao, Delfassy and Edwards. The Finance Committee assists the Board with its oversight responsibilities regarding financial matters, including by reviewing our corporate capital structure, material transactions and investments to assess their impact on our strategic plans and business operations. The Finance Committee also assists the Board in discharging its responsibilities regarding oversight of the development and implementation of Spansion’s business strategies. 14 Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee consists of Mr. Roberson, as Chair, Ms. Hart and Mr. Stich, each of whom was determined by the Board of Directors to be “independent.” Mr. Chao and Ms. Hart each served on the Nominating and Corporate Governance Committee until September 20, 2007, Mr. Chao served as Chair until Mr. Roberson was appointed as Chair on March 16, 2007 and Ms. Hart was reappointed on March 20, 2008. The Nominating and Corporate Governance Committee assists the Board with its oversight responsibilities regarding the identification of qualified candidates to become Board members, the selection of nominees for election as directors at the next Annual Meeting of Stockholders (or special meeting of stockholders at which directors are to be elected), the selection of candidates to fill any vacancies on the Board, the selection of Board members for each committee of the Board, the development and recommendation to the Board of a set of applicable corporate governance guidelines and principles and oversight of the evaluation of the Board. In seeking candidates to determine if they are qualified to become Board members, the Nominating and Corporate Governance Committee looks for the following attributes, which, among others, the Nominating and Corporate Governance Committee deems appropriate: personal and professional integrity, ethics and values; experience in corporate management, such as serving as an officer or former officer of a publicly held company; experience serving as a director of a privately or publicly held company; experience in our industry and with relevant social policy concerns; ability to make independent analytical inquiries; academic expertise in an area of our operations; and practical and mature business judgment. For a detailed description of the process for nomination of director candidates by stockholders, please see information under the heading “Consideration of Stockholder Nominees for Director” on page 10. The Nominating and Corporate Governance Committee will use the same standards to evaluate all director candidates, whether or not the candidates are proposed by stockholders. Strategy Committee The Strategy Committee, which had authority to monitor and review material strategic transactions, including any potential mergers, acquisitions, consolidations, joint ventures or similar transactions, and to make recommendations to the Board regarding such transactions, was established in March 2007 and dissolved in March 2008. Bylaws and Committee Charters You can access Spansion’s bylaws and the charters of our Audit, Compensation, Finance and Nominating and Corporate Governance Committees at the Investor Relations page of our website at www.spansion.com or by writing to us at Corporate Secretary, Spansion Inc., 915 DeGuigne Drive, P.O. Box 3453, Sunnyvale, California 94088, or emailing us at Corporate.Secretary@spansion.com. We will provide you with this information free of charge. Please note that information contained on our website is not incorporated by reference in, or considered to be a part of, this document. Compensation Committee Interlocks and Insider Participation The individuals who served as members of the Compensation Committee during fiscal 2007 were Ms. Hart and Messrs. Chao, Delfassy, Edwards, Roberson and Stich. No member of the Compensation Committee was at any time during fiscal 2007 or at any other time an officer or employee of Spansion, and no member had any relationship with Spansion requiring disclosure under Item 404 of Regulation S-K. None of our executive officers has served on the board of directors or compensation committee of any other entity that has or has had one or more executive officers who served as a member of the Board of Directors or the Compensation Committee during fiscal 2007. 15 DIRECTOR COMPENSATION Spansion uses a combination of cash and equity-based incentive compensation to attract and retain qualified candidates to serve on the Board of Directors. Our independent director compensation is determined by the Board of Directors acting upon the recommendation of the Compensation Committee. In setting director compensation, our Board of Directors considers, among other things, the significant amount of time that directors spend in fulfilling their duties, the skill-level required by directors and competitive market data provided by Hewitt Associates, an independent compensation consultant. Directors who are also employees of Spansion, or who are otherwise determined to not be independent, receive no additional compensation for service as a director. We may reimburse any of our directors and, in some circumstances, spouses who accompany directors, for travel, lodging and related expenses they incur in attending Board of Directors and Board committee meetings. Cash Compensation During fiscal 2007, our independent directors received fees for their services as set forth in the table below. Board retainer and meeting fees have not changed for fiscal 2008. All annual cash compensation is paid in quarterly installments, in advance. Annual Retainer (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000 Additional Annual Retainers Chairperson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Committee Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finance Committee Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominating and Corporate Governance Committee Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategy Committee Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lead Independent Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 $ 15,000 $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 30,000 Fees Per Board Meeting in Excess of Eight Board Meetings (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,000 Fees Per Committee Meeting in Excess of Twelve Committee Meetings (2) . . . . . . . . . . . . . . . . . . . . . $ 2,000 (1) All independent directors, including directors serving as Chairperson, receive this annual retainer. (2) If in any calendar year an independent director is required to and does attend (i) more than eight meetings of our Board of Directors, such director will receive $2,000 for each Board meeting attended in excess of eight, or (ii) more than twelve meetings of a specific Board committee on which he or she serves, such director will receive $2,000 per such Board committee meeting in excess of twelve. Equity-Based Incentive Compensation Each independent director received an initial stock option award exercisable for 20,000 shares of our Class A Common Stock and an initial restricted stock unit award of 20,000 units that convert upon vesting into 20,000 shares of our Class A Common Stock. These awards were made at the time of our initial public offering of our Class A Common Stock in December 2005 or, if later, upon the director’s appointment to our Board of Directors. In addition, an independent director who serves as Chairperson of the Board receives an additional initial restricted stock unit award of 10,000 units that convert upon vesting into 10,000 shares of our Class A Common Stock. For each year of continued service, independent directors receive an annual stock option award exercisable for 10,000 shares of our Class A Common Stock and an annual restricted stock unit award of 10,000 units that convert upon vesting into 10,000 shares of our Class A Common Stock. In addition, for each year of continued service, an independent director serving as the Chairperson of the Board shall receive an additional annual stock option award exercisable for 5,000 shares of our Class A Common Stock and an additional annual restricted 16 stock unit award of 5,000 units that convert upon vesting into 5,000 shares of our Class A Common Stock. All annual equity-based compensation is awarded to independent directors on the date of the annual stockholders meeting. At the annual stockholders meeting, each independent director who (i) joined our Board of Directors at or prior to the last annual stockholders meeting, or (ii) joined our Board of Directors after the last annual stockholders meeting but attended at least three meetings of the full Board of Directors, is entitled to receive an annual equity award at that annual stockholders meeting. All stock option and restricted stock unit awards granted to our independent directors vest 25% on the anniversary of the grant date and the remainder vests in equal installments quarterly over the remaining 36 months, except for the stock option and restricted stock unit awards granted to our independent directors in December 2005 at the time of the initial public offering of our Class A Common Stock. Those awards vested 25% on January 28, 2007 and the remainder vests in equal installments quarterly over the remaining 36 months beginning January 28, 2007. Director Summary Compensation Table for Fiscal 2007 The following table provides information concerning compensation expense paid to or earned by each of our independent directors for fiscal 2007. Dr. Cambou, our President and Chief Executive Officer, does not receive additional compensation for his services as a director. Name (1) Fees Earned or Paid in Cash (6) ($) Stock Awards (7)(8)(9) ($) Option Awards (7)(8)(9) ($) Total ($) 61,875 15,000 71,250 67,500 41,875 84,375 65,625 — — 75,137 11,342 72,108 75,137 17,013 75,137 72,509 — — 41,258 4,904 36,539 41,258 4,904 41,258 36,742 — — 178,270 31,246 179,897 183,895 63,792 200,770 174,876 — — David K. Chao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gilles Delfassy (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . Robert L. Edwards . . . . . . . . . . . . . . . . . . . . . . . . . . . Patti S. Hart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Donald L. Lucas (2) . . . . . . . . . . . . . . . . . . . . . . . . . . David E. Roberson . . . . . . . . . . . . . . . . . . . . . . . . . . . John M. Stich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Toshihiko Ono (3) (4) . . . . . . . . . . . . . . . . . . . . . . . . . Hector de J. Ruiz (3) (5) . . . . . . . . . . . . . . . . . . . . . . . (1) Bertrand F. Cambou, Spansion’s President and Chief Executive Officer, is not included in this table as he is an employee of Spansion and thus receives no compensation for his services as director. The compensation received by Dr. Cambou as an employee of Spansion is shown in the Fiscal 2007 Summary Compensation Table on page 33. (2) Messrs. Delfassy and Lucas were elected to Spansion’s Board of Directors on September 20, 2007. (3) Mr. Ono and Dr. Ruiz were non-independent directors and consequently received no compensation for their services as a director. (4) Mr. Ono resigned from the Board of Directors on March 16, 2007. (5) Dr. Ruiz resigned from the Board of Directors on September 20, 2007. (6) Mr. Lucas earned $1,875 for his service as Chair of the Finance Committee during the fourth quarter of fiscal 2007 but did not receive payment until February 2008. (7) On May 29, 2007, Messrs. Chao and Roberson and Ms. Hart received their annual stock option award exercisable for 10,000 shares of our Class A Common Stock and a restricted stock unit award of 10,000 units that convert upon vesting into 10,000 shares of our Class A Common Stock. The grant date fair value computed in accordance with FAS 123(R) of the fiscal 2007 annual stock option awards and restricted stock unit awards was $49,817 and $107,300, respectively. 17 (8) As of December 30, 2007, the aggregate number of shares of Class A Common Stock underlying stock option and restricted stock unit awards for each of our independent directors was: Name (1) Aggregate Number of Shares Underlying Stock Options Aggregate Number of Shares Underlying Restricted Stock Units 30,000 20,000 20,000 30,000 20,000 30,000 20,000 — — 21,250 20,000 15,000 21,250 30,000 21,250 15,000 — — David K. Chao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gilles Delfassy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Robert L. Edwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . Patti S. Hart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Donald L. Lucas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . David E. Roberson . . . . . . . . . . . . . . . . . . . . . . . . . . . . John M. Stich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Toshihiko Ono . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hector de J. Ruiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) Reflects the grant date fair value of each stock option and restricted stock unit award computed in accordance with FAS 123(R). The assumption used in valuation of these awards are set forth in the notes to our consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007, filed with the Securities Exchange Commission on February 28, 2007. These amounts do not correspond to the actual value that will be recognized by the Named Executive Officers. 18 SECURITY OWNERSHIP Security Ownership of Certain Beneficial Owners The following table sets forth the beneficial owners of more than five percent of the outstanding shares of Spansion Common Stock as of March 31, 2008. This information is based upon our records and other information available from outside sources. We are not aware of any other beneficial owner of more than five percent of any class of Spansion Common Stock. Except as otherwise indicated, to our knowledge, each person has sole investment and voting power with respect to the shares shown as beneficially owned. Number of Shares Beneficially Owned Percent of Class Beneficially Owned (1) Name and Address of Beneficial Owner Title of Class Fujitsu Microelectronics Limited (2) . . . . . . . . . . . . . . . . . . . . . Shinjuku Daiichi Seimei Building, 2-7-1 Nishi-Shinjuku, Shinjuku-ku Tokyo 163-0701, Japan Class A Class C 18,352,934 1 11.59% 100% Prudential Financial, Inc. (3) (4) . . . . . . . . . . . . . . . . . . . . . . . . . 751 Broad Street Newark, NJ 07102-3777 Class A 15,311,456 9.67% Ameriprise Financial, Inc. (5) (6) . . . . . . . . . . . . . . . . . . . . . . . . 145 Ameriprise Financial Center Minneapolis, MN 55474 Class A 15,262,314 9.63% FMR LLC (7) (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Class A 82 Devonshire Street Boston, MA 02109 14,135,029 8.92% AMD Investments, Inc. (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One AMD Place Sunnyvale, CA 94088 Class A 14,039,910 8.86% Donald Smith & Co., Inc. (10) . . . . . . . . . . . . . . . . . . . . . . . . . . 152 West 57th Street New York, NY 10019 Class A 13,507,800 8.53% Janus Capital Management LLC (11) (12) (13) . . . . . . . . . . . . . 151 Detroit Street Denver, CO 80206 Class A 7,948,434 5.02% (1) Based on 158,323,770 shares of Class A Common Stock and one share of Class C Common Stock outstanding as of March 31, 2008. Calculated in accordance with the rules of the Securities Exchange Act of 1934, as amended. (2) The Class A Common Stock information is based on information set forth in a Schedule 13D/A filed with the Securities and Exchange Commission on March 24, 2008. Fujitsu Microelectronics Limited is the holder of the single outstanding share of Class C Common Stock, and therefore holds 100 percent of the Class C Common Stock. (3) Based on information set forth in a Schedule 13G/A filed with the Securities and Exchange Commission on February 6, 2008. According to the Schedule 13G/A, Prudential Financial, Inc. has sole voting power with respect to 2,950,600 shares, shared voting power with respect to 11,941,573 shares, sole dispositive power with respect to 2,950,600 shares and shared dispositive power with respect to 12,360,856 shares. (4) Prudential Financial, Inc. has the power to direct the voting and disposition of the securities held by Jennison Associates LLC. (5) Based on information set forth in a Schedule 13G filed with the Securities and Exchange Commission on February 13, 2008. According to the Schedule 13G, Ameriprise Financial, Inc. has shared voting power with respect to 140,470 shares and shared dispositive power with respect to 15,262,314 shares. 19 (6) Ameriprise Financial, Inc. has the power to direct the voting and disposition of the securities held by RiverSource Funds and RiverSource Investments LLC. (7) Based on information set forth in a Schedule 13G filed with the Securities and Exchange Commission on March 10, 2008. (8) Edward C. Johnson 3d and FMR LLC, have the power to direct the disposition of the securities held by Fidelity Management & Research Company. (9) Based on information set forth in a Schedule 13D/A filed with the Securities and Exchange Commission on November 28, 2006 and in Forms 4 filed with the Securities and Exchange Commission on February 22, 2007, February 26, 2007 and February 28, 2007. AMD Investments, Inc. is a wholly owned subsidiary of AMD (U.S.) Holdings, Inc., which is a wholly owned subsidiary of Advanced Micro Devices, Inc. (AMD). AMD (U.S.) Holdings, Inc. and AMD are indirect beneficial owners of the reported securities. (10) Based on information set forth in a Schedule 13G/A filed with the Securities and Exchange Commission on February 8, 2008. According to the Schedule 13G/A, Donald Smith & Co., Inc. has sole voting power with respect to 10,144,000 shares and sole dispositive power with respect to 13,507,800 shares. (11) Based on information set forth in a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2008. According to the Schedule 13G, Janus Capital Management LLC has sole voting power with respect to 7,948,434 shares and sole dispositive power with respect to 7,948,434 shares. (12) Janus Capital Management LLC (“Janus Capital”) is the investment adviser of Janus Growth and Income Fund (“Janus Growth”) and consequently has voting control and investment discretion over securities held by Janus Growth. Janus Capital therefore may be deemed to be the beneficial owner with sole voting power and sole dispositive power with respect to such securities. (13) Janus Capital indirectly owns Enhanced Investment Technologies LLC (“INTEC”) and Perkins, Wolf, McDonnell and Company, LLC (“Perkins Wolf”). Due to this ownership structure, holdings for Janus Capital, Perkins Wolf and INTECH are aggregated for the purposes of the Schedule 13G filed on February 14, 2008. Janus Capital therefore may be deemed to be the beneficial owner with sole voting power and sole dispositive power with respect to such securities. 20 SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information known to us with respect to beneficial ownership of Spansion Class A Common Stock, as of March 31, 2008, for our current directors and the nominees for election as directors, each of our executive officers listed in the Fiscal 2007 Summary Compensation Table on page 33, and all of our directors and executive officers as a group. This ownership information is based upon information provided by the individuals. Name (1) Bertrand F. Cambou . . . . . David K. Chao . . . . . . . . . . Gilles Delfassy . . . . . . . . . Robert L. Edwards . . . . . . Boaz Eitan . . . . . . . . . . . . . Patti S. Hart . . . . . . . . . . . . Donald L. Lucas . . . . . . . . David E. Roberson . . . . . . John M. Stich . . . . . . . . . . James E. Doran . . . . . . . . . Thomas T. Eby . . . . . . . . . Ahmed Nawaz . . . . . . . . . . Dario Sacomani . . . . . . . . . All directors and executive officers as a group (14 persons) . . . . . . . . . . . . . Shares Acquirable Currently or Within 60 Days Aggregate Shares Beneficially Owned (2) 121,608 10,000 — 6,250 7,905,021 32,000 — 18,000 (4) 16,250 (5) 29,650 23,721 3,909 — 199,331 17,500 — 6,250 — 17,500 — 17,500 6,250 102,759 99,420 33,937 96,562 320,939 27,500 — 12,500 7,905,021 49,500 — 35,500 22,500 132,409 123,141 37,846 96,562 — — 4.99% * — * * * * * * 8,179,983 666,331 8,846,314 5.58% Shares Currently Owned Percent of Class Beneficially Owned (2)(3) * * * Less than one percent. (1) The address of each beneficial owner is 915 DeGuigne Drive, Sunnyvale, CA 94085-3836. (2) The number and percentage of shares beneficially owned is determined under the rules of the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any share which the individual has the right to acquire within 60 days of March 31, 2008, through the exercise of any stock option or the vesting of any restricted stock unit. Unless otherwise indicated in the footnotes, each person has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares shown as beneficially owned. (3) Percent of class beneficially owned is based on 158,323,770 shares of Spansion Class A Common Stock outstanding as of March 31, 2008. (4) Represents the direct beneficial ownership of 8,000 shares and the indirect beneficial ownership of 10,000 shares that are held in an IRA owned by Mr. Roberson. (5) Represents the direct beneficial ownership of 6,250 shares and the indirect beneficial ownership of 10,000 shares that are held by Mr. Stich’s family LLC. 21 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers (as defined under Section 16) and any persons holding more than ten percent of a registered class of equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Their initial report must be filed using the Securities and Exchange Commission’s Form 3 and they must report subsequent stock purchases, sales, option exercises and other changes using the Securities and Exchange Commission’s Form 4, which must be filed within two business days of most transactions. In some cases, such as changes in ownership arising from gifts and inheritances, the Securities and Exchange Commission allows delayed reporting at year-end on the Securities and Exchange Commission’s Form 5. Officers, directors and persons who beneficially own more than ten percent of a registered class of our equity securities are required by Securities and Exchange Commission regulations to furnish us with copies of all reports they file pursuant to Section 16(a). We make the services of our legal department available to our officers and directors to assist them in meeting their filing obligations. Based solely on our review of these reports and written representations from our directors and executive officers, we believe that during fiscal 2007, each of Spansion’s directors, executive officers and ten percent security-holders complied with all applicable Section 16(a) filing requirements. EXECUTIVE OFFICERS Bertrand F. Cambou, age 52, has served as our President and Chief Executive Officer since July 2003. From July 2003 until November 2005, he served as a member of Spansion LLC’s Board of Managers. Since November 2005, he has served as a member of our Board of Directors. Beginning in January 2002 until December 2005, he served as a vice president of AMD, first as group vice president of their memory group, and later as an executive vice president. Dr. Cambou was chief operating officer and co-president of Gemplus International S.A. from June 1999 until January 2002. Also during this time, he was a board member of Gemplus International S.A. and of Ingenico Ltd. Dr. Cambou’s career includes a 15-year tenure at Motorola Inc. where he held various management positions including senior vice president and general manager of the Networking and Computing System Group as well as chief technical officer of the Semiconductor Sector. Dr. Cambou received his engineering degree from Supelec, Paris, and his doctorate in electrical engineering from Paris XI University. He is the author of 15 U.S. patents. James E. Doran, age 59, has served as our Executive Vice President and Chief Operating Officer since February 2006. He served as Executive Vice President of Group Operations from April 2004 until February 2006. From July 2003 through April 2004, Mr. Doran was Spansion LLC’s Group Vice President of Worldwide Technology Development and Manufacturing. Mr. Doran served as a member of Spansion LLC’s Board of Managers from July 2003 until November 2005, and served as a member of our Board of Directors from November 2005 until consummation of Spansion’s initial public offering in December 2005. As Executive Vice President and Chief Operating Officer, he is responsible for worldwide operations, business processes and infrastructure. From March 2001 until June 2003, Mr. Doran served as vice president of worldwide technology development and manufacturing for AMD’s memory group. Prior to that, Mr. Doran was vice president and general manager of a German subsidiary of AMD from September 1999 until March 2001. Prior to September 1999, Mr. Doran served as vice president, Fab 25 and earlier as vice president, Submicron Development Center (SDC) Operations. Mr. Doran joined AMD in 1990 as director of the SDC. Before joining AMD, Mr. Doran was vice president of operations for Paradigm Semiconductor and a fabrication facility manager at Intel Corporation. Mr. Doran holds a bachelor’s degree in physics from Northwestern University and a master’s degree in physics from the University of Wisconsin. Thomas T. Eby, age 47, has served as our Executive Vice President, Consumer, Set Top Box and Industrial Division since September 2007. He is responsible for the division’s marketing, product and platform engineering, 22 infrastructure development and program management functions. From October 2005 until September 2007, Mr. Eby served as our Executive Vice President and Chief Marketing and Sales Officer, and from January 2005 until October 2005, he served as our Executive Vice President and Chief Marketing Officer. From July 2003 until December 2004, he was our Executive Vice President with responsibility for leading the integration of the former AMD and Fujitsu Limited assets that were contributed to Spansion LLC. Beginning in 1998, Mr. Eby served as a vice president of AMD, including roles as group vice president of AMD’s Communication Group, then as the group vice president of strategy & business development for AMD and later as senior vice president. In addition, Mr. Eby held a wide range of sales and marketing positions both in the United States and Europe. Mr. Eby holds a bachelor’s degree in electrical engineering and computer sciences from Princeton University. Robert C. Melendres, age 43, has served as our Executive Vice President, Corporate Development and Chief Legal Officer since January 2007. From February 2006 until January 2007, he served as our Executive Vice President, Corporate Development, General Counsel and Corporate Secretary. He was appointed as Spansion’s Corporate Secretary in March 2005. He served as our Corporate Vice President, Corporate Development and General Counsel from January 2005 until February 2006. From July 2002 until January 2005, Mr. Melendres served at AMD in various management positions responsible for business development, most recently as the corporate vice president, business development. Prior to joining AMD, Mr. Melendres served in various senior management positions, including president and general counsel of WebGain, Inc. from July 2000 until July 2002. He also served as director of worldwide contracts and business practices for IBM Corp., and IBM legal counsel from June 1993 until July 2000. Mr. Melendres holds a bachelor’s degree in economics from the University of California at Los Angeles and a juris doctorate from Harvard Law School. Ahmed Nawaz, age 58, has served as our Executive Vice President, Wireless Solutions Division since November 2006. He is responsible for the division’s marketing, platform engineering, infrastructure development and program management functions. Prior to joining Spansion, Mr. Nawaz was a management consultant from January 2006 to November 2006. From March 2001 to December 2005, he was executive vice president of worldwide sales at Agere Systems. Prior to that, Mr. Nawaz was President of Worldwide Sales, Strategy and Business Development, from April 2000 to March 2001, and President, Integrated Circuits Division, from June 1998 to April 2000, of Lucent’s Microelectronics and Communications Technologies Group. He joined AT&T in 1992 and moved to Lucent following its spin-off from AT&T in 1996. Mr. Nawaz also spent 14 years in various design, engineering, marketing and general management positions in Texas Instruments Incorporated’s semiconductor group. Mr. Nawaz holds a master’s degree in electrical engineering from the University of Missouri and a master’s degree in Business Administration from Houston Baptist University. Dario Sacomani, age 51, has served as our Executive Vice President and Chief Financial Officer since February 2006. From June 2002 until December 2005, he was employed at Richardson Electronics, Ltd., where he served as chief financial officer, senior vice president and board director from June 2002 until July 2005. Prior to Richardson Electronics, Mr. Sacomani was senior vice president, chief financial officer and treasurer of ON Semiconductor, a spin-off of Motorola, Inc., from August 1999 until April 2002. Mr. Sacomani also spent 18 years at Motorola in several finance positions within Motorola’s Semiconductors Products Sector, including as vice president and group controller of the Semiconductor Components Group. 23 EXECUTIVE COMPENSATION Compensation Discussion and Analysis Introduction This Compensation Discussion and Analysis presents material information necessary to understand the objectives and policies of our compensation program for executives. Throughout this discussion, those individuals named in the Fiscal 2007 Summary Compensation Table on page 33 are referred to as our “Named Executive Officers” and the Compensation Committee of the Board of Directors is referred to as the “Committee.” Roles and Responsibilities The role of the Committee, as described on page 14, is to oversee Spansion’s compensation strategies and programs for our executive officers, including total compensation for the Named Executive Officers. The role of Spansion’s management is to review Spansion’s executive compensation programs, policies and governance and make recommendations regarding these matters. Management is responsible for, among other things: • Reviewing the effectiveness of the compensation programs, including competitiveness and alignment with Spansion’s objectives; • Recommending changes to compensation programs, as may be required, to ensure achievement of all program objectives; and • Recommending salaries, bonuses and other awards for executive officers other than the Chief Executive Officer. The Committee is authorized to engage its own independent advisors to assist in carrying out its responsibilities. During fiscal 2007, the Committee engaged Hewitt Associates (“Hewitt”) as its independent compensation consultant to provide advice on matters related to executive compensation and general compensation programs. The Committee, at its discretion, may replace Hewitt or hire additional consultants at any time. Hewitt is independent from Spansion because it does not provide any other services to Spansion and receives compensation from Spansion only for services it provides to the Committee. Hewitt’s engagement includes gathering and analyzing data, and reviewing and advising on principal aspects of executive and non-employee director compensation. This includes base salaries, bonuses, and equity awards for executive officers, and cash compensation and equity awards for non-employee directors. At the Committee’s invitation, Hewitt attended all of the Committee’s meetings held during fiscal 2007. Hewitt provided independent expertise on executive compensation issues, including more specifically: • Composition of the group of publicly traded semiconductor industry companies with which we compete for talent (collectively, the “Compensation Peer Group”); • Competitive market pay analysis for executive officers and directors; • Executive compensation strategy and program design, including pay philosophy, peer group selection, incentive design and policies and terms related to severance and change of control arrangements; and • Impact of pertinent regulations on executive compensation and benefit programs. Compensation Program Philosophy and Objectives Spansion has a market-based “pay for performance” compensation philosophy designed to both attract and retain talented executive officers while supporting our business strategy. In line with that philosophy, a significant percentage of the total potential compensation for our executive officers is performance-based. We 24 have no pre-established policy or target for allocating between either cash and non-cash or short-term and longterm incentive compensation. Rather, the Committee periodically reviews relevant market data to determine the appropriate components and level of an executive officer’s compensation. The compensation program for our executive officers is designed to: • Recognize and reward executives for achieving both company and individual performance objectives in support of Spansion’s business strategy; • Provide competitive pay opportunities relative to the Compensation Peer Group; • Align the respective interests of the executive officers and our stockholders through compensation that varies based on achievement of financial objectives; and • Maintain flexible pay programs that can be modified to respond to changes in competitive trends and Spansion’s business strategy and financial position. Setting Compensation Generally, we set compensation for our Named Executive Officers in the same manner used to set compensation for our other executive officers. Details regarding the specific compensation for each of our Named Executive Officers for fiscal 2007 are set forth in the Fiscal 2007 Summary Compensation Table on page 33. Competitive Market Data In September 2007, based on the review and recommendations presented by Hewitt, and in consultation with Hewitt, the Committee reviewed and approved a revised Compensation Peer Group to be used for benchmarking and for setting executive compensation for fiscal 2008. To determine the appropriate Compensation Peer Group, the Committee considered companies within the semiconductor industry that have revenue, number of employees, market capitalization, location and scope of international operations similar to our corresponding components. The Committee will continue to periodically review and update the Compensation Peer Group as appropriate. Based on the cited criteria, six companies (Advanced Micro Devices, Inc.; Agere Systems Inc.; Applied Materials, Inc.; Broadcom Corporation; Freescale Semiconductor; and Micron Technology, Inc.) were removed from our prior Compensation Peer Group and two companies (Amkor Technology, Inc. and Cypress Semiconductor Corporation) were added to the group. The Compensation Peer Group established for fiscal 2008 is as follows: • • • • • • Altera Corporation Amkor Technology, Inc. Analog Devices, Inc. Atmel Corporation Cypress Semiconductor Corporation Fairchild Semiconductor • • • • • • • Juniper Networks, Inc. KLA-Tencor Corporation Lam Research Corporation Linear Technology Corporation LSI Corporation Maxim Integrated Products, Inc. National Semiconductor Corporation • • • • • Novellus Systems, Inc. NVIDIA Corporation ON Semiconductor Corp. SanDisk Corporation Xilinx, Inc. Total compensation targets for our Named Executive Officers are set between the 50th and 60th percentiles for compensation paid to similarly situated executives in the Compensation Peer Group, taking into consideration the targets for base salary, bonus and equity awards. We set these targets slightly higher than the median compensation of executives in the Compensation Peer Group to better position Spansion to attract and retain highly qualified executive officers. As part of our annual performance review process, total compensation targets 25 were adjusted for our Named Executive Officers based on the 2008 Compensation Peer Group. In most cases, compensation targets were reduced. Our incentive compensation, including cash and equity, is structured so that when our corporate performance meets or exceeds our established objectives, executive officers have an opportunity to receive incentive compensation greater than comparable market targets. When our corporate performance does not meet our established objectives, executive officers receive incentive compensation that is generally below comparable market targets. For fiscal 2007, total compensation for our Named Executive Officers was well below our collective compensation targets, primarily as a result of below target bonus payments and equity awards as most performance targets for short-term performance-based incentive compensation were not met. Performance Evaluations We conduct annual performance evaluations of all Spansion employees, including our Named Executive Officers. As part of the executive officer evaluation, we consider a number of performance criteria, including among other things, the Named Executive Officer’s ability to: • Meet specific performance objectives; • Set the strategy and direction of his organization, consistent with Spansion’s overall objectives; and • Effectively lead his organization. The Chief Executive Officer evaluates the performance of each of the other executive officers, including the other Named Executive Officers, and presents the evaluations to the Committee for review and approval. The Committee performs an independent evaluation of the Chief Executive Officer’s performance. Compensation Review In preparation for decisions regarding compensation actions for each of the Named Executive Officers for the upcoming year, the Committee reviews tally sheets that reflect total current compensation, equity awards (vested and unvested) and benefits information. In addition, the Committee considers each individual’s performance, contributions, role and responsibilities, leadership abilities, growth potential and compensation relative to peers within Spansion. The Committee also considers the competitive market for comparable executives in the Compensation Peer Group. Following this review, the Committee sets the compensation for the Chief Executive Officer and for the other executive officers, taking into consideration the Chief Executive Officer’s compensation recommendations for each of the other executive officers. The final compensation packages for all Named Executive Officers, including the Chief Executive Officer, contain the components described below. 2007 Executive Compensation Components Spansion seeks to achieve the compensation program objectives stated above through five principal compensation components: • Base salary; • Short-term performance-based incentive compensation; • Long-term equity-based incentive compensation; • Change of control agreements; and • Benefits and perquisites. Spansion’s practices with respect to each of these five principal compensation components, as well as other components of compensation, are set forth below. 26 Base Salary Spansion provides base salaries to compensate executive officers for services performed during the fiscal year. Each executive officer’s salary is intended to reflect the individual’s job responsibilities and value to Spansion in terms of expertise and performance, taking into account competitive market data and internal pay relationships. For our Named Executive Officers, generally, base salaries are targeted at the 60th percentile of base salaries paid to similarly situated individuals in the Compensation Peer Group. Base salaries for the Named Executive Officers are evaluated on an annual basis using the criteria described above. In April 2007, all Named Executive Officers, excluding Mr. Nawaz, who joined Spansion in November 2006, were eligible for and received a merit increase. Merit increases ranged from six percent to eight percent, resulting in competitive pay levels relative to the 2007 Compensation Peer Group. The annual base salaries as of the end of fiscal 2006 and fiscal 2007 for each of our Named Executive Officers were as follows: Bertrand F. Cambou . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dario Sacomani . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . James E. Doran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thomas T. Eby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ahmed Nawaz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Base Salary as of December 31, 2006 Base Salary as of December 30, 2007 $675,000 $375,000 $425,000 $388,241 $425,000 $715,500 $405,000 $459,000 $411,536 $425,000 Short-Term Performance-Based Incentive Compensation Our executive officers have an opportunity to earn annual cash awards under a short-term performancebased incentive compensation plan (the “STIP”) designed to compensate them for the achievement of pre-determined annual corporate objectives and individual objectives that correlate closely with the corporate objectives. At the beginning of each fiscal year, the Committee approves the target cash bonus opportunities and objectives for that year relevant to the STIP. Our STIP is referred to as the “Pay for Performance Plan.” The target bonus opportunity for each executive officer is based on the individual’s position within Spansion and competitive data from the Compensation Peer Group, and is established as a percentage of base salary. For our Named Executive Officers, generally, awards are targeted between the 50th and 60th percentiles of bonus awards made to similarly situated individuals in the Compensation Peer Group. STIP payouts are contingent upon Spansion’s performance as measured against the pre-determined annual corporate objectives approved by the Committee. For fiscal 2007, approximately 80 percent of our Chief Executive Officer’s, and approximately 70 percent of the other Named Executive Officers’, bonus opportunity is based directly on Spansion’s achievement relative to these pre-determined annual objectives for specific metrics that have been approved by the Committee. If these objectives are achieved, the remainder of the bonus opportunity for the executive officer is based on his individual performance, recognizing achievement against other critical objectives. If none of the annual corporate performance objectives are achieved, no bonuses are paid, irrespective of the executive officer’s performance. The Committee reviews and approves all recommended STIP payments for the executive officers. Prior to the second quarter of fiscal 2007, the only corporate performance metric established by the Committee was Spansion’s achievement of operating profit. In the second quarter of fiscal 2007, the Committee reassessed that metric and established additional corporate performance metrics to take into account market share and the sale of advanced technology products that are key to Spansion’s future success. At that time, the Committee also set specific objectives for each metric. The objectives for each metric were set at performance levels that we believe are very difficult to achieve. The final corporate performance metrics for fiscal 2007, and their relative weighting out of 100 percent, were as follows: • Achieve breakeven on operating profit, including the effect of equity-based expense (70 percent weighting); 27 • Increase NOR segment share in the Flash memory market relative to fiscal 2006 (15 percent weighting); and • Achieve a threshold level of revenue from certain products based on specified advanced technologies (15 percent weighting). The target STIP award opportunities for our Named Executive Officers are generally between the 50th and percentiles of similar opportunities in the Compensation Peer Group, and they range from 70 percent to 125 percent of base salary, with actual awards determined as follows: 60th • No awards would be paid if Spansion did not achieve the minimum performance objectives for at least one of the metrics, and • Payment of 7.5 percent to 200 percent of the target awards would be made depending on Spansion’s level of performance against each metric, assuming the minimum performance objective was achieved on at least one of the metrics and considering the relative weighting of each metric. Spansion did not achieve breakeven on operating profit or the threshold revenue level from products based on specified advanced technologies for fiscal 2007. However, we did increase our NOR segment share relative to fiscal 2006, achieving our minimum objective for that metric. This resulted in the funding of bonuses in an amount equal to 13 percent of the STIP target opportunity. As noted above, at least 70 percent of each Named Executive Officer’s award was based directly on our performance against the corporate objectives. The remainder of their awards, while funded by Spansion’s performance against our corporate objectives, was based on each executive officer’s individual performance. The individual portion of the STIP was recommended by the Chief Executive Officer and approved by the Committee based on a number of performance criteria, including attainment of individual performance objectives (which include organizational profitability, new product introductions and improvements in manufacturing yields), ability to successfully set the strategy and direction of his organization (through actions such as establishment of strategic business partnerships or creation of corporate efficiencies), and ability to effectively lead his organization (through actions such as improving global integration and improving organizational efficiency). The table below describes for each Named Executive Officer for fiscal 2007 the target percentage of base salary, target amount attainable, payout opportunity range as a percent of base salary, award amount and award as a percent of base salary. Named Executive Officer Bertrand F. Cambou . . . . . . . . . . . . . . . . . . . . . . Dario Sacomani . . . . . . . . . . . . . . . . . . . . . . . . . . James E. Doran . . . . . . . . . . . . . . . . . . . . . . . . . . Thomas T. Eby . . . . . . . . . . . . . . . . . . . . . . . . . . Ahmed Nawaz . . . . . . . . . . . . . . . . . . . . . . . . . . . Target Percent of Base Salary 125% 70% 70% 70% 70% Target Amount Payout Range as Percent of Base Salary Award Amount $894,375 $283,500 $321,300 $288,075 $297,500 0% to 250% 0% to 140% 0% to 140% 0% to 140% 0% to 140% $125,000 $ 60,000 $ 80,000 $ 40,000 $ 40,000 Award as Percent of Base Salary 18% 15% 17% 10% 9% The amounts of STIP awards for fiscal 2007 for Named Executive Officers are presented in the Non-Equity Incentive Plan Compensation column of the Fiscal 2007 Summary Compensation Table on page 33. The individual fiscal 2007 target award percentages remain unchanged for fiscal 2008 as they continue to be in alignment with those of the Compensation Peer Group. The corporate performance metrics for fiscal 2008 also remain unchanged, although objectives that we believe are very difficult to achieve have again been set for each metric. The difficulty of achieving our performance objectives is demonstrated by the fact that no STIP awards were achieved for fiscal 2006, and only minimal award levels (i.e., 13 percent of target) were achieved for fiscal 2007. Long-Term Equity-Based Incentive Compensation A fundamental tenet of our compensation philosophy is that equity participation by our executive officers creates a vital long-term partnership between our executive officers and our stockholders. We believe that equitybased compensation promotes equity ownership among executives, drives performance toward the achievement 28 of long-term stockholder value, provides balance to the awards provided under the STIP, and helps to promote the retention of the officers through vesting contingencies. Our stockholder-approved 2007 Equity Incentive Plan is our long-term incentive plan (the “LTIP”), and it is designed to align the interests of executive officers over a multi-year period directly with the interests of stockholders. The Committee administers the LTIP and approves target award levels based on data from the Compensation Peer Group and an executive’s position within Spansion. For our Named Executive Officers, generally, award levels are targeted at the 50th percentile of equity awards made to similarly situated individuals in the Compensation Peer Group in an attempt to provide equity award opportunities that are competitive with those of our peers. The Committee reviews target award levels annually. The LTIP provides for various awards in the form of stock options, stock appreciation rights, restricted stock units, stock bonuses, restricted stock, performance stock, stock units, phantom stock, dividend equivalents, and similar rights to purchase or acquire shares. To date, awards under the LTIP have been made in the forms of stock options and restricted stock units. Generally, employees below the vice president level are granted restricted stock unit awards and vice presidents and executive officers, including our Named Executive Officers, receive a combination of stock option and restricted stock unit awards. We grant stock options to vice presidents and executive officers in order to tie their compensation more directly to total stockholder return. The Committee approves all equity awards for executive officers and the annual equity awards granted to employees following Spansion’s annual performance evaluation process. The annual awards are generally granted in the second fiscal quarter, following the first quarter earnings release, at regularly scheduled Committee meetings. The Committee has delegated to our Grant Committee, which consists of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, authority to approve stock option and restricted stock unit awards to non-executive officers, subject to established guidelines. The purpose of this delegation is to provide administrative flexibility to recognize new hires and promotions or achievements for employees below the level of executive officer. The Committee approves all equity awards granted to non-executive officers that are not within the guidelines established for the Grant Committee. The Committee also reviews all equity awards approved by the Grant Committee. Each equity award granted under the LTIP typically vests over four years from the grant date. Prior to the exercise of a vested stock option or the vesting of a restricted stock unit, the holder of the stock option or restricted stock unit has no rights as a stockholder with respect to the shares subject to such awards. With limited exceptions, vesting ceases upon termination of employment. The exercise price for a stock option awarded under the LTIP is equal to the closing price of Spansion’s Class A Common Stock, as quoted on the NASDAQ Stock Market, on the date the award is granted. Spansion has never granted a stock option with an exercise price that is less than the closing price of its Common Stock on the grant date, nor has it ever granted a stock option priced on a date other than the grant date. The annual equity awards granted to our executive officers for fiscal 2007 consisted of a combination of stock option and restricted stock unit awards that ranged, in the aggregate, from 97,500 shares to 162,500 shares. These awards were competitive relative to those of the 50th percentile of the Compensation Peer Group. All of our Named Executive Officers were eligible for and received, in April 2007, an annual equity award for fiscal 2007. Since Mr. Nawaz had recently joined Spansion, he received a relatively smaller annual equity award in April 2007 and a supplemental award in June 2007. Mr. Nawaz’ aggregate awards for fiscal 2007 were within the range of the annual awards received by the other Named Executive Officers. The Named Executive Officers are eligible for annual equity awards in fiscal 2008, subject to the approval of the Committee. The awards for fiscal 2007 for each of our Named Executive Officers are shown in the Grants of Plan-Based Awards for Fiscal 2007 table on page 35. 29 Change of Control Agreements The Committee recognizes that from time to time Spansion may consider potential transactions that could result in a change of control of the ownership and management of Spansion. Therefore, the Committee determined that it is in the best interests of Spansion and its stockholders to provide our key executive officers with an incentive in the form of certain benefits to maintain their focus and dedication to Spansion notwithstanding a possible transaction that could result in a change of control. The Committee consulted with Hewitt regarding the type and level of benefits that similarly situated companies, including those in the Compensation Peer Group, provide for their key employees. Hewitt advised the Committee based on pertinent market data, including Institutional Shareholder Services’ recommendations. Based largely on Hewitt’s advice, the Committee approved a form of change of control severance agreement (the “Agreement”) that would provide an incentive to executive officers for their continued service up to and after a change of control. Under the terms of the Agreement, the executive officer would receive, subject to certain conditions, the following benefits in the event of a change of control and termination of employment: • A lump sum separation payment; • Acceleration of unvested equity; • Reimbursement for premium payments for medical and dental COBRA continuation coverage for a limited time; and • In certain cases, tax-related benefits. We have entered into an Agreement with each of our Named Executive Officers. The benefits available to each Named Executive Officer under their respective Agreements are the same with the exception of the base salary portion of the lump sum separation payment and tax-related benefit. The base salary portion of the lump sum separation payment for each of Messrs. Doran, Eby, Nawaz and Sacomani is two times the aggregate of (i) his base salary and (ii) his target bonus opportunity under the STIP, whereas the base salary portion of the lump sum separation payment for Dr. Cambou is equal to three times the aggregate of (i) his base salary and (ii) his target bonus opportunity under the STIP. The disparity in the payout level between Dr. Cambou and the other Named Executive Officers is attributable to Dr. Cambou’s role as Chief Executive Officer and the particular importance of his continued dedication to Spansion at a time when Spansion could be considering a transaction that results in a change of control. In addition, the Agreements for Dr. Cambou and Messrs. Doran, Eby and Sacomani, which expire in November 2009, provide for reimbursement of any 280G excise tax they may be subject to as a result of benefits they receive under their respective Agreements. Our new form of change of control severance agreement does not contain a provision that provides reimbursement for excise tax. We have entered into this new form of change of control severance agreement with Mr. Nawaz. Additional details regarding our change of control severance agreements are set forth in the discussion under “Termination in Connection With a Change of Control” on page 39 and the tables that follow the discussion. Benefits and Perquisites Retirement Savings Plan. The Spansion Retirement Savings Plan (the “401(k) Plan”) is a tax-qualified 401(k) plan to which all U.S. employees may contribute on a before-tax basis up to the lesser of 100 percent of eligible pay or the contribution limit prescribed by the Internal Revenue Code. Spansion contributes to each employee’s 401(k) account $0.50 on each $1 of pay deferred by employees under the 401(k) Plan. Spansion’s contributions are capped at three percent of the employee’s pay. All contributions to the 401(k) Plan, including Spansion’s matching contributions, are fully vested at the time the contribution is made. Executive Deferred Compensation Program. Our U.S. executive officers, as well as our other U.S. executives, are eligible to participate in the Spansion Executive Investment Account (“EIA”) Plan. Participants in the EIA Plan may defer up to 50 percent of base salary and up to 100 percent of bonus payments under the STIP or sales incentive plan. Spansion contributes to each employee’s EIA account $0.50 on each $1 of pay deferred 30 under the EIA Plan in excess of the applicable compensation limit set by the Internal Revenue Code. Spansion’s contributions are capped at three percent of the employee’s pay. Currently, none of our executive officers participates in the EIA Plan. Life and Long-Term Disability Insurance. We provide our U.S. executive officers with life insurance such that the executive officer’s beneficiary will receive a death benefit of up to three times the executive’s annual salary, to a maximum of $3 million. In addition, our executive officers are eligible to participate in our Executive Disability Plan, which pays up to $15,000 a month if an executive is unable to work due to a disability. Other Health and Welfare Benefits and Perquisites. Spansion offers health and welfare benefits, in accordance with applicable local regulations and competitive practice, to employees in all of the countries in which we operate. During fiscal 2007, our executive officers were eligible to participate in those plans offered in their respective work locations. We also provide our executive officers with a monthly automobile allowance and company-paid financial counseling benefits. At the end of fiscal 2007, we discontinued a physical examination benefit that had been provided to executive officers because the standard health benefits program offered to all employees, including executive officers, adequately covers this benefit. We may offer relocation benefits to employees when their job requires relocation. In the event that an executive officer voluntarily terminates his or her employment, such executive officer may be required to repay to Spansion a portion of his or her relocation benefits. Tax and Accounting Implications $1 Million Deduction Limit. Section 162(m) of the Internal Revenue Code generally limits a tax deduction to public corporations for certain executive compensation in excess of $1 million per fiscal year. Certain types of compensation are deductible only if performance criteria are approved by stockholders. The Committee will endeavor to structure compensation plans to achieve maximum deductibility under Section 162(m) with minimal sacrifices in flexibility and corporate objectives. While the Committee will consider deductibility under Section 162(m) with respect to future compensation arrangements with executive officers, deductibility will not be the sole factor used in ascertaining appropriate levels or modes of compensation. Since corporate objectives may not always be consistent with the requirements for full deductibility, certain compensation paid by Spansion in the future may not be fully deductible under Section 162(m). Accounting for Equity-Based Compensation. Beginning on December 26, 2005, Spansion began accounting for equity-based awards in accordance with the requirements of FASB Statement 123(R) “Share-Based Payment.” Impact of Section 409A. To avoid adverse 409A impact, Spansion does not grant stock options to U.S. employees with an exercise price less than the fair market value of the Company’s Class A Common Stock on the date of grant. 31 Compensation Committee Report The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement. THE COMPENSATION COMMITTEE Patti S. Hart, Chair Gilles Delfassy David E. Roberson 32 Fiscal 2007 Summary Compensation Table The table below summarizes the total compensation paid to or earned by each of the Named Executive Officers for the fiscal year ended December 30, 2007. No defined benefit pension plan was offered to the Named Executive Officers in fiscal 2007, and none of the Named Executive Officers elected to defer compensation under our EIA Plan in fiscal 2007. Spansion has not entered into any employment agreements with any of the Named Executive Officers. All employees, including the Named Executive Officers, agree to their employment-related compensation and benefits by executing our employment offer letter, which, in the case of Named Executive Officers, are filed with the Securities and Exchange Commission. Name and Principal Position Year Salary ($)(1) Bertrand F. Cambou . . 2007 703,038 President and Chief 2006 692,787 (5) Executive Officer Bonus ($) Stock Awards ($) (2) Non-Equity Option Incentive Plan All Other Awards Compensation Compensation ($) (3) ($) ($) (4) — — 477,435 539,066 573,961 359,421 125,000 — Dario Sacomani . . . . . 2007 395,769 Executive Vice 2006 315,865 President and Chief Financial Officer — 187,500 (7) 54,183 321,852 — 235,698 60,000 — James E. Doran . . . . . 2007 448,538 Executive Vice 2006 427,345 President and Chief Operating Officer — — 230,592 281,310 286,990 199,679 80,000 — 32,629 38,387 Thomas T. Eby . . . . . . 2007 404,368 2006 388,186 Executive Vice President, Consumer, Set-Top Box & Industrial Division — — 190,971 275,021 229,578 199,679 40,000 — 50,172 (9) 37,933 — 116,608 190,410 Ahmed Nawaz . . . . . . 2007 425,000 2006 49,038 (10) 400,000 (11) 4,908 9,327 Executive Vice President, Wireless Solutions Division 40,000 — Total ($) 39,447 (6) 1,883,986 42,108 (6) 1,668,277 143,016 (8) 80,516 (8) 974,820 819,579 1,073,069 952,401 960,532 855,376 236,559 (12) 1,008,577 12,834 (12) 476,107 (1) The amounts shown in the Salary column reflect 53 weeks of salary in fiscal 2006 and 52 weeks of salary in fiscal 2007 for the Named Executive Officers who were employed by Spansion for the full fiscal years. All Named Executive Officers were employed for the full years except for Mr. Sacomani, whose employment commenced on February 28, 2006, and Mr. Nawaz, whose employment commenced on November 20, 2006. (2) The amounts shown in the Stock Awards column reflect the recognized compensation expense for stock awards, excluding the impact of service-based forfeitures for financial statement reporting purposes for the fiscal years ended December 31, 2006 and December 30, 2007. The amounts also reflect the grant date fair value of each restricted stock unit award computed in accordance with FAS 123(R). The assumption used in valuation of these awards are set forth in the notes to our consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007, filed with the Securities Exchange Commission on February 28, 2008. These amounts do not correspond to the actual value that will be recognized by the Named Executive Officers. (3) The amounts shown in the Option Awards column reflect the recognized compensation cost for option awards, excluding the impact of service-based forfeitures for financial statement reporting purposes for the 33 fiscal years ended December 31, 2006 and December 30, 2007. Black-Scholes-Merton assumptions used in the calculation of these amounts are disclosed in Note 4 of the notes to Spansion’s audited consolidated financial statements for the fiscal year ended December 30, 2007 included in Spansion’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2008. These amounts do not correspond to the actual value that will be recognized by the Named Executive Officers. (4) The amounts shown in the All Other Compensation column reflect the following compensation for each Named Executive Officer, although only values exceeding ten percent of the total amount of perquisites and personal benefits are specified in these footnotes: • Matching 401(K) contributions: The contribution in fiscal 2006 for each of Dr. Cambou and Messrs. Sacomani, Doran and Eby was $6,600. The contribution in fiscal 2007 for each of Dr. Cambou and Messrs. Sacomani, Doran, Eby and Nawaz was $6,750. • Life insurance premium benefits: The value in fiscal 2006 for Messrs. Doran and Eby was $6,625 and $6,872, respectively. • Car allowance (based on 53 weeks in fiscal 2006 and 52 weeks in fiscal 2007): The amount in fiscal 2006 for each of Dr. Cambou and Messrs. Doran and Eby was $24,462, and for Messrs. Sacomani and Nawaz was $21,231 and $2,769, respectively. The car allowance paid in fiscal 2007 for each of Dr. Cambou and Messrs. Sacomani, Doran, Eby and Nawaz was $24,000. • Financial planning services: Dr. Cambou received a reimbursement in the amount of $6,000 in fiscal 2006 and $6,600 in fiscal 2007. (5) Dr. Cambou’s salary for fiscal 2006 was effective as of December 16, 2005 but not implemented until January 2006. Therefore, the salary paid to Dr. Cambou in fiscal 2006 includes six days of retroactive pay that would otherwise have been paid to him in fiscal 2005. (6) In addition to the items noted in footnote 4 above, the amount reflects the cost of home security services of $2,683 in fiscal 2006 and $215 in fiscal 2007 provided for Dr. Cambou. (7) The amount reflects a bonus paid as part of Mr. Sacomani’s employment arrangement. The total amount is $187,500, of which $112,500 was paid in fiscal 2006. The remaining amount of $75,000 was paid in fiscal 2007. (8) The amount includes relocation and relocation-related personal travel expense paid by Spansion to Mr. Sacomani in the amount of $51,906 in fiscal 2006 and $111,486 in fiscal 2007. (9) In addition to the items noted in footnote 4 above, the amount reflects a payment of vacation cash out to Mr. Eby in the amount of $14,932 in fiscal 2007. (10) Mr. Nawaz was hired as Spansion’s Executive Vice President, Wireless Solutions Division on November 20, 2006. (11) The amount reflects a bonus paid as part of Mr. Nawaz’s employment arrangement. The total amount is $400,000, of which $266,667 was paid in January 2007 and $133,333 was paid in November 2007. (12) In addition to the items noted in footnote 4 above, the amount reflects relocation benefits paid by Spansion to Mr. Nawaz in the amount of $10,000 in fiscal 2006 and $202,279 in fiscal 2007. 34 Grants of Plan-Based Awards for Fiscal 2007 The table below summarizes all grants of plan-based awards to all Named Executive Officers during fiscal 2007, which ended on December 30, 2007. The stock option awards and the unvested portion of the stock awards identified in the table below are also reported in the Outstanding Equity Awards at Fiscal 2007 Year-End Table on page 36. Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1) Threshold Target Maximum ($) ($) ($) All Other Stock All Other Exercise Awards: Option or Grant Number Awards: Base Date Fair of Number of Price Value of Shares of Securities of Stock and Stock or Underlying Option Option Units Options Awards Awards (2) (#) (3) (#) ($ / Sh) (4) ($) Name Grant Date Bertrand F. Cambou . . . . . . — 4/20/2007 (5) — 4/20/2007 (6) — 894,375 1,788,750 — — — — — 75,000 — 4/20/2007 (5) — 4/20/2007 (6) — 283,500 — — — 4/20/2007 (5) — 4/20/2007 (6) — Dario Sacomani . . . . . . . . . . James E. Doran . . . . . . . . . . Thomas T. Eby . . . . . . . . . . Ahmed Nawaz . . . . . . . . . . . 187,500 — 10.41 906,225 00.00 780,750 567,000 — — — 30,000 75,000 — 10.41 362,490 00.00 312,300 321,300 — — 642,600 — — — 33,000 82,500 — 10.41 398,739 00.00 343,530 — 4/20/2007 (5) — 4/20/2007 (6) — 288,075 — — 576,150 — — — 30,000 75,000 — 10.41 362,490 00.00 312,300 — 6/13/2007 (7) 6/13/2007 (8) 4/20/2007 (5) 4/20/2007 (6) 297,500 — — — — 595,000 — — — 13,000 — — — 12,000 32,500 — 30,000 — 11.53 00.00 10.41 00.00 — — — — 173,979 149,890 144,996 124,920 (1) Reflect the target and maximum target bonus amounts for fiscal 2007 performance under the short-term performance-based incentive compensation plan, as described in “Compensation Discussion and Analysis— Short-Term Performance-Based Incentive Compensation.” The actual bonus amounts were determined by the Compensation Committee in March 2008 and are reflected in the “Non-Equity Incentive Plan Compensation” column of the Fiscal 2007 Summary Compensation Table. (2) All restricted stock units granted to Named Executive Officers vest 25% on the anniversary of the grant date and the remainder vests in equal installments quarterly over the remaining 36 months. (3) All stock options granted to Named Executive Officers vest 25% on the anniversary of the grant date and the remainder vests in equal installments quarterly over the remaining 36 months. (4) Reflects the grant date fair value of each stock option and restricted stock unit award computed in accordance with FAS 123(R). The assumption used in valuation of these awards are set forth in the notes to our consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007, filed with the Securities Exchange Commission on February 28, 2008. These amounts do not correspond to the actual value that will be recognized by the Named Executive Officers. (5) Represents an annual stock option award granted on April 20, 2007 under the 2005 Equity Incentive Plan. (6) Represents an annual restricted stock unit award granted on April 20, 2007 under the 2005 Equity Incentive Plan. (7) Represents a stock option award granted on June 13, 2007 under the 2007 Equity Incentive Plan. (8) Represents a restricted stock unit award granted on June 13, 2007 under the 2007 Equity Incentive Plan. 35 Outstanding Equity Awards at Fiscal 2007 Year-End The table below summarizes the outstanding Spansion equity awards held and exercisable by Named Executive Officers at the end of fiscal 2007. Spansion does not offer an equity incentive plan, as defined under Item 402(a)(6)(iii) of Regulation S-K. Option Awards Name Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Option Expiration Date Stock Awards Market Number of Value of Shares or Shares or Units of Units of Stock That Stock That Have Not Have Not Vested Vested (#) (1) ($) (2) Bertrand F. Cambou . . . . . . . . . . . . 98,437 — 126,563 (3) 187,500 (5) 12.00 10.41 12/15/2012 04/20/2014 42,864 (4) 75,000 (7) 171,027 299,250 Dario Sacomani . . . . . . . . . . . . . . . 54,687 — 70,313 (5) 75,000 (6) 14.74 10.41 03/03/2013 04/20/2014 — 30,000 (7) — 119,700 James E. Doran . . . . . . . . . . . . . . . . 54,687 — 70,313 (3) 82,500 (6) 12.00 10.41 12/15/2012 04/20/2014 21,432 (4) 33,000 (7) 85,514 131,670 Thomas T. Eby . . . . . . . . . . . . . . . . 54,687 — 70,313 (3) 75,000 (6) 12.00 10.41 12/15/2012 04/20/2014 17,146 (4) 30,000 (7) 68,413 119,700 Ahmed Nawaz . . . . . . . . . . . . . . . . 18,750 — — 56,250 (8) 14.93 30,000 (6) 10.41 32,500 (10) 11.53 12/07/2013 04/20/2014 06/13/2014 15,000 (9) 12,000 (7) 13,000 (11) 59,850 47,880 51,870 (1) Each restricted stock unit represents a contingent right to receive one share of Spansion Class A Common Stock. There is no exercise price. (2) Based on closing price of $3.99 of Spansion Class A Common Stock on December 28, 2007. (3) The stock option was granted on December 15, 2005 and vests over a four-year period with 25% of the shares vesting on January 28, 2007, and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning April 28, 2007. (4) The restricted stock unit award was granted on December 15, 2005 and vests over a four-year period, with 25% of the shares vesting on April 28, 2006, and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning July 28, 2006. (5) The stock option was granted on March 3, 2006 and vests over a four-year period, with 25% of the shares vesting on January 28, 2007, and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning April 28, 2007. (6) The stock option was granted on April 20, 2007 and vests over a four-year period, with 25% of the shares vesting on the anniversary of the date of grant and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning July 20, 2007. (7) The restricted stock unit award was granted on April 20, 2007 and vest over a four-year period, with 25% of the shares vesting on the anniversary of the date of grant and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning July 20, 2007. (8) The stock option was granted on December 7, 2006 and vests over a four-year period, with 25% of the shares vesting on the anniversary of the date of grant and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning December 7, 2007. (9) The restricted stock unit award was granted on December 7, 2006 and vests over a four-year period with 25% of the shares vesting on the anniversary of the date of grant and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning December 7, 2007. (10) The stock option was granted on June 13, 2007 and vests over a four-year period, with 25% of the shares vesting on the anniversary of the date of grant and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning September 13, 2008. 36 (11) The restricted stock unit award was granted on June 13, 2007 and vests over a four-year period with 25% of the shares vesting on the anniversary of the date of grant and the remaining shares vesting in equal quarterly installments over the remaining 36 months beginning September 13, 2008. The table below summarizes the outstanding Advanced Micro Devices, Inc.’s (AMD) equity awards held by Named Executive Officers at the end of fiscal 2007. Some of our Named Executive Officers held, or continue to hold, stock options that were granted to them by AMD prior to our initial public offering in December 2005. As a result of Spansion’s secondary public offering in November 2006, AMD’s percentage ownership in Spansion declined to below 30 percent. Consequently, all remaining AMD stock options that were granted to our Named Executive Officers ceased vesting, and all unvested AMD stock options were canceled. Option Awards Number of Securities Underlying Option Unexercised Exercise Options (#) Price Exercisable ($) Name James E. Doran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500 (1) 10,000 (2) 15,000 (3) 15,000 (4) 71,492 (5) 10,000 (6) 14.64 14.22 15.50 16.66 14.86 11.33 Option Expiration Date 11/21/2008 11/21/2008 11/21/2008 11/21/2008 11/21/2008 11/21/2008 (1) Stock option was granted on February 2, 2004 and unvested amounts were canceled prior to the end of fiscal 2006. (2) Stock option was granted on April 30, 2004 and unvested amounts were canceled prior to the end of fiscal 2006. (3) Stock option was granted on October 25, 2004 and unvested amounts were canceled prior to the end of fiscal 2006. (4) Stock option was granted on February 3, 2005 and unvested amounts were canceled prior to the end of fiscal 2006. (5) Stock option was granted on January 30, 2004 and unvested amounts were canceled prior to the end of fiscal 2006. (6) Stock option was granted on July 28, 2004 and unvested amounts were canceled prior to the end of fiscal 2006. Option Exercises and Stock Vested for Fiscal 2007 The table below summarizes the Spansion restricted stock units vested by Named Executive Officers during fiscal 2007. There were no Spansion or AMD stock option exercises by Named Executive Officers during fiscal 2007. Stock Awards Name Bertrand F. Cambou . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dario Sacomani . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . James E. Doran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thomas T. Eby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ahmed Nawaz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($) (1) 28,575 — 14,288 11,430 5,000 299,106 — 149,560 119,640 22,450 (1) The value realized equals the fair market value of Spansion Class A Common Stock on the vesting date, as measured by the closing price on that date, multiplied by the number of shares that vested. 37 Pension Benefits for Fiscal 2007 We provide a defined benefit plan for certain employees of our subsidiary in Japan. We do not provide a defined benefit plan for any of our other employees. Therefore, none of our Named Executive Officers are entitled to receive any benefits from a defined benefit plan. Nonqualified Deferred Compensation for Fiscal 2007 Our executive officers, and our other executives, who are located in the United States are eligible to participate in the Spansion Executive Investment Account Plan (the “EIA Plan”). Participants in the EIA Plan may defer up to 50 percent of base salary and up to 100 percent of bonus payments under the Short-Term Performance-Based Incentive Compensation Plan or Sales Incentive Plan. Spansion matches up to three percent of pay ($0.50 on each $1 of pay deferred under the EIA Plan) on the executive’s base salary in excess of the applicable compensation limit set by the Internal Revenue Code. Currently, none of our executive officers participates in the EIA Plan. Potential Payments upon Termination, a Change of Control or Other Event Following is a general discussion of the compensation available to our Named Executive Officers in the event an executive’s employment terminates. The actual payments can be determined only at the time of the executive’s separation from Spansion. For purposes of illustration, however, tables below reflect the compensation Spansion would have provided to the Named Executive Officers had their employments terminated effective December 28, 2007. Termination for Any Reason When employment terminates for any reason, each Named Executive Officer is entitled to receive compensation earned during the time the executive was employed. Such compensation includes: • Compensation earned during the fiscal year; • Vested equity awards issued under any Spansion equity plan pursuant to the applicable terms and conditions of each award; • Amounts deferred under the EIA Plan; • Benefits accrued under Spansion’s Retirement Savings Plan; and • Accrued unused vacation pay. Retirement If employment termination is due to retirement (which is achieved when an employee has reached 60 years of age and has provided 15 years of service to Spansion), in addition to compensation listed above under “Termination for Any Reason,” each Named Executive Officer receives all or a pro rata portion of the payment he or she would otherwise have been entitled to receive under Spansion’s Short-Term Performance-Based Incentive Compensation Plan (“STIP”) so long as the Named Executive Officer was an active participant in the STIP for at least six months of the plan year. Termination Due to Death In the event employment termination is due to death, in addition to compensation listed above under “Termination for Any Reason,” each Named Executive Officer’s beneficiary receives all or a pro-rata portion of the payment he or she would otherwise have been entitled to receive under the STIP, as long as the Named Executive Officer was an active participant in the STIP for at least six months of the plan year, and life insurance 38 benefits. In addition, if the executive has at least 15 years of service, all equity awards that would have vested any time during the calendar year in which the death occurred are accelerated to vest on the executive’s employment termination date. Termination Due to Disability In the event employment termination is due to a disability, in addition to compensation listed above under “Termination for Any Reason,” each Named Executive Officer is eligible to receive benefits under the Spansion disability plans in which he or she participated at the time of the termination; and if the executive has at least 15 years of service, all equity awards that would have vested any time during the calendar year in which the disability occurred are accelerated to vest on the executive’s employment termination date. Involuntary Termination in Connection with a Reduction in Force In the event employment termination is involuntary due to a reduction in force, in addition to any compensation due under “Termination for Any Reason” and “Retirement” listed above, each Named Executive Officer receives, but only in return for executing a general release agreement: a lump sum payment based on length of service (the “Severance Pay Period”), payment for four months of medical COBRA continuation coverage, use of Spansion’s employee assistance program for a period of time, eight weeks base salary, any STIP award not yet paid following the close of a plan year, and, at Spansion’s discretion, additional compensation to be determined by Spansion for any sabbatical the executive had earned but not taken prior to the termination date. Additionally, vesting for Spansion equity awards held by the executive that would regularly vest during the Severance Pay Period is accelerated to vest on the executive’s employment termination date. Termination in Connection With a Change of Control In fiscal 2005, we entered into a Change of Control Severance Agreement (the “Initial COC Agreement”) with each of our then-current executive officers, including Dr. Cambou and Messrs. Doran, Eby, and Sacomani, four of our current Named Executive Officers. Under the Initial COC Agreements, if within 24 months following a change of control (as described below), an executive officer’s employment was terminated by Spansion or its successor other than for Cause (as defined in the Initial COC Agreement) or by reason of death or disability, or if the executive officer terminated employment for Good Reason (as defined in the Initial COC Agreement), in addition to the compensation listed above under the heading “Termination of Employment for Any Reason,” the following would have occurred: • The executive officer would have received a lump sum payment consisting of a pro rata portion of the executive officer’s actual bonus payment, if any, under the STIP, plus two times (three times in the case of the Chief Executive Officer) the aggregate of (i) the executive’s then current base salary and (ii) the executive’s target bonus opportunity under the STIP; • Acceleration of all unvested equity granted to the executive officer under any Spansion equity incentive plan and held by the executive officer at the effective termination date; • Payment of premiums incurred by the executive officer for medical and dental COBRA continuation coverage as of the effective termination date, and ending the earlier of 18 months from that termination date or the date the executive officer begins receiving comparable medical and dental benefits through other employment; and • Upon a change of control, an executive may be subject to certain excise taxes pursuant to Section 4999 of the Internal Revenue Code, as amended (the “IRC”). Should change of control payments have exceeded 15 percent of the qualified 280G limit under Section 4999, the executive would have been reimbursed such that the after-tax benefit would have been the same as if no excise tax had been applied. Otherwise, calculated change-of-control payments in excess of the 280G limit would have been reduced such that the executive officer would not have been subject to any excise tax. 39 Generally, under the Initial COC Agreements, a change of control is conclusively presumed to have occurred on: • The acquisition by any person, other than by us, of beneficial ownership of more than 33 percent of either our then-outstanding membership interests or shares of our common stock, or the combined voting power of our then-outstanding voting securities entitled to vote generally in the election of directors; • A change of the majority of our board of directors as of a determination date (the “incumbent board”), provided, however, that any individual becoming a new board director subsequent to the determination date whose election or nomination for election by our security holders was approved by a vote of at least two-thirds of the members comprising the incumbent board shall be considered as though such individual were a member of the incumbent board; • The consummation of a reorganization, merger, statutory share exchange or consolidation or similar transaction, a sale or other disposition of all or substantially all of our assets, or an acquisition of assets or stock of another entity, whereby the individuals and entities that were the beneficial owners of our then-outstanding common stock and other then-outstanding voting securities cease to own more than 50 percent of the then-outstanding equity interests and the combined voting power of our then-outstanding voting securities entitled to vote generally in the election of directors; or • The approval by our stockholders of a complete liquidation or dissolution other than in the context of a transaction that does not constitute a change of control as described above. In September 2007, the Board of Directors, upon the recommendation of the Compensation Committee, approved an amended and restated form of the Initial COC Agreement (the “Amended COC Agreement”). The Amended COC Agreement incorporates deadlines for change of control payments in compliance with the regulations implementing section 409A of the IRC and is otherwise substantially similar to the Initial COC Agreement. Also in September 2007, the Committee approved a new form of change of control severance agreement (the “Current COC Agreement”) for use going forward for all new eligible executive officers. The Current COC Agreement is substantially similar to the Initial COC Agreement, except that the Current COC Agreement: • Does not contain the provision allowing for a tax gross-up in connection with change of control payments that exceeded 15 percent of the qualified 280G limit under Section 4999 of the IRC; • Includes an “alternative cap” provision allowing for the highest after-tax benefit without additional cost to Spansion; and • Includes deadlines for change of control payments in accordance with the regulations implementing section 409A of the IRC. During October and November 2007, we entered into an Amended COC Agreement with Dr. Cambou and Messrs. Doran, Eby and Sacomani, and we entered into a Current COC Agreement with Mr. Ahmed Nawaz. On November 26, 2007, we notified each of the executive officers with whom we entered into an Amended COC Agreement that we intend to cancel their respective Amended COC Agreements on or about November 27, 2009. When the Amended COC Agreements terminate, we expect to enter into a Current COC Agreement, or such other form of change of control agreement that the Board of Directors deems appropriate, with each executive officer who is eligible for such agreement at that time. The forms of Initial COC Agreement, Amended COC Agreement and Current COC Agreement have been filed with the Securities and Exchange Commission. 40 The following table shows the potential payments that would have been made to each of the Named Executive Officers if their respective employment with us had terminated as of December 28, 2007: Bertrand F. Cambou Normal Retirement Executive Benefits (60 years and Payments Upon and 15 Termination as of December 28, Voluntary years 2007 Termination Service) Compensation: Base Salary . . . . . . . . . . . . . . . Short-term Incentive . . . . . . . . Long-term Incentive Stock Options—Unvested and Accelerated . . . . . . . . . . . . . Restricted Stock Units— Unvested and Accelerated . . . . . . . . . . . . . Subtotal: . . . . . . . . . . . . . . . . . Benefits and Perquisites: Post-Employment Health Insurance (COBRA) . . . . . . Life Insurance Proceeds . . . . . Survivor Income Benefit . . . . Accrued Vacation Pay . . . . . . Sabbatical . . . . . . . . . . . . . . . . Reduction in Severance (due to modified gross-up) . . . . . Subtotal: . . . . . . . . . . . . . . . . . Vested Benefits: Stock Awards . . . . . . . . . . . . . Retirement Savings Plan . . . . Subtotal: . . . . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . . . . Involuntary Not for Cause Termination (Reduction in Force) Involuntary or for Good Reason Following Change of Control For Cause Within 24 Termination Months — — — $ 178,875 (1) — (3) $ 125,000 (4) — — — — — (6) — — — — — $ 28,505 (6) $ 332,380 — — — — — $ 34,372 — — — — $ 34,372 — — $ 34,372 — $637,657 $637,657 $672,029 $ Death $2,146,500 (2) — $2,683,125 (5) $ 125,000 (4) — (6) — $ 470,277 (6) — $5,299,902 $ 125,000 19,112 — — 34,372 — Disability — — — — — $ $ 3,687 — — 34,372 27,519 — $ — — $ 34,372 $ — — $1,000,000 $ 4,000 $ 34,372 — — — — $ 34,372 — — $ 34,372 $ — 65,578 — $ (237,517) $ 34,372 $ (184,033) — $1,038,372 — $ 34,372 — $637,657 $637,657 $672,029 — (6) — — (6) — (6) — (6) $ 637,657 $637,657 $ 637,657 $ 637,657 $637,657 $ 637,657 $637,657 $ 637,657 $ 637,657 $637,657 $1,035,615 $672,029 $5,753,526 $1,801,029 $672,029 (1) Dr. Cambou is eligible to receive 13 weeks of severance pay upon an involuntary, not for cause, termination. (2) Dr. Cambou is eligible to receive three times his annual base salary of $715,500 upon termination as described under “Termination in Connection with a Change of Control” above. (3) Ineligible due to age and years of service requirements. (4) Pro rata amount of bonuses earned. (5) Dr. Cambou is eligible to receive three times his annual target bonus of $894,375 upon termination in the event of a change of control as described under “Termination in Connection with a Change of Control” above. (6) Stock value is calculated based on the in-the-money position using a fair market value of $3.99 on December 28, 2007, which was the last business day of fiscal 2007. 41 Dario Sacomani Executive Benefits and Payments Upon Termination as of December 28, 2007 Compensation: Base Salary . . . . . . . . . . . . . Short-term Incentive . . . . . . Long-term Incentive Stock Options—Unvested and Accelerated . . . . . . . . Restricted Stock Units— Unvested and Accelerated . . . . . . . . . . . Bonus Repayment . . . . . . . . Subtotal: . . . . . . . . . . . . . . . Benefits and Perquisites: Post-Employment Health Insurance (COBRA) . . . . Life Insurance Proceeds . . . . Survivor Income Benefit . . . Accrued Vacation Pay . . . . . Relocation Repayment . . . . . Subtotal: . . . . . . . . . . . . . . . Vested Benefits: Stock Awards . . . . . . . . . . . . Retirement Savings Plan . . . Subtotal: . . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . . Voluntary Termination Normal Retirement (60 years and 15 years Service) Involuntary Not for Cause Termination (Reduction in Force) Involuntary or for Good Reason Following Change of Control For Cause Within 24 Termination Months — — — $ 77,885 (1) — (3) $ 60,000 (4) — — — — — (6) — — $18,750 (7) $18,750 — — — — (6) — $137,885 — — — — — — — — — $16,605 $16,605 $ 344 (8) — $16,949 $16,605 $ — $59,387 $59,387 $95,086 — (6) — $ 59,387 $59,387 $ 59,387 $59,387 $217,564 $75,992 — $59,387 $59,387 $75,992 3,687 — — $ 16,605 — $ 20,292 — — — $16,605 — $16,605 Death $ 810,000 (2) $ 567,000 (5) $ — (6) $ — — 60,000 — — — — — — — $1,000,000 $ 4,000 $ 16,605 — $1,020,605 — — — $16,605 — $16,605 — (6) — $ 59,387 $ 59,387 $ 59,387 $ 59,387 $1,591,804 $1,139,992 — $59,387 $59,387 $75,992 $ $ 19,112 — — 16,605 — 35,717 — 60,000 (4) — $ 119,700 (6) — $1,496,700 $ Disability (1) Mr. Sacomani is eligible to receive 10 weeks of severance pay upon an involuntary, not for cause, termination. (2) Mr. Sacomani is eligible to receive two times his annual base salary of $405,000 upon termination as described under “Termination in Connection with a Change of Control” above. (3) Ineligible due to age and years of service requirements. (4) Pro rata amount of bonuses earned. (5) Mr. Sacomani is eligible to receive two times his annual target bonus of $283,500 upon termination in the event of a change of control as described under “Termination in Connection with a Change of Control” above. (6) Stock value is calculated based on the fair market value $3.99 on December 28, 2007, which was the last business day of fiscal 2007. (7) Repayment of a pro rata amount of a bonus paid as part of Mr. Sacomani’s employment arrangement. (8) Repayment of a pro rata amount of Sacomani’s relocation benefits. 42 James E. Doran Executive Benefits and Payments Upon Termination as of December 28, 2007 Compensation: Base Salary . . . . . . . . . . . . Short-term Incentive . . . . . Long-term Incentive Stock Options—Unvested and Accelerated . . . . . . . Restricted Stock Units— Unvested and Accelerated . . . . . . . . . . Subtotal: . . . . . . . . . . . . . . Benefits and Perquisites: Post-Employment Health Insurance (COBRA) . . . Life Insurance Proceeds . . Survivor Income Benefit . . . . . . . . . . . . . . Accrued Vacation Pay . . . . Sabbatical . . . . . . . . . . . . . Subtotal: . . . . . . . . . . . . . . Vested Benefits: Stock Awards . . . . . . . . . . Retirement Savings Plan . . . . . . . . . . . . . . . . Subtotal: . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . Normal Retirement (60 years and 15 Voluntary years Termination Service) Involuntary Not for Cause Termination (Reduction in Force) Involuntary or for Good Reason Following Change of Control For Cause Within 24 Termination Months Death — — — $ 260,394 (1) — (3) $ 80,000 (4) — — — — — (6) — — — — — $ 69,649 (6) $ 410,043 — — $ 217,184 (6) $ 1,777,784 $ — — — — $ — — $ — $ 55,682 — $ 55,682 — $773,813 $773,813 $829,495 — $55,682 — $55,682 — $773,813 $773,813 $829,495 3,687 — — $ 55,682 $ 70,615 $ 129,984 — (6) $ 773,813 $ 773,813 $1,313,840 — $ 55,682 — $ 55,682 — $773,813 $773,813 $829,495 $ 918,000 (2) $ 642,600 (5) $ — (6) $ $ Disability — 80,000 (4) — — — — — 80,000 — — 19,112 — — $1,377,000 — — — 55,682 — 74,794 $ $ — (6) $ 773,813 $ 773,813 $ 2,626,391 4,000 55,682 — $1,436,682 — $ 773,813 $ 773,813 $2,290,495 — $ 55,682 — $ 55,682 — $773,813 $773,813 $829,495 (1) Mr. Doran is eligible to receive 29.5 weeks of severance pay upon an involuntary, not for cause, termination. (2) Mr. Doran is eligible to receive two times his annual base salary of $459,000 upon termination as described under “Termination in Connection with a Change of Control” above. (3) Ineligible due to age and years of service requirements. (4) Pro rata amount of bonuses earned. (5) Mr. Doran is eligible to receive two times his annual target bonus of $321,300 upon termination in the event of a change of control as described under “Termination in Connection with a Change of Control” above. (6) Stock value is calculated based on the fair market value $3.99 on December 28, 2007, which was the last business day of fiscal 2007. 43 Thomas T. Eby Executive Benefits and Payments Upon Termination as of December 28, 2007 Compensation: Base Salary . . . . . . . . . . . . Short-term Incentive . . . . . Long-term Incentive Stock Options—Unvested and Accelerated . . . . . . . Restricted Stock Units— Unvested and Accelerated . . . . . . . . . . Subtotal: . . . . . . . . . . . . . . Benefits and Perquisites: Post-Employment Health Insurance (COBRA) . . . Life Insurance Proceeds . . Survivor Income Benefit . . . . . . . . . . . . . . Accrued Vacation Pay . . . . Sabbatical . . . . . . . . . . . . . Subtotal: . . . . . . . . . . . . . . Vested Benefits: Stock Awards . . . . . . . . . . Retirement Savings Plan . . . . . . . . . . . . . . . . Subtotal: . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . Normal Retirement (60 years and 15 Voluntary years Termination Service) Involuntary Not for Cause Termination (Reduction in Force) Involuntary or for Good Reason Following Change of Control For Cause Within 24 Termination Months Death — — — $ 360,094 (1) — (3) $ 40,000 (4) — — — — — (6) — — — — — $ 90,493 (6) $ 490,587 — — $ 188,113 (6) $1,587,334 $ — — — — $ 3,687 — — — $ — 26,546 15,828 46,061 — $ 26,546 $ — $ 26,546 $ — $ 26,546 — $ 26,546 — $812,927 $812,927 $839,473 — $ 26,546 — $ 26,546 $ $ $ — $812,927 $812,927 $839,473 — (6) $ 812,927 $ 812,927 $1,349,575 — $ 823,071 (2) $ 576,150 (5) $ — (6) Disability — 40,000 (4) — — — — — 40,000 — — 19,112 — — $1,235,000 — — — 26,546 — 45,658 $ $ — (6) $812,927 $ 812,927 $812,927 $ 812,927 $839,473 $2,445,919 4,000 26,546 — $1,265,546 — $ 812,927 $ 812,927 $2,118,473 — $ 26,546 — $ 26,546 — $812,927 $812,927 $839,473 (1) Mr. Eby is eligible to receive 45.5 weeks of severance pay upon involuntary not for cause, termination. (2) Mr. Eby is eligible to receive two times his annual base salary of $411,536 upon termination as described under “Termination in Connection with a Change of Control” above. (3) Ineligible due to age and years of service requirements. (4) Pro rata amount of bonuses earned. (5) Mr. Eby is eligible to receive two times his annual target bonus of $288,075 upon termination in the event of a change of control as described under “Termination in Connection with a Change of Control” above. (6) Stock value is calculated based on the fair market value $3.99 on December 28, 2007, which was the last business day of fiscal 2007. 44 Ahmed Nawaz Executive Benefits and Payments Upon Termination as of December 28, 2007 Compensation: Base Salary . . . . . . . . . . . . Short-term Incentive . . . . . Long-term Incentive Stock Options—Unvested and Accelerated . . . . . . . Restricted Stock Units— Unvested and Accelerated . . . . . . . . . . Bonus Repayment . . . . . . . Subtotal: . . . . . . . . . . . . . . Benefits and Perquisites: Post-Employment Health Insurance (COBRA) . . . Life Insurance Proceeds . . . Survivor Income Benefit . . Accrued Vacation Pay . . . . Relocation Repayment . . . . Subtotal . . . . . . . . . . . . . . . Vested Benefits: Stock Awards . . . . . . . . . . . Retirement Savings Plan . . Subtotal: . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . . Voluntary Termination Normal Involuntary Retirement Not for (60 years Cause and 15 Termination years (Reduction Service) in Force) Involuntary or for Good Reason Following Change of Control For Cause Within 24 Termination Months — — — $ 81,731 (1) — (3) $ 40,000 (4) — — — — — (6) — — 366,667 (7) 366,667 — — — $ 4,988 (6) — $126,719 — — — $ 850,000 (2) $ 595,000 (5) $ — (6) — $ 159,600 (6) — $1,604,600 $ $ — — 40,000 — — — — — — 3,687 — — $ 19,182 — $ 22,869 — — — $19,182 — $19,182 $ — $1,000,000 $ 4,000 $ 19,182 — $1,023,182 — — — $19,182 — $19,182 — $ 26,811 $ 26,811 $607,249 — (6) $ 26,811 $ 26,811 $176,399 — $26,811 $26,811 $45,993 — (6) — $ 26,811 $ 26,811 $ 26,811 $ 26,811 $1,669,285 $1,089,993 — $26,811 $26,811 $45,993 $ 18,692 — — 19,182 — 37,874 — 40,000 (4) Disability — — — — — — $ 19,182 $19,182 194,589 (8) — $213,771 $19,182 — $26,811 $26,811 $45,993 $ Death (1) Mr. Nawaz is eligible to receive 10 weeks of severance pay upon an involuntary, not for cause, termination. (2) Mr. Nawaz is eligible to receive two times his annual base salary of $425,000 upon termination as described under “Termination in Connection with a Change of Control” above. (3) Ineligible due to age and years of service requirements. (4) Pro rata amount of bonuses earned. (5) Mr. Nawaz is eligible to receive two times his annual target bonus of $297,500 upon termination in the event of a change of control as described under “Termination in Connection with a Change of Control” above. (6) Stock value is calculated based on the fair market value $3.99 on December 28, 2007, which was the last business day of fiscal 2007. (7) Repayment of a pro rata amount of a bonus paid as part of Mr. Nawaz’s employment arrangement. (8) Repayment of a pro rata amount of Mr. Nawaz’s relocation benefits. 45 EQUITY COMPENSATION PLAN INFORMATION The following table summarizes the number of outstanding options, warrants and rights granted to employees and directors, as well as the number of securities remaining available for future issuance under Spansion’s 2005 Equity Incentive Plan (the “2005 Plan”) and 2007 Equity Incentive Plan (the “2007 Plan”) as of December 30, 2007. Plan category Equity compensation plans approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity compensation plans not approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) (b) Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) Weighted-average exercise price of outstanding options, warrants and rights ($) 6,690,394 (1) — 6,690,394 $11.53 (2) — (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (#) 7,506,427 (3) — 7,506,427 (1) Includes the following: • 3,327, 718 shares issuable upon exercise of outstanding stock options awarded under the 2005 Plan. • 2,912,741 shares issuable upon vesting of outstanding restricted stock units awarded under the 2005 Plan. • 209,250 shares issuable upon exercise of outstanding stock options awarded under the 2007 Plan. • 240,685 shares issuable upon vesting of outstanding restricted stock units awarded under the 2007 Plan. (2) Represents a weighted average exercise price of $11.67 for stock options outstanding under the 2005 Plan, and $9.31 for stock options outstanding under the 2007 Plan. Excludes the following: • 2,912,741 shares issuable upon vesting of outstanding restricted stock units awarded under the 2005 Plan. • 240,685 shares issuable upon vesting of outstanding restricted stock units awarded under the 2007 Plan. (3) Includes 360,839 shares that were cancelled as of December 30, 2007 under the 2005 Plan and are now available to be issued under the 2007 Plan. 46 ITEM 2—RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We are asking stockholders to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for our current fiscal year. Our current fiscal year began on December 31, 2007 and will end on December 28, 2008. Unless you indicate otherwise, your proxy will vote FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the current fiscal year. The Audit Committee appoints the independent registered public accounting firm annually. Before appointing Ernst & Young LLP for fiscal 2008, the Audit Committee carefully considered the firm’s qualifications and performance during fiscal 2006 and fiscal 2007. In addition, the Audit Committee reviewed and pre-approved all audit and permissible non-audit services performed by Ernst & Young LLP and the fees charged for such services in fiscal 2006 and 2007. The Audit Committee also examined, among other things, the effect that the performance of non-audit services may have upon Ernst & Young LLP’s independence. Although ratification by stockholders is not required by law, the Board of Directors has determined that it is desirable to request ratification of this selection by the stockholders. Notwithstanding its selection, the Audit Committee, in its discretion, may appoint a new independent registered public accounting firm at any time during the year if the Audit Committee believes that such a change would be in the best interest of Spansion and its stockholders. If the stockholders do not ratify the appointment of Ernst & Young LLP, the Audit Committee may reconsider its selection. A representative of Ernst & Young LLP is expected to be present at the Annual Meeting and will have an opportunity to make a statement if he or she so desires. He or she will also be available to respond to appropriate questions from stockholders. Audit Committee Pre-Approval Policy The Audit Committee has established a pre-approval policy for audit, audit-related and tax services that can be performed by the independent auditors without specific authorization from the Audit Committee, subject to certain restrictions. The pre-approval policy identifies the specific services pre-approved by the Audit Committee and the applicable limitations, while ensuring the independence of the independent auditors to audit Spansion’s financial statements is not impaired. Under the pre-approval policy, the Audit Committee pre-approves all audit and non-audit services not prohibited by law to be provided by the independent registered public accounting firm. Such pre-approval authority for non-audit services may be delegated by the Audit Committee to one or more of its members. Any pre-approval decisions must be consistent with the guidelines and fee levels or budgeted amounts established annually by the Audit Committee, provided that the member or members to whom such authority is delegated shall report any pre-approval decisions to the full Audit Committee at its next regular meeting. Any proposed services exceeding the fee levels or budgeted amounts established by the Audit Committee must be specifically approved by the Audit Committee. All Ernst & Young LLP services and fees in fiscal 2006 and fiscal 2007 were pre-approved by the Audit Committee. Service Fees Paid to the Independent Registered Public Accounting Firm Audit Fees. Audit fees of Ernst & Young LLP during fiscal 2006 and fiscal 2007 were associated with the annual audit of our consolidated financial statements, statutory audits required internationally, and fees related to other regulatory filings, including our registration statement in connection with our secondary public offering in fiscal 2006. Audit fees for fiscal 2006 and fiscal 2007 included fees related to Ernst & Young LLP’s audit of the effectiveness of Spansion’s internal controls pursuant to Section 404 of the Sarbanes-Oxley Act. Audit fees for fiscal 2006 were $3.1 million. Audit fees for fiscal 2007 were $2.3 million. Audit-Related Fees. Fees for audit-related services rendered by Ernst & Young LLP were $0.2 million in fiscal 2007. There were no fees for audit-related services paid to Ernst & Young LLP for fiscal 2006 47 Tax Fees. Tax fees paid to Ernst & Young LLP for fiscal 2007 were $0.1 million. There were no tax fees paid to Ernst & Young LLP for fiscal 2006. All Other Fees. There were no other fees paid to Ernst & Young LLP for fiscal 2007 and fiscal 2006. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE CURRENT FISCAL YEAR. 48 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Review and Approval of Transactions with Related Persons The Audit Committee has adopted a written policy for approval of transactions between Spansion and its directors, director nominees, executive officers, greater than five percent beneficial owners and their respective immediate family members, where the amount involved in the transaction exceeds or is expected to exceed $120,000 in a single calendar year. The related person transactions described in this proxy statement were approved by the Board of Directors before this policy was adopted. The policy provides that the Audit Committee reviews certain transactions subject to the policy and determines whether or not to approve or ratify those transactions. In doing so, the Audit Committee takes into account, among other factors it deems appropriate: • the related person’s interest in the transaction; • the approximate dollar value of the amount involved in the transaction; • the approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss; • whether the transaction was undertaken in the ordinary course of business of Spansion; • whether the transaction with the related person is proposed to be, or was, entered into on terms no less favorable to Spansion than terms that could have been reached with an unrelated third party; • the purpose of, and the potential benefits to Spansion of, the transaction; and • any other information regarding the transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction. In addition, the Audit Committee has delegated authority to the Chair of the Audit Committee to pre-approve or ratify certain transactions. A summary of any new transactions pre-approved or ratified by the Chair is provided to the full Audit Committee for its review in connection with its next scheduled Audit Committee meeting. The Audit Committee has considered and adopted standing pre-approvals under the policy for limited transactions with related persons. Pre-approved transactions include: • employment of executive officers, subject to certain conditions; • any compensation paid to a director if the compensation is required to be reported in Spansion’s proxy statement under Item 402 of Regulation S-K promulgated by the Securities and Exchange Commission; • any transaction with another company at which a related person’s only relationship is as an employee (other than an executive officer or director) or beneficial owner of less than ten percent of that company’s equity, if the aggregate amount involved does not exceed the greater of $1,000,000, or two percent of that company’s total annual revenues; • any charitable contribution, grant or endowment by the Company to a charitable organization, foundation or university at which a related person’s only relationship is as an employee (other than an executive officer or director), if the aggregate amount involved does not exceed the lesser of $1,000,000, or two percent of the charitable organization’s total annual receipts; and • any transaction where the related person’s interest arises solely from the ownership of Spansion’s Class A Common Stock and all holders of Spansion’s Class A Common Stock received the same benefit on a pro rata basis. A summary of new transactions covered by the standing pre-approvals described above is provided to the Audit Committee for its review at each regularly schedule Audit Committee meeting. 49 Overview We have ongoing relationships and transactions with Advanced Micro Devices, Inc. (“AMD”) and Fujitsu Limited (“Fujitsu”). Dr. Ruiz, Chairman of the Board and Chief Executive Officer of AMD, was the Chairman of our Board of Directors until September 20, 2007. Mr. Ono, Corporate Senior Executive Vice President and Representative Director of Fujitsu Limited, was a member of our Board of Directors until March 16, 2007. Due to their respective positions with AMD and Fujitsu, Dr. Ruiz could be deemed to have an indirect material interest in the transactions with AMD (as described below), and Mr. Ono could be deemed to have an indirect material interest in the transactions with Fujitsu (as described below). On March 18, 2008, we completed our acquisition of Saifun Semiconductors Limited (“Saifun”). In connection with the Saifun acquisition, the Board of Directors appointed Dr. Boaz Eitan, Executive Vice President and Chief Executive Officer, Saifun, as a member of the Board effective as of the closing of the acquisition. Dr. Eitan serves as a Class II director and will serve until our 2010 annual meeting of stockholders or until his earlier removal, resignation or death. Also in connection with the Saifun acquisition, we entered into a Noncompetition and Retention Agreement with Dr. Eitan whereby he will receive an annual gross salary equal to the Israeli shekel equivalent of $260,000 (as determined according to the representative rate of exchange published by the Bank of Israel). In addition, Dr Eitan will be eligible for an annual performance bonus and one time retention bonus if he remains employed by Spansion at the one year anniversary of the closing of the Saifun acquisition. The Noncompetition and Retention Agreement also contains a two-year non-competition provision and a two-year non-solicitation provision. We are also currently party to several agreements with AMD and Fujitsu. These agreements include: • the Amended and Restated Fujitsu Distribution Agreement; • the Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement; • the Amended and Restated Patent Cross-License Agreement with Fujitsu; • the Amended and Restated Patent Cross-License Agreement with AMD; • the Amended and Restated Non-Competition Agreement; • various software license, maintenance, consulting and development agreements; • various service agreements and leases; and • agreements with Fujitsu related to the sale of our JV1 and JV2 wafer fabrication facilities (the “JV1/JV2 Facilities”) and certain equipment, assets and inventory located at these facilities (the “JV1/JV2 Transaction”). Amended and Restated Fujitsu Distribution Agreement We and Fujitsu are party to the Amended and Restated Fujitsu Distribution Agreement, which provides that Fujitsu acts as a distributor for sales of our products in Japan and throughout the rest of the world, except for Europe and the Americas, with limited exceptions. We license use of the Spansion trademark to Fujitsu so that our products are sold under our own brand name. We also indemnify Fujitsu from and against any third-party action claiming our products infringe upon a third-party’s intellectual property rights up to the amounts paid to Fujitsu by their customers for the affected products. Under the Fujitsu Distribution Agreement, our prices are based on our recommended sales prices, subject to adjustment in certain cases based on Fujitsu’s sales prices to their customers, less an agreed-upon distribution margin. Fujitsu has agreed to use its best efforts to promote the sale of our products in Japan and to specified customers served by Fujitsu. In the event that we reasonably determine that Fujitsu’s sales performance is not satisfactory based on specified criteria, then we have the right to require Fujitsu to propose and implement an agreed-upon corrective action plan. If we reasonably believe that the corrective action plan is inadequate, we can 50 take steps to remedy deficiencies ourselves through means that include selling products ourselves or appointing another distributor as a supplementary distributor. The Fujitsu Distribution Agreement will expire on September 30, 2008 although we and Fujitsu can mutually agree to terminate the agreement at any time. Either party can terminate the Fujitsu Distribution Agreement for a material breach of performance thereunder after a failure to cure the breach within 120 days. Currently, the distribution margin earned by Fujitsu on the sale of certain of our products is 4.3 percent. Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement AMD and Fujitsu have each contributed to us various intellectual property rights and technologies pursuant to an Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement. Under this agreement, we became owners, or joint owners with each of Fujitsu and AMD, of certain patents, patent applications, trademarks, and other intellectual property rights and technology. AMD and Fujitsu reserved rights, on a royalty-free basis, to practice the contributed patents and to license these patents to their affiliates and successors-in-interest to their semiconductor groups. AMD and Fujitsu each have the right to use the jointly owned intellectual property for their own internal purposes and to license such intellectual property to others to the extent consistent with their non-competition obligations to us. Subject to our confidentiality obligations to third parties, and only for so long as AMD’s and Fujitsu’s ownership interests in us remain above specific minimum levels, we are obligated to identify any of our technology to each of AMD and Fujitsu, and to provide copies of and training with respect to that technology to them. In addition, we have granted a non-exclusive, perpetual, irrevocable fully paid and royalty-free license of our rights, other than patent and trademark rights, in that technology to each of AMD and Fujitsu. AMD may grant licenses under our patents, provided that these licenses are of no broader scope than, and are subject to the same terms and conditions that apply to, any license of AMD’s patents granted in connection with such license, and the recipient of such license grants to us a license of similar scope under its patents. Amended and Restated Patent Cross-License Agreements In connection with our reorganization as Spansion LLC in June 2003, we granted to each of AMD and Fujitsu, and AMD and Fujitsu each granted to us, non-exclusive licenses under certain patents and patent applications of their semiconductor groups to make, have made, use, sell, offer to sell, lease, import and otherwise dispose of certain semiconductor-related products anywhere in the world. The patents and patent applications that are licensed are those with an effective filing date prior to the termination of our patent crosslicense agreements. The agreements will automatically terminate on the later of June 30, 2013 and the date AMD or Fujitsu, as applicable, sells its entire equity interest in us. The agreements may be terminated by a party on a change in control of the other party or its semiconductor group. The licenses to patents under license at the time of the termination will survive until the last such patent expires. In cases where there is a change of control of us, AMD, Fujitsu, or the semiconductor group of AMD or Fujitsu, as the case may be, each other party to the cross-license agreement shall have the right to terminate the agreement (or to invoke the provisions described in this paragraph if the agreement had been previously terminated) by giving 30 days written notice within 90 days after receiving notice of the change of control. If so terminated, the rights, licenses and immunities granted under the agreement will continue solely with respect to those licensed patents that are entitled to an effective filing date that is on or before, and are licensed as of, the date of such change of control, and will continue until the expiration of the last to expire of such licensed patents. Moreover, with respect to circuit patents, which are patents (other than process patents) covering elements using electrical signals to achieve a particular function, the rights, licenses and immunities granted to the party undergoing the change of control are limited solely to: • each existing and pending product of such party as of the date of change of control; • each existing and pending product of the acquiring third party of such party as of the date of change of control that would have been in direct competition with products described in (i) above; and • successor products of products described in (i) and (ii) above. 51 We will continue to make royalty payments associated with licenses that survive the termination of the agreement. We currently pay royalties to each of AMD and Fujitsu in the amount of 0.15 percent of net sales of our products. The royalty rates will be further reduced to zero percent in November 2008. The royalty rates were negotiated by AMD, Fujitsu and us. In fiscal 2007, we incurred approximately $3.2 million of expenses related to royalties to each of AMD and Fujitsu under their respective patent cross-license agreements. Amended and Restated Non-Competition Agreement We are party to a non-competition agreement with AMD and Fujitsu, whereby AMD and Fujitsu each agree not to directly or indirectly engage in a business that manufactures or supplies standalone semiconductor devices (including single chip, multiple chip or system devices) containing certain Flash memory, which is the business in which we primarily compete. This non-competition agreement does not prevent AMD or Fujitsu from manufacturing or selling products that incorporate Flash memory (whether it be Spansion Flash memory or a competitive product). Although AMD currently has no other operations that compete in the Flash memory market, Fujitsu currently produces and sells products that incorporate Spansion Flash memory or competitive Flash memory. Furthermore, AMD and Fujitsu each agree that if either of them acquires a business that has a division or other operations that manufactures or supplies standalone semiconductor devices (including single chip, multiple chip or system devices) containing certain Flash memory, AMD and Fujitsu will provide us with a right of first offer to acquire the competing division or operations. AMD and Fujitsu are required to use their commercially reasonable efforts to divest the competing division or operations if we do not purchase them. These non-competition obligations of AMD will last until the earlier of (i) the dissolution of our company, and (ii) two years after the date on which AMD’s ownership interest in us is less than or equal to five percent. These non-competition obligations of Fujitsu will last until the earlier of (i) the dissolution of our company, and (ii) two years after the date on which Fujitsu’s ownership interest in us is less than or equal to five percent. We, AMD and Fujitsu also agreed not to solicit each other’s employees. Without our prior written consent, each of AMD and Fujitsu will not directly or indirectly either for itself or another person, (i) hire any individual employed by our company or (ii) solicit or encourage any individual to terminate his or her employment with our company. These obligations not to solicit or hire do not apply if (A) our company has terminated the employment of such individual or (B) at least two years has elapsed since such individual has voluntarily terminated his or her employment with our company. Similarly, without the prior written consent of AMD or Fujitsu, we agreed not to directly or indirectly either for ourselves or another person, (i) hire any individual employed by AMD or Fujitsu or (ii) solicit or encourage any individual to terminate his or her employment with AMD or Fujitsu. These obligations not to solicit or hire do not apply if (A) AMD or Fujitsu, as applicable, has terminated the employment of such individual or (B) at least two years has elapsed since such individual has voluntarily terminated his or her employment with AMD or Fujitsu, as applicable. These non-solicitation obligations of AMD will last until the earlier of (i) the dissolution of our company, and (ii) two years after the date on which AMD’s ownership interest in us is less than or equal to five percent. These non-solicitation obligations of Fujitsu will last until the earlier of (i) the dissolution of our company, and (ii) two years after the date on which Fujitsu’s ownership interest in us is less than or equal to five percent. These non-solicitation obligations of our company with respect to AMD employees or Fujitsu employees will terminate at the same time as the non-solicitation obligations of AMD or Fujitsu, as applicable, terminate. AMD/Fujitsu Service Agreements We were party to various service agreements with each of AMD and Fujitsu. Under its IT Services Agreement and General Services Agreement, AMD provided certain administrative services to us. Under its IT Services Agreement and General Services Agreement, Fujitsu provided, among other things, information technology, research and development, quality assurance, insurance, facilities, environmental, and human resources services primarily to our manufacturing facilities in Japan. For services rendered, AMD and Fujitsu were each paid fees in an amount equal to cost plus five percent except for services procured by AMD and Fujitsu from third parties, which were provided to us at cost. AMD and Fujitsu each had the right to approve 52 certain amendments to the other’s service agreements with us. Each of these service agreements expired on June 30, 2007. The services that were previously provided under these services agreement are currently provided by AMD and Fujitsu to us on a purchase order basis. For fiscal 2007, the total charges to us for services from AMD were approximately $600,000 and the total charges to us for services from Fujitsu were approximately $2.8 million. Research and Design Services Agreement We were party to an agreement pursuant to which we provided certain research and design services to AMD and Spansion (China) Limited provided manufacturing support services to AMD Technologies (China) Co. Ltd., AMD’s microprocessor assembly and test facility in Suzhou, China. For services rendered, we were paid fees generally in an amount equal to cost plus five percent. For fiscal 2007, the total charge to AMD for these services was approximately $137,000. This service agreement expired on June 30, 2007. Fujitsu Manufacturing Services Agreement Prior to September 30, 2006, we were party to an agreement pursuant to which Fujitsu provided manufacturing services to us at volumes ordered by us and prices established on a quarterly basis. Prices were on the basis of product-type and were equal to Fujitsu’s good faith estimate of its projected material, labor and overhead costs for the applicable product-type plus three percent. If Fujitsu’s aggregate expended labor and overhead costs for the manufacturing services actually purchased by us during a fiscal quarter were less than 97 percent of the projected labor and overhead costs for such fiscal quarter, then we were required to pay Fujitsu the amount of such deficiency in order to protect Fujitsu’s labor and overhead commitments from situations where the actual amounts of services purchased by us were materially different from projected orders. These services consisted of assembly and testing services for our products. The Manufacturing Services Agreement expired on September 30, 2006. Currently, such manufacturing services are provided by Fujitsu to us on a purchase order basis. As a result of manufacturing services provided by Fujitsu, we incurred approximately $3.6 million of expenses in fiscal 2007. Spansion Japan/Fujitsu Foundry Agreement On March 31, 2005, Spansion Japan, one of our subsidiaries, entered into a foundry manufacturing agreement with Fujitsu. Under this agreement, Spansion Japan provides wafer process foundry manufacturing services for Fujitsu’s microcontroller products that contain embedded Flash memory. The agreement has a term of three years and is automatically renewed for additional one-year periods absent notification of termination by a party at least two years prior to the termination date. This agreement terminated on April 2, 2007, upon the effectiveness of the closing of the JV1/JV2 Transaction (the “JV1/JV2 Closing”). Fees paid by Fujitsu to Spansion Japan under this agreement were approximately $2.9 million for fiscal 2007. Remediation Agreement In connection with our reorganization as of June 30, 2003, AMD contributed to us assets, including real property located in Sunnyvale, California, which is a Superfund listed property under CERCLA. A clean up order was issued by the San Francisco Bay Regional Water Quality Control Board, and a record of decision for remedial action for the site was issued by the U.S. Environmental Protection Agency in 1991, pursuant to which AMD must conduct groundwater remediation activities. To clarify their respective responsibilities regarding the release of hazardous substances at the Sunnyvale property prior to its contribution to Spansion, we entered into a remediation agreement with AMD and Fujitsu, pursuant to which AMD covenants to conduct remediation activities in accordance with the U.S. EPA’s record of decision and the San Francisco Bay Regional Water Quality Control Board’s order. AMD also agreed to indemnify Fujitsu and us against any losses incurred by Fujitsu and us in connection with this environmental condition for actions taken prior to the contribution of the property to Spansion. 53 Software Agreements We are party to various software license, maintenance, consulting services, and development agreements with AMD relating to certain AMD manufacturing software. Under a software license agreement, AMD granted us various licenses to use certain AMD manufacturing software in our manufacturing facilities. We also have granted AMD corresponding licenses to use improvements made to the software by us. Under a software maintenance and services agreement, AMD agreed to provide us software maintenance and support for the AMD manufacturing software. Under a consulting services agreement, AMD agreed to provide certain manufacturing software consulting services as may be mutually agreed upon between AMD and us. Additionally, under a joint development agreement, we have agreed with AMD to jointly develop manufacturing software in accordance with statements of work that may be mutually agreed upon from time to time. The software license agreement has no expiration date, but may be terminated by AMD upon a breach by us of the terms of the agreement, our insolvency, or a change of control as defined in the agreement. The software maintenance and services agreement expired on December 15, 2007, but automatically is renewed for additional one year terms unless either party provides 120 days notice to the contrary. The consulting services agreement expired on December 31, 2007. The joint development agreement expires on December 31, 2011 unless terminated earlier in accordance with the terms of the agreement. For fiscal 2007, the total amount that we paid to AMD under these agreements was approximately $1.6 million. Leases In connection with our reorganization, Fujitsu’s subsidiary, Fujitsu VLSI, agreed to lease premises in Aichi, Japan, to Spansion Japan for a term of one year, to be automatically renewed for one-year periods unless three months prior notice is given by either party. Under this lease, Fujitsu VLSI also provides various office services to Spansion Japan. We pay Fujitsu VLSI approximately $17,000 per month (based on the exchange rate as of December 30, 2007) for the premises lease and the office services. We lease from Fujitsu the land upon which JV3 and SP1, our fabrication facilities in Aizu-Wakamatsu, Japan, are located. As a result of our lease with Fujitsu, we incurred approximately $1.6 million in expenses in fiscal 2007. We agreed to lease approximately 170,000 square feet of space at our facilities in Austin, Texas to AMD for a term of two years expiring December 31, 2007. On December 19, 2007, we agreed to extend the term of the lease for the majority of the premises to June 30, 2008, and for a small portion of the premises to December 31, 2008. The space is used for office, warehouse, and data center purposes. Under the terms of the lease, AMD paid a quarterly rental equal to a percentage of the total operating expenses of the premises. We received from AMD approximately $3.0 million in fiscal 2007. We also leased from Fujitsu the land upon which JV1/JV2 are located. We incurred $80,000 in expenses in fiscal 2007 under this lease. This lease terminated on April 2, 2007 at the time of the JV1/JV2 Closing. Stockholders Agreement We are party to a Stockholders Agreement with AMD and Fujitsu that imposes certain restrictions and obligations on AMD and Fujitsu and on their respective shares of our common stock and that provides for certain matters pertaining to our management and governance. Pursuant to the Stockholders Agreement, AMD and Fujitsu agree to vote all shares of common stock held by them or their affiliates so as to cause the election of each Class A director proposed for election by the nominating committee of our board of directors. The Stockholders Agreement also provided for certain rights relating to the appointment of directors to serve on our Board. These rights terminated when AMD and Fujitsu’s ownership fell below 15 percent of our capital stock. We will allow AMD or Fujitsu, as the case may be, to have one representative attend the meetings of our board of directors as a non-voting participant for so long as such stockholder owns at least five percent of our capital stock, on an as converted to common stock basis. 54 Neither stockholder can transfer shares in an amount equal to or greater than one percent of the then outstanding common stock to any entity whose principal business competes with us, without first obtaining the consent of the non-transferring stockholder, such consent not to be unreasonably withheld after June 30, 2007. The Stockholders Agreement also provides for our cooperation with information. AMD and Fujitsu are both publicly traded companies, each of which is subject to legal and stock exchange reporting and other disclosure requirements. Accordingly, we will agree with AMD and Fujitsu to provide, subject to limitations, various financial and other information relating to us and to assist them in connection with their respective reporting, disclosure and other obligations. Each party has agreed that it will use any information provided under the agreement, unless otherwise made public, only in connection with these obligations and that it will not use the information for any other purpose, including in connection with the sale or purchase of securities issued by us. Pursuant to the Stockholders Agreement, we have agreed to grant AMD and Fujitsu rights to request us to register all or any part of their shares of Class A Common Stock under the Securities Act of 1933, as amended. In addition, subject to limitations, AMD and Fujitsu have rights to request that their shares be included in any registration of our common stock that we initiate. With the exception of board observer rights and registration rights, AMD’s rights under the Stockholders Agreement terminated on March 18, when AMD’s aggregate ownership interest in us fell below ten percent. Commercial Die Purchases We purchased from Fujitsu approximately $18.5 million of commercial die that we incorporate in our multichip package products during fiscal 2007. The prices paid by us to Fujitsu for these commercial die are determined through a bidding process that we use with our other suppliers. In selecting commercial die suppliers, we consider a number of factors, including price and whether the product design used by our end customer incorporates commercial die of specified suppliers. We believe that we could obtain a similar volume of commercial die from alternative sources without a material adverse effect on our operations, although there may be some delay due to the time required to qualify an alternate supplier. JV1/JV2 Transaction Asset Purchase Agreement On September 28, 2006, Spansion Japan entered into an Asset Purchase Agreement with Fujitsu, pursuant to which Spansion Japan sold to Fujitsu, effective as of the JV1/JV2 Closing, the JV1/JV2 Facilities, and certain of its assets, including inventory, located in the JV1/JV2 Facilities. The purchase price for the JV1/JV2 Facilities was approximately $150 million plus the value of the inventory as of the JV1/JV2 Closing. The obligations of Spansion Japan under the Asset Purchase Agreement are being guaranteed by Spansion Inc., Spansion LLC and Spansion Technology Inc. The sale of the JV1/JV2 Facilities closed on April 2, 2007. Master Lease Agreement In connection with the sale of the JV1/JV2 Facilities, on September 28, 2006 Spansion Japan and Fujitsu entered into a Master Lease Agreement for certain equipment, located at the JV1/JV2 Facilities and identified on equipment schedules agreed to by the parties. Effective upon the JV1/JV2 Closing, Spansion Japan began to lease to Fujitsu the equipment under the Master Lease Agreement. The initial term of each lease schedule will continue for the number of months specified in the applicable schedule unless otherwise terminated in accordance with the terms of the applicable schedule or the Master Lease Agreement. Fujitsu has the option to renew or extend the lease term for any or all of the equipment at the end of the initial term or any extension thereof for up to six months. If specified demand targets for wafers are not met, and subject to conditions 55 described in the Master Lease Agreement, each of Spansion Japan and Fujitsu will have a right to terminate the lease of some or all of the leased equipment on or after June 30, 2008, by giving notice to the other party prior to December 31, 2007. Subject to the terms of the Master Lease Agreement, Fujitsu will have a right of first refusal in the event of the sale by Spansion Japan of any equipment for a purchase price equal to the highest offer received from a third party. In addition, subject to the terms of the Master Lease Agreement, Fujitsu will have the option to purchase any or all of the equipment at the expiration of the applicable term, upon any early lease termination or if any equipment is not returned in its proper condition for a purchase price equal to the fair market value of the equipment at the time of purchase or any other purchase price as may be set forth in the applicable schedule. The obligations of Spansion Japan under the Master Lease Agreement are being guaranteed by Spansion Inc., Spansion LLC and Spansion Technology Inc. Fujitsu paid approximately $2.3 million in fees to Spansion Japan in fiscal 2007 under the Master Lease Agreement. Foundry Agreement In connection with the sale of the JV1/JV2 Facilities, Spansion Japan and Fujitsu entered into a Foundry Agreement, pursuant to which Fujitsu provides certain foundry services for the manufacture of our products at the JV1/JV2 Facilities. Pursuant to the Foundry Agreement, Fujitsu began to provide foundry services to us commencing upon the JV1/JV2 Closing. The Foundry Agreement also includes minimum capacity and purchase commitments between both the parties resulting in financial penalties if such capacity and purchase commitments are not achieved. The initial term of the Foundry Agreement ends on December 31, 2009. Spansion Japan and Fujitsu have agreed to enter into discussions to decide whether or not to extend the initial term of the Foundry Agreement by December 31, 2008, and Fujitsu has agreed to give Spansion Japan at least 12-months prior notice of its intent to cease providing foundry services to Spansion Japan under the Foundry Agreement. Either Spansion Japan or Fujitsu may terminate the Foundry Agreement in the event that the other party fails to correct or cure its material breach under the Foundry Agreement within 60 days of receipt of written notice from the non-defaulting party specifying such breach. We incurred approximately $159.7 million in expenses in fiscal 2007 under the Foundry Agreement. Secondment and Transfer Agreement In connection with the sale of the JV1/JV2 Facilities, Spansion Japan and Fujitsu entered into a Secondment and Transfer Agreement, or Secondment Agreement, pursuant to which Spansion Japan seconds certain employees to Fujitsu commencing upon the JV1/JV2 Closing. In addition, certain employees will ultimately be transferred to Fujitsu. Unless the parties otherwise agree, the period of secondment for seconded employees not designated for transfer will end no later than June 30, 2008, and no later than December 31, 2009 for seconded employees designated for transfer. The seconded employees remain employees of Spansion Japan and remain eligible to participate in Spansion Japan’s various benefit plans, and Fujitsu is required to reimburse Spansion Japan for all compensation and expenses associated with such seconded employees and incurred by Spansion Japan during the secondment period. The Secondment Agreement can be terminated (i) by the mutual written agreement of Spansion Japan and Fujitsu, (ii) by either Spansion Japan or Fujitsu in the event that the other party materially defaults in the performance of a material obligation under the Secondment Agreement and the breaching party has not cured such breach within 120 days after receipt of notice of default by the non-breaching party and (iii) by either Spansion Japan or Fujitsu in the event that the other party is subject to bankruptcy or insolvency proceedings. 56 The Secondment Agreement automatically terminates (i) on the transfer date of the last of the transferred employees or (ii) upon the termination of the Foundry Agreement unless otherwise agreed by Spansion Japan and Fujitsu. Fujitsu paid approximately $21.0 million in fees to Spansion Japan in fiscal 2007 under the Secondment Agreement. Wafer Processing Services Agreement In connection with the JV1/JV2 Closing, on April 2, 2007, Spansion Japan and Fujitsu entered into a Wafer Processing Services Agreement (the “Wafer Processing Agreement”), pursuant to which Fujitsu provides certain wafer processing services to Spansion Japan at the JV1/JV2 Facilities. The term of the Wafer Processing Agreement commenced on April 2, 2007 and is effective until December 31, 2009. The Wafer Processing Agreement will automatically terminate upon termination or expiration of that certain Foundry Agreement dated as of September 28, 2006, among Spansion Japan, Spansion Inc., Spansion LLC and Spansion Technology Inc. and Fujitsu. Either Spansion Japan or Fujitsu may terminate the Wafer Processing Agreement in the event that the other party fails to correct or cure any material breach by such other party of any covenant or obligation under the Wafer Processing Agreement within 60 days of receipt of written notice from the non-defaulting party specifying such breach. We incurred approximately $8.1 million in expenses in fiscal 2007 under the Wafer Processing Services Agreement. Sort Services Agreement In connection with the JV1/JV2 Closing, on April 2, 2007, Spansion Japan and Fujitsu entered into a Sort Services Agreement (the “Sort Services Agreement”), pursuant to which Fujitsu provides probe testing services of Spansion Japan’s wafers at the JV1/JV2 Facilities. The term of the Sort Services Agreement commenced on April 2, 2007 and is effective until December 31, 2009. Spansion Japan may terminate the Sort Services Agreement in its sole discretion with 60 days’ prior written notice to Fujitsu, and either Spansion Japan or Fujitsu may terminate the Sort Services Agreement in the event that the other party fails to correct or cure any material breach by such other party of any covenant or obligation under the Sort Services Agreement within 60 days of receipt of written notice from the non-defaulting party specifying such breach. We incurred approximately $20.0 million in expenses in fiscal 2007 under the Sort Services Agreement. Rental Agreement In connection with the JV1/JV2 Closing, on April 2, 2007, Spansion Japan and Fujitsu Semiconductor Technology, Inc., a Japanese corporation (“FSET”), entered into a Rental Agreement (the “Rental Agreement”), pursuant to which Spansion Japan rents certain equipment (the “Rental Equipment”) to FSET for the sole purpose of fulfilling the obligations of Fujitsu in the Sort Services Agreement. Spansion Japan will retain title to the Rental Equipment at all times, and FSET is prohibited form selling, pledging or otherwise encumbering or disposing of the Rental Equipment. The term of the Rental Agreement commenced on April 2, 2007 and is effective until the termination or expiration of the Sort Services Agreement. FSET paid approximately $3.6 million in fees to Spansion Japan in fiscal 2007 under the Rental Agreement. Services Agreement In connection with the JV1/JV2 Closing, on April 2, 2007, Spansion Japan and FSET entered into a Services Agreement (the “Services Agreement”), pursuant to which Spansion Japan provides certain human resource services and information technology (“IT”) services to FSET (collectively, the “Services”). Any services are to be provided pursuant to statements of works, which may be updated by Spansion Japan and FSET from time to time upon mutual agreement. Spansion Japan will provide the Services to FSET at cost plus five percent (5%). Pursuant to the Services Agreement, Spansion Japan shall perform the Services with the same degree of accuracy, quality and completeness as it would provide similar services to its own divisions or affiliates (“Service Level”). 57 The term of the Services Agreement commenced on April 2, 2007 and is effective until March 31, 2009. FSET may terminate all or a part of any individual Service at any time with six months’ advance notice to Spansion Japan. FSET may also terminate all or a part of any individual Service if Spansion Japan’s provision of such Service fails to comply with the applicable Service Level for such Service and Spansion Japan fails to correct its performance failure within 60 days of receipt of written notice from FSET of such failure. In addition, FSET may terminate the Services Agreement in the event that Spansion Japan fails to correct or cure any material breach of any obligation under the Services Agreement within 90 days of receipt of written notice from FSET of such breach, and Spansion Japan may terminate the Services Agreement in the event FSET fails to make any payments due to Spansion Japan under the Services Agreement within 90 days of receipt of written notice from Spansion Japan of such default in payment. FSET paid approximately $825,000 in fees to Spansion Japan in fiscal 2007 under the Services Agreement. Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings, including this proxy statement, in whole or in part, the following report will not be incorporated by reference into any such filings, nor will it be deemed to be soliciting material or deemed filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended. 58 AUDIT COMMITTEE REPORT The Audit Committee reviewed and discussed Spansion’s audited financial statements for the fiscal year ended December 30, 2007, with Spansion management and Ernst & Young LLP, Spansion’s independent registered public accounting firm. The Audit Committee also discussed with Ernst & Young LLP the matters required to be discussed by Statement on Auditing Standards No. 61. This included a discussion of the independent registered public accounting firm’s judgments as to the quality, not just the acceptability, of Spansion’s accounting principles and such other matters that generally accepted auditing standards require to be discussed with the Audit Committee. The Audit Committee also received and reviewed the written disclosures and the letter from Ernst & Young LLP required by Independence Standards Board Standard No. 1, Independence Discussion with Audit Committees, and the Audit Committee discussed the independence of Ernst & Young LLP with that firm. Based on the Audit Committee’s review and discussions noted above, the Audit Committee recommended to the Board that the audited financial statements be included in Spansion’s Annual Report on Form 10-K for the fiscal year ended December 30, 2007 for filing with the Securities and Exchange Commission. AUDIT COMMITTEE Robert L. Edwards, Chair David E. Roberson John M. Stich OTHER MATTERS The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the meeting, the proxies will be voted in accordance with the best judgment of the person or persons voting such proxies. ANNUAL REPORT AND FINANCIAL STATEMENTS Spansion’s Annual Report on Form 10-K, which includes Spansion’s audited financial statements for the fiscal year ended December 30, 2007, has accompanied or preceded this proxy statement. You may also access a copy of Spansion’s Annual Report on Form 10-K in the Investor Relations section of www.spansion.com. Upon your request, we will provide, without any charge, a copy of any of Spansion’s filings with the Securities and Exchange Commission. Requests should be directed to Spansion’s Corporate Secretary at Spansion Inc., 915 DeGuigne Drive, P.O. Box 3453, Sunnyvale, California 94088 or by email to Corporate.Secretary@spansion.com. Spansion is a registered trademark of Spansion Inc. Other product and company names used in this publication are for identification purposes only and may be trademarks of their respective companies. 59 Directions to Four Seasons Hotel Silicon Valley at East Palo Alto 2050 University Avenue, East Palo Alto, California 94303 Telephone: 650.566.1200 Facsimile: 650.566.1221 Directions From San Francisco International Airport and San Francisco • Travel south on Highway 101 to the University Avenue exit • Turn left onto University Avenue and make the first right at Woodland • Turn right into the hotel entrance Directions From Points North of the Golden Gate Bridge • Follow Highway 101 south towards San Francisco, over the Golden Gate Bridge ($5 toll) • Just past the toll booths, exit at Highway 1/Park Presidio • Follow Highway 1/Park Presidio through Golden Gate Park and onto 19th Avenue • Follow 19th Avenue to Highway 280 south • Merge onto Highway 280 south and travel 14 miles to Highway 92 east • Travel east on Highway 92 to Highway 101 south • Proceed south on Highway 101 for 10 miles to the University Avenue exit • Turn left onto University Avenue and make the first right at Woodland • Turn right into the hotel entrance Directions From the Monterey Peninsula, Santa Cruz and San Jose • Travel north on Highway 1 to Highway 17 • Follow Highway 17 towards San Jose • Proceed on Highway 17, which will become Highway 880 • Follow Highway 880 to Highway 101 north, toward Palo Alto • Exit at University Avenue • Travel west on University Avenue and make the first right at Woodland • Turn right into the hotel entrance Directions From San Jose Airport • Departing the airport terminal, follow the signs to Highway 101 north • Travel north on Hwy 101 approximately 14 Miles • Exit at University Avenue • Travel west on University Avenue and make the first right at Woodland • Turn right into the hotel entrance UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 30, 2007 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission File Number 000-51666 SPANSION INC. (Exact name of registrant as specified in its charter) Delaware 20-3898239 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 915 DeGuigne Drive P.O. Box 3453 Sunnyvale, CA 94088 (408) 962-2500 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Class A Common Stock, $0.001 Par Value Per Share NASDAQ Stock Market LLC Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È 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 È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ 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 “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Smaller reporting company ‘ Non-accelerated filer ‘ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ‘ No È The aggregate market value of Common Stock held by non-affiliates of the registrant (based upon the closing sale price on the NASDAQ Global Select Market on July 1, 2007 was approximately $1,140 million. Shares held by each executive officer, director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of each of the registrant’s classes of common stock as of the close of business on February 26, 2008: Large accelerated filer È Accelerated filer ‘ Class Number of Shares Class A Common Stock, $0.001 par value 135,572,590 Class C Common Stock, $0.001 par value 1 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2008 Annual Meeting of Stockholders are incorporated into Part III hereof. Spansion Inc. FORM 10-K For The Fiscal Year Ended December 30, 2007 INDEX Page PART I ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . 3 16 38 38 39 40 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 43 44 63 66 118 118 118 PART III ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 119 119 119 119 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 127 PART I ITEM 1. BUSINESS Cautionary Statement Regarding Forward-Looking Statements The statements in this report include forward-looking statements. These statements relate to future events or our future financial performance. Forward-looking statements may include words such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties, and actual events or results may differ materially. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under “Risk Factors” in this report and the following factors: • our ability to successfully introduce our next generation products to market in a timely manner; • our ability to effectively and timely achieve volume production of our next generation products; • our ability to improve our gross margins and to implement successfully our cost reduction efforts; • our ability to increase market acceptance of our products based on our MirrorBit technology; • our ability to accelerate our product development cycle; • our ability to penetrate further the integrated category of the Flash memory market with our high density products and expand the number of customers in emerging markets; • our ability to successfully develop and transition to the latest technologies; • our ability to finance, construct and equip SP1 and have 300-millimeter Flash memory wafer manufacturing capacity in fiscal 2008; • our ability to control our operating expenses, particularly our marketing, general and administrative costs; • our ability to develop our MirrorBit ORNAND, MirrorBit ORNAND2, MirrorBit Quad and MirrorBit Eclipse architectures, introduce new products based on these architectures, and to achieve customer acceptance of these products, particularly among mobile phone OEMs; • our ability to develop systems-level solutions that provide value to customers of our products; • our ability to enter new markets not traditionally served by Flash memory, for example, integrating logic functions within high density arrays of Flash memory and replacing DRAM in servers with MirrorBit Flash memory; and • our ability to negotiate successfully patent and other intellectual property licenses and patent crosslicenses and acquire additional patents. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report, or to conform such statements to actual results or changes in our expectations. Our Company We are a semiconductor device company exclusively dedicated to designing, developing, manufacturing, marketing and selling Flash memory solutions. Our Flash memory is integrated into a broad range of electronic products, including mobile phones, consumer electronics, automotive electronics, networking and telecommunications equipment, and computer peripherals. Our Flash memory solutions are incorporated in products from original equipment manufacturers, or OEMs, in each of these markets, including all of the top ten mobile phone OEMs, all of the top ten consumer electronics OEMs and all of the top ten automotive electronics OEMs. 3 We are headquartered in Sunnyvale, California. We operate three Flash memory wafer fabrication facilities, or fabs, four assembly, test mark and pack sites and a development fab, known as our Submicron Development Center, or SDC. For financial information about geographic areas and for information with respect to our sales, refer to the information set forth in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, beginning on page 44, below. We were originally organized as a Flash memory manufacturing venture of Advanced Micro Devices, Inc. (AMD) and Fujitsu Limited (Fujitsu) in 1993 named Fujitsu AMD Semiconductor Limited, or FASL. The primary function of FASL was to manufacture and sell Flash memory wafers to AMD and Fujitsu, who in turn converted the Flash memory wafers into finished Flash memory products and sold them to their customers. AMD and Fujitsu were also responsible for all research and development and marketing activities and provided FASL with various support and administrative services. By 2003, AMD and Fujitsu desired to expand the operations of FASL to: achieve economies of scale; add additional Flash memory wafer fabrication capacity; include assembly, test, mark and pack operations; include research and development capabilities and include various marketing and administrative functions. To accomplish these goals, in 2003, AMD and Fujitsu reorganized our business as a Flash memory company called FASL LLC, later renamed Spansion LLC, by integrating the manufacturing venture with other Flash memory assets of AMD and Fujitsu. Since this reorganization, until the beginning of the second quarter of fiscal 2006, we manufactured and sold finished Flash memory devices to customers worldwide through our two sole distributors, AMD and Fujitsu. Since the beginning of the second quarter of fiscal 2006, we have sold our products directly to our customers, including customers not served solely by Fujitsu. Fujitsu is currently our sole distributor in Japan and also as a nonexclusive distributor throughout the rest of the world, other than Europe and the Americas with limited exceptions. We were reorganized from Spansion LLC into Spansion Inc., a Delaware corporation, in connection with our initial public offering in December 2005. Our mailing address and executive offices are located at 915 DeGuigne Drive, Sunnyvale, California 94088, and our telephone number is (408) 962-2500. References in this report to “Spansion,” “we,” “us,” “our,” or the “Company” shall mean Spansion Inc. and our consolidated subsidiaries, unless the context indicates otherwise. We post on the Investor Relations page of our Web site, www.spansion.com, a link to our filings with the SEC, our Code of Ethics for our Chief Executive Officer, Chief Financial Officer, Corporate Controller and other Senior Finance Executives, our Code of Business Conduct, which applies to all directors and all our employees, and the charters of our Audit, Compensation, Finance, Nominating and Corporate Governance and Strategy committees. Our filings with the SEC are posted as soon as reasonably practical after they are filed electronically with the SEC. You can also obtain copies of these documents by writing to us at: Corporate Secretary, Spansion Inc., 915 DeGuigne Drive, Sunnyvale, California 94088, or emailing us at: Corporate.Secretary@spansion.com. These documents and filings are provided free of charge. For a discussion of the risk factors related to our business operations, please see the sections entitled, “Cautionary Statement Regarding Forward-Looking Statements,” above, and the “Risk Factors” set forth under Item 1A below. For fiscal 2007, our net sales were approximately $2.5 billion and our net loss was approximately $263.5 million, reflecting a decline in net sales of approximately three percent and an increase in net loss by approximately 78 percent over fiscal 2006 net sales of approximately $2.6 billion and net loss of approximately $148 million. According to market research firm iSuppli, in the first nine months of 2007, we were responsible for approximately 32 percent of all NOR Flash memory net sales, making us the largest supplier of NOR Flash memory in the world. We were also one of the largest suppliers for the overall Flash memory market, with a 12 percent market share, based on end sales of our products. In 2006, based on iSuppli data, we were the largest 4 supplier of NOR Flash memory, responsible for approximately 31 percent of all NOR Flash memory sales, and we were one of the largest suppliers for the overall Flash memory market, with a 12 percent market share, based on end sales of our products. Our Industry Consumers are increasingly demanding access to digital content through sophisticated communications equipment, consumer electronic products and automotive electronics. People now expect to instantly access, store and interact with multimedia content, including photos, music, video and text files using such products as mobile phones, digital cameras, DVD players, digital HDTVs, set top boxes, or STBs, MP3 players, video players and automotive electronics such as navigation systems. The primary semiconductor component used to store and access this kind of digital content is Flash memory, and as a result, Flash memory has become one of the most critical components of electronic products. Most electronic products use Flash memory to store important program instructions, known as code, as well as multimedia or other digital content, known as data. Code storage allows the basic operating instructions, operating system software or program code to be retained, which allows an electronic product to function, while data storage allows digital content, such as multimedia files, to be retained. There are two major architectures of Flash memory in the market today: NOR Flash memory, which is used for code and data storage in mobile phones and primarily for code storage in consumer and industrial electronics, and NAND Flash memory, which is primarily used for data storage in removable memory applications, such as Flash memory cards and USB drives, and is increasingly being used in high-end mobile phones and embedded applications such as MP3 players. The Flash memory market can be divided into two major categories based on application: the integrated category, which includes wireless and embedded applications, and the removable storage category. Within the integrated category, portable, battery-powered communications applications are referred to as “wireless” and all other applications, such as consumer, industrial, telecommunications and automotive electronics, are referred to as “embedded.” Within the removable storage category, applications include Flash memory cards and USB drives. Based on iSuppli data, the wireless portion of the integrated category, which primarily consists of mobile phones, represented the largest market for NOR Flash memory in fiscal 2007. We focus primarily on the integrated category of the Flash memory market, including wireless and embedded applications. Global demand for NAND Flash memory is growing much faster than that of NOR Flash memory largely on the strength of growth in multimedia consumer applications such as MP3 audio players and video players together with removable storage in applications such as Flash memory cards for digital photography, USB storage for general purpose use and an emerging trend for solid state drive solutions to replace hard drives in portable computer applications. Products Our current product portfolio is predominately based on NOR architecture, and ranges from 1 megabit to 2 gigabits with a breadth of interfaces and features. While historically our products have been based on floating gate technology, the majority of our new product designs use MirrorBit technology. Our products have traditionally been designed to support code, or combined code and data storage applications, and serve the wireless and/or embedded applications in the integrated category of the Flash memory market. Mobile phone applications represent a majority of our sales in fiscal 2007 and fiscal 2006 and are largely based on multi-chip package, or MCP, solutions that include Flash memory together with volatile memory such as dynamic random access memory, or DRAM. Embedded applications represent most of the balance of our sales in fiscal 2007 and fiscal 2006. While historically net sales to wireless applications far exceeded net sales to embedded applications, during fiscal 2007 we began to see a shift toward a balance between these two applications. Sales of MirrorBit technology-based products increased from approximately 50 percent of our total net sales in fiscal 2006 to approximately 71 percent in fiscal 2007. The remainder of our sales has been based on floating gate technology. 5 Technology Flash memory technology refers to the structure of an individual memory cell or transistor. Our products are based on two technologies, single-bit-per-cell floating gate technology and two- or more-bit-per-cell MirrorBit technology. In the first quarter of fiscal 2007, we began commercial shipments of products based on our MirrorBit Quad technology, the industry’s first four-bit-per-cell technology. Our products that are designed primarily for code storage and execution applications are based on NOR Flash memory architecture and utilize either traditional floating gate technology or our MirrorBit technology. Our products that are designed for content delivery or data storage applications and utilize our MirrorBit ORNAND and MirrorBit Quad architectures. Floating Gate Technology. Floating gate is the conventional memory cell technology that is utilized by most Flash memory companies today for both NOR and NAND products. A memory cell comprises a transistor having a source, a drain and a control gate to regulate the current flow between the source and the drain, thereby defining whether the memory cell stores a “0” bit or a “1” bit by storing charge in the cell storage medium. Floating gate is a memory cell technology in which the “floating gate” is a conductive storage medium between the control gate and the source and drain. It is referred to as a floating gate as it is electrically isolated or “floating” from the rest of the cell to ensure that stored charge does not leak away resulting in memory loss. We have created innovations in floating gate technology that have become industry standards, such as negative gate erase, single power supply and embedded programming algorithms, and we continue to hold a leading position in the Flash memory market with our products based on floating gate technology. Our products using floating gate technology are typically used for code storage in applications requiring very high read speeds or the ability to operate at extreme temperatures in harsh environments such as those found in automotive applications. The majority of low density applications also use products based on floating gate technology. MirrorBit Technology. To achieve storage density of two bits per cell, and most recently four bits per cell, we developed MirrorBit technology. MirrorBit technology stores two distinct charges in a single memory cell, with each charge equivalent to one bit of data thereby at least doubling the density, or storage capacity, of each memory cell and enabling higher density, lower cost products. This is made possible because MirrorBit technology stores charge in a nonconductive storage medium, silicon nitride, which eliminates the need for a floating gate, as opposed to the conductive storage medium used by floating gate technology. While electrons stored in a particular location of a MirrorBit nitride cell stay in place, those stored in a floating gate diffuse, preventing the storage of more than one charge in a floating gate cell. MirrorBit technology is the foundation for expanding our product roadmap with enhanced capabilities. For example, in the first quarter of fiscal 2007 we began selling products for content delivery applications using MirrorBit Quad technology, a technology with the ability to store four bits per cell. MirrorBit Quad, as with our two-bit-per-cell MirrorBit technology, stores charges in two distinct locations in a non-conducting nitride storage medium but the quantity of each charge is variable to produce the equivalent of two bits of data in each location for a total of four bits per cell. Furthermore, MirrorBit technology has the ability to efficiently integrate logic functions on the same device within high-density arrays of Flash memory which will enable us to create new types of Flash memory products not available on the market today, such as our planned HD-SIM product that is designed to integrate high performance processors and significant security capabilities. Also, we have leveraged our MirrorBit technology to expand our Flash memory offering into new areas such as serial interface Flash memory known as Serial Peripheral Interface. We believe that these Flash memory innovations made possible by MirrorBit technology will enable us to expand our opportunity in the Flash memory market. Process Technology Process technology refers to the particular method used to manufacture semiconductor integrated circuits. Like most semiconductor companies, we direct significant efforts toward invention and development of manufacturing processes technologies that achieve one or more of the following objectives: reduction of our manufacturing costs, improvement of our device performance, and addition of product features and capabilities. We achieve these goals primarily through a combination of optimizing the number of process steps required to 6 produce a product, and by reducing the scale or size of key structures in our integrated circuits such as the cells or transistors used to store charge and the surrounding circuits that manage and interface to these cells. We develop each process technology using particular design rules and refer to this as the process or technology node using nanometers as a measurement of length of certain critical structures in the process. By shrinking the transistors, we enable more transistors in the same area, which allows us to manufacture more bits per wafer at each successive process node, decreasing material cost per bit and increasing yield for a given density. During fiscal 2007, we offered products manufactured on technology nodes from 320-nanometer to 90-nanometer, utilizing MirrorBit and floating gate cell technology. We continue to manufacture products based on floating gate technology at process nodes from 320-nanometer to 110-nanometer. However, the majority of our wafer production is now focused on MirrorBit technology. The majority of our production during fiscal 2007 was the manufacture of MirrorBit products using 110- and 90-nanometer process technology for both MirrorBit NOR and MirrorBit ORNAND products. We sampled MirrorBit ORNAND products using our 65-nanometer process technology in 2007 and also sampled 65-nanometer MirrorBit Quad products in January 2008. Our 300millimeter wafer fabrication facility in Aizu-Wakamatsu, Japan, SP1, is now manufacturing 65-nanometer MirrorBit ORNAND products which we expect to sell to customers upon qualification. We plan to sample MirrorBit products manufactured with 45-nanometer process technology by the end of fiscal 2008. We believe that as we continue to reduce the size of our process nodes, from 90-nanometer to 65-nanometer to 45-nanometer and beyond, our transition to more advanced process nodes will provide us and our customers cost and performance benefits. Architecture Flash memory architecture may be defined as the connection of cells in a memory array with circuits that give access to and manage these cells for read, write and erase operations. Traditionally, customers requiring fast read performance and superior reliability have chosen a NOR architecture for program code storage as well as for combined code and data storage purposes. Flash memory customers requiring higher densities, faster write speeds and lower costs mostly for removable data storage applications have typically chosen a NAND architecture. Our products have historically implemented a NOR architecture and therefore have fast random and sequential read, fast random write and high reliability. To address applications in the integrated category of the market that use products with a NAND architecture, we instead developed a new architecture called ORNAND based on our MirrorBit technology that draws from some of the best attributes of both NOR and NAND architectures. We began commercial shipments of MirrorBit ORNAND-based products to customers in the second quarter of fiscal 2006. During fiscal 2007, we announced plans for products based on our MirrorBit Eclipse architecture, which we anticipate will provide high-performance code execution, fast write capability and a combination of two bits per cell and four bits per cell, combining attributes of MirrorBit NOR, MirrorBit ORNAND and MirrorBit Quad architectures in a single die. We expect to have products based on two bits per cell MirrorBit Eclipse architecture available mid-year fiscal 2008. In November 2007, we announced plans for the next generation of MirrorBit ORNAND architecture, which we refer to as MirrorBit ORNAND2. The new architecture is planned to expand the current MirrorBit ORNAND product portfolio with new solutions at 45-nanometer that require 25 percent fewer mask layers than Spansion’s 65-nanometer MirrorBit ORNAND products and is expected to support faster write speed performance and lower cost. MirrorBit ORNAND2 products are expected to be available in early 2009. Starting at the 65-nanometer process node, both new and existing architectures, such as MirrorBit Eclipse and MirrorBit ORNAND, will include a new capability we refer to as Built In Self Test, or BIST. BIST is available because a microcontroller is designed and built into our Flash memory die. Within a customers’ application, this microcontroller manages the Flash memory, replacing the previous use of fixed function circuits dedicated to this task. However, at the test stage of our manufacturing process we can utilize this same microcontroller to perform self-testing of the Flash memory die. This ability for the die to test itself enables the 7 use of lower cost testers and also permits all die on a wafer to be tested simultaneously. The ability to test all die on a wafer simultaneously is particularly significant in combination with our 300-millimeter manufacturing capacity. When using BIST, the test time for a 300-millimeter wafer is similar to a 200-millimeter wafer when producing the same Flash memory die. However, a 300-millimeter wafer can produce more than twice the number of die, effectively doubling test throughput and cutting the test cost in half. Utilizing BIST in our manufacturing processes enables us to significantly reduce test cost and support additional cost savings over conventional test processes using more expensive testers. Wireless Products Our products for wireless applications, particularly for mobile phones, offer a combination of low power consumption with fast performance and competitive cost structure for a wide range of customer platforms and wireless applications with different interface requirements. Key wireless products include the following: WS and NS Families. The WS and NS product families, with a 1.8 volt interface, are used for a broad range of mobile phones from low-end to higher-end with capabilities such as complex ring tones, enhanced color displays, higher resolution cameras and larger internal storage for multimedia content including music, videos and pictures. The WS and NS families, which include products based on floating gate and MirrorBit technology, combine a high performance burst-mode 1.8-volt interface, with Simultaneous Read/Write and Advanced Sector Protection features at 16-megabit to 512-megabit densities for code and data requirements. WS and NS products are usually combined with third-party SRAM, pSRAM or DRAM die in a single MCP to meet mobile phone memory needs. PL and GL Families. The PL and GL product families, with a 3-volt interface, enable code and data applications in low-end and mid-range mobile phones. The PL and GL product families, which are manufactured using floating gate and MirrorBit technology, include products with a page-mode interface, simultaneous Read/ Write capability and Advanced Sector Protection at 32-megabit to 256-megabit densities for wireless applications providing scalable platforms for code and data applications. PL and GL products are usually combined with third-party SRAM and pSRAM die in a single MCP to meet mobile phone memory needs. MS Family. The MS family, which includes 512-megabit to 2-gigabit density devices with a 1.8-volt interface, enables enhanced data applications in mid-range and higher-end mobile phones. The MS family, which is manufactured using ORNAND architecture based on MirrorBit technology, has faster write speeds than current NOR products and includes an interface similar to floating gate NAND. MS products, on their own or together with code-optimized Flash memory products such as those from the WS and NS families, are usually combined with third-party low-power SDRAM die in a single MCP to meet mobile phone memory needs. Embedded Products We offer a variety of general purpose as well as highly optimized products to serve the diverse needs of the embedded portion of the integrated category. Key embedded products include the following: AL and GL Families. The AL and GL product families address applications where high reliability coupled with low cost are important, including consumer, networking and telecommunications. The AL product family offers densities as low as 4 megabits, supports a simpler feature set and provides a standard interface for valuefocused applications, such as DVD players. The GL product family offers densities up to 1 gigabit in production and includes a page-mode interface and Advanced Sector Protection to support high performance consumer applications, such as high-end STBs and digital video recorders, or DVRs. MirrorBit technology is utilized for the GL family, while both MirrorBit and floating gate technology are utilized for the AL family. CD Family. The CD product family addresses automotive engine and transmission control applications, which require high reliability and feature rich, high performance solutions operating over wide temperature ranges. The CD product family combines a high performance burst-mode 2.5-volt interface, with Simultaneous 8 Read/Write and Advanced Sector Protection at 16- and 32-megabit densities. Because engine and transmission control units must withstand extreme temperatures, this family operates at up to 145°C and is available in a fully tested die-only solution for incorporation into special customer modules. We use our floating gate technology to meet the extreme operating temperature range and very high reliability requirements of automotive Flash memory customers. FL Family. The FL product family addresses the need for continued cost reduction in applications such as personal computers and personal computer peripherals, for example in hard disk drives and graphics cards and in consumer applications such as DVD players and home networking. The FL family utilizes our MirrorBit technology and a Serial Peripheral Interface with a low pin count package to provide optimal low cost solutions at densities from 4 to 128 megabits. Development Platforms We provide development tools and subsystems to customers of our Flash memory products that help them easily and quickly design Flash devices into their integrated products. We assist these customers in prototyping their designs with our Flash memory devices by providing the necessary hardware development tools and platforms for design, development, verification, evaluation and programming. Our goal is to streamline and simplify the design and development cycle by providing consistent and comprehensive tools to support the design and development process, from initial system bring-up to final product deployment. For example, our Productivity, Adaptive Communication & Entertainment, or PACE, development platform offers customers of our Flash memory products the benefit of utilizing our products on fully functional cell phone and PDA platforms running with multiple operating systems and with a variety of popular baseband and CPU chipsets. We believe this reference platform can remove significant design overhead and complexity from product development cycles. Additionally, PACE enables system tuning and optimization before final product release. PACE is used in generating benchmarks, creating reference designs, debugging software, integrating new hardware platforms and systems and prototyping next generation wireless architectures. Together with our key partners, we created the Platform Independent Storage Module, or PISMO, memory interface standard. PISMO is used to create standard memory modules recommended for development platforms and we offer comprehensive support of our Flash memory products on PISMO modules. PISMO modules enable our partners and customers to significantly reduce system development and debugging time and the PISMO standard is supported by a large number of system and chipset companies. PISMO allows design and system validation of memory combinations before any MCP is produced, allowing system design and software development to start while the final product is being manufactured. Together with our partners, we offer a comprehensive set of personal computer and embedded development environments based on PISMO. Other examples of our development tools include Spansion USB Programmer, or SUP, and a variety of devices models. SUP is a portable Flash programmer system used to program and verify our Flash memory devices. The SUP provides basic programming and verification functions in addition to the ability to exercise our advanced Flash memory features and enhancements all through the USB port of any personal computer or laptop. Sales and Marketing We market and sell our products worldwide under the Spansion trademark. Since the beginning of the second quarter of fiscal 2006, we have sold our products to our customers directly or through distributors, including customers not served solely by Fujitsu. Fujitsu is currently our sole distributor in Japan and our nonexclusive distributor throughout the rest of the world, other than Europe and the Americas, with limited exceptions. We market our products through a variety of direct and indirect channels. We focus on direct relationships with many of the top mobile phone OEMs and embedded Flash memory customers worldwide. We supplement 9 this effort with programs designed to support design-in of our products on reference designs, which are typically used by a broad base of wireless providers when choosing Flash memory solutions. For embedded Flash memory customers, we focus our marketing efforts on providers of complementary silicon to ensure our products interoperate effectively with the most widely used components in various embedded applications. Our marketing activities targeting customers, reference design houses and our potential partners include a combination of direct marketing activities such as trade shows, events and marketing collateral and indirect activities such as public relations and other marketing communications activities. Customers We serve our customers worldwide directly or through our distributors, including Fujitsu, who buy products from us and resell them to their customers, either directly or through third-party distributors. Customers for our products consist of OEMs, original design manufacturers, or ODMs, and contract manufacturers. Among those customers, Nokia Corporation accounted for approximately 10 percent of our net sales in fiscal 2007. For fiscal 2006 and fiscal 2005, AMD accounted for approximately 13 percent and 56 percent of our net sales. For fiscal 2007, fiscal 2006 and fiscal 2005, Fujitsu accounted for approximately 35 percent, 36 percent and 44 percent of our net sales. AMD’s sales force responsible for selling our products was transferred to us in the second quarter of fiscal 2005. We currently use Fujitsu as our sole distributor in Japan and with limited exceptions as a nonexclusive distributor throughout the rest of the world, other than Europe and the America. Original Equipment Manufacturers OEMs consist primarily of foreign and domestic manufacturers of mobile phones, consumer electronics, automotive electronics and networking equipment companies, selected regional accounts and customers in other target applications. Third-Party Distributors Our third-party distributors typically resell to OEMs, ODMs and contract manufacturers. Sales through our direct distributors are typically made pursuant to agreements that provide return rights for discontinued products or for products that are not more than twelve months older than their manufacturing date code. In addition, some of our agreements with distributors may contain standard stock rotation provisions permitting limited levels of product returns. Our distribution agreement with Fujitsu grants limited stock rotation rights to Fujitsu and allows Fujitsu to provide similar limited rights to some of its distributors. However, to date, Fujitsu has not extended these rights to its distributors. We generally warrant that products sold to our customers and our distributors will, at the time of shipment, be free from defects in workmanship and materials and conform to our approved specifications. Subject to specific exceptions, we offer a one-year limited warranty. Research and Development Research and development is critical to our success and is focused on process, product and system level development. We conduct our product and system engineering activities primarily in Sunnyvale, California and in Kawasaki, Japan with additional design and development engineering teams located in the United States, Europe and Asia. Our primary development focus is on MirrorBit products for the integrated category of the Flash memory market. We conduct our process development primarily at our SDC facility located in Sunnyvale, California, our Fab 25 facility located in Austin, Texas and our facilities in Aizu-Wakamatsu, Japan. Currently, we are developing new non-volatile memory process technologies with continuing refinement of our 65-nanometer process technology and plans for development of 45-nanometer and more advanced technology. In February 2007, we stopped further development of manufacturing processes on 200-millimeter at our SDC 10 facility with all future development at the SDC now focused on 300-millimeter wafers at 65-nanometer process technology and beyond. We also participate in alliances or other arrangements with external partners in the area of product technology, process technology and systems solutions to reduce the cost of development for ourselves and our Flash memory customers. Furthermore, these relationships with external partners enable us to broaden our product offerings and accelerate access to new technologies. Our research and development expenses for fiscal 2007, fiscal 2006 and fiscal 2005 were $437 million, $342 million and $293 million, respectively. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Manufacturing We own and operate seven manufacturing facilities, of which three, Fab 25, JV3 and SP1, are wafer fabrication facilities and four are assembly and test facilities. Fab 25 and JV3 are in full production with 200-millimeter wafers and we have begun production of 300-millimeter pre-qualification wafers at SP1. We believe the use of advanced process technologies at SP1 in combination with 300-millimeter wafers and BIST will result in significant cost benefits in the future. By utilizing 65-nanometer MirrorBit process technology in early 2008 and with plans to utilize 45-nanometer MirrorBit process technology in 2009 we believe our SP1 manufacturing facility will be using one of the most advanced Flash memory process technologies in the industry. Utilizing 300-millimeter wafers enables two and a quarter times more surface area than 200-millimeter wafers and will support greater than two and a quarter times the number of similar die from 200-millimeter wafers while utilizing a similar wafer processing time. Leveraging in early 2008 BIST in our 65-nanometer technology and beyond will enable us to significantly reduce test cost versus 200-millimeter BIST on the same process node and support additional cost savings over conventional test process using more expensive testers. In addition to our investment in 300-millimeter manufacturing capacity, we continue to optimize our 200-millimeter manufacturing. Fab 25 is focused almost exclusively on 90-nanometer MirrorBit process technology while JV3 is focused on 110-nanometer MirrorBit technology. To augment our internal wafer fabrication capacity, we have foundry agreements with Taiwan Semiconductor Manufacturing Company Limited, Semiconductor Manufacturing International Corporation and Fujitsu Limited. We believe these arrangements provide us flexibility to focus on advanced technologies at our own facilities, while supporting customer demand for products based on trailing-edge technologies from foundry. Our foundry arrangements also support our advanced technology for peaks in customer demand and for additional capacity when our own capacity may be temporarily reduced due to process node transitions at our facilities. In April 2007, we completed the sale of the JV1 and JV2 wafer fabrication facilities located in AizuWakamatsu, Japan, and certain equipment, assets and inventory located at these facilities, to Fujitsu for approximately $150 million plus the value of the inventory at the time of closing (the JV1/JV2 Transaction). Fujitsu currently provides foundry services to us for the manufacture of products at our former JV1 and JV2 wafer fabrication facilities. 11 The locations of our wafer fabrication facilities, the process technologies currently employed and the approximate clean room square footage are described in the table below. Wafer Fabrication Facilities Name/Location Austin, Texas Fab 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aizu-Wakamatsu, Japan JV3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SP1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wafer Size (diameter in millimeters) Process Technology (in nanometers) Approximate Clean Room Square Footage 200 65 to 110 120,000 200 300 110 to 170 65 142,500 86,700 The following table describes the location and approximate clean room square footage of our assembly and test facilities. Assembly and Test Facilities Approximate Clean Room Square Footage Location Bangkok, Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kuala Lumpur, Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Penang, Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Suzhou, China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,000 71,300 71,000 30,250 Our manufacturing processes require many raw materials, such as silicon wafers, mold compound, substrates and various chemicals and gases, and the necessary equipment for manufacturing. We obtain these materials and equipment from a large number of suppliers located throughout the world. Environmental Matters Many of our facilities are located on properties or in areas with a long history of industrial activity. Prior to our reorganization in 2003, environmental audits were conducted for each of our manufacturing facilities. The audits described various conditions customary of facilities in our industry and, in particular, noted historical soil and groundwater contamination at our Sunnyvale, California facility arising from the leakage of chlorinated solvent storage tanks that previously had been located on this property. This property is listed on the U.S. Environmental Protection Agency’s Superfund National Priorities List. AMD, as the former owner of the property, is investigating and remediating this contamination. In connection with our reorganization in 2003, each of AMD and Fujitsu agreed to indemnify us against losses arising out of the presence or release, prior to June 30, 2003, of hazardous substances at or from these and other sites they each contributed to us. Conversely, our subsidiary agreed to indemnify each of AMD and Fujitsu from and against liabilities arising out of events or circumstances occurring after June 30, 2003, in connection with the operation of our business. We also share some permits and facilities with AMD and Fujitsu. For example, our Aizu-Wakamatsu manufacturing facilities are located adjacent to other manufacturing facilities of Fujitsu. AMD and Fujitsu, on the one hand, and we, on the other, agreed to indemnify the other against liability arising from permit violations attributable to our respective activities. To the extent AMD and Fujitsu cannot meet their obligations under any of their indemnity agreements, or material environmental conditions arise, we may be required to incur costs to address these matters, which could have a material adverse effect on us. 12 We have made and will continue to make capital and other expenditures to comply with environmental laws, but we do not expect compliance with environmental requirements to result in material expenditures in the foreseeable future. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time—factors that could alter the current outlook. See “Risk Factors—We are subject to a variety of environmental laws that could result in liabilities.” Competition Our principal NOR Flash memory competitors are Intel Corporation, Samsung Electronics Co., Ltd., and STMicroelectronics. In May 2007, reflecting the trend towards consolidation in the NOR Flash memory industry, Intel Corporation, STMicroelectronics and Francisco Partners collectively announced their intention to form an independent semiconductor company, named Numonyx, which is expected to be focused on Flash memory technologies and products. Numonyx is being created from the key assets of Flash memory businesses of Intel Corporation and STMicroelectronics. Numonyx is expected to replace Intel Corporation and STMicroelectronics as principal competitors for NOR Flash memory. We increasingly compete with NAND Flash memory manufacturers where NAND Flash memory has the ability to replace NOR Flash memory in customer applications and as we develop data storage solutions such as MirrorBit ORNAND, MirrorBit Quad and MirrorBit ORNAND2 based products for the integrated category of the Flash memory market. Our principal NAND Flash memory competitors include Samsung Electronics Co., Ltd, Toshiba Corporation, Hynix Semiconductor Inc. and STMicroelectronics. In the future, our principal NAND Flash memory competitors may include Intel Corporation, Micron Technology, Inc., IM Flash Technology LLC (the joint venture between Intel Corporation and Micron Technology, Inc.) Numonyx and SanDisk Corporation. We believe Flash memory providers must also possess the following attributes to remain competitive: • strong relationships with OEMs, ODMs and contract manufacturers that are acknowledged leaders within their respective industries; • discipline to continually reduce costs ahead of historically declining semiconductor market prices; • strong market focus to identify emerging Flash memory applications; • leadership in research and development; • flexibility in manufacturing capacity and utilization so as to take advantage of industry conditions through market cycles; • access to the financial resources needed to maintain a highly competitive technological position; • the ability to establish and sustain strategic relationships and alliances with key industry participants; and • rapid time to market for new products, measured by the time elapsed from first conception of a new product to its commercialization. Employees As of December 30, 2007, we had approximately 9,300 employees. Some employees of our wholly owned Japanese subsidiary, Spansion Japan, are represented by a company union. Backlog We generally manufacture and market standard lines of products. Consequently, a significant portion of our sales are made from inventory on a current basis. Sales are made primarily pursuant to purchase orders for current delivery or agreements covering purchases over a period of time. These orders or agreements may be 13 revised or canceled without penalty. Generally, in light of current industry practice and experience, we do not believe that backlog information is necessarily indicative of actual sales for any succeeding period. Intellectual Property and Licensing Our success depends in part on our proprietary technology. While we attempt to protect our proprietary technology through patents, copyrights and trade secrets, we believe that our success will depend more upon technological expertise, continued development of new products, and successful cost reductions achievable by improving process technologies. In addition, we have access to intellectual property through certain cross-license arrangements with AMD and Fujitsu. There can be no assurance that we will be able to protect our technology or that competitors will not be able to develop similar technology independently. We currently have a number of United States and foreign patents and patent applications. There can be no assurance that the claims allowed on any patents we hold will be sufficiently broad to protect our technology, or that any patents will issue from any application pending or filed by us. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to us. Rights to Intellectual Property We rely on a combination of protections provided by contracts, including confidentiality and non-disclosure agreements, copyrights, patents, trademarks and common law rights, such as trade secrets, to protect our intellectual property. Our U.S. patents are potentially valid and enforceable for either 17 years from the date they were issued or 20 years from the date they were filed. Accordingly, some of our existing patents will only survive for a few more years while others will survive for approximately another 15 years. We do not believe that the expiration of any specific patent will have a material adverse effect on us. In addition, the duration of our valid and enforceable trademarks is indefinite. AMD and Fujitsu have each contributed to us various intellectual property rights pursuant to an Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement. Under this agreement, we became owners, or joint owners with each of Fujitsu and AMD, of certain patents, patent applications, trademarks, and other intellectual property rights and technology. AMD and Fujitsu reserved rights, on a royaltyfree basis, to practice the contributed patents and to license these patents to their affiliates and successors-in-interest to their semiconductor groups. AMD and Fujitsu each have the right to use the jointlyowned intellectual property for their own internal purposes and to license such intellectual property to others to the extent consistent with their non-competition obligations to us. Subject to our confidentiality obligations to third parties, and only for so long as AMD’s and Fujitsu’s ownership interests in us remain above specific minimum levels, we are obligated to identify any of our technology to each of AMD and Fujitsu, and to provide copies of and training with respect to that technology to them. In addition, we have granted a non-exclusive, perpetual, irrevocable, fully paid and royalty-free license of our rights in that technology to each of AMD and Fujitsu. In connection with our reorganization in June 2003, we entered into separate patent cross-license agreements with each of AMD and Fujitsu in which we granted to AMD or Fujitsu, as applicable, and AMD or Fujitsu, as applicable, each granted to us, non-exclusive licenses under certain patents and patent applications of their semiconductor groups to make, have made, use, sell, offer to sell, lease, import and otherwise dispose of specific semiconductor-related products anywhere in the world. The patents and patent applications that are licensed are those with an effective filing date prior to the termination of our patent cross-license agreements. Each agreement will automatically terminate on the later of June 30, 2013 or the date AMD or Fujitsu, whichever is the other party to the agreement, sells its entire equity interest in us. Each agreement may be terminated by a party on a change in control of the other party or its semiconductor group. The licenses to patents under license at the time of the termination will survive until the last such patent expires. 14 Under each agreement, in cases where there is a change of control of us or the other party (AMD or Fujitsu, or each of their semiconductor groups, as applicable), the other party shall have the right to terminate the agreement (or to invoke the provisions described in this paragraph if the agreement had been previously terminated) by giving 30 days written notice within 90 days after receiving notice of the change of control. If so terminated, the rights, licenses and immunities granted under the agreement will continue solely with respect to those licensed patents that are entitled to an effective filing date that is on or before, and are licensed as of, the date of such change of control, and will continue until the expiration of the last to expire of such licensed patents. Moreover, with respect to circuit patents, which are patents (other than process patents) covering elements relating to electrical signals to achieve a particular function, the rights, licenses and immunities granted to the party undergoing the change of control are limited solely to: i. each existing and pending product of such party as of the date of change of control; ii. each existing and pending product of the acquiring third party of such party as of the date of change of control that would have been in direct competition with products described in (i) above; and iii. successor products of products described in (i) and (ii) above provided such successor product is based substantially on the same technology. We will continue to make royalty payments associated with licenses that survive the termination of the cross-license agreement. In fiscal 2007, fiscal 2006 and fiscal 2005, we incurred royalty expenses of approximately $3 million, $6 million and $14 million to each of AMD and Fujitsu under their respective patent cross-license agreements. The royalty rate we pay to each of AMD and Fujitsu under our patent cross-license agreements with them was reduced from one percent of net sales of our products to 0.5 percent on October 1, 2005, and was further reduced to 0.3 percent on December 21, 2005. Following the conversion of our Class D common stock into Class A common stock, the royalty rate was further reduced to 0.15 percent and terminates in November 2008. As a subsidiary of AMD up until our initial public offering, we were the beneficiary of AMD’s intellectual property arrangements with third parties, including patent cross-license agreements with other major semiconductor companies such as Intel, Motorola and IBM, and licenses from third parties for technology incorporated in our products and software used to operate our business. Since the completion of our initial public offering in December 2005, we are no longer a beneficiary under a number of these agreements. Furthermore, upon the conversion of the outstanding shares of Class D common stock into shares of Class A common stock, we lost all rights as a beneficiary under most of these license agreements. As a result, we may be subject to claims that we are infringing intellectual property rights of third parties through the manufacture and sale of our products and the operation of our business. Therefore, absent negotiating our own license agreements with the third parties who own such intellectual property, we will be vulnerable to claims by such parties that our products or operations infringe such parties’ patents or other intellectual property rights. Under our Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement with AMD and Fujitsu that we executed in December 2005, AMD agreed to enforce its applicable patents to minimize, to the extent reasonably possible, any of our losses incurred as a result of the infringement of thirdparty patents, provided that the details of the manner in which AMD enforces its patents, including which of its patents AMD enforces, is left to AMD’s reasonable discretion. However, as a result of the conversion of the Class D common stock, AMD is no longer obligated to provide us this benefit. We will continue to attempt to negotiate our own agreements and arrangements with third parties for intellectual property and technology that is important to our business, including the intellectual property that we previously had access to through our relationship with AMD. We will also attempt to acquire new patents as our success in negotiating patent crosslicense agreements with other industry participants will depend in large part upon the strength of our patent portfolio relative to that of the third party with which we are negotiating. If the third-party benefits from an existing patent cross-license agreement with AMD, in many cases it will retain the rights that it has under that agreement even after we cease to be an AMD subsidiary, including rights to utilize the patents that AMD and Fujitsu transferred to us in connection with our reorganization as Spansion LLC in June 2003 and in connection 15 with our initial public offering. In many cases, any such third party will also retain such rights to utilize any patents that have been issued to us or acquired by us subsequent to our reorganization and prior to our no longer being a subsidiary of AMD. Our negotiating position will therefore be impaired, because the other party will already be entitled to utilize a large number, or even all, of our patents, while we will no longer have the right to utilize that party’s patents. As a result, we may be unable to obtain access to the other party’s patent portfolio on favorable terms or at all. Similarly, with respect to licenses from third parties for technology incorporated in our products or software used to operate our business, we may not be able to negotiate prices with these third parties on terms as favorable to us as those available when we were a subsidiary of AMD because we are not able to take advantage of AMD’s size and purchasing power. These parties, and other third parties with whom AMD had no prior intellectual property arrangement, may file lawsuits against us seeking damages (potentially including treble damages) or an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted. Such litigation could be extremely expensive and time-consuming. We cannot assure you that such litigation would be avoided or successfully concluded. The award of damages, including material royalty payments, or the entry of an injunction against the manufacture or sale of some or all of our products, would have a material adverse effect on us. Patents and Patent Applications As of December 31, 2007, we had 1,273 U.S. patents and 609 foreign patents as well as 615 patent applications pending in the United States. We expect to file future patent applications in both the United States and abroad on significant inventions, as we deem appropriate. In addition, under our cross-license agreement with AMD, AMD granted us the right to use a substantial number of patents that AMD owns. Similarly, under our cross-license agreement with Fujitsu, Fujitsu also granted us the right to use a substantial number of patents that Fujitsu owns. Pending Acquisition of Saifun Semiconductors Ltd. On October 8, 2007, we and Saifun Semiconductors Ltd. (Saifun) entered into an Agreement and Plan of Merger and Reorganization, dated as of October 7, 2007. Upon consummation of the acquisition of Saifun, we plan to license certain of our and Saifun’s intellectual property to semiconductor companies operating directly in the non-volatile memory market or integrating non-volatile memory technology into products whose primary application is outside the non-volatile memory market, and provide design and product development services to such licensees. ITEM 1A. RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this annual report. If any of the following risks occur, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected. As a result, the price of our common stock could decline, and you could lose all or part of your investment. The demand for our products depends in large part on continued growth in the industries into which they are sold. A decline in the markets served by any of these industries, or a decline in demand for Flash memory products in these industries, would have a material adverse effect on our results of operations. Sales of our Flash memory products are dependent to a large degree upon consumer demand for mobile phones. In fiscal 2006 and fiscal 2007, wireless customers, who primarily consist of mobile phone OEMs represented the largest market for NOR Flash memory. The market research firm iSuppli projects that wireless handset NOR Flash memory will represent approximately 61 percent of all NOR Flash memory sales in 2008, excluding commercial die such as the DRAM that is bundled in our multi-chip packages, or MCPs. In fiscal 2007, fiscal 2006 and fiscal 2005, sales to wireless Flash memory customers drove a majority of our sales. 16 Similarly, sales of our products targeting embedded Flash memory customers are dependent upon demand for consumer electronics such as set top boxes, or STBs, and DVD players, automotive electronics, industrial electronics such as networking equipment, personal computers and personal computer peripheral equipment such as printers. Sales of our products are also dependent upon the inclusion of increasing amounts of Flash memory content in some of these products. In fiscal 2007 and fiscal 2006, sales to embedded Flash memory customers drove a significant portion of our sales. If demand for mobile phones or products in the embedded portion of the integrated category of the Flash memory market, or the Flash memory content of these products, is below our or analysts’ expectations, if the functionality of successive generations of such products does not require increasing Flash memory density or if such products no longer require Flash memory due to alternative technologies or otherwise, our operating results would be materially adversely affected. Our business has been characterized by average selling prices that decline over time, which can negatively affect our results of operations. Historically, average selling prices of our products have decreased during the products’ lives, and we expect this trend to continue. When our average selling prices on existing products decline, our net sales and gross margins also decline unless we are able to compensate by selling more units, reducing our manufacturing costs or introducing and selling new, higher margin products with higher densities and/or advanced features. If average selling prices for our products decline, our operating results could be materially adversely affected. Moreover, during downturns, periods of extremely intense competition, or the presence of oversupply in the industry, average selling prices for our products have declined at a high rate over relatively short time periods as compared to historical rates of decline. For example, during the second quarter of fiscal 2007, our average selling prices decreased by approximately 11 percent compared with the first quarter of fiscal 2007 due to unanticipated intense competitive pricing environments in the Flash memory market that were greater than expected. We are unable to predict average selling prices for any future periods and may experience unanticipated, sharp declines in average selling prices for our products. When such steep pricing declines occur, we may not be able to mitigate the effects by selling more or higher margin units, or by reducing our manufacturing costs. In such circumstances, our operating results could be materially adversely affected. We have lost rights to key intellectual property arrangements because we are no longer a beneficiary of AMD’s patent cross-license agreements and other licenses, which creates a greatly increased risk of patent or other intellectual property infringement claims against us. As a subsidiary of Advanced Micro Devices, Inc (AMD) until our initial public offering in December 2005, we were the beneficiary of AMD’s intellectual property arrangements with third parties, including patent crosslicense agreements with other major semiconductor companies such as Intel, Motorola and IBM, and licenses from third parties for technology incorporated in our products and software used to operate our business. As a result of the conversion of the outstanding shares of Class D common stock into shares of Class A common stock in November 2006, we ceased to be a beneficiary under most of the remainder of these license agreements. As a result, we may be subject to claims that we are infringing intellectual property rights of third parties through the manufacture and sale of our products and the operation of our business. Therefore, absent negotiating our own license agreements with the third parties who own such intellectual property, we will be vulnerable to claims by such parties that our products or operations infringe such parties’ patents or other intellectual property rights. We will continue to attempt to negotiate our own agreements and arrangements with third parties for intellectual property and technology that are important to our business, including the intellectual property that we previously had access to through our relationship with AMD. We will also continue to attempt to acquire new patents as our success in negotiating patent cross-license agreements with other industry participants will depend in large part upon the strength of our patent portfolio relative to that of the third party with which we are negotiating. If such third-party benefits from an existing patent cross-license agreement with AMD or Fujitsu 17 Limited (Fujitsu), in many cases such third party will retain the rights that it has under that agreement, including rights to utilize the patents that AMD and Fujitsu transferred to us in connection with our reorganization as Spansion LLC in June 2003. In many cases, third parties also retain such rights to utilize any patents that have been issued to us or acquired by us between the dates of our reorganization in 2003 and our initial public offering in 2005 or, in some cases, between the dates of our reorganization in 2003 and the conversion of the Class D common stock in 2006. Our negotiating position will therefore be impaired, because the other party will already be entitled to utilize a large number of our patents, while we will no longer have the right to utilize that party’s patents. As a result, we may be unable to obtain access to the other party’s patent portfolio on favorable terms or at all. Similarly, with respect to licenses from third parties for technology incorporated in our products or software used to operate our business, we may not be able to negotiate prices with these third parties on terms as favorable to us as those previously available to us because we are not able to take advantage of AMD’s size and purchasing power. These parties, and other third parties with whom AMD had no prior intellectual property arrangement, may file lawsuits against us seeking damages (potentially including treble damages) or an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted. Such litigation could be extremely expensive and time consuming. We cannot assure you that such litigation would be avoided or successfully concluded. The award of damages, including material royalty payments, or the entry of an injunction against the manufacture or sale of some or all of our products, would have a material adverse effect on us. The Flash memory market is highly cyclical and has experienced severe downturns that have materially adversely affected, and may in the future materially adversely affect, our business. The Flash memory market is highly cyclical and has experienced severe downturns, often as a result of wide fluctuations in supply and demand, constant and rapid technological change, continuous new product introductions and price erosion. Our financial performance has been, and may in the future be, adversely affected by these downturns. We have incurred substantial losses in past downturns, due principally to: • substantial declines in average selling prices, particularly due to aggressive pricing by competitors and an imbalance in product supply and demand; • a decline in demand for end-user products that incorporate our products; and • less than expected demand in the distribution channels such as by mobile phone OEMs. For example, during the first quarter of fiscal 2007, our business was adversely affected by a seasonal drop in unit shipments, and during the first nine months of fiscal 2007, our business was adversely affected by a greater than average decline in average selling prices as a result of intense competitive pressures. Our historical financial information does not necessarily indicate what our results of operations, financial condition or cash flows will be in the future. If our net sales decline in the future, or if these or other similar conditions continue or occur again in the future, our business would likely be materially adversely affected. If our expense reduction efforts are not effective, our business could be materially adversely affected. We incurred net losses in each of fiscal 2007, 2006 and 2005 of approximately $263.5 million, $147.8 million and $304.1 million. As a result, we continue to undertake actions in an effort to significantly reduce our expenses. These actions include the sale of non-performing assets, the consolidation of certain functional operations and other activities related to reducing expenses. We cannot assure you that we will be able to achieve anticipated expense reductions. If our expense reduction efforts are unsuccessful, our operating results may be materially adversely affected. Although we expect that the Saifun acquisition will result in benefits to us, those benefits may not occur because of integration and other challenges. Achieving the expected benefits of the Saifun acquisition will depend on the timely and efficient integration of our and Saifun’s technology, operations, business culture and personnel. This will be particularly challenging 18 due to the fact that Saifun was headquartered in Israel and we are headquartered in California. The integration may not be completed as quickly as expected, and if we fail to effectively integrate the companies or the integration takes longer than expected, we may not achieve the expected benefits of the acquisition. The challenges involved in this integration include, among others: • retaining the licensees and customers of both companies, including licensees and customers of Saifun who may compete with us; • retaining the main sources of supply of both companies; • incorporating Saifun’s technology into our current and future technology and product lines; • integrating Saifun’s sales force into our worldwide sales network; • demonstrating to Saifun’s licensees and customers that the acquisition will not result in adverse changes in pricing, customer service standards or support; • coordinating research and development activities to enhance introduction of new products and technologies; • integrating Saifun’s internal control over financial reporting with our internal control over financial reporting; • migrating Saifun to our information systems; • integrating Saifun’s engineering operations with ours; • persuading the employees of both companies that the companies’ business cultures are compatible; • maintaining employee morale and retaining key employees; • ensuring there are no delays in releasing new products and technologies to market; and • coordinating geographically separate organizations. This integration effort is international in scope, complex, time consuming and expensive, and may disrupt the respective businesses or result in the loss of licensees, customers or key employees or the diversion of the attention of management. In addition, the integration process may strain our financial and managerial controls and reporting systems and procedures. This may result in the diversion of management and financial resources from our core business objectives. There can be no assurance that we will successfully integrate Saifun into our business or that we will realize the anticipated benefits of the acquisition. If we do not realize the anticipated benefits of the acquisition, or if charges and other accounting changes resulting from the acquisition adversely affect our earnings, the acquisition could result in a reduction of our per-share earnings as compared to the per-share earnings that would have been achieved by us if the acquisition had not occurred. Also, if Saifun shareholders promptly sell the Spansion Class A common stock received in the transaction, such sales could cause a decline in the market price of our common stock. If we complete the acquisition of Saifun, political, economic and military conditions in Israel may adversely affect our business. Saifun’s headquarters and business operations are located in Israel, which is affected and surrounded by unstable political, economic and military conditions. We cannot predict the effect of continued or increased violence in Lebanon or Gaza, or the effect of military action elsewhere in the Middle East. Continued armed conflicts or political instability in the region would harm business conditions and could adversely affect the combined company’s results of operations. Furthermore, several countries continue to restrict or ban business with Israel and Israeli companies. These restrictive laws and policies may limit the combined company’s ability to make sales in those countries, and, as a global company, may limit our own ability to efficiently administer our worldwide resources. 19 The proposed acquisition of Saifun may result in a loss of licensees or customers. We and Saifun operate in a highly competitive industry, and the combined company’s future performance will be affected by its ability to retain each company’s existing licensees and customers. Some of Saifun’s licensees and customers are our competitors or work with our competitors and may reduce or terminate their business relationships with Saifun in anticipation of the acquisition or with the combined company as a result of our acquisition of Saifun. We may not realize the expected value of Saifun’s NROM technology. We expect that licensees of Saifun’s NROM technology will continue to implement and expand their uses of the technology. If such licensees fail to successfully implement the NROM technology in a timely manner or in a large number of their products, the value of NROM technology could be diminished. Moreover, if leading Flash memory semiconductor manufacturers adopt and achieve success with other technologies or incorporate Saifun’s NROM technology but fail to achieve success with its products, the value of the NROM technology could be adversely affected. In addition, we cannot assure you that Saifun’s patents, including those covering NROM technology, would not be challenged, invalidated or circumvented, or that rights granted under these patents will provide a competitive advantage to us. If Saifun’s patents are ultimately challenged, invalidated or circumvented, we may be materially adversely affected. Our business may be adversely affected if our acquisition of Saifun is delayed or not completed. Our acquisition of Saifun is subject to several customary conditions, including obtaining clearance from governmental entities. If our acquisition of Saifun is delayed or not consummated, we could be subject to a number of risks that may adversely affect our business, including: • the adverse consequences resulting from our management’s attention having been diverted from our day-to-day business over an extended period of time; • the disruption to our relationships with customers, suppliers and partners as a result of our and their efforts relating to the acquisition; • any consequent potential loss of business to our competitors; • the significant costs and expenses that we may have incurred relating to the acquisition; and • our inability to realize the benefits we expect by acquiring Saifun. We cannot assure you that we will successfully complete our acquisition of Saifun, and any inability to successfully complete, or a delay in completing, the Saifun acquisition could have a material adverse effect on us. A significant market shift to NAND architecture would materially adversely affect us. Flash memory products are generally based on either NOR or NAND architecture. To date, our Flash memory products have been based on NOR architecture which are typically produced at a higher cost-per-bit than NAND-based products. We do not currently manufacture products based on NAND architecture. We have developed our MirrorBit ORNAND, MirrorBit Quad and MirrorBit Eclipse architectures to address certain portions of the integrated category of the Flash memory market served by NAND-based products, but we cannot be certain that our MirrorBit ORNAND-, Quad- or Eclipse- based products will satisfactorily address those market needs. During 2004, industry sales of NAND-based Flash memory products grew at a higher rate than sales of NOR-based Flash memory products, resulting in NAND vendors in aggregate gaining a greater share of the 20 overall Flash memory market and NOR vendors in aggregate losing overall market share. This trend continued in 2005 and 2006 when sales of NAND-based Flash memory products represented a majority of the Flash memory products sold in the Flash memory market. In 2007, according to iSuppli, total sales for the Flash memory market reached approximately $21.8 billion, of which approximately 35 percent was classified as sales of NOR-based Flash memory products and approximately 65 percent was classified as sales of NAND-based Flash memory products. iSuppli estimates that sales of NAND-based Flash memory products grew by approximately 15 percent from 2005 to 2006 and will grow at a 18 percent compound annual growth rate from 2006 to 2011, while sales of NOR-based Flash memory products grew by approximately six percent from 2005 to 2006 and will decline by approximately three percent compound annual growth rate from 2006 to 2011. We expect the Flash memory market trend of decreasing market share for NOR-based Flash memory products relative to NAND-based Flash memory products to continue in the foreseeable future. Moreover, the removable storage category of the Flash memory market, which is predominantly served by floating gate NAND vendors, is expected to constitute a significant portion of the Flash memory market for the foreseeable future. As mobile phones and other consumer electronics become more advanced, they will require higher density Flash memory to meet the increased data storage requirements associated with music downloads, photos and videos. Because storage requirements will increase to accommodate data-intensive applications, OEMs may increasingly choose higher density floating gate NAND-based Flash memory products over MirrorBit NOR-, ORNAND-, Quad- or Eclipse-based Flash memory products for their applications. If this occurs and OEMs continue to prefer the attributes and characteristics of floating gate NAND-based products over those of MirrorBit NOR-, ORNAND-, Quad- or Eclipse-based products for their applications, we may be materially and adversely affected. Moreover, some of our competitors are able to manufacture floating gate NAND-based Flash memory products on 300-millimeter wafers produced in much larger capacity fabs than our SP1 fab or may choose to utilize more advanced manufacturing process technologies than we use today to offer products competitive to ours at a lower cost. If floating gate NAND vendors continue to increase their share of the Flash memory market, our market share may decrease, which would materially adversely affect us. In addition, even if products based on NAND architecture are unsuccessful in displacing products based on NOR architecture, the average selling prices for our products may be adversely affected by a significant decline in the price for NAND-based products. Such a decline may result in downward price pressure in the overall Flash memory market affecting the price we can obtain for our NOR-based products, which would adversely affect us. We believe such downward pricing pressure was a factor in the steep declines in average selling prices in the first half of 2007. If the prices for NAND products do not improve, or continue to decline, we may be materially adversely affected. We have a substantial amount of, and continue to incur, indebtedness which could adversely affect our financial position. We currently have and will continue to have for the foreseeable future, a substantial amount of indebtedness. Our indebtedness has increased over time and may increase in the future. At the time of our initial public offering in December 2005, our aggregate principal amount of outstanding debt was approximately $760.0 million. As of December 30, 2007, we had an aggregate principal amount of approximately $1.4 billion in outstanding debt. In order to advance our business with new technologies, like other semiconductor manufacturers, we are required to make sizable capital investment in facilities and equipment. If cash flow from operations is not sufficient to meet capital requirements, we may need to incur additional indebtedness. Our substantial indebtedness may: • require us to use a substantial portion of our cash flows from operations to make debt service payments; • make it difficult for us to satisfy our financial obligations; 21 • limit our ability to use our cash flows, use our available financings to the fullest extent possible, or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes; • limit our flexibility to plan for, or react to, changes in our business and industry; • place us at a competitive disadvantage compared to our less leveraged competitors; and • increase our vulnerability to the impact of adverse economic and industry conditions. Financial market conditions may impede access to or increase the cost of financing operations and investments. The recent changes in U.S. and global financial and equity markets, including market disruptions and tightening of the credit markets, may make it more difficult for us to obtain financing for our operations or investments or increase the cost of obtaining financing. In addition, our borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in significant part, on our performance as measured by credit metrics such as interest coverage and leverage ratios. A decrease in these ratings could increase our cost of borrowing or make it more difficult for us to obtain financing, which would materially adversely affect us. We are currently party to and intend to enter into debt arrangements in the future, each of which may subject us to restrictive covenants which could limit our ability to operate our business. We are party to a $175.0 million senior secured revolving credit facility that imposes various restrictions and covenants on us that limits our ability to: • enter into any mergers, consolidations or sales of property, or sales of inventory, equipment and assets except in the ordinary course of business; • make any distributions except for distributions from Spansion LLC to us in specified circumstances; • make investments, except for the purchase of inventory, equipment and intellectual property in the ordinary course of business, unless we meet minimum liquidity requirements consisting of availability under the revolving credit facility and domestic cash of at least $200.0 million, provided, however, that investments are limited to no more than a total of $50.0 million while the reduced minimum liquidity requirement is in place; • incur additional debt, enter into capital leases and, in limited cases, make loans to subsidiaries; • engage in transactions with affiliates unless the transactions are in the normal course of business, negotiated at arms-length and disclosed to the agent for the lenders; • incur any new liens except for equipment leases and loans; and • prepay any debt, except that debt of foreign subsidiaries may be prepaid by the applicable foreign subsidiary and we may prepay any debt as long as after such repayment we meet minimum liquidity requirements consisting of availability under the revolving credit facility plus domestic cash of at least $250.0 million. In addition, the indentures governing Spansion LLC’s $250.0 million principal amount of 11.25% Senior Notes due 2016 and Spansion LLC’s $625.0 million aggregate principal amount of Senior Secured Floating Rate Notes due 2013 impose substantially similar restrictions and covenants on us which could limit our ability to respond to market conditions, make capital investments or take advantage of business opportunities. In the future, we will likely incur additional indebtedness through arrangements such as credit agreements or term loans that may also impose similar restrictions and covenants. These restrictions and covenants limit, and 22 any future covenants and restrictions likely will limit, our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities. Any debt arrangements we enter into would likely require us to make regular interest payments, which would adversely affect our results of operations. As of December 30, 2007, we were in compliance with the financial covenants under our debt instruments. However, we cannot assure you that in the future we will be able to satisfy the covenants, financial tests and ratios of our debt instruments, which can be affected by events beyond our control. If we fail to comply with such covenants, we cannot assure you that we will be able to obtain waivers for any future failures to comply with our financial covenants, or amendments which will prevent a failure to comply in the future. A breach of any of the covenants, financial tests or ratios under our debt instruments could result in a default under the applicable agreement, which in turn could trigger cross-defaults under our other debt instruments, any of which would materially adversely affect us. If we cannot generate sufficient operating cash flows and obtain external financing, we may be unable to make all of our planned capital expenditures. Our ability to fund anticipated capital expenditures depends on generating sufficient cash flows from operations and the continued availability of external financing. We expect our total capital expenditures for fiscal 2008 to be approximately $535.0 million. Our capital expenditures, together with ongoing operating expenses, will be a substantial drain on our cash flows and may decrease our cash balances. The timing and amount of our capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for our products, product mix, changes in industry conditions and market competition. We may assess markets for external financing opportunities, including debt and equity. Such financing may not be available when needed or, if available, may not be available on satisfactory terms. Moreover, the funds availability under our existing $175.0 million senior secured revolving credit facility may be adversely affected by our financial condition, results of operations and incurrence or maintenance of additional debt, such as our 11.25% Senior Notes due 2016 and our 2.25% Exchangeable Senior Secured Debentures. Also, funds availability under the Spansion Japan 2007 Credit Facility are based on capital deliveries, which may not be made in a timely manner, to SP1, our Flash memory manufacturing facility in Aizu-Wakamatsu, Japan. Finally, any equity financing may not be desirable because of resulting dilution to our stockholders. Our inability to obtain needed financing or to generate sufficient cash from operations may require us to abandon projects or curtail capital expenditures. If we cannot generate sufficient operating cash flows or obtain external financing, we may be delayed in achieving, or may not achieve, needed manufacturing capacity, and we could be materially adversely affected. If we are unable to timely and efficiently expand our manufacturing capacity to implement 300-millimeter wafer capacity at SP1, and achieve a competitive wafer cost for SP1 output, our business and financial results could be materially adversely affected. We have expanded our manufacturing capacity to produce 300-millimeter wafers at SP1. In fiscal 2006, we commenced a plan to spend approximately $1.2 billion over three years to construct and equip SP1 for production of 65-nanometer process technology on 300-millimeter wafers, and we expect to sample 45-nanometer process technology on 300-millimeter wafer capacity in late 2008. In order for SP1 to produce wafers at a competitive cost, we must achieve suitable economies of scale which we anticipate will require additional capital expenditures at SP1 to reach our planned manufacturing capacity. Financing may not be available when needed or, if available, may not be available on satisfactory terms. If we do not achieve our desired capacity at the anticipated cost, or if we cannot obtain suitable financing, we could be materially adversely affected. The timing for implementing 300-millimeter capacity in SP1 will also depend in part on our ability to execute our plan for equipping the facility and other factors that may be beyond our control, such as delivery schedules for the required machinery and equipment and construction schedules. If we are delayed in 23 implementing this capability or are unable to obtain foundry services at competitive rates or to timely and efficiently ramp production on 300-millimeter wafers, we will not achieve anticipated cost savings associated with this technology and our gross margins could decline. Even if we are successful in implementing this capacity, if the demand for our products is not sufficient to support the additional capacity when it becomes available, we could be materially and adversely affected. The loss of a significant customer or a reduction in demand for our Flash memory products from a significant customer could have a material adverse effect on us. We serve our customers worldwide directly through our sales force and indirectly through our distributors, who purchase products from us and sell them to customers, either directly or through their distributors. Our customers consist of OEMs, ODMs and contract manufacturers. In fiscal 2007, fiscal 2006 and fiscal 2005, the five largest of these customers accounted for a significant portion of end sales of our products. If one of these customers stopped purchasing our Flash memory products, or if one of these customers were to materially reduce its demand for our products, we could be materially adversely affected. For example, in the fourth quarter of fiscal 2006 we were materially adversely affected by the reduced customer demand for some of our custom high density NOR-based Flash memory solutions. Our business strategy is to continue to maintain and increase our market share, diversify our customer base in the integrated category of the Flash memory market, and enter new markets enabled by our MirrorBit technology. We cannot assure you that we will be successful in implementing this strategy, and if we are unsuccessful, we could be materially adversely affected. If we fail to successfully diversify our customer base and we lose a significant customer or suffer a reduction in demand from a significant customer, our business may be materially adversely affected. If we fail to successfully develop, introduce and commercialize new products and technologies or to accelerate our product development cycle, we may be materially adversely affected. Our success depends to a significant extent on the development, qualification, production, introduction and acceptance of new product designs and improvements that provide value to Flash memory customers. We must also be able to accomplish this process at a faster pace than we currently do. For example, we introduced products on 90-nanometer process technology in fiscal 2006, plan production on 65-nanometer process technology in the first quarter of fiscal 2008, and plan to introduce products on 45-nanometer process technology in late fiscal 2008. Our ability to develop and qualify new products and related technologies to meet evolving industry requirements, at prices acceptable to our customers and on a timely basis are significant factors in determining our competitiveness in our target markets. If we are delayed in developing or qualifying new products or technologies, we could be materially adversely affected. For example, during the first quarter of fiscal 2005, we experienced a delay in qualifying and introducing a new Flash memory product based on our MirrorBit technology for wireless Flash memory customers. The delay, which was due to our having to re-design the product in order to achieve higher performance specifications under all temperature conditions, contributed to lower than anticipated net sales during first six months of fiscal 2005 and caused us to lose market share. Competitors may introduce new memory or other technologies that may make our Flash memory products uncompetitive or obsolete. Our competitors are working on a number of new technologies, including FRAM, MRAM, polymer, charge trapping and phase-change based memory technologies. Some of our competitors have announced plans to bring to market products based on phase-change based memory technology in 2008. If such products are successfully developed and commercialized as a viable alternative to MirrorBit or floating gate Flash memory, these other products could pose a competitive threat to a number of Flash memory companies, including us. In addition, some of Saifun’s licensees and customers are our competitors or work with our competitors and have licensed Flash memory intellectual property associated with NROM technology from Saifun. Use of this NROM 24 intellectual property or use of independently developed charge trapping Flash memory technology by our competitors, if successfully developed and commercialized, may allow these competitors to develop Flash memory technology that may compete with our proprietary MirrorBit technology. If we fail to successfully develop products based on our new MirrorBit ORNAND, MirrorBit Eclipse, MirrorBit Quad or MirrorBit ORNAND2 architectures, or if there is a lack of market acceptance of these products, our future operating results would be materially adversely affected. We are positioning ourselves to address the increasing demand for data optimized Flash memory by offering higher density, lower cost and more versatile products based on our new MirrorBit ORNAND, MirrorBit Quad, MirrorBit Eclipse and MirrorBit ORNAND2 architectures. The success of these architectures requires that we timely and cost effectively develop, manufacture and market products based on these architectures that are competitive with floating gate NAND-based Flash memory solutions. We began commercial shipments of MirrorBit ORNAND-based products in the second quarter of fiscal 2006 and began commercial shipments of MirrorBit Quad-based products in the first quarter of fiscal 2007. However, if we fail to develop and commercialize these products and additional products based on these architectures on a timely basis, our future operating results would be materially adversely affected. Furthermore, if market acceptance of products based on our MirrorBit architectures occurs at a slower rate than we anticipate, our ability to compete will be reduced, and we would be materially adversely affected. If we do not achieve market acceptance of these architectures or subsequent MirrorBit products, our future operating results would be materially adversely affected. Manufacturing capacity constraints may adversely affect us. There may be situations in which our manufacturing capacity is inadequate to meet the demand for some of our products. We continue to depend on foundry, subcontractor and similar arrangements with third parties to meet demand. Our arrangements with third-party suppliers do not necessarily include capacity guarantees. If a third-party manufacturer on which we rely does not have the capacity to deliver an adequate amount of product to meet actual demand, we may not be able to obtain the manufacturing capacity, either in our own facilities or through other third-party arrangements, to meet such demand. During fiscal 2006, demand for certain of our products exceeded the available supply. As a result, we were unable to meet the demand of some of our customers for these products. This adversely impacted our relationships with these customers, and comparable situations in the future could cause harm to our reputation in the marketplace, cause these customers to move future business to our competitors or cause us to make financial concessions to our customers. Any of these occurrences could have a material adverse effect on us. Also, in the third and fourth quarters of fiscal 2005 and fiscal 2006, we experienced capacity constraints for final test and assembly of some of our products. While we have worked internally and with subcontractors to increase capacity to meet anticipated demand, we cannot assure you that we will not experience similar constraints in the future. These capacity constraints limit our ability to respond to rapid and short-term surges or changes in demand for our products. If we are unable to obtain sufficient manufacturing capacity to meet anticipated demand, either in our own facilities or through foundry, subcontractor or similar arrangements with third parties, or if we are unable to obtain foundry services at competitive rates, our business may be materially adversely affected. Our increased reliance on third-party manufacturers entails risks that could materially adversely affect us. We currently obtain foundry services from other companies, including Taiwan Semiconductor Manufacturing Company Limited and Fujitsu (as a result of the sale of our JV1/JV2 manufacturing facilities in April 2007). In addition, we recently entered into an agreement with Semiconductor Manufacturing International Corporation under which we may obtain foundry services in the future. We also use independent contractors to perform some of the assembly, testing and packaging of our products. Third-party manufacturers are often under no obligation to provide us with any specified minimum quantity of product. We depend on these manufacturers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to us on a timely basis at 25 acceptable prices. We cannot assure you that these manufacturers will be able to meet our near-term or long-term manufacturing requirements. These manufacturers also make products for other companies, including certain of our competitors, and/or for themselves and could choose to prioritize capacity for themselves or other customers beyond any minimum guaranteed amounts, reduce deliveries to us or, in the absence of price guarantees, increase the prices they charge us on short notice, such that we may not be able to pass cost increases on to our customers. Because it could take several quarters or more to establish a relationship with a new manufacturing partner, we may be unable to secure an alternative supply for specific products in a short timeframe or at all at an acceptable cost to satisfy our production requirements. In addition, we may be required to incur additional development, manufacturing and other costs to establish alternative sources of supply. Other risks associated with our increased dependence on third-party manufacturers include: their ability to adapt to our proprietary technology, reduced control over delivery schedules, quality assurance, manufacturing yields and cost, lack of capacity in periods of excess demand, misappropriation of our intellectual property, reduced ability to manage inventory and parts and risks associated with operating in foreign countries. If we are unable to secure sufficient or reliable suppliers of wafers or obtain the necessary assembling, testing and packaging services, our ability to meet customer demand for our products may be adversely affected, which could have a material adverse effect on us. Industry overcapacity could require us to lower our prices and have a material adverse effect on us. Semiconductor companies with their own manufacturing facilities and specialist semiconductor foundries, which are subcontractors that manufacture semiconductors designed by others, have added significant capacity in recent years and are expected to continue to do so. In the past, capacity additions sometimes exceeded demand requirements leading to oversupply situations and downturns in the industry. Fluctuations in the growth rate of industry capacity relative to the growth rate in demand for Flash memory products contribute to cyclicality in the Flash memory market, which may in the future negatively impact our average selling prices and materially adversely affect us. Industry overcapacity could cause us to under-utilize our manufacturing capacity and have a material adverse effect on us. It is difficult to predict future growth or decline in the markets we serve, making it very difficult to estimate requirements for production capacity. If our target markets do not grow as we anticipate, we may under-utilize our manufacturing capacity. This may result in write-downs or write-offs of inventories and losses on products the demand for which is lower than we anticipate. In addition, during periods of industry overcapacity, such as we have recently experienced, customers do not generally order products as far in advance of the scheduled shipment date as they do during periods when our industry is operating closer to capacity, which can exacerbate the difficulty in forecasting capacity requirements. Many of our costs are fixed. Additionally, pursuant to some of our subcontractor and foundry arrangements with third parties we may incur and pay penalties, according to which we have agreed to pay for a certain amount of product even if we do not accept delivery of all of such amount. Accordingly, during periods in which we under-utilize our manufacturing capacity as a result of reduced demand for some of our products, our costs cannot be reduced in proportion to the reduced revenues for such periods. When this occurs, our operating results are materially adversely affected. Our customers’ ability to change booked orders may lead to excess inventory. Because our manufacturing processes require long lead times, we use indicators such as booking rates and book-to-bill ratios, in conjunction with other business metrics, to schedule production in our fabrication facilities. Consequently, when customers change orders booked by us, our planned manufacturing capacity may be greater or less than actual demand, resulting in less than optimal inventory levels. When this occurs, we adjust our 26 production levels but such adjustments may not prevent our production of excess inventory in environments when bookings and book-to-bill ratios are strong. As a result, our business may be materially adversely affected. Intense competition in the Flash memory market could materially adversely affect us. Our principal NOR Flash memory competitors are Intel Corporation, Samsung Electronics Co., Ltd. and STMicroelectronics. In the future, our principal NOR Flash memory competitors may also include Numonyx, the announced joint venture between Intel, STMicroelectronics and Francisco Partners. Additional significant NOR Flash memory competitors include Silicon Storage Technology, Inc., Macronix International Co., Ltd., Toshiba Corporation and Sharp Electronics Corp. We increasingly compete with NAND Flash memory manufacturers where NAND Flash memory has the ability to replace NOR Flash memory in customer applications and as we develop data storage solutions based on our MirrorBit ORNAND, MirrorBit Quad, MirrorBit Eclipse and MirrorBit ORNAND2 architectures for the integrated category and select portions of the removable category of the Flash memory market. Our principal NAND Flash memory competitors include Samsung Electronics Co., Ltd, Toshiba Corporation, Hynix Semiconductor Inc. and STMicroelectronics. In the future our principal NAND Flash memory competitors may include Intel Corporation, Micron Technology, Inc., IM Flash Technology LLC, the joint venture between Intel and Micron Technology, Inc., Numonyx and SanDisk Corporation. The Flash memory market is characterized by intense competition. The basis of competition is cost, selling price, performance, quality, customer relationships and ability to provide value-added solutions. In particular, in the past, our competitors have aggressively priced their products, which resulted in decreased average selling prices for our products in the first half of fiscal 2007 and adversely impacted our results of operations. Some of our competitors, including Intel, Samsung, STMicroelectronics, Toshiba, and Sharp, are more diversified than we are and may be able to sustain lower operating margins in their Flash memory business based on the profitability of their other, non-Flash memory businesses. In addition, recent capital investments by competitors have resulted in substantial industry manufacturing capacity, which may further contribute to a competitive pricing environment. Some of our competitors are able to manufacture floating gate NAND-based Flash memory products on 300-millimeter wafers produced in much larger capacity fabs than our SP1 fab or may choose to utilize more advanced manufacturing process technologies than we use today to offer products competitive to ours at a lower cost. Moreover, products based on our MirrorBit ORNAND-, MirrorBit Quad-, MirrorBit Eclipse- and MirrorBit ORNAND2-based architectures may not have the price, performance, quality and other features necessary to compete successfully for these applications. We expect competition in the market for Flash memory devices to intensify as existing manufacturers introduce new products, new manufacturers enter the market, industry-wide production capacity increases and competitors aggressively price their Flash memory products to increase market share. Competition also may increase if NOR memory vendors merge, if NAND memory vendors acquire NOR businesses or other NAND businesses, or if our competitors otherwise consolidate their operations. Furthermore, we face increasing competition from NAND Flash memory vendors in some portions of the integrated Flash memory market. To compete successfully, we must decrease our manufacturing costs and develop, introduce and sell products at competitive prices that meet the increasing demand for greater Flash memory content in mobile phones, consumer electronics, automotive and other applications. If we are unable to compete effectively, we could be materially adversely affected. We cannot be certain that our substantial investments in research and development will lead to timely improvements in technology or that we will have sufficient resources to invest in the level of research and development that is required to remain competitive. We make substantial investments in research and development for design, process technologies and production in an effort to design and manufacture advanced Flash memory products. For example, in fiscal 2006 27 and fiscal 2007, our research and development expenses were approximately $342.0 million and $436.8 million, respectively, or approximately 13 and 17 percent, respectively, of our net sales. Currently, we are developing new non-volatile memory process technologies, including 65-nanometer and 45-nanometer process technologies. Our Submicron Development Center facility is developing manufacturing process technologies on 300-millimeter wafers. We cannot assure you that we will have sufficient resources to maintain the level of investment in research and development that is required for us to remain competitive, which could materially adversely affect us. Further, we cannot assure you that our investments in research and development will result in increased sales or competitive advantage, which could adversely affect our operating results. Unless we maintain manufacturing efficiency, we may not become profitable and our future profitability could be materially adversely affected. The Flash memory industry is characterized by rapid technological changes. For example, new manufacturing process technologies using smaller feature sizes and offering better performance characteristics are generally introduced every one to two years. The introduction of new manufacturing process technologies allows us to increase the functionality of our products while at the same time optimizing performance parameters, decreasing power consumption and/or increasing storage capacity. In addition, the reduction of feature sizes enables us to produce smaller chips offering the same functionality and thereby considerably reduces the costs per bit. In order to remain competitive, it is essential that we secure the capabilities to develop and qualify new manufacturing process technologies. For example, our leading Flash memory products must be manufactured at 65-nanometer and more advanced process technologies and on 300-millimeter wafers. If we are delayed in transitioning to these technologies and other future technologies, we could be materially adversely affected. Manufacturing our products involves highly complex processes that require advanced equipment. Our manufacturing efficiency is an important factor in our profitability, and we cannot be sure that we will be able to maintain or increase our manufacturing efficiency to the same extent as our competitors. For example, we continuously modify our manufacturing processes in an effort to improve yields and product performance and decrease costs. We are continuing to transition products to 90-nanometer process technology and developing the 65-nanometer process technology for the manufacture of some of our products. During periods when we are implementing new process technologies, manufacturing facilities may not be fully productive. We may fail to achieve acceptable yields or may experience product delivery delays as a result of, among other things, capacity constraints, delays in the development of new process technologies, changes in our process technologies, upgrades or expansion of existing facilities, impurities or other difficulties in the manufacturing process. Any of these occurrences could adversely impact our relationships with customers, cause harm to our reputation in the marketplace, cause customers to move future business to our competitors or cause us to make financial concessions to our customers. For example, in the third quarter of fiscal 2006, we had lower than expected yields on 12,000 raw wafers and, as a result, we were unable to meet the demand of some of our customers, including in Japan, and our revenue and gross margins were adversely affected. Improving our manufacturing efficiency in future periods is dependent on our ability to: • develop advanced process technologies and advanced products that utilize those technologies; • successfully transition to 65-nanometer and more advanced process technologies; • continue to reduce test times; • ramp product and process technology improvements rapidly and effectively to commercial volumes across our facilities; • achieve acceptable levels of manufacturing wafer output and yields, which may decrease as we implement more advanced technologies; and • maintain our quality controls and rely upon the quality and process controls of our suppliers. 28 If we cannot adequately protect our technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses. We rely on a combination of protections provided by contracts, including confidentiality and non-disclosure agreements, copyrights, patents, trademarks and common law rights, such as trade secrets, to protect our intellectual property. However, we cannot assure you that we will be able to adequately protect our technology or other intellectual property from third-party infringement or from misappropriation in the United States and abroad. Any patent owned or licensed by us or issued to us could be challenged, invalidated or circumvented or rights granted under these patents or licenses may not provide a competitive advantage to us. Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other intellectual property rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property on a worldwide basis in a cost-effective manner. Foreign laws may provide less intellectual property protection than afforded in the United States. If we cannot adequately protect our technology or other intellectual property rights in the United States and abroad, we may be materially adversely affected. We are party to intellectual property litigation and may become party to other intellectual property claims or litigation that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our products. We provide indemnities relating to non-infringement of patents and other intellectual property indemnities to certain of our customers in connection with the delivery, design, manufacture and sale of our products. From time to time, we may be notified, or third parties may bring actions against us based on allegations, that we are infringing the intellectual property rights of others. If any such claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. We cannot assure you that we will be able to obtain all of the necessary licenses on satisfactory terms, if at all. In the event that we cannot obtain a license, these parties may file lawsuits against us seeking damages (potentially including treble damages) or an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products, increase the costs of selling some of our products, or cause damage to our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the manufacture and sale of some or all of our products, would have a material adverse effect on us. We could decide, in the alternative, to redesign our products or to resort to litigation to challenge or defend such claims, either of which could be expensive and time-consuming and may have a material adverse effect on us. For example, Tessera, Inc. filed lawsuits against us alleging that we have infringed certain of Tessera’s patents. Tessera has sought to enjoin such alleged infringements, to recover an unspecified amount of damages, and to bar our importation and sale of allegedly infringing products. In addition, Fujitsu has informed us that Texas Instruments has asserted that a number of our products infringe some of Texas Instruments’ patents. Fujitsu has also informed us that it expects us to defend and indemnify Fujitsu against Texas Instruments’ claims. Fujitsu has provided us with formal notice that they believe we have a duty to defend or indemnify Fujitsu under the terms of our distribution agreement. Since then, we and Fujitsu have been discussing the issues raised by this notice, and if Fujitsu were to terminate our distribution agreement, we could be materially adversely affected. Defending these alleged infringement claims and similar claims could be extremely expensive and timeconsuming and an award of damages or an injunction could have a material adverse effect on us. We cannot assure you that litigation related to the intellectual property rights of ours or others can be avoided or will be successfully concluded. 29 Our inability to design and implement new enterprise-wide information systems in a timely and costeffective manner could materially adversely affect us. Although we have completed our physical separation from AMD’s information systems, we are continuing to design and implement our own enterprise-wide information systems. These systems have been designed to automate more fully our business processes and affect most of our functional areas including sales, finance, procurement, inventory control, collections, order processing and manufacturing. In connection with the implementation of these information systems, we may experience functional and performance problems, including problems relating to the information systems’ response time and data integrity. In addition, resolution of any such problems could entail significant additional costs. We cannot assure you that we will be able to implement these information systems successfully or on a timely basis and in a cost-effective manner or that these information systems will not fail or prove to be unsuitable for our needs. Our inability to implement or resolve problems with these information systems in a timely and cost-effective manner could materially adversely affect us. If essential equipment or adequate supplies of satisfactory materials are not available to manufacture our products, we could be materially adversely affected. Our manufacturing operations depend upon obtaining deliveries of equipment and adequate supplies of materials on a timely basis. We purchase equipment and materials from a number of suppliers. From time to time, suppliers may extend lead times, limit supply to us or increase prices due to capacity constraints or other factors. Because the equipment that we purchase is complex, it is difficult for us to substitute one supplier for another or one piece of equipment for another. Some raw materials we use in the manufacture of our products are available from a limited number of suppliers. Our manufacturing operations also depend upon the quality and usability of the materials we use in our products, including raw materials and wafers we receive from our suppliers. For example, in the third quarter of fiscal 2006, we had lower than expected yields on 12,000 raw wafers received from one of our suppliers and our revenue and gross margins were adversely affected. If the materials we receive from our suppliers do not meet our manufacturing requirements or product specifications, we may be materially adversely affected. We also rely on purchasing commercial memory die such as DRAMs from third-party suppliers to incorporate these die into multi-chip package, or MCP, products. The availability of these third-party purchased commercial die is subject to market availability, and the process technology roadmaps and manufacturing capacities of our vendors. In addition, some of our major suppliers, including Samsung, are also our competitors. Interruption of supply from a competitor that is a supplier or otherwise or increased demand in the industry could cause shortages and price increases in various essential materials. If we are unable to procure these materials, or if the materials we receive from our suppliers do not meet our production requirements or product specifications, we may have to reduce our manufacturing operations or our manufacturing yields may be adversely affected. Such a reduction and yield issues have in the past and could in the future have a material adverse effect on us. Our inability to continue to attract, retain and motivate qualified personnel could impact our business. Our future success depends upon the continued service of numerous qualified engineering, manufacturing, marketing, sales and executive personnel. We cannot assure you that our equity incentive plan or our employee benefit plans will be effective in motivating or retaining our employees or attracting new employees. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and the loss of key employees or executive personnel or an inability to attract, retain and motivate additional highly skilled employees could materially adversely affect us. Costs related to defective products could have a material adverse effect on us. One or more of our products may be found to be defective after the product has been shipped to customers in volume. The cost of product replacements or product returns may be substantial, and our reputation with our 30 customers would be damaged. In addition, we could incur substantial costs to implement modifications to fix defects. Any of these problems could materially adversely affect us. Uncertainties involving the ordering of our products could materially adversely affect us. Flash memory suppliers compete in part on the basis of their ability to deliver products to end customers on short lead times and it is common for prevailing lead times in the market to be shorter than the minimum manufacturing cycle time. To deliver products with competitive lead times, we must maintain a buffer stock of product to fulfill customer orders. Because our buffer stock must be produced before customer orders are received, our production levels are based on forecasts of customer demand. Generally, we sell our products pursuant to individual purchase orders from our direct customers, distributors and our distributors’ customers. Generally, these customers and distributors may cancel their orders for standard products thirty days prior to shipment without incurring a significant penalty. Customer demand for our products may be difficult to predict because such customers may change their inventory practices on short notice for any reason or they may cancel or defer product orders. Inaccurate forecasts of customer demand or cancellation or deferral of product orders could result in excess or obsolete inventory, which could result in write-downs of inventory. Because market conditions are uncertain, we could be materially adversely affected if we are unable to accurately predict demand for our products. Our investments in marketable debt securities are subject to risks which may cause losses and affect the liquidity of these investments. Our cash and cash equivalents as of December 30, 2007, totaled $199.1 million and consisted of cash, money market funds and commercial paper. Our marketable securities totaled $216.7 million, and included student loan backed and municipal bond backed auction rate securities. These marketable securities are subject to general credit, liquidity, market risks and interest rate fluctuations that have affected various sectors of the financial markets and caused overall tightening of the credit markets. Although during fiscal 2007, we had no declines in the fair value of any of our marketable securities, we cannot assure you that the market risks associated with our investment portfolio will not in the future have a negative adverse effect on our results of operations, liquidity and financial condition. As of February 20, 2008, within our marketable securities portfolio we held approximately $122.0 million of AAA/Aaa securities with auction reset features (auction rate securities) whose underlying assets are student loans and are substantially backed by the U.S. government Federal Family Education Loan Program. Since the end of fiscal 2007, we have liquidated a significant portion of our auction rate securities, but we recently were unsuccessful in liquidating a part of our remaining portfolio. Although our auction rate securities are sponsored by the U.S. government and are currently rated AAA/Aaa, our ability to liquidate these investments in the near term may be limited. We cannot assure you that auctions on our auction rate securities holdings will succeed in the near future. Any delays in liquidating these securities in the future could have a material adverse effect on us. Unfavorable currency exchange rate fluctuations could adversely affect us. As a result of our foreign operations, we have sales, expenses, assets and liabilities that are denominated in Japanese yen and other foreign currencies. For example, • some of our manufacturing costs are denominated in Japanese yen, Chinese renminbi, and other foreign currencies such as the Thai baht and Malaysian ringgit; • sales of our products to Fujitsu are denominated in both US dollars and Japanese yen; and • some fixed asset purchases are denominated in Japanese yen and European Union euros. 31 Consequently, movements in exchange rates could cause our net sales and expenses to fluctuate, affecting our profitability and cash flows. We use foreign currency forward contracts to reduce our exposure to foreign currency exchange rate fluctuations. The objective of these contracts is to reduce the impact of foreign currency exchange rate movements on our operating results and on the cost of capital asset acquisitions. We do not use these contracts for speculative or trading purposes. We cannot assure you that these activities will be successful in reducing our foreign currency exchange rate exposure. Failure to do so could have a material adverse effect on us. Worldwide economic and political conditions may adversely affect demand for our products. Worldwide economic conditions may adversely affect demand for our products. Because our sales are primarily to customers purchasing Flash memory that addresses the wireless and embedded applications, our business depends on the overall economic conditions and the economic and business conditions within our customers’ industries. A weakening of the worldwide economy or the demand for our customers’ products may cause a decrease in demand for our products, which could materially adversely affect us. Our consolidated financial results could also be significantly and adversely affected by geopolitical concerns and world events, such as wars and terrorist attacks. Our revenues and financial results have been and could be negatively affected to the extent geopolitical concerns continue and similar events occur or are anticipated to occur. In particular, consequences of military action in the Middle East have in the past, and may in the future, adversely affect demand for our products and our relationship with various third parties with which we collaborate. In addition, terrorist attacks may negatively affect our operations, directly or indirectly, and such attacks or related armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks may make travel and the transportation of our products more difficult and more expensive, which could materially adversely affect us. The United States has been and may continue to be involved in armed conflicts that could have a further impact on our sales and our supply chain. Political and economic instability in some regions of the world may also result and could negatively impact our business. The consequences of armed conflicts are unpredictable, and we may not be able to foresee events that could have a material adverse effect on us. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. economy and worldwide financial markets. Any of these occurrences could have a material adverse effect on us. Our operations in foreign countries are subject to political and economic risks, which could have a material adverse effect on us. The majority of our wafer fabrication capacity is located in Japan and nearly all final test and assembly of our products is performed at our facilities in China, Malaysia and Thailand and by third parties in Taiwan and Japan. In addition, we have international sales operations and, as part of our business strategy, we are continuing to seek to expand our product sales in high growth markets. The political and economic risks associated with our sales to, and operations in, foreign countries include: • expropriation; • changes in political or economic conditions; • changes in tax laws, trade protection measures and import or export licensing requirements; • difficulties in protecting our intellectual property; • difficulties in achieving headcount reductions; • changes in foreign currency exchange rates; • restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions; • changes in freight and interest rates; 32 • disruption in air transportation between the United States and our overseas facilities; and • loss or modification of exemptions for taxes and tariffs. Any conflict or uncertainty in the countries in which we operate, including public health or safety concerns, natural disasters or general economic factors, could have a material adverse effect on our business. Any of the above risks, should they occur, could have a material adverse effect on us. We are subject to a variety of environmental laws that could result in liabilities. Our properties and many aspects of our business operations are subject to various domestic and international environmental laws and regulations, including those relating to materials used in our products and manufacturing processes; chemical use and handling; waste minimization; discharge of pollutants into the environment; the treatment, transport, storage and disposal of solid and hazardous wastes; and remediation of contamination. Certain of these laws and regulations require us to obtain permits for our operations, including permits related to the discharge of air pollutants and wastewater. From time to time, our facilities are subject to investigation by governmental regulators. Environmental compliance obligations and liability risks are inherent in many of our manufacturing and other activities. Any failure to comply with applicable environmental laws, regulations or permits may subject us to a range of consequences, including fines, suspension of production, alteration of manufacturing processes, sales limitations, and criminal and civil liabilities or other sanctions. We could also be held liable for any and all consequences arising out of exposure to hazardous materials used, stored, released, disposed of by us or located at or under our facilities, or for other environmental or natural resource damage. Certain environmental laws, including the U.S. Comprehensive, Environmental Response, Compensation and Liability Act of 1980, or the Superfund Act, impose joint and several liability on current and previous owners or operators of real property for the cost of removal or remediation of hazardous substances and costs related to damages to natural resources. Liability can attach even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. These environmental laws also can result in liability for persons, like us, who arrange for hazardous substances to be sent to disposal or treatment facilities, in the event such facilities are found to be contaminated. Such persons can be responsible for cleanup costs at a disposal or treatment facility, even if they never owned or operated the contaminated facility. One property where we currently conduct research and development operations is listed on the U.S. Environmental Protection Agency’s Superfund National Priorities List. However, other parties currently are responsible for all investigation, cleanup and remediation activities. Although we have not been named a responsible party at this site, if we were so named, costs associated with the cleanup of the site could have material adverse effect upon us. We have not been named a responsible party at any Superfund or other contaminated site. If we were ever so named, costs associated with the cleanup of the site could be material. Additionally, contamination that has not yet been identified could exist at one or more of our facilities, and identification of such contamination could have a material adverse effect on us. Our business is subject to complex and dynamic environmental regulatory schemes. While we have budgeted for reasonably foreseeable environmental expenditures, we cannot assure you that environmental laws will not change or become more stringent in the future. Future environmental regulations could require us to procure expensive pollution abatement or remediation equipment; to modify product designs; or to incur other expenses associated with compliance with such regulations. For example, the European Union and China recently began imposing stricter requirements regarding reduced lead content in semiconductor packaging. Therefore, we cannot assure you that our costs of complying with current and future environmental and health and safety laws, or liabilities arising from past or future releases of, or exposure to, hazardous substances, will not have a material adverse effect on our business. 33 Our worldwide operations and the operations of our suppliers could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. Our worldwide operations could be subject to natural disasters and other business disruptions, such as a world health crisis, fire, earthquake, tsunami, volcano eruption, flood, hurricane, power loss, power shortage, telecommunications failure or similar events, which could harm our future revenue and financial condition and increase our costs and expenses. For example, our corporate headquarters are located near major earthquake fault lines in California, and one of our two wafer fabrication facilities, as well as our new 300-millimeter wafer fabrication facility, SP1, are located near major earthquake fault lines in Japan. In addition, our assembly and test facilities located in China, Malaysia and Thailand may be affected by tsunamis. In the event of a major earthquake or tsunami, we could experience loss of life of our employees, destruction of facilities or other business interruptions. If such business disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or demand for our products, or directly impact our marketing, manufacturing, financial, and logistics functions, our results of operations and financial condition could be materially adversely affected. Furthermore, the operations of our suppliers could be subject to natural disasters and other business disruptions, which could cause shortages and price increases in various essential materials, such as liquid hydrogen, which are required to manufacture our products or commercial memory die such as DRAMs for incorporation into our MCP products. If we are unable to procure an adequate supply of materials that are required for us to manufacture our products, or if the operations of our other suppliers of such materials are affected by an event that causes a significant business disruption, then we may have to reduce our manufacturing operations. Such a reduction could in the future have a material adverse effect on us. We may be delayed or prevented from taking actions that require the consent of AMD and Fujitsu, whose interests may differ from or conflict with our interests or those of our other stockholders, which could decrease the value of your shares. Our bylaws provide that for so long as AMD or Fujitsu maintains an aggregate ownership interest in us of at least 10 percent, we will not be able to amend our certificate of incorporation or bylaws or effect any resolution to wind up Spansion Inc. or any other subsidiary without their prior consent. We cannot assure you that the interests of AMD and Fujitsu will be aligned with our interests or those of our other stockholders with respect to such decisions. As a result, we may be unable to take steps that we believe are desirable and in the best interests of our stockholders. In addition, these consent rights could make an acquisition of us more difficult, even if the acquisition may be considered beneficial by some stockholders. The interests of AMD and Fujitsu, and our director nominated by Fujitsu, may differ from or conflict with our interests or those of our other stockholders. When exercising their rights as our stockholders, either alone or in concert, AMD and Fujitsu may take into account not only our interests but also their interests and the interests of their other affiliates. Our interests and the interests of AMD and Fujitsu may at times conflict since the growth of our business depends, in part, on successful competition with other semiconductor companies. These conflicts may result in lost corporate opportunities for us, including opportunities to enter into lines of business that may overlap with those pursued by AMD and Fujitsu. We may not be able to resolve any potential conflicts, and, even if we do so, the resolution may be less favorable to us than if we were dealing with unaffiliated parties. Various other conflicts of interest between AMD, Fujitsu and us may arise in the future in a number of areas relating to our business and relationships, including potential acquisitions of businesses or properties, intellectual property matters, transfers by AMD or Fujitsu of all or any portion of its ownership interest in us or its other 34 assets, which could be to one of our competitors, indemnity arrangements, service arrangements and business opportunities that may be attractive to AMD, Fujitsu and us. AMD and Fujitsu are two of our largest stockholders. Fujitsu has the right to elect one member to our board of directors. Each stockholder’s ability to elect directors is subject to reduction based on the amount of our common stock that they own and this right terminates when their ownership in us falls below 10 percent. Individuals who are our directors and also officers of Fujitsu have a duty of care and loyalty to us when acting in their capacities as our directors and a duty of care and loyalty to Fujitsu when acting as their officers or directors. However, our certificate of incorporation provides that in the event a director or officer of our company who is also a director or officer of Fujitsu acquires knowledge of a potential business opportunity that may be deemed a corporate opportunity of our company and Fujitsu, such opportunity will belong to Fujitsu, as applicable, unless it has been expressly offered to such director or officer in writing solely in his or her capacity as a director or officer of our company. Ownership of AMD common stock by any of our officers could create, or appear to create, potential conflicts of interest when those directors and officers are faced with decisions that could have different implications for AMD than they do for us. Our stock price may decline as a result of sales of common stock by us, AMD or Fujitsu. Our reorganization in 2003 was the commencement of AMD’s and Fujitsu’s respective divestures of their Flash memory businesses. Our initial public offering in December 2005 and our secondary stock offering in November 2006 have been vehicles by which AMD and Fujitsu further reduced their holdings in us. In early 2007, AMD also sold large numbers of our shares in the public market under Rule 144, and we expect AMD to continue its divesture. Sales of substantial amounts of our common stock, or the possibility of such sales, could adversely affect the market price of our common stock and impede our ability to raise capital through the issuance of additional equity securities. We cannot predict with any certainty the effects of AMD’s sales; however, any further sale by AMD, or a sale by Fujitsu or us of our common stock in the public market, or the perception that sales could occur, could adversely affect prevailing market prices for our common stock. In addition, we could issue and sell additional shares of our common stock. Any sale by us of our common stock would have a dilutive effect on the outstanding shares, and could adversely affect the prevailing market prices for our common stock. Third parties may seek to hold us responsible for liabilities of AMD and Fujitsu that we did not assume in our agreements. Under our agreements with AMD and Fujitsu, we agreed to assume liabilities related to our business after June 30, 2003, and liabilities related to our business prior to June 30, 2003 if such liabilities were reflected as accruals or reserves on the AMD and Fujitsu contributed balance sheets. Our assumed liabilities include claims made with respect to Flash memory products sold after June 30, 2003, even if such products were manufactured prior to June 30, 2003, and warranty claims with respect to products sold prior to June 30, 2003 to the extent such warranty claims were reflected as accruals or reserves on the AMD and Fujitsu contributed balance sheets. The allocation of assets and liabilities between AMD, Fujitsu and us may not reflect the allocation that would have been reached between unaffiliated parties and may be less favorable to us as a result. Third parties may seek to hold us responsible for AMD’s and Fujitsu’s retained liabilities. If our losses for AMD’s and Fujitsu’s retained liabilities were significant and we were ultimately held liable for them, we cannot assure you that we would be able to recover the full amount of our losses. We rely on Fujitsu to be our sole distributor in Japan. We currently rely on Fujitsu to act as the sole distributor of our products to customers in Japan, which was one of our most important geographic markets in fiscal 2006 and in fiscal 2007. Under our distribution agreement with Fujitsu, Fujitsu has agreed to use its best efforts to promote the sale of our products in Japan and to other 35 customers served by Fujitsu. In the event that we reasonably determine that Fujitsu’s sales performance in Japan and to those customers served by Fujitsu is not satisfactory based on specified criteria, then we have the right to require Fujitsu to propose and implement an agreed-upon corrective action plan. If we reasonably believe that the corrective action plan is inadequate, we can take steps to remedy deficiencies ourselves through means that include appointing another distributor as a supplementary distributor to sell products in Japan and to customers served by Fujitsu. Pursuing these actions would be costly and disruptive to the sales of our products in Japan. If Fujitsu’s sales performance in Japan is unsatisfactory or if we are unable to successfully maintain our distribution agreement and relationship with Fujitsu, as a result of its seeking indemnity from us in respect of certain infringement claims made by Texas Instruments or otherwise, and we can not timely find a suitable supplementary distributor, we could be materially adversely affected. On December 28, 2007, we entered into an amendment to our distribution agreement with Fujitsu which provides, among other terms, that Fujitsu no longer has territorial exclusivity in Japan and that effective April 1, 2008 we may enter into distribution agreements with Fujitsu’s sub-distributors in Japan. We also agreed to negotiate in good faith a successor distribution agreement with Fujitsu Electronics, Inc., or such other semiconductor sales group affiliate of Fujitsu. If Fujitsu, Fujitsu Electronics, Inc., or another semiconductor sales group affiliate of Fujitsu unexpectedly or abruptly terminates its distribution agreement with us, or otherwise ceases its support of our customers in Japan, we would be required to rely on a relationship with another distributor or establish our own local sales organization and support functions. Although we are currently establishing a sales organization and infrastructure in Japan, we cannot be certain that we will be successful in selling our products to customers currently served by Fujitsu or new customers. If customers currently served by Fujitsu, or potential new customers, refuse to purchase our products directly from us or from another distributor, our sales in Japan may decline, and we could be materially adversely affected. AMD and Fujitsu may continue to use all of our intellectual property and the intellectual property they have transferred to us. In connection with our reorganization as Spansion LLC in June 2003, AMD and Fujitsu transferred approximately 400 patents and patent applications to us. In addition, AMD and Fujitsu contributed additional patents to us at the time of our initial public offering. However, both AMD and Fujitsu have retained the rights to use any patents contributed to us for an unlimited period of time. In addition, under their respective patent crosslicense agreements with us, AMD and Fujitsu have also obtained licenses to our present and future patents with effective filing dates prior to the later of June 30, 2013, or such date on which they have transferred all of their shares in us, although the scope of patents under license can be impacted by a change in control of the parties or their semiconductor groups. These licenses continue until the last to expire of the patents under license expires and provide AMD and Fujitsu with licenses to all of our present and future patents in existence through such cross-license termination date. Furthermore, we entered into an Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement with AMD and Fujitsu in connection with our reorganization as Spansion Inc. in December 2005. Pursuant to that agreement, subject to our confidentiality obligations to third parties, and only for so long as AMD’s and Fujitsu’s ownership interests in us remain above specific minimum levels, we are obligated to identify any of our technology to each of AMD and Fujitsu, and to provide copies of and training with respect to that technology to them. In addition, pursuant to this agreement we have granted a non-exclusive, perpetual, irrevocable fully paid and royalty-free license of our rights, other than patent and trademark rights, in that technology to each of AMD and Fujitsu. Under our non-competition agreement, both AMD and Fujitsu have agreed that they will not directly or indirectly engage in a business, and have agreed to divest any acquired business, that manufactures or supplies standalone semiconductor devices (including single chip, multiple chip or system devices) containing certain Flash memory, which is the business in which we primarily compete. With respect to each of AMD and Fujitsu, this non-competition restriction will last until the earlier of (i) two years from the date such stockholder’s ownership in us falls to or below five percent, or (ii) the dissolution of our company. After that time, should they ever decide to re-enter the Flash memory business, AMD or Fujitsu could use our present and future patents and 36 technologies licensed by us to AMD and Fujitsu under the cross licenses and our Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement to compete against us. If either AMD or Fujitsu were to compete with us, we could be materially adversely affected. Our stock price may be volatile, and stockholders may lose all or part of their investment. The market price of shares of our common stock has been volatile and may in the future be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including: • actual or anticipated changes in our operating results; • changes in financial estimates by securities analysts; • fluctuations in the valuation of companies perceived to be comparable to us; • announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; and • stock price and volume fluctuations attributable to inconsistent trading volume levels or other factors. Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could materially adversely affect us. If securities or industry analysts publish negative reports about our business, the price and trading volume of our securities could decline. The trading market for our securities depends, in part, on the research reports and ratings that securities or industry analysts or ratings agencies publish about us, our business and the Flash memory market in general. We do not have any control over these analysts or agencies. If one or more of the analysts or agencies who cover us downgrades us or our securities, the price of our securities may decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our securities or trading volume to decline. We currently do not intend to pay dividends on our common stock and, consequently, our stockholders’ only opportunity to achieve a return on their investment is through appreciation in the price of our common stock. We currently do not plan to pay dividends on shares of our common stock in the foreseeable future and are currently prohibited from doing so in specific circumstances under agreements governing our borrowing arrangements. The terms of our senior secured revolving credit facility limit our ability to pay cash dividends on any shares of our common stock. Furthermore, if we are in default under this credit facility, our ability to pay cash dividends will be limited in the absence of a waiver of that default or an amendment to that facility. Similar prohibitions are applicable under the indenture governing the outstanding notes issued by Spansion LLC. In addition, because we are a holding company, our ability to pay cash dividends on shares of our common stock may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including the restrictions under the indenture governing the notes. Our common stock will rank junior as to payment of dividends to any series of preferred stock that we may issue in the future. Generally, unless full dividends including any cumulative dividends still owing on all outstanding shares of any preferred stock have 37 been paid, no dividends will be declared or paid on our common stock. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates. Any future issuance of our preferred stock could adversely affect holders of our common stock. Our board of directors is authorized to issue shares of preferred stock without any action on the part of our stockholders. Our board of directors also has the power, without stockholder approval, to set the terms of any such series of shares of preferred stock that may be issued, including voting rights, dividend rights and preferences over our common stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up of our affairs, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected. The use of our net operating loss carryforwards may be limited. If we conduct an offering of our common stock, we may experience an “ownership change” as defined in the Internal Revenue Code such that our ability to utilize our federal net operating loss carryforwards of approximately $594.4 million as of December 30, 2007 may be limited under certain provisions of the Internal Revenue Code. As a result, we may incur greater tax liabilities than we would in the absence of such a limitation and any increased liabilities could materially adversely affect us. Provisions in our corporate governance documents as well as Delaware law may delay or prevent an acquisition of us that stockholders may consider favorable, which could decrease the value of your shares. Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include restrictions on the ability of our stockholders to remove directors, a classified board of directors and limitations on action by our stockholders by written consent. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to make an acquisition of us more difficult. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our principal engineering, manufacturing and administrative facilities comprise approximately 4.8 million square feet and are located in the United States, France, Japan, Korea, Malaysia, Thailand and China. Over 4.3 million square feet of this space is in buildings we own. The remainder of this space is leased. We lease from Fujitsu Limited (Fujitsu) approximately 1.3 million square feet of land in Aizu-Wakamatsu, Japan for our wafer fabs including the land upon which JV3 and SP1 are located and we lease office space in Aichi, Japan from a subsidiary of Fujitsu, Fujitsu VLSI. We lease approximately 635,000 square feet of land in Suzhou, China for our assembly and test facility. Our Fab 25 facility in Austin, Texas and our facility in Sunnyvale, California are encumbered by liens securing our senior secured term loan facility and our senior secured floating rate notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations.” 38 Our facility leases have terms of generally one to five years. We currently do not anticipate difficulty in either retaining occupancy of any of our facilities through lease renewals prior to expiration or through month-to-month occupancy or replacing them with equivalent facilities. Our land lease in Aizu-Wakamatsu expires in 2033. ITEM 3. LEGAL PROCEEDINGS Tessera, Inc. v. Spansion LLC, et al., Civil Action No. 05-04063 (CW), in the United States District Court for the Northern District of California On October 7, 2005, Tessera, Inc. filed a complaint, Civil Action No. 05-04063, for patent infringement against Spansion LLC in the United States District Court for the Northern District of California under the patent laws of the United States of America, 35 U.S.C. section 1, et seq., including 35 U.S.C. section 271. The complaint alleges that Spansion LLC’s Ball Grid Array (BGA) and multichip packages infringe the following Tessera patents: United States Patent No. 5,679,977, United States Patent No. 5,852,326, United States Patent No. 6,433,419 and United States Patent No. 6,465,893. On December 16, 2005, Tessera filed a First Amended Complaint naming Spansion Inc. and Spansion Technology Inc., our wholly owned subsidiary, as defendants. On January 31, 2006, Tessera filed a Second Amended Complaint adding Advanced Semiconductor Engineering, Inc., Chipmos Technologies, Inc., Chipmos U.S.A., Inc., Silicon Precision Industries Co., Ltd., Siliconware USA, Inc., ST Microelectronics N.V., ST Microelectronics, Inc., Stats Chippac Ltd., Stats Chippac, Inc., and Stats 34 Chippac (BVI) Limited. The Second Amended Complaint alleges that Spansion LLC’s BGA and multichip packages infringe the four Tessera patents identified above. The Second Amended Complaint further alleges that each of the newly named defendants is in breach of a Tessera license agreement and is infringing on a fifth Tessera patent, United States Patent No. 6,133,627. The Second Amended Complaint seeks unspecified damages and injunctive relief. On February 9, 2006, Spansion filed an answer to the Second Amended Complaint and asserted counterclaims against Tessera. On April 18, 2006, U.S. District Court Judge Claudia Wilken issued a Case Management Order that set a trial date of January 28, 2008. On March 13, 2007, Judge Wilken issued an order vacating the trial date. On April 12, 2007, Judge Wilken issued an order referring case management scheduling issues to a Special Master, and directing that the court will appoint an expert in the case to testify on the ultimate merits of the technical issues relating to infringement and patent validity. On April 26, 2007, Spansion, along with other defendants, filed a motion to stay the District Court action pending resolution of the proceeding before the International Trade Commission described below. On May 24, 2007, Judge Wilken issued an order staying the District Court action until final resolution of the ITC action. Tessera has requested the following findings and remedies in this District Court action: • a finding that Tessera’s patents are valid and enforceable and that we are deliberately and willfully infringing Tessera’s patents; • injunctive relief prohibiting us from engaging in any further conduct that would infringe Tessera’s patents; • An award to Tessera to recover all damages, including interest on damages, from the alleged infringement; • An award of treble damages for deliberate and willful conduct; • a finding that the case is exceptional, in which case attorney fees should be awarded to the prevailing party; and • An unspecified award of attorneys’ fees and costs. We believe that we have meritorious defenses against Tessera’s claims and we intend to defend the lawsuit vigorously. 39 In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same, in the United States International Trade Commission On April 17, 2007, Tessera, Inc. filed a complaint under section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, in the United States International Trade Commission against respondents ATI Technologies, Inc., Freescale Semiconductor, Inc., Motorola, Inc., Qualcomm, Inc., Spansion Inc., Spansion LLC and STMicroelectronics N.V. Tessera claims that “face up” and “stacked-chip” small format laminate Ball Grid Array (BGA) packages, including the Spansion 5185941F60 chip assembly, infringe certain specified claims of United States Patent Nos. 5,852,326 and 6,433,419 (the Asserted Patents). The complaint requests that the International Trade Commission institute an investigation into the matter. Tessera has requested the following relief in the International Trade Commission action: • a permanent exclusion order pursuant to section 337(d) of the Tariff Act of 1930, as amended, excluding from entry into the United States all semiconductor chips with small format laminate BGA semiconductor packaging that infringe any of the Asserted Patents, and all products containing such infringing small format laminate BGA semiconductor packaged chips; and • a permanent cease and desist order pursuant to section 337(f) of the Tariff Act of 1930, as amended, directing respondents with respect to their domestic inventories to cease and desist from marketing, advertising, demonstrating, sampling, warehousing inventory for distribution, offering for sale, selling, distributing, licensing, or using any semiconductor chips with small format laminate BGA semiconductor packaging that infringe any of the Asserted Patents, and/or products containing such semiconductor chips. On May 15, 2007, the International Trade Commission instituted an investigation pursuant to 19 U.S.C. § 1337, entitled In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same, Inv. No. 337-TA-605. On June 8, 2007, the respondents in this matter filed a motion to stay the International Trade Commission investigation pending reexamination of the Asserted Patents by the U.S. Patent and Trademark Office. On July 11, 2007, the administrative law judge ordered that an Initial Determination shall be due on May 21, 2008 and that a target date for completion of the investigation shall be August 21, 2008. On October 17, 2007, the International Trade Commission investigation was reassigned to Administrative Law Judge Theodore Essex, who set a hearing for February 25, 2008. On February 26, 2008, Judge Essex issued an Initial Determination granting respondents’ motion for a stay of the ITC investigation pending completion of the reexamination of the Asserted Patents by the United States Patent & Trademark Office. We believe that we have meritorious defenses against Tessera’s claims and we intend to defend this proceeding vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 40 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Price of Common Stock Our Class A common stock has been traded on The NASDAQ Global Select Market under the symbol “SPSN” since December 15, 2005. The following table sets forth the high and low per shares sales prices for our Class A common stock for fiscal 2007 and fiscal 2006 as reported on the NASDAQ Global Select Market. Fiscal Year Ended December 30, 2007 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year Ended December 31, 2006 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Low $ 8.68 $12.64 $12.83 $15.05 $ 3.96 $ 7.86 $ 9.49 $11.32 High Low $17.94 $18.50 $18.59 $16.19 $13.35 $13.18 $12.90 $12.31 As of February 26, 2008, there were six holders of record of our Class A common stock. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these recordholders. We currently do not plan to pay dividends on shares of our common stock in the foreseeable future and are currently prohibited from doing so in specific circumstances under agreements governing our borrowing arrangements. 41 Stock Performance Graph This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into any filing of Spansion under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. The following graph shows a comparison from December 16, 2005 (the date our Class A common stock commenced trading on the Nasdaq Global Select Market) through December 30, 2007 of the cumulative total return for our Class A common stock, The Nasdaq Market Index and the S&P 500 Semiconductors Index. Such returns are based on historical results and are not intended to suggest future performance. Data for The Nasdaq Market Index and the S&P 500 Semiconductors Index assume reinvestment of dividends. We have never paid dividends on our Class A common stock and have no present plans to do so. $150 $125 $100 $75 $50 $25 $0 12/16/05 12/25/05 12/31/06 Spansion Inc. S&P 500 Semiconductors Index 42 12/30/07 Nasdaq Market Index ITEM 6. SELECTED FINANCIAL DATA The following summary historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Form 10-K. Effective June 30, 2003, we adopted a fiscal year ending the last Sunday of December. Fiscal 2003 was therefore a transition year beginning April 1, 2003 and ending December 28, 2003 and included approximately 39 weeks. Fiscal 2004 and fiscal 2005 included 52 weeks each. Fiscal 2006 and fiscal 2007 included 53 weeks and 52 weeks, respectively. Nine Months Ended Dec. 28, 2003 Year Ended Dec. 30, 2007 Year Ended Year Ended Year Ended Dec. 31, Dec. 25, Dec. 26, 2006 2005 2004 (in thousands, except per share amounts) Statement of Operations Data: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net sales to related parties/members . . . . . . . $1,627,253 873,560 $1,310,479 1,268,795 $ — 2,002,805 Total net sales . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,813 2,065,143 2,579,274 2,063,639 2,002,805 1,809,929 2,262,227 1,840,862 1,193,212 1,086,030 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses: Research and development . . . . . . . . . . . . . . Sales, general and administrative . . . . . . . . . 435,670 515,635 192,876 421,365 107,182 436,785 239,317 342,033 264,358 292,926 184,833 280,954 137,159 146,947 74,200 Operating income (loss) . . . . . . . . . . . . . . . . Interest and other income (expense), net . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . (240,432) 32,595 (80,803) (90,756) 11,681 (70,903) (284,883) 3,173 (45,032) 3,252 3,198 (40,165) (113,965) 1,335 (20,733) Loss before income taxes . . . . . . . . . . . . . . . Benefit for income taxes . . . . . . . . . . . . . . . . (288,640) 25,144 (149,978) 2,215 (326,742) 22,626 (33,715) 14,013 (133,363) 4,420 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss per common share: Basic and Diluted(1) . . . . . . . . . . . . . . . . . . . . Shares used in per share calculation: Basic and Diluted(1) . . . . . . . . . . . . . . . . . . . . $ — 2,262,227 $ — 1,193,212 $ (263,496) $ (147,763) $ (304,116) $ (19,702) $ (128,943) $ (1.95) $ 134,924 Dec. 30, 2007 Balance Sheet Data: Cash, cash equivalents and marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . $ 415,742 Working capital . . . . . . . . . . . . . . . . . . . . . . . 592,518 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 3,815,645 Long-term debt and capital lease obligations, including current portion, and notes payable to banks under revolving loans . . 1,401,333 Total stockholders’ equity/members’ capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,632,448 (1.15) $ 128,965 (4.15) $ 73,311 (0.27) $ 72,549 (1.78) 72,549 Dec. 31, 2006 Dec. 25, 2005 Dec. 26, 2004 Dec. 28, 2003 $ 885,769 1,085,027 3,549,717 $ 725,816 881,902 3,301,965 $ 196,138 359,420 2,919,515 $ 329,544 640,184 3,125,623 1,118,047 759,613 773,597 899,684 1,845,760 1,921,977 1,647,207 1,657,595 (1) Diluted net loss per share is computed using the weighted-average number of common shares and excludes potential common shares, as their effect is antidilutive. The potential common shares that were antidilutive for fiscal 2007, fiscal 2006 and fiscal 2005 were approximately 18.4 million, 16.8 million and 5.5 million shares, respectively, issuable upon exercise of outstanding stock options, upon vesting of outstanding restricted stock units and upon conversion of Spansion LLC’s 2.25% Exchangeable Senior Subordinated Debentures. 43 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes as of December 30, 2007 and December 31, 2006 and for the fiscal years ended December 30, 2007, December 31, 2006 and December 25, 2005, which are included in this annual report. Overview We are a semiconductor device company exclusively dedicated to designing, developing, manufacturing, marketing and selling Flash memory solutions. There are two major architectures of Flash memory in the market today: NOR Flash memory, which is primarily used for code and data storage in mobile phones and primarily for code storage in consumer and industrial electronics, and NAND Flash memory, which is primarily used for data storage in removable memory applications, such as Flash memory cards and USB drives, and is increasingly being used in high-end mobile phones and embedded applications such as MP3 players. Global demand for NAND Flash memory has grown much faster than that of NOR Flash memory largely on the strength of growth in multimedia consumer applications such as MP3 audio players and video players together with removable storage in applications such as Flash memory cards for digital photography, USB storage for general purpose use and an emerging trend for solid state drive solutions to replace hard drives in portable computer applications. The Flash memory market can be divided into two major categories based on application: the integrated category, which includes wireless and embedded applications, and the removable storage category. Within the integrated category, portable, battery-powered communications applications are referred to as “wireless” and all other applications, such as consumer, industrial, telecommunications and automotive electronics, are referred to as “embedded.” Within the removable storage category applications include Flash memory cards and USB drives. We focus primarily on the integrated category of the Flash memory market, including the wireless and embedded portions. More than two thirds of our net sales are based on our products containing our two or more-bit-per cell MirrorBit technology, and the balance of our net sales are based on single-bit-per-cell floating gate technology. We expect that products using our MirrorBit technology will continue to represent the substantial majority of total net sales. Our Flash memory is integrated into a broad range of electronic products, including mobile phones, consumer electronics, automotive electronics, networking and telecommunications equipment, and personal computer peripherals. Through April 2, 2007, we operated four Flash memory wafer fabrication facilities, or fabs, four assembly and test sites and a development fab, known as our Submicron Development Center, or SDC. On April 2, 2007, we sold two fabs located in Japan to Fujitsu Limited (Fujitsu), and in fiscal 2007 we started to equip and test our new 300-millimeter fab, SP1, in Japan. We currently operate three Flash memory wafer fabrication facilities, one in the US and two in Japan. Our headquarters are located in Sunnyvale, California. In fiscal 2007, we sold products on technology nodes ranging from 320-nanometer to 65-nanometer, utilizing MirrorBit and floating gate cell technology. We serve our customers worldwide directly or through our distributors, including Fujitsu, who buy products from us and resell them to their customers, either directly or through third-party distributors. Customers for our products consist of OEMs, original design manufacturers or ODMs and contract manufacturers. Fiscal 2007 was a particularly difficult year for the Flash memory semiconductor industry as a whole, as blended average selling prices (ASPs) for Flash memory devices fell at a rate greater than experienced historically. With the significant decrease in ASPs, a direct result of increased competitive pricing behavior, we intensified our efforts to accelerate cost reductions at a pace faster than the ASP decline. Although we believe we achieved significant cost reductions, our financial results nonetheless were negatively impacted because the rate of ASP decline was greater than the rate at which we were able to reduce our costs. Despite the challenges we faced during fiscal 2007, we continued to evolve our technology and increase our share of the NOR flash 44 segment. During fiscal 2007, we introduced technology advancements and achieved customer acceptance of our products manufactured using our 90-nanometer MirrorBit technology node process technology. During fiscal 2007, we focused a significant portion of our efforts in several areas: SP1, our new 300-millimeter fab in Aizu-Wakamatsu, Japan; our disposition of our JV1 and JV2 wafer fabrication facilities in Aizu-Wakamatsu, Japan; cost reductions; development of new technologies and architectures; and the acquisition of Saifun Semiconductors Ltd.: • We concentrated much of our capital expenditure investments in SP1, which we believe will be an important contributor to our future financial performance. In order to gain technological and costeffectiveness advantages, we equipped SP1, allowing us to begin manufacturing 300-millimeter wafers in first quarter of fiscal 2008 at technology nodes of 65-nanometers. Additionally, we expect to begin introducing production at the 45-nanometer node in late fiscal 2008. By using advance manufacturing process technology and larger wafers, we believe we can attain important cost savings, and offer advanced products to our customers. • In April 2007, we sold our older JV1 and JV2 wafer fabrication facilities in Aizu-Wakamatsu, Japan to Fujitsu. Concurrently with the closing of the sale, we entered into a foundry arrangement with Fujitsu for products to be manufactured at the JV1 and JV2 facilities. The sale of JV1 and JV2 enabled us to redeploy our capital toward leading-edge technologies, while we believe the foundry arrangement maintains our access to legacy products to augment manufacturing capabilities during peak demand periods and to provide our customers with long-term supply stability. • We intensified and accelerated our cost reduction efforts in response to the changing business environment and increased ASP declines. The fiscal 2007 cost reduction actions included increased productivity and output of internal wafer fabs, improvement of cumulative product yields, test time reductions and price reductions with external suppliers. • During fiscal 2007, we began recognizing revenue from sales of products employing our 90-nanometer MirrorBit technology including products based on our ORNAND architecture and introduced certain technologies which we believe will be important to our future success including our MirrorBit Eclipse and our MirrorBit ORNAND2 architectures. • In October 2007, we announced that we entered into a definitive merger agreement for us to acquire Saifun Semiconductors Ltd. We believe the acquisition of Saifun is an opportunity for future growth and improved financial performance, by serving as a vehicle for our entry into the Flash memory technology licensing business. In fiscal 2007, the sales from products based on MirrorBit technology exceeded two-thirds of our total net sales. The percentage of our total net sales attributable to MirrorBit products grew from approximately 23 percent in fiscal 2005 to approximately 50 percent in fiscal 2006 to approximately 71 percent in fiscal 2007. In fiscal 2008, we expect the trend of our customers’ adoption of MirrorBit technology to continue and sales of MirrorBit products to increase. Moreover, we intend to introduce products based on our MirrorBit Eclipse architecture in early 2008. We believe these products will reduce our customers’ costs, enable increased memory capacity and higher performance, greater customer product flexibility, which could contribute to sales growth for our company. For fiscal 2007, our net sales were approximately $2.5 billion and our net loss was approximately $263.5 million. For fiscal 2006, our net sales were approximately $2.6 billion and our net loss was approximately $147.8 million. For fiscal 2005, our net sales were approximately $2.0 billion and our net loss was approximately $304.1 million. Total net sales for fiscal 2007 decreased three percent compared to the corresponding period of fiscal 2006, primarily attributable to a 10 percent decline in blended average selling prices, which was partially offset by an increase of seven percent in unit shipments in fiscal 2007. Our results for fiscal 2007 reflected an increase in unit shipments and sales from products based on our MirrorBit technology, which represented approximately 71 percent of total net sales and 46 percent of total units 45 shipped for fiscal 2007, compared with approximately 50 percent of total net sales and 30 percent of total units shipped for fiscal 2006. We expect this trend of increased unit shipments and sales generated from such products to continue in fiscal 2008. Our cash and cash equivalents at December 30, 2007, totaled $199.1 million and consisted of cash, money market funds and commercial paper and our marketable securities totaled $216.7 million at December 30, 2007. We believe that our anticipated cash flows from operations and current cash balances, our existing credit facilities and available external financing will be sufficient to fund working capital requirements, capital investments, debt service and operations, and to meet our cash needs for at least the next twelve months. Our ability to fund our cash needs over the long term will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive and other factors, such as those discussed in Part I, Item 1A “Risk Factors,” many of which are beyond our control. Should we require additional funding, such as to satisfy our short-term and long-term debt obligations when due or to make additional capital investments, we may need to raise the required additional funds through additional bank borrowings or public or private sales of debt or equity securities. We cannot assure you that such funding will be available in needed quantities or on terms favorable to us, if at all. Basis of Presentation Fiscal 2007, Fiscal 2006 and Fiscal 2005 Our fiscal years end on the last Sunday of December. Fiscal 2007, fiscal 2006 and fiscal 2005 consisted of 52, 53 and 52 weeks, respectively. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenues, inventories, asset impairments, income taxes and pension benefits. We base our estimates on 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. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. We believe the following critical accounting policies are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments. Estimates of Sales Returns and Allowances From time to time we may accept sales returns or provide pricing adjustments to customers who do not have contractual return or pricing adjustment rights. We record a provision for estimated sales returns and allowances on product sales in the same period that the related revenues are recorded, which primarily impacts gross margin. We base these estimates on actual historical sales returns, allowances, historical price reductions, market activity, and other known or anticipated trends and factors. These estimates are subject to management’s judgment, and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenues and operating results. Impairment of Long-Lived Assets We have significant investments in long-lived assets, principally capital equipment, which could be exposed to impairment. Therefore, we consider at each balance sheet date whether indicators of impairment of long-lived 46 assets are present. These indicators may include, but are not limited to significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. If we identify indicators of impairment, recoverability of an asset that will continue to be used in our operations is measured by comparing the carrying amount of the asset in question to our estimate of the related total future undiscounted net cash flows attributable to the asset. If an asset carrying value is not recoverable through the related undiscounted cash flows, the asset is considered to be impaired. The impairment is measured by the difference between the asset’s carrying amount and its fair value. Fair value is determined by discounted future cash flow modeling, appraisals or other methods. Estimated future cash flows, terminal values and discount rates used in valuation models require significant management judgment. We may incur impairment losses in future periods if factors influencing our estimates of the undiscounted cash flows change. Impairment losses were not material in any of the periods presented. Income Taxes Prior to our reorganization into Spansion Inc. we operated as a Delaware limited liability company that had elected to be treated as a partnership for U.S. federal tax reporting purposes and therefore, we were not a U.S. taxable entity. We now operate as Spansion Inc., which is a taxable entity for U.S. federal tax reporting purposes. Our foreign subsidiaries are wholly owned and are taxable as corporations in their respective foreign countries of formation. In determining taxable income for financial statement reporting purposes, we must make estimates and judgments. These estimates and judgments are applied in the calculation of specific tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes. The recognition and measurement of current and deferred income tax assets and liabilities impact our tax provision. We must assess the likelihood that we will be able to recover our deferred tax assets. Unless recovery of these deferred tax assets is considered more likely than not, we must increase our provision for taxes by recording a charge to income tax expense, in the form of a valuation allowance against those deferred tax assets for which we believe it is not more likely than not they will be realized. We consider past performance, future expected taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment by the relevant tax jurisdiction. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result. Inventory Valuation The valuation of inventory impacts gross margin. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory and are also used for near-term factory production planning. We do not value inventories on hand in excess of forecasted demand of six months. In addition, we write off inventories that we consider obsolete. We adjust remaining specific inventory balances to approximate the lower of our standard manufacturing cost or market value. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. If we anticipate future demand or market conditions to be less favorable than our previous projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. This would have a negative impact on our gross margin in that period. If in any period we are able to sell inventories that were not valued or that had been written down in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period. 47 Pension and Post-Retirement Benefits We provide a pension plan for certain employees of Spansion Japan, and as a result, we have significant pension benefit costs and credits that are computed and recorded in our financial statements based on actuarial valuations. The actuarial valuations require assumptions and methods which must be used to develop the best estimate of the benefit costs. These valuation assumptions include salary growth, long-term return on plan assets, discount rates and other factors. The salary growth assumptions reflect our future and near-term outlook for salary growth within the industry. Long-term return on plan assets is determined based on historical results in the debt and equity markets and management’s expectation of the current economic environment and the allocation target and expected future yields of each asset class. The discount rate assumption is based on current investment yields on Japanese government long-term bonds, as no deep corporate market exists for high quality corporate debt instruments. Actual results that differ from these assumptions are accumulated and amortized over the future life of the plan participants. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect the pension costs and obligations. Stock-Based Compensation Expenses Effective December 26, 2005, we adopted Financial Accounting Standards Board (FASB) Statement No. 123(R), “Share-Based Payment,” which requires a public entity to reflect on its income statement, instead of pro forma disclosures in its financial footnotes, the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Statement 123(R) supersedes our previous accounting under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” for periods beginning in fiscal 2006. The valuation and recognition of share-based compensation impact gross margin, research and development expenses, and sales, general and administrative expenses. We estimated the fair value of our stock-based awards to employees using the Black-Scholes-Merton option pricing model, which requires the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The assumptions for expected volatility and expected life are the two assumptions that significantly affect the grant date fair value. Stock-based compensation expense recognized during a period is based on the higher of the grant-date fair value of the portion of share-based payment awards that is ultimately expected to vest, or actually vest, during the period. Compensation expense for all share-based payment awards was recognized using the straight-line attribution method reduced for estimated forfeitures. We estimate volatility based on our recent historical volatility and the volatilities of our competitors who are in the same industry sector with similar characteristics (“guideline” companies) because of the lack of historical realized volatility data on our business. We use the simplified calculation of expected life described in the Securities and Exchange Commission’s Staff Accounting Bulletin 107, due to changes in the vesting terms and contractual life of current option grants compared to our historical grants. If we determined that another method used to estimate expected volatility or expected life was more reasonable than our current methods, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and longer expected lives result in an increase to share-based compensation determined at the date of grant. In addition, Statement No. 123(R) requires us to develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Prior to the fourth quarter of fiscal 2007, we did not have sufficient historical forfeiture experience related to our own stock-based awards and therefore, estimated our forfeitures based on the average of our own fiscal 2006 forfeiture rate and historical forfeiture rates for Advanced Micro Devices, Inc. (AMD), as we believed these forfeiture rates to be the most indicative of our own expected forfeiture rate. Beginning the fourth quarter of fiscal 2007, we estimated forfeitures based on the weighted average of our own fiscal 2007 and 2006 forfeiture rates. Statement 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. 48 Results of Operations Total Net Sales for Fiscal 2007, Fiscal 2006 and Fiscal 2005 The following is a summary of our total net sales for fiscal 2007, fiscal 2006 and fiscal 2005. Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dec. 30, 2007 Year Ended Dec. 31, 2006 (in thousands) Dec. 25, 2005 $2,500,813 $2,579,274 $2,002,805 Total Net Sales Comparison for Fiscal 2007 and Fiscal 2006 Total net sales of approximately $2,500.8 million in fiscal 2007 decreased three percent compared to total net sales in fiscal 2006. The decrease in total net sales was primarily attributable to an approximately 10 percent decrease in blended ASPs (defined as total net sales divided by total unit shipments), which was partially offset by an approximately seven percent increase in unit shipments. The decrease in blended ASPs was primarily the result of unusually high price declines in the overall semiconductor memory industry during fiscal 2007. We believe our increase in unit shipments resulted in large part from our increased share in the NOR segment of the Flash memory market. We also believe that increased sales of MirrorBit products, which rose from approximately 50 percent of total net sales in fiscal 2006 to approximately 71 percent of total net sales in fiscal 2007, were the primary reason for our increasing share of the NOR segment of the Flash memory market. Under another measure, our ASP per bit (defined as total net sales divided by total Flash memory bits shipped) declined approximately 38 percent in fiscal 2007 compared to fiscal 2006 also reflecting the unusually high price declines in the overall semiconductor memory industry during fiscal 2007. Total Net Sales Comparison for Fiscal 2006 and Fiscal 2005 Total net sales of approximately $2,579.3 million in fiscal 2006 reflected an increase of approximately 29 percent compared to total net sales in fiscal 2005. The increase in total net sales was primarily attributable to an approximately 28 percent increase in unit shipments. We believe the increase was primarily driven by higher demand for MirrorBit products which rose from approximately 23 percent of total net sales in fiscal 2005 to approximately 50 percent of total net sales in fiscal 2006. Blended ASPs in fiscal 2006 as compared to fiscal 2005 were relatively flat. While we experienced an increase in ASPs of our MirrorBit products, the increases were offset by a decrease in ASPs of our other products. Net Sales Comparison—WSD and CSID for Fiscal 2007 and Fiscal 2006 Year Ended Variance in Dollars (in thousands) Variance in Percent Dec. 30, 2007 Dec. 31, 2006 Wireless Solutions Division (WSD) . . . . . . . . . . . . . . . . . . . . . Consumer, Set Top Box and Industrial Division (CSID) . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,362,508 1,130,265 8,040 $1,549,155 1,025,229 4,890 $(186,647) 105,036 3,150 (12)% 10% 64% Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500,813 $2,579,274 $ (78,461) (3)% Net sales in our Wireless Solutions Division (WSD) decreased approximately 12 percent in fiscal 2007 as compared to fiscal 2006. The overall unexpectedly high ASP degradation experienced in fiscal 2007 was focused on the more competitive wireless market, resulting in our WSD net sales decline. Net sales in our Consumer, Set Top Box and Industrial Division (CSID) increased 10 percent in fiscal 2007 as compared to fiscal 2006. The ASP decline was less severe in this business unit and the increase in CSID net 49 sales was due to a higher acceptance of our high density MirrorBit products by our customers in the CSID business, which is a significant change from our historical trend of net sales of mid- and lower-density products. In addition, CSID has been successful in expanding in the serial peripheral interface market with our MirrorBit technology. For fiscal 2007, our WSD business accounted for approximately 54 percent of our total net sales, and our CSID business accounted for approximately 45 percent of our total net sales, as compared to 60 percent and 40 percent, respectively for fiscal 2006. We believe a combination of business conditions in the overall Flash memory market and our efforts to sell our products containing MirrorBit technology led to the large percentage shift between our two primary business units. Gross Margin; Operating Expenses; Interest and Other Income (Expense), Net; Interest Expense and Income Taxes Benefit The following is a summary of gross margin; operating expenses; interest and other income, net; interest expense and (benefit) provision for income taxes for fiscal 2007, fiscal 2006 and fiscal 2005. Dec. 30, 2007 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended Dec. 31, 2006 (in thousands) Dec. 25, 2005 $2,500,813 $2,579,274 $2,002,805 2,065,143 2,063,639 1,809,929 17% 20% 10% 436,785 342,033 292,926 239,317 264,358 184,833 (240,432) (90,756) (284,883) 32,595 11,681 3,173 (80,803) (70,903) (45,032) 25,144 2,215 22,626 The decrease in gross margin in fiscal 2007 was primarily due to the unusually high price declines in the flash memory industry. Our ASP per bit declined by 38 percent in fiscal 2007 as compared to fiscal 2006. During fiscal 2007, we reduced our cost per bit (defined as total cost of sales divided by total bits shipped) by 36 percent as compared to fiscal 2006, as we executed cost reduction plans that included increased productivity and output of internal wafer fabs, improvement of cumulative product yields, test time reductions and price negotiations with external suppliers. However, the significant reduction in our cost per bit was not sufficient to offset the rate of decline in ASP per bit during fiscal 2007. This resulted in a decline in our gross margin. The increase in gross margin in fiscal 2006 was primarily due to an increase in the sales of our higher margin MirrorBit products and improved factory utilization. MirrorBit sales represented approximately 50 percent of sales in fiscal 2006 compared to approximately 23 percent of sales in fiscal 2005. Research and development expenses of approximately $436.8 million in fiscal 2007 reflected an increase of 28 percent compared to approximately $342.0 million in fiscal 2006. The increase in research and development expense in fiscal 2007 was primarily due to an increase in 300-millimeter development costs at SP1 and the SDC, which together represented approximately 66 percent of the increase for fiscal 2007. During fiscal 2007, development costs from SP1 were included in research and development expenses, which in part caused the increase from fiscal 2006 research and development expenses. Also, approximately 20 percent of the increase was due to higher labor costs during fiscal 2007, primarily related to increased headcount during the period, and approximately 12 percent of the increase was due to a gain on the sale of our 200-millimeter equipment of approximately $11.5 million in fiscal 2006 with no comparable gain in fiscal 2007. We expect research and development expenses to decrease as a percent of net sales in fiscal 2008. 50 Research and development expenses of approximately $342.0 million in fiscal 2006 increased 17 percent compared to approximately $292.9 million in fiscal 2005. Approximately 40 percent of the increase was due to an increase in 300-millimeter development costs in SDC in fiscal 2006, offset in part by a gain on the sale of our 200-millimeter equipment of approximately $11.5 million. Also, approximately 30 percent of the increase was due to higher labor costs during fiscal 2006, primarily related to increased headcount during the period and the impact of an extra work week in fiscal 2006. Research and development expense included $4.7 million of stockbased compensation expense in fiscal 2006. We did not have a comparable charge for the corresponding period of fiscal 2005. Sales, general and administrative expenses of approximately $239.3 million in fiscal 2007 decreased 9 percent compared to approximately $264.4 million in fiscal 2006. Approximately 60 percent of the decrease was due to lower information technology and other administrative expenses as a result of the reduction in services provided by AMD. Since fiscal 2006, we have expanded our administrative functions and significantly reduced our reliance on administrative services provided by AMD. Also, approximately 24 percent of the decrease was due to outside consulting charges that were primarily related to operational efficiency initiatives incurred in fiscal 2006 which were not incurred in fiscal 2007. We expect sales, general and administrative expenses will be approximately flat as a percent of net sales in fiscal 2008. Sales, general and administrative expenses of approximately $264.4 million in fiscal 2006 increased 43 percent compared to approximately $184.8 million in fiscal 2005. The increase was primarily due to expenses incurred as a result of the formation of our own sales force and additional information technology, legal and consulting fees incurred as a new public entity. These additional costs accounted for approximately 73 percent of the increase in fiscal 2006. Sales, general and administrative expense included $7.0 million of stock-based compensation expense in fiscal, 2006. We did not have a comparable charge for the corresponding period of fiscal 2005. Interest and other income (expense), net, increased by $20.9 million in fiscal 2007 compared to fiscal 2006, primarily due to a $13.9 million decrease in loss on early extinguishment of debt and a $6.3 million increase in interest income for fiscal 2007 due to the combined effect of increases in our invested cash, cash equivalents and marketable securities balances, and an increase in our average investment portfolio yield of approximately 0.4 percent. The increase in interest and other income (expense), net for fiscal 2007 was also partially due to a $7.5 million gain realized on the sale of land in Asia in the second quarter of fiscal 2007 as compared to a $6.9 million gain on the sale of marketable securities in the second quarter of fiscal 2006. Interest and other income (expense), net increased by $8.5 million in fiscal 2006 compared to fiscal 2005, primarily due to an increase of $18.7 million of interest income generated from a portion of the proceeds from our Senior Secured Term Loan Facility and initial public offering in December 2005 that was invested in cash equivalents and marketable securities, and $6.9 million of realized gain from the sale of marketable securities. This increase was partially offset by a $17.3 million loss on early extinguishment of debt as a result of the repurchase and cancellation of the 12.75% Senior Subordinated Notes. Interest expense increased by approximately $9.9 million in fiscal 2007 as compared to fiscal 2006, primarily due to the increase in average debt balances. The increase in the debt balance was primarily attributable to a borrowing of $500.0 million under the Senior Secured Term Loan Facility during the fourth quarter of fiscal 2006, subsequently replaced by the $625.0 million Senior Secured Floating Rate Notes during the second quarter of fiscal 2007, and a borrowing of $256.5 million under our Spansion Japan 2007 Credit Facility in 2007. The increase in interest expense incurred was partially offset by approximately $16.9 million of interest capitalized related to the build out of SP1, an approximately $8.2 million reduction in interest expense related to an adjustment to a capital lease obligation during fiscal 2007, and a lower average interest rate on our debt portfolio. The average interest rates for fiscal 2007 were 7.58 percent as compared to 7.85 percent for fiscal 2006. We do not anticipate interest capitalization after the first quarter of fiscal 2008 due to the expected completion of the build out of SP1 during that quarter. 51 Interest expense increased by $25.9 million in fiscal 2006 as compared to fiscal 2005, primarily due to the additional interest expense on the 11.25% Senior Notes and 12.75% Senior Subordinated Notes issued by Spansion LLC, our wholly owned operating company subsidiary, at the end of the fourth quarter of fiscal 2005. The Senior Subordinated Notes were repurchased in the second quarter of fiscal 2006 in connection with the issuance of our 2.25% Exchangeable Senior Subordinated Debentures. The increase in fiscal 2006 was also due to the additional interest expense incurred on the borrowing of $500.0 million under the Senior Secured Term Loan Facility in the fourth quarter of fiscal 2006. We recorded income tax benefits of approximately $25.1 million in fiscal 2007, approximately $2.2 million in fiscal 2006, and approximately $22.6 million in fiscal 2005. The benefit for income taxes recorded for fiscal 2007 differs from the benefit for income taxes that would be derived by applying a U.S. statutory 35 percent rate to the loss before income taxes primarily due to our inability to benefit from U.S. operating losses due to lack of a history of earnings, a decrease of $21.0 million in the valuation allowance associated with deferred tax assets of our Japanese subsidiary and income that was incurred and tax effected in foreign jurisdictions with different tax rates. The decrease of $21.0 million in the valuation allowance associated with deferred tax assets of our Japanese subsidiary was recorded due to our change in judgment about the realizability of our Japanese deferred tax assets. This amount included the effect of the change in the beginning of the year balance of the valuation allowance that will be realized in future years, and the portion of the valuation allowance that was recognized in the current year as part of the effective tax rate. The benefit for income taxes recorded for fiscal 2006 and 2005 differs from the benefit for income taxes that would be derived by applying a U.S. statutory 35 percent rate to the loss before income taxes primarily due to our inability to benefit from U.S. operating losses due to lack of a history of earnings, and income that was incurred and tax effected in foreign jurisdictions with different tax rates. As of December 30, 2007, we recorded a valuation allowance of approximately $238.2 million against our U.S. deferred tax assets, net of deferred tax liabilities. This valuation allowance offsets all of our net U.S. deferred tax assets. As of December 30, 2007, we have also recorded valuation allowances of approximately $35.5 million against various foreign deferred tax assets for which we believe it is not more likely than not that they will be realized. 52 Other Items In the second quarter of fiscal 2006, we began selling our products directly to AMD’s former customers and customers not served solely by Fujitsu. The following table summarizes net sales by geographic areas for the periods presented: Dec. 30, 2007 Geographical sales(1): Net sales to end customers(2): North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 295,632 China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658,205 Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,854 EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333,430 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,132 Net sales to related parties: United States (net sales to AMD)(3) . . . . . . . . . . . . . . . . . . . . . — Japan (net sales to Fujitsu) . . . . . . . . . . . . . . . . . . . . . . . . . . . 873,560 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500,813 Year Ended Dec. 31, 2006 (in thousands) $ 174,930 479,040 282,596 312,114 61,799 Dec. 25, 2005 $ — — — — — 336,172 932,623 1,114,150 888,655 $2,579,274 $2,002,805 (1) Geographical sales are based on the customer’s bill-to location. (2) Net sales to end customers represent sales since the end of the first quarter of fiscal 2006 to AMD’s former customers and customers not served solely by Fujitsu. (3) For fiscal 2006, these represent sales during the first quarter. The impact on our operating results from changes in foreign currency exchange rates has not been material, principally because our expenses denominated in yen are generally comparable to our sales denominated in yen, and we enter into foreign currency exchange contracts to mitigate our exposure when yen denominated expenses and sales are not comparable. 53 Contractual Obligations The following table summarizes our contractual obligations at December 30, 2007. The table is supplemented by the discussion following the table. Total 2008 2009 2010 (in thousands) Senior Secured Floating Rate Notes . . . . . . . . . . . . . . . . . . . $ 625,000 $ — $ — $ — $ Spansion Japan 2007 Credit Facility . . . . . . . . . . . . . . . . . 256,503 61,561 82,081 112,861 Senior Notes . . . . . . . . . . . . . . . 250,000 — — — Exchangeable Senior Subordinated Debentures . . . 207,000 — — — Capital lease obligations . . . . . . 74,012 33,092 25,616 8,774 Other Credit Facility— Subsidiaries . . . . . . . . . . . . . . 7,433 7,143 290 — Total principal contractual obligations . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . Unconditional purchase commitments(1) . . . . . . . . . . . Interest payments on debt and capital leases . . . . . . . . . . . . . 2011 — 2012 $ 2013 and Beyond — $ 625,000 — — — — 250,000 — 6,530 — — — 207,000 — — 1,419,948 25,511 101,796 12,888 107,987 8,085 121,635 2,205 6,530 805 — 625 1,082,000 903 612,305 313,644 190,061 61,510 31,845 15,025 220 592,089 96,451 93,312 88,268 85,509 85,274 143,275 Total contractual obligations . . $2,649,853 $524,779 $399,445 $273,618 $124,689 $100,924 $1,226,398 (1) Unconditional purchase commitments include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Unconditional purchase commitments exclude agreements that are cancelable without penalty. These agreements are related principally to inventory and other items. Senior Secured Floating Rate Notes In May 2007, Spansion LLC, issued $625.0 million aggregate principal amount of the Senior Secured Floating Rate Notes due 2013 (the Notes). Interest on the Notes accrues at a rate per annum, reset quarterly, equal to the three-month London Interbank Offered Rate plus 3.125 percent. Interest is payable on March 1, June 1, September 1 and December 1 of each year beginning September 1, 2007 until the maturity date of June 1, 2013. As of December 30, 2007, the Notes bear interest at approximately 8.25 percent. In connection with the issuance of the Notes, we, Spansion LLC and Spansion Technology Inc. (STI), our indirect wholly owned subsidiary, executed a pledge and security agreement pursuant to which and subject to exceptions specified therein, the Notes are secured by a first priority lien on all of Spansion LLC’s inventory (excluding returned inventory), equipment and real property and proceeds thereof (excluding receivables or proceeds arising from sales of inventory in the ordinary course of business), presently owned or acquired in the future by Spansion LLC and by each of the current and any future guarantors. The Notes are also secured by a second-priority lien that is junior to the liens securing Spansion LLC’s Revolving Credit Agreement dated as of September 19, 2005, as amended, on substantially all other real and personal property and proceeds thereof, including receivables or proceeds arising from sales of inventory in the ordinary course of business presently owned or acquired in the future by us and by each of the current and any future guarantors. The Notes are further secured by certain deeds of trust related to real property owned by Spansion LLC in California and Texas. As of 54 December 30, 2007, the Notes are collateralized by a first priority lien on our inventory and property, plant and equipment with a total net book value of approximately $1.2 billion, and by a second priority lien on our accounts receivable with a net book value of approximately $217.0 million. Upon the occurrence of a change of control of Spansion LLC, holders of the Notes may require Spansion LLC to repurchase the Notes for cash equal to 101 percent of the aggregate principal amount to be repurchased plus accrued and unpaid interest. Beginning June 1, 2008, Spansion LLC may redeem all or any portion of the Notes, at any time or from time to time at redemption prices specified therein. Prior to June 1, 2008, Spansion LLC may redeem up to 35 percent of the Notes from the proceeds of certain equity offerings at a redemption price of 100 percent. Certain events are considered “Events of Default,” which may result in the accelerated maturity of the Notes, including: • Spansion LLC’s failure to pay when due the principal or premium amount on any of the Notes at maturity, upon acceleration, redemption, optional redemption, required repurchase or otherwise; • Spansion LLC’s failure to pay interest on any of the Notes for 30 days after the date when due; • Spansion LLC’s or the guarantors’ failure to comply with certain restrictions on Spansion LLC’s or Guarantors’ ability to merge, consolidate or sell substantially all of its assets; • Spansion LLC’s failure to perform or observe any other covenant or agreement in the Notes or in the Indenture for a period of 45 days after receiving notice of such failure; • A default by Spansion LLC or any restricted subsidiary (as defined in the Indenture) under any indebtedness that results in acceleration of such indebtedness, or the failure to pay any such indebtedness at maturity, in an aggregate principal amount in excess of $50.0 million (or its foreign equivalent at the time); • If any judgment or judgments for the payment of money in an aggregate amount in excess of $50.0 million (or its foreign equivalent at the time) is rendered against Spansion LLC, the guarantors or any significant subsidiary and is not waived, satisfied or discharged for any period of 60 consecutive days during which a stay of enforcement is not in effect; • Certain events of bankruptcy, insolvency or reorganization with respect to Spansion LLC or any significant subsidiary; • If any note guaranty ceases to be in full force and effect, other than in accordance with the terms of the Indenture, or a guarantor denies or disaffirms its obligations under its note guaranty, other than in accordance with the terms of the Indenture; or • Any lien securing the collateral underlying the Notes at any time ceases to be in full force and effect, and does not constitute a valid and perfected lien on any material portion of the collateral intended to be covered thereby, if such default continues for 30 days after notice. Spansion Japan 2007 Credit Facility On March 30, 2007, Spansion Japan, our indirect wholly owned subsidiary, entered into an agreement with certain Japanese financial institutions that provides Spansion Japan with a committed 48.4 billion yen senior secured term loan facility (approximately $431.0 million as of December 30, 2007). Spansion Japan may, pursuant to the terms of this facility, borrow amounts in increments of 1.0 billion yen (approximately $8.9 million as of December 30, 2007). Amounts borrowed under this facility bear interest at a rate equal to the Japanese yen three-month Tokyo Interbank Offered Rate, or TIBOR, at the time of the drawdown, plus a margin of two percent per annum, which will reset quarterly. Borrowing availability is based on capital deliveries for Spansion Japan’s SP1 facility. 55 Pursuant to the terms of Spansion Japan 2007 Credit Facility, Spansion Japan is not permitted, among other things, to create any security interests or liens on any of its pledged assets and to sell or dispose of any of its pledged assets, subject to certain exceptions including JV1/JV2 Transaction. This facility may be terminated in the event of default in accordance with the terms of this facility. Events of default under the facility include, among other things, the following: a default in performance of payment; if any of debt obligations of Spansion LLC exceeding $25.0 million, or of Spansion Japan exceeding 1.0 billion yen, are not paid when due; or if any debt obligations of Spansion Japan or Spansion LLC are accelerated or otherwise become due and payable, in each case if not cured within applicable time periods set forth in the Spansion Japan 2007 Credit Facility. As of December 30, 2007, the outstanding balance under this facility is 28.8 billion yen (approximately $256.5 million). This amount bears interest at approximately 2.87 percent. We are to pay 80 percent of the balance in ten equal, consecutive, quarterly principal installments starting from the second quarter of fiscal 2008 through the third quarter of fiscal 2010 and the remaining balance will be paid in the fourth quarter of fiscal 2010. This facility is collateralized by the assets with a net book value of 125.6 billion yen (approximately $1.1 billion as of December 30, 2007). This drawdown period will expire on March 31, 2008. Senior Notes On December 21, 2005, Spansion LLC completed an offering of $250 million aggregate principal amount of 11.25% Senior Notes due 2016. The Senior Notes were issued at 90.302% of face value, resulting in net proceeds of approximately $218.1 million after deducting the initial purchasers’ discount and estimated offering expenses. The Senior Notes are general unsecured senior obligations of Spansion LLC and will rank equal in right of payment with any of our existing and future senior debt. Interest is payable on January 15 and July 15 of each year beginning July 15, 2006 until the maturity date of January 15, 2016. Certain events may result in the accelerated maturity of the Senior Notes, including a default in any interest, principal or premium amount payment; a merger, consolidation or sale of all or substantially all of the Spansion LLC’s property; a breach of covenants in the Senior Notes or the respective indenture; a default in certain debts; or if a court enters certain orders or decrees under any bankruptcy law. Upon occurrence of one of these events, the principal of and accrued interest on all of the Senior Notes, as the case may be, may become immediately due and payable. If we, our wholly owned subsidiary, Spansion Technology Inc., or STI, or Spansion LLC incurs any judgment for the payment of money in an aggregate amount in excess of $50 million or takes certain voluntary actions in connection to insolvency, all amounts on the Senior Notes shall become due and payable immediately. Exchangeable Senior Subordinated Debentures In June 2006, Spansion LLC, issued $207.0 million of aggregate principal amount of 2.25% Exchangeable Senior Subordinated Debentures due 2016. The Debentures are general unsecured senior subordinated obligations and rank subordinate in right of payment to all of our senior indebtedness, including the Senior Notes, and senior in right of payment to all of our subordinated indebtedness. The Debentures bear interest at 2.25 percent per annum. Interest is payable on June 15 and December 15 of each year beginning December 15, 2006 until the maturity date of June 15, 2016. The Debentures were not exchangeable prior to January 6, 2007. On or after January 6, 2007, the Debentures became exchangeable for shares of our Class A common stock, cash or a combination of cash and shares of such Class A common stock, at our option. Full conversion of the Debentures into shares would result in an initial exchange rate of 56.7621 shares of Class A common stock per debenture representing an initial exchange price of approximately $17.6174 per share of Class A common stock. We have reserved 11.7 million shares of Class A common stock for issuance upon conversion of the debentures. No debentures have been exchanged for our Class A common stock as of December 30, 2007. At any time prior to maturity, we may make an irrevocable election to satisfy the exchange obligation in cash up to 100% of the principal amount of the debentures exchanged, with any remaining amount to be satisfied 56 in shares of Class A common stock or a combination of cash and shares of Class A common stock at the above exchange ratio. In the event that we make this irrevocable election, debenture holders may exchange their debentures only under the following circumstances: • during any fiscal quarter after our fiscal quarter ending April 1, 2007 (and only during such fiscal quarter) if the sale price of our Class A common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than or equal to 120% of the conversion price per share of our Class A common stock; • subject to certain exceptions, during the five business day period following any five consecutive trading day period in which the trading price of the debentures for each day of such period was less than 98% of the product of the sale price of our Class A common stock and the number of shares issuable upon exchange of $1,000 principal amount of the debentures; or • upon the occurrence of specified corporate events that constitute a fundamental change under certain circumstances. The holders of the Debentures will have the ability to require us to repurchase the Debentures in whole or in part for cash in the event of a fundamental change. In such case, the repurchase price would be 100 percent of the principal amount of the Debentures plus any accrued and unpaid interest. Capital Lease Obligations As of December 30, 2007, we had capital lease obligations of approximately $83.3 million, which included imputed interest of approximately $9.3 million. Obligations under these lease agreements are collateralized by the assets leased and are payable through 2011. Leased assets consist principally of machinery and equipment. Other Credit Facility—Subsidiaries Certain of our subsidiaries maintain local in-country credit facilities to cover short-term liquidity requirements. During 2007, our Spansion China and Spansion Penang subsidiaries maintained credit facilities locally. As of December 30, 2007, approximately $7.4 million was outstanding on the local credit facilities. Interest rates range from approximately 5.75 percent to 6.24 percent in local currency and US dollar where applicable. All of these facilities are without parent guarantee, and callable by the lending financial institution. We have the ability to draw on the Senior Secured Revolving Credit Facility and provide intercompany funding to meet our financial obligations in our worldwide subsidiaries. We intend to continue to maintain these facilities based on cost of funds, availability and subsidiary funding requirements. Senior Secured Revolving Credit Facility On May 9, 2007, Spansion LLC, the agent and the other lenders party to the Senior Secured Revolving Credit Facility amended the credit agreement and the security agreement in connection therewith, and we, STI and Spansion International entered into certain new security agreements. Pursuant to the amendment to the revolving facility credit agreement, lenders consented to the incurrence of the Senior Secured Floating Rate Notes and the grant of related liens. This resulted in the revolving credit facility lenders and the Senior Secured Floating Rate Notes holders holding substantially similar security. The relative priorities of the classes of lenders in various types of collateral is set forth in an intercreditor agreement between the agent for the revolving credit facility lenders and the trustee and collateral agent for the Senior Secured Floating Rate Notes holders. As of December 30, 2007, we have not borrowed any amounts under this revolving credit facility. We had approximately $97.5 million available under this facility at the end of fiscal year 2007. This facility will expire on September 19, 2010. 57 Spansion Japan 2007 Revolving Credit Facility On December 28, 2007, Spansion Japan entered into a Revolving Credit Facility Agreement with the several financial institutions, which provides for a revolving credit facility in the aggregate principal amount of up to 14 billion yen (approximately $124.7 million as of December 30, 2007). Available amounts for borrowing under this credit facility are limited to the amount of trade receivables held by Spansion Japan. If at anytime the aggregate amount of borrowings under this credit facility exceeds the amount of the trade receivables, Spansion Japan is obligated to prepay an amount such that borrowings outstanding after such prepayment are below the level of the trade receivables. Borrowings may be for a term of one week or more, but not more than three months, as determined by Spansion Japan. Amounts borrowed under this credit facility bear interest at a rate equal to TIBOR, at the specified date preceding or at the time of the borrowing in accordance with the terms of this credit facility, plus a margin of 0.50 percent per annum. Pursuant to the terms of this credit facility, Spansion Japan is not permitted, among other things, to create any security interests or liens on the trade receivables; change its primary business; subordinate the payment of its debt under this credit facility to the payment of any unsecured debts; and enter into any merger, company partition, exchange or transfer of shares, assign all or a part of its business or assets to a third party, or otherwise transfer all or a material part of its assets to a third party, subject to certain exceptions. As of December 30, 2007, we have not borrowed any amounts under this revolving credit facility. Subject to certain limitation under Spansion Japan 2007 Credit Facility, we had 10 billion yen (approximately $89.1 million as of December 30, 2007) available under this facility as of December 30, 2007. This facility will expire on December 28, 2009 and is extendable at each anniversary with an extension fee at 0.2 percent of the commitment amount. Other Financial Matters JV1/JV2 Transaction On April 2, 2007, pursuant to the terms of an Asset Purchase Agreement dated as of September 28, 2006. Spansion Japan closed the sale of JV1 and JV2, two wafer fabrication facilities located in Aizu-Wakamatsu, Japan (the JV1/JV2 Facilities), to Fujitsu together with selected manufacturing equipment, inventory and other tangible assets located at the JV1/JV2 Facilities and received proceeds of approximately $170.0 million in cash from Fujitsu (the JV1/JV2 Transaction). In conjunction with the JV1/JV2 Transaction on April 2, 2007, Spansion Japan also sold certain equipment located at the JV1/JV2 Facilities to an unrelated third party Japanese corporation for approximately $24.0 million, which is leasing the equipment to Fujitsu. The total gain from the JV1/JV2 Transaction, which was the difference between the sales proceeds and the net book value of the assets sold under the terms of the agreement, was approximately $72.5 million. We accounted for the JV1/JV2 Transaction as a sale of real estate that included property improvements and integral equipment because the building was subject to an existing lease of the underlying land. We determined that continuing involvement existed with Fujitsu under the Foundry Agreement effective until December 2009 and, accordingly, we recognize the gain over the term of the Foundry Agreement with Fujitsu (i.e., over the period of continuing involvement). Pending Acquisition of Saifun Semiconductors Ltd. On October 8, 2007, we and Saifun Semiconductors Ltd. (Saifun) entered into an Agreement and Plan of Merger and Reorganization, dated as of October 7, 2007, of which certain terms, including the cash distribution, 58 were amended as of December 12, 2007 (the Acquisition Agreement). Upon the consummation of the acquisition, each Saifun shareholder will receive 0.7429 shares of our Class A common stock and approximately $6.05 per share (based on Saifun’s capitalization as of the amendment date of the Acquisition Agreement) in cash (representing a distribution of approximately $189.7 million of Saifun’s existing cash to all holders of record immediately prior to the consummation of the acquisition) for each Saifun Ordinary Share. In addition, Saifun’s stock options will convert into stock options with respect to our Class A common stock, after giving effect to the exchange ratio in the acquisition and the cash distribution. The acquisition is expected to be completed no later than the first quarter of fiscal 2008. Liquidity and Capital Resources Financial Condition (Sources and Uses of Cash) Our cash and cash equivalents at December 30, 2007 totaled $199.1 million and consisted of cash, money market funds and commercial paper. Our marketable securities totaled $216.7 million at December 30, 2007 and consisted of auction rate securities which underlying assets are municipal bonds and student loans. We are subject to restrictions on our distribution of cash contained in our third-party loan agreements described under the “Contractual Obligations” section above. Our cash flows for fiscal 2007, fiscal 2006 and fiscal 2005 are summarized as follows: Dec. 30, 2007 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . $ 216,339 (1,015,741) 250,377 (11,677) $ (560,702) Year Ended Dec. 31, 2006 (in thousands) Dec. 25, 2005 $ 451,617 (603,547) 396,969 8,316 $ 253,355 $ 321,313 (553,066) 597,701 2,303 $ 368,251 Net Cash Provided by Operating Activities Net cash provided by operating activities was approximately $216.3 million in fiscal 2007. Non-cash items included in the net loss consisted primarily of approximately $517.3 million of depreciation and amortization and approximately $16.1 million in compensation cost recognized under stock plans and an increase of approximately $41.4 million in benefit for deferred income taxes. The net changes in operating assets and liabilities in fiscal 2007 were primarily attributable to a build of our inventory of approximately $128.5 million in order to meet the demand for our higher density products in the first quarter of fiscal 2008; an increase in accounts payable and accrued liabilities of approximately $137.0 million primarily due to an increase in days of payables outstanding from 70 days in fiscal 2006 to 77 days in fiscal 2007 reflecting our continued focus on cash management in fiscal 2007; and an increase in income taxes payable of approximately $9.4 million primarily due to the gain from the JV1/JV2 Transaction consummated in the second quarter of fiscal 2007. Our days of inventory were 103 days in fiscal 2007 compared to 81 days in fiscal 2006. The days of sales outstanding were relatively flat in fiscal 2007 and approximated 54 days. Net cash provided by operating activities was approximately $451.6 million in fiscal 2006. Non-cash charges included in the net loss consisted primarily of approximately $537.0 million of depreciation and amortization, loss on debt extinguishment of approximately $17.3 million and compensation cost recognized under stock plans of approximately $17.4 million. The net changes in operating assets and liabilities in fiscal 2006 were primarily attributable to an increase in accounts payable and accrued liabilities of approximately $41.7 million and a decrease in accounts receivable of approximately $20.4 million. 59 Net Cash Used in Investing Activities Net cash used in investing activities in fiscal 2007 was approximately $1,015.7 million, which consisted of approximately $1,115.6 million of capital expenditures used to purchase property, plant and equipment, principally related to our investment in 300-millimeter equipment at SP1 and SDC, and approximately $90.7 million used in the purchase of marketable securities, and which was offset in part by cash proceeds of approximately $190.5 million from the sale of property, plant and equipment, primarily from the JV1/JV2 Transaction. Net cash used in investing activities was approximately $603.5 million in fiscal 2006, primarily as a result of approximately $716.6 million used to purchase property, plant and equipment, in part related to our investment in 300-millimeter equipment at SP1, and a cash used of approximately $279.6 million for the purchase of marketable securities, offset in part by a cash inflow of approximately $372.6 million from the maturities and sale of marketable securities and approximately $20.1 million in proceeds from sale of property, plant and equipment. Net Cash Provided by (Used in) Financing Activities Net cash provided by financing activities was approximately $250.4 million in fiscal 2007, primarily as a result of approximately $854.1 million of proceeds from the issuance of Senior Secured Floating Rate Notes, net of issuance costs, and borrowing under our Spansion Japan 2007 Credit Facility, offset in part by approximately $603.8 million in payments on debt and capital lease obligations, $500 million of which constituted repayment and early extinguishment of the Senior Secured Term Loan Facility. Net cash provided by financing activities was approximately $397.0 million in fiscal 2006. This amount included approximately $889.7 million of proceeds received mainly from our Senior Secured Term Loan Facility and the issuance of Spansion LLC’s 2.25% Exchangeable Senior Subordinated Debentures. During fiscal 2006, we also received approximately $67.8 million in net proceeds from the issuance of Class A common stock in our secondary stock offering and approximately $48.2 million of proceeds from equipment sale-leaseback transactions. These amounts were partially offset by approximately $600.3 million in payments on debt and capital lease obligations, including approximately $197.6 million in payments to AMD and Fujitsu, of which $175 million was used to repurchase Spansion LLC’s 12.75% Senior Subordinated Notes. We also paid AMD approximately $8.5 million for stock-based compensation for AMD’s grant of options to our employees prior to our initial public offering in December 2005. Liquidity Our future uses of cash are expected to be primarily for working capital, capital expenditures, debt service and other contractual obligations. Our capital expenditures during fiscal 2007 were approximately $1,115.6 million, of which approximately 64 percent was related to our 300-millimeter development and technology facilities, SP1 and SDC. We expect to spend approximately $535.0 million on capital expenditures in fiscal 2008, approximately 50 percent of which is related to SP1. We expect that our cash need for capital deliveries, the majority of which is anticipated in first half of fiscal 2008, will be financed from existing credit facilities, capital leases, and cash on hand. Timing of the payments will depend on terms negotiated with individual vendors, and will affect our cash and debt positions in the first half of fiscal 2008. Additionally, the total amount due on debt service and other contractual obligations for fiscal 2008 is approximately $524.8 million. As of December 30, 2007, we had cash and cash equivalents of approximately $199.1 million, marketable securities of approximately $216.7 million and approximately $222.2 million available under our revolving credit facilities, totaling approximately $638.0 million. In addition, we have borrowed approximately $256.5 million of the JPY 48,400 million (approximately $431.0 million) available under our Spansion Japan 2007 Credit Facility. Additional drawing under this facility is contingent on delivery of capital equipment as collateral through the end of the first quarter of fiscal 2008. Based on expected deliveries in fiscal 2008, we believe we will borrow an additional $50 million to $70 million under this facility in fiscal 2008. The remaining undrawn amounts under 60 the Spansion Japan 2007 Credit Facility after the first quarter of fiscal 2008 will be unavailable unless we are able to restructure the underlying credit agreement. The availability under our credit facilities is subject to certain borrowing base limitations and other covenants. As of December 30, 2007, we were in compliance with all covenants under our credit facilities. We believe that our anticipated cash flows from operations and current cash balances, our existing credit facilities and available external financing will be sufficient to fund working capital requirements, capital investments, debt service and operations and to meet our cash needs for at least the next twelve months. Our ability to fund our cash needs over the long term will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive and other factors, such as those discussed in Part II, Item 1A “Risk Factors,” including the risk factor described as “Our investments in marketable debt securities are subject to risks which may cause losses and affect the liquidity of these investments,” many of which are beyond our control. Should we require additional funding, such as to satisfy our short-term and long-term debt obligations when due or to make additional capital investments, we may need to raise the required additional funds through additional bank borrowings or public or private sales of debt or equity securities. Credit market conditions will affect our ability to access the capital market and/or the cost of financing. We cannot assure you that such funding will be available in needed quantities or on terms favorable to us, if at all. Off-Balance-Sheet Arrangements During the normal course of business, we made certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property indemnities to our customers in connection with the delivery, design, manufacture and sale of our products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to other parties to certain acquisition agreements, such as under the JV1/JV2 Transaction. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. We believe that substantially all of our indemnities and commitments provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities and commitments because such liabilities are contingent upon the occurrence of events which are not reasonably determinable. Management believes that any liability for these indemnities and commitments would not be material to our accompanying consolidated financial statements. Recently Issued Accounting Pronouncement In June 2006, the FASB ratified the EITF Issue No. 06-2 (Issue 06-2), Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43. Issue 06-2 provides guidelines under which sabbatical leave or other similar benefits provided to an employee are considered to accumulate. If such benefits are deemed to accumulate, they should be accrued for as compensation expense over the employee’s requisite service period. The provisions of this Issue are effective for fiscal years beginning after December 15, 2006 and allow for either retrospective application or a cumulative effect adjustment approach upon adoption. Prior to December 30, 2007, our Sabbatical Program provided for eight weeks of paid leave for exempt US employees, and its Recognition Trip Program provided for one week of paid leave and a fixed cash compensation for non-exempt US employees, upon the completion of seven years of credited service. Effective December 29, 2007, we discontinued these programs, and implemented a new Sabbatical Program that provides for two weeks of paid leave for all regular US employees upon the completion of five years of credited service. Prior to the adoption of the Issue, we accounted for benefits under the old Sabbatical and Recognition programs only after the completion of the seven years by the eligible employees because none of the benefits vest or accrete to the employee until completion of the full seven years of service. We adopted this Issue beginning January 1, 2007 using the cumulative effect adjustment approach. With the adoption of Issue 06-2, we began accounting for those programs, and it now accounts for benefits under the new Sabbatical Program by recording the estimated total 61 program payouts upon attaining the requisite service conditions as compensation expense ratably over each employee’s requisite service period. The adoption of this Issue resulted in an increase to our accumulated deficit of approximately $10.2 million as of the beginning of fiscal 2007. The effect of this change on our condensed consolidated statements of operations for the year ended December 30, 2007 was not material. In July 2006, the FASB issued Financial Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Adoption on January 1, 2007 did not have a material effect on our consolidated financial statements. As of the date of adoption, our total gross unrecognized tax benefits were $2.7 million, of which $0.2 million, if recognized, would affect our effective tax rate. The recognition of the remaining unrecognized tax benefits would be offset by a change in valuation allowance. In September 2006, the FASB issued Statement No. 157 (Statement 157), Fair Value Measurements. Statement 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of Statement 157 are effective for the fiscal years beginning after November 15, 2007; and we determined upon adoption of this standard as of January 1, 2008 that it did not have a material impact on our consolidated financial statements. In February 2007, the FASB issued Statement No. 159 (Statement 159), The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. Under Statement 159, a company may choose, at specified election dates, to measure eligible financial instrument and certain other items at fair value that are not otherwise required to be so measured. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. Statement 159 is effective as of the beginning of the fiscal year beginning after November 15, 2007. We are currently evaluating the impact, if any, of Statement 159 on our financial position, results of operations and cash flows. In December 2007, the FASB issued Statement No. 160 (Statement 160), Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. Statement 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. Statement 160 is effective for us on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal year 2009. As of December 30, 2007, we did not have any minority interests. The adoption of Statement 160 will not impact our consolidated financial statements. In December 2007, the FASB issued Statement No. 141 (revised 2007), (Statement 141(R)), Business Combinations, which will change the accounting for business combinations. Under Statement 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions and will also change the accounting treatment and disclosure for certain specific items in a business combination. Statement 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted and Statement 141(R) will apply to us for the fiscal year beginning January 1, 2009. We expect Statement 141(R) to have an impact on accounting for business combinations once adopted. Accordingly, any business combinations we engage in prior to the adoption of Statement 141(R) will be recorded and disclosed following existing GAAP until January 1, 2009. 62 In December 2007, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 110 (SAB 110), which clarified the views of the SEC staff regarding the continued use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement 123(R). Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of a share option. The use of the “simplified” method, which was first described in Staff Accounting Bulletin No. 107, Share-Based Payment, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. We have used the simplified method since our initial public offering on December 21, 2005 and believe that we will continue to use this method upon the adoption of SAB 110, which is effective January 1, 2008, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term since our initial public offering. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk Our exposure to market risk for changes in interest rates relates to our debt and our investment portfolio. As of December 30, 2007, all investments in our investment portfolio were either cash equivalents or marketable securities and, with the exception of auction rate securities, scheduled to mature within the next twelve months. Our investments in auction rate securities are scheduled to reset every 28 or 35 days. As of December 30, 2007, approximately 33 percent of the principal amounts outstanding under our unrelated third party debt obligations were fixed rate. Approximately 67 percent of our total debt obligations were variable rate. Changes in interest rates associated with the variable rate portion of our debt could result in a change to our interest expense. For example, a one percent aggregate change in interest rates would increase/ decrease our interest expense by $8.9 million annually. We continually monitor market conditions and may enter into hedges if deemed appropriate. We do not currently have any hedges of interest rate risk in place. We do not use derivative financial instruments for speculative or trading purposes. Default Risk We mitigate default risk by investing only in high credit quality securities. Our investment portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. As of February 20, 2008, within our marketable securities portfolio we held approximately $122 million of AAA/Aaa securities with auction reset features (auction rate securities) whose underlying assets are student loans and are substantially backed by the U.S. government Federal Family Education Loan Program. Since the end of fiscal 2007 we have liquidated a significant portion of our auction rate securities, but we recently were unsuccessful in liquidating a part of our remaining portfolio. 63 The following table presents the cost basis, fair value and related weighted-average interest rates by year of maturity for our investment portfolio and debt obligations as of December 30, 2007 and comparable fair values as of December 31, 2006: 2008 2009 Investment Portfolio Cash equivalents: Fixed rate amounts . . . . . . . . . . Weighted-average rate . . . . . . . Variable rate amounts . . . . . . . . Weighted-average rate . . . . . . . Marketable Securities: Weighted-average rate . . . . . . . Variable rate amounts . . . . . . . . Weighted-average rate . . . . . . . $ 29,869 $ 4.38% $ 66,500 $ 4.95% — — — — 0.00% $216,650 $ 6.40% — — — Total Investment Portfolio . . . $313,019 — Debt Obligations Debt—fixed rate amounts . . . . . Weighted-average rate . . . . . . . Debt to related parties/ members—fixed rate amounts . . . . . . . . . . . . . . . . . Weighted-average rate . . . . . . . Debt—variable rate amounts . . Weighted-average rate . . . . . . . Total Debt Obligations . . . . . . 2010 $— — $— — $ — — — — $— — — $— — $ — — — 0.00% 0.00% 0.00% $ 216,650 $ 216,650 $ 125,975 6.40% 6.40% 5.33% $ — $— $— $ — $ 313,019 290 $ 5.90% — — $— — $— — $ 437,628 $ 439,657 $ 327,799 $ 483,393 7.49% 7.48% 13.11% 7.16% — $ — $ — — — — $ 66,966 $82,081 $112,861 3.12% 2.87% 2.87% $— — $— — $— — $— — $ $ 68,705 $— $— $1,063,384 $ 1,739 $ 5.90% $ $82,371 $112,861 $ — — — — $ $ 29,869 $ 4.38% 66,500 $ 4.95% 2006 Fair value $— — $— — $ $ 2007 Fair value — — — — $ $ 2011 2012 Thereafter Total (in thousands, except for percentages) 29,869 $ 565,660 4.38% 5.39% 66,500 $ 67,000 4.95% 5.24% $ 313,019 $ 758,635 — $ — $ — $ 500 — — — 0.00% $ 625,756 $ 887,664 $ 824,408 $ 541,533 8.24% 6.67% 8.01% 7.89% $1,327,321 $1,152,207 $1,025,426 Foreign Exchange Risk As a result of our foreign operations, we have sales, expenses, assets and liabilities that are denominated in Japanese yen and other foreign currencies. For example, • some of our manufacturing costs are denominated in Japanese yen, Chinese renminbi, and other foreign currencies such as the Thai baht and Malaysian ringgit; • sales of our products to Fujitsu are denominated in both US dollars and Japanese yen; and • some fixed asset purchases are denominated in Japanese yen and European Union euros. Consequently, movements in exchange rates could cause our net sales and our expenses to fluctuate, affecting our profitability and cash flows. We use foreign currency forward contracts to reduce our exposure to foreign currency exchange rate fluctuations. The objective of these contracts is to reduce the impact of foreign currency exchange rate movements on our operating results and on the cost of capital asset acquisitions. We do not use these contracts for speculative or trading purposes. We had an aggregate of $120.5 million (notional amount) of short-term foreign currency forward contracts denominated in Japanese yen outstanding as of December 30, 2007. The unrealized loss related to the foreign currency forward contracts for fiscal 2007 increased by $628,000. We do not anticipate any material adverse effect on our consolidated financial position, results of operations or cash flows resulting from the use of these instruments in the future. However, we cannot assure you that these strategies will be effective or that transaction losses can be minimized or forecasted accurately. In particular, we generally cover only a portion of our foreign currency exchange exposure. Moreover, we determine our total foreign currency exchange exposure using projections of long-term expenditures for items such as equipment and materials used in manufacturing. We cannot assure you that these activities will eliminate foreign exchange rate exposure. Failure to eliminate this exposure could have an adverse effect on our business, financial condition and results of operations. 64 The following table provides information about our foreign currency forward contracts as of December 30, 2007 and December 31, 2006. All of our foreign currency forward contracts as of December 30, 2007 mature within the next 12 months. As of Dec. 30, 2007 As of Dec. 31, 2006 Average Average Notional Contract Estimated Notional Contract Estimated Amount Rate Fair Value Amount Rate Fair Value (in thousands, except contract rates) Foreign currency forward contracts: Japanese yen . . . . . . . . . . . . . . . . . . . . . . . $120,500 65 ¥112.85 $(604) $10,900 ¥118.76 $24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Spansion Inc. Consolidated Statements of Operations Year Ended Year Ended Year Ended Dec. 30, Dec. 31, Dec. 25, 2007 2006 2005 (in thousands, except per share amounts) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net sales to related parties/members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,627,253 873,560 $1,310,479 1,268,795 $ — 2,002,805 Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,813 2,579,274 2,002,805 2,065,143 2,063,639 1,809,929 436,785 342,033 292,926 239,317 264,358 184,833 Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense): Gain on sale of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on early extinguishment of debt (Note 9) . . . . . . . . . . . . . . . . . . . . . Interest and other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense (including $0, $11,998 and $25,975 of expenses charged by related parties/members) . . . . . . . . . . . . . . . . . . . . . . . . . . (240,432) (90,756) (284,883) — (3,435) 36,030 6,884 (17,310) 22,107 — — 3,173 (80,803) (70,903) (45,032) Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48,208) (288,640) 25,144 (59,222) (149,978) 2,215 (41,859) (326,742) 22,626 Expenses: Cost of sales (including $235,263, $202,122 and $251,626 of expenses charged by related parties/members) . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development (including $1,155, $14,105 and $31,994 of expenses charged by related parties/members) . . . . . . . . . . . . . . . . . . Sales, general and administrative (including $1,555 , $24,296 and $63,902 of expenses charged by related parties/members) . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (263,496) $ (147,763) $ (304,116) Net loss per common share: Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Shares used in per share calculation: Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes 66 (1.95) $ 134,924 (1.15) $ 128,965 (4.15) 73,311 Spansion Inc. Consolidated Balance Sheets (in thousands, except par value and share amounts) Dec. 30, 2007 Dec. 31, 2006 Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade accounts receivable from related parties (Note 5) . . . . . . . . . . . . . . . . . . . Allowance for doubtful accounts (including $2,726 and $2,088 for related parties) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables from related parties (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,092 216,650 184,873 189,372 $ 759,794 125,975 202,359 195,816 (6,156) 368,089 11,873 (4,597) 393,578 2,325 Inventories: Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,877 421,765 130,227 44,840 344,603 66,397 Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583,869 26,607 46,452 1,452,632 455,840 1,395 36,163 1,775,070 Property, plant and equipment: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,662 1,122,480 4,411,666 768,918 6,330,726 (4,058,762) 2,271,964 38,828 1,445,037 4,601,702 258,084 6,343,651 (4,607,957) 1,735,694 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,957 61,092 $ 3,815,645 13,556 25,397 $ 3,549,717 Liabilities and Stockholders’ Equity Current liabilities: Notes payable to banks under revolving loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable to related parties (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities to related parties (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income on shipments to a related party . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income on shipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term obligations to related parties (Note 9) . . . . . . . . . . Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term obligations under capital leases . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 — 489,163 56,929 60,778 9,666 88,006 13,818 582 39,375 — 68,705 33,092 860,114 $ 33,608 408,365 14,559 51,598 11,273 59,045 4,333 229 32,267 500 12,560 61,706 690,043 Spansion Inc. Consolidated Balance Sheets—(Continued) (in thousands, except par value and share amounts) Dec. 30, 2007 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term obligations under capital leases, less current portion . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Stockholders’ equity: Capital stock: Preferred stock, $0.001 par value, 50,000,000 shares authorized, no shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Class A common stock, $0.001 par value, 714,999,998 shares authorized, 135,371,515 and 134,219,224 shares issued and outstanding as of December 30, 2007 and December 31, 2006 (Note 15) . . . . . . . . . . . . . . . Class B convertible common stock, $0.001 par value, 1 share authorized, 0 and 1 share issued and outstanding as of December 30, 2007 and December 31, 2006 (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Class C convertible common stock, $0.001 par value, 1 share authorized, 1 share issued and outstanding as of December 30, 2007 and December 31, 2006 (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 1,258,616 40,920 23,361 Dec. 31, 2006 188 934,138 75,535 4,053 — 135 134 — — — 2,221,175 (552,667) (36,195) — 2,204,513 (279,181) (79,706) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,632,448 1,845,760 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . $3,815,645 $3,549,717 See accompanying notes 68 Spansion Inc. Consolidated Statements of Cash Flows Year Ended Dec. 30, 2007 Year Ended Dec. 31, 2006 (in thousands) Year Ended Dec. 25, 2005 Cash Flows from Operating Activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (263,496) $(147,763) $(304,116) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517,281 536,993 542,286 Loss on pension curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,010 — — Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . 3,435 17,310 — Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,559 2,383 2,214 Benefit for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,401) (2,528) (27,710) Net gain on sale and disposal of property, plant, and equipment . . . . (30,172) (14,582) (2,282) Gain on sale of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . — (6,884) — Compensation recognized under employee stock plans . . . . . . . . . . . 16,138 17,424 231 Amortization of premium on floating rate notes and discount of senior subordinated and senior notes, net . . . . . . . . . . . . . . . . . . . . 2,309 3,158 — Changes in operating assets and liabilities: Decrease (increase) in trade accounts receivable from related parties/members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,444 210,973 (34,097) (Increase) decrease in other receivables from related parties/ members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,548) 11,742 (6,312) Decrease (increase) in trade account receivables . . . . . . . . . . . . . . . . 17,486 (202,359) — (Increase) decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,489) 4,304 404 Increase in prepaid expenses and other current assets . . . . . . . . . . . . (11,606) (2,374) (16,873) (Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,769) 3,700 (5,813) Increase (decrease) in accounts payable and accrued liabilities to related parties/members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,763 (111,776) 77,092 Increase in accounts payable and accrued liabilities . . . . . . . . . . . . . 96,267 153,429 101,367 (Decrease) increase in accrued compensation and benefits . . . . . . . . (3,767) (13,403) 8,385 Increase (decrease) in income taxes payable . . . . . . . . . . . . . . . . . . . 9,435 (8,725) (14,324) Increase (decrease) increase in deferred income on shipments to a related party/member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 (31,672) 861 Increase in deferred income on shipments . . . . . . . . . . . . . . . . . . . . . 7,107 32,267 — Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . 216,339 451,617 321,313 Cash Flows from Investing Activities: Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . . . . . Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturity and sale of marketable securities . . . . . . . . . . . . . Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,532 (1,115,598) 891,250 (981,925) 20,075 (716,618) 372,583 (279,587) 6,409 (425,339) 77,950 (212,086) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,015,741) (603,547) (553,066) 69 Spansion Inc. Consolidated Statements of Cash Flows—(Continued) Year Ended Dec. 30, 2007 Cash Flows from Financing Activities: Cash contribution from related parties/members . . . . . . . . . . . . . . . . . . . . . . Cash distributions to related parties/members for stock-based compensation (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale-leaseback transactions . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from borrowings from related parties/members, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from borrowings, net of issuance costs . . . . . . . . . . . . . . . . . . . . . Payments on loans from related parties/members . . . . . . . . . . . . . . . . . . . . . Payments on debt and capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of common stock, net of offering costs . . . . . . . . . . Year Ended Year Ended Dec. 31, Dec. 25, 2006 2005 (in thousands) — — — — (8,485) 48,236 (869) 144,096 — 854,120 — (603,819) 76 — 889,735 (197,619) (402,711) 67,813 158,970 396,006 (265,607) (364,257) 525,612 Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,377 396,969 597,701 Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . (11,677) 8,316 2,303 Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . Cash and cash equivalents at the beginning of period . . . . . . . . . . . . . . . . . . (560,702) 759,794 253,355 506,439 368,251 138,188 $ 199,092 $ 759,794 $ 506,439 $ 95,392 9,650 $ 48,457 6,229 $ 45,111 17,540 — — — 45,956 — — 167,991 7,500 7,500 — — — (9,157) — — 9,166 100,000 11,121 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental Cash Flows Disclosures: Interest paid (including $ 0, $11,306, $30,944 of interest on obligations to related parties/members) . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Cash Investing and Financing Activities: Equipment sale-leaseback transactions . . . . . . . . . . . . . . . . . . . . . . . . . Contributed assets from AMD Investments, Inc., net . . . . . . . . . . . . . . Contributed assets from Fujitsu Microelectronics Holding, Inc., net . . Accrued capital distributions to (contribution from) members for stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion of debt to common stock . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of assets from AMD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes 70 3,750 Spansion Inc. Consolidated Statement of Stockholders’ Equity/Members’ Capital (in thousands) Common Stock Capital in Number of Excess of Contributed Shares Amount Stated Value Capital Balance at December 26, 2004 . . . . . . . . . . . . . . . . — $— Contributed capital: AMD Investments, Inc. . . . . . . . . . . . . . . . . . . . . Fujitsu Microelectronics Holdings, Inc. . . . . . . . . — — — — — — 11,250 7,500 — — — — 11,250 7,500 Distribution to members for stock-based compensation (Note 4): AMD Investments, Inc. . . . . . . . . . . . . . . . . . . . . Fujitsu Microelectronics Holding, Inc. . . . . . . . . — — — — — — (5,500) (3,666) — — — — (5,500) (3,666) — — — — — (304,116) — — — — — 7,291 7,291 — — — — — 10,792 10,792 — — — — — (74,624) Comprehensive loss: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income: Net unrealized gains on investment, net of taxes of $0 . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in minimum pension liability, net of taxes of $0 . . . . . . . . . . . . . . . . . . . . . . . . Net change in cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . $ — Retained Earnings (Deficit) $ 1,475,241 $ 172,698 Total Accumulated Stockholders’ Other Equity/ Comprehensive Members’ Income (Loss) Capital (304,116) $ (732) $1,647,207 (74,624) Total other comprehensive loss . . . . . . . . . . . . . . (56,541) Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . (360,657) Issuance of shares: Issuance of common stock in initial public offering, net of issuance costs of $7,526 . . . . . Conversion of debt to common stock . . . . . . . . . . Conversion of contributed capital to common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation recognized under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 25, 2005 . . . . . . . . . . . . . . . . Comprehensive loss: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income: Net unrealized gains on investment, net of taxes of $0 . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in minimum pension liability, net of taxes of $0 . . . . . . . . . . . . . . . . . . . . . . . . Net change in cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for realized gain on sale of marketable securities included in net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,264 8,333 47 8 525,565 99,992 72,549 73 1,484,752 — 128,146 — 128 — — (1,484,825) — — — — — — 231 — 2,110,540 — (131,418) — (147,763) — (57,273) — 525,612 100,000 — 231 1,921,977 — — — — — — — — — — — — — — 7,412 7,412 — — — — — (11,801) (11,801) (6,884) (6,884) (407) (147,763) (407) Total other comprehensive loss . . . . . . . . . . . . . . (11,680) Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . Adjustment to initially apply FASB Statement No. 158, net of tax . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation activity with related party, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discharge of stock-based compensation payable to AMD (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . (159,443) Issuance of shares: Vesting of RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of common stock in secondary offering, net of issuance costs of $2,133 . . . . . . . . . . . . . Compensation recognized under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2006 . . . . . . . . . . . . . . . . — — — — — — — (415) — — — — — — — — 9,157 — — — — — — 9,157 826 1 5,247 5 67,808 — 17,424 — 134 2,204,513 — — 134,219 — 71 (1) — (279,181) (10,753) (10,753) (415) 67,813 — 17,424 (79,706) 1,845,760 Spansion Inc. Consolidated Statement of Stockholders’ Equity/Members’ Capital—(Continued) (in thousands) Common Stock Capital in Number of Excess of Contributed Shares Amount Stated Value Capital Comprehensive loss: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income: Change in pension plan, net of taxes of $0 . . . . Net change in cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained Earnings (Deficit) Total Accumulated Stockholders’ Other Equity/ Comprehensive Members’ Income (Loss) Capital (263,496) (263,496) 2,269 2,269 41,242 41,242 Total other comprehensive loss . . . . . . . . . . . . . . . 43,511 Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . Adjustment to initially apply Issue 06-2 . . . . . . . . . . Adjustment to initially apply FIN 48 . . . . . . . . . . . . Adjustment to common stock issuance costs . . . . . . Issuance of shares: Vesting of RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of options . . . . . . . . . . . . . . . . . . . . . . . . Compensation recognized under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 30, 2007 . . . . . . . . . . . . . . . . (219,985) (10,150) 160 466 (10,150) 160 466 1,148 5 1 0 (1) 60 — 60 16,137 135,372 $135 $2,221,175 See accompanying notes 72 16,137 $— $(552,667) $(36,195) $1,632,448 Spansion Inc. Notes to Consolidated Financial Statements 1. Nature of Operations The Company Spansion Inc. is a semiconductor manufacturer headquartered in Sunnyvale, California, with manufacturing, research and assembly operations in the United States and Asia. The Company designs, develops, manufactures, markets and sells Flash memory solutions that encompass a broad spectrum of densities and features, which primarily address the integrated Flash memory market. The Company’s Flash memory devices are incorporated into a broad range of electronic products, including mobile phones, consumer electronics, automotive electronics, networking and telecommunications equipment, personal computers and PC peripheral applications. History of the Company In 1993, Advanced Micro Devices, Inc. (AMD) and Fujitsu Limited (Fujitsu) formed a corporate manufacturing venture, Fujitsu AMD Semiconductor Limited (FASL). FASL produced wafers containing Flash memory circuits. These wafers were then sold to AMD and Fujitsu, who separated the circuits on each wafer into individual die, processed the die into finished goods and sold the finished Flash memory devices to their customers. AMD and Fujitsu performed all research and development activities for the design and development of Flash memory devices and developed the manufacturing processes that were to be used in the operation of the fabs to manufacture Flash memory devices. Through June 30, 2003, FASL contracted with AMD and Fujitsu for the receipt of certain support and administrative services. As of June 30, 2003, in order to expand their existing manufacturing venture, AMD and Fujitsu formed a limited liability company called FASL LLC and later renamed Spansion LLC. In addition to its 49.992 percent ownership in FASL, AMD contributed to Spansion LLC its Flash memory inventory, its wafer manufacturing facility located in Austin Texas, its Flash memory research and development facility (the Submicron Development Center (SDC)) located in Sunnyvale, California, and its Flash memory assembly and test facilities located in Thailand, Malaysia and China. Fujitsu contributed to Spansion LLC its 50.008 percent ownership interest in FASL, its Flash memory inventory and its Flash memory assembly and test facilities located in Malaysia. Both AMD and Fujitsu transferred employees to Spansion LLC to perform various research and development, marketing and administration functions. AMD and Fujitsu also provided working capital to Spansion LLC in the form of cash contributions and loans. As a result, Spansion LLC began manufacturing finished Flash memory devices which through the first fiscal quarter of fiscal 2006 were exclusively sold to AMD and Fujitsu. In the second quarter of fiscal 2006, the Company began selling its products directly to customers previously served by AMD (See Note 5). On December 21, 2005, Spansion LLC was reorganized into Spansion Inc. and completed its underwritten initial public offering (IPO) of its Class A common stock. The Company’s shares of Class A common stock trade on The Nasdaq Global Select Market under the symbol “SPSN.” 2. Basis of Presentation Fiscal Year The Company operates on a 52- to 53-week fiscal year ending on the last Sunday in December. The year ended December 30, 2007 consisted of 52 weeks and the years ended December 31, 2006 and December 25, 2005 consisted of 53 and 52 weeks, respectively. 73 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) 3. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany accounts and transactions. Use of Estimates The preparation of consolidated financial statements and disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of commitments and contingencies and the reported amounts of revenues and expenses during the reporting periods. Estimates are used to account for revenue, the allowance for doubtful accounts, product warranties, inventory valuation, impairment of long-lived assets, income taxes, stockbased compensation expenses and pension and postretirement benefits. Actual results may to differ from those estimates, and such differences may be material to the financial statements. Financial Statements Reclassifications Certain prior period amounts in the consolidated statements of operations and statements of cash flows have been reclassified to conform to the current period presentation. There is no material impact to the Company’s previously reported gross margin and no effect on results from operations due to these reclassifications. Cash Equivalents Cash equivalents consist of financial instruments that are readily convertible into cash and have original maturities of three months or less at the time of purchase. Marketable Securities The Company’s investments in marketable securities consist of money market funds, commercial paper, and auction rate securities, which underlying assets are municipal bonds and student loans. These securities are designated as available-for-sale and are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), net of tax, a component of stockholders equity/ members’ capital. The Company recognizes an impairment charge in earnings when the declines in the fair values of its investments below the cost basis are judged to be other-than-temporary. The Company considers various factors in determining whether to recognize a decline in value, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company has not recorded any such impairment in any of the periods presented. The cost of securities sold is based on the specific identification method. The Company classifies investments in marketable securities as current when, at the date of acquisition, their remaining time to maturity is less than or equal to 12 months or, if the time to maturity is greater than 12 months, when they represent investments of cash that are intended to be used in current operations. Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts based on a variety of factors, including the length of time the receivable is past due, historical experience and the financial condition of customers. 74 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The following describes activity in the accounts receivable allowance for doubtful accounts for the years ended December 30, 2007, December 31, 2006 and December 25, 2005. Balance at Beginning of Period Year 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,597 $2,214 $ — Additions Charged to Costs and Expenses Deductions(1) (in thousands) $1,559 $2,383 $2,472 $— $— $258 Balance at End of Period $6,156 $4,597 $2,214 (1) Uncollectible amounts written off, net of recoveries Inventories Inventories are stated at standard cost adjusted to approximate the lower of actual cost (first-in, first-out method) or market. Inventories in stock in excess of forecasted customer demand over the next six months are not valued. Obsolete inventories are written off. Revenue Recognition Prior to the second quarter of fiscal 2006, the Company generally recognized revenue when AMD and Fujitsu, the Company’s sole distributors, sold its products to their OEM customers. In the second quarter of fiscal 2006, the Company began selling its products directly to the customers previously served by AMD. Since such time, the Company generally recognizes revenue when it has sold its products to its OEM customers and title and risk of loss for the products have transferred to the OEM. Estimates of product returns and sales allowances, related to reasons other than product quality, are based on actual historical experience and are recorded as a reduction in revenue at the time revenue is recognized. Beginning in the second quarter of fiscal 2006, the Company also began selling directly to distributors to whom it provided similar rights of return, stock rotation and price protection previously offered by AMD. The Company defers the recognition of revenue and related product costs on these sales as deferred income until the merchandise is resold by its distributors. The Company also sells some of its products to certain distributors under sales arrangements with terms that do not allow for rights of returns or price protection on unsold products held by them. In these instances, the Company recognizes revenue when it ships the product directly to the distributors. Fujitsu also sells the Company’s products to its distributors. The Company’s distribution agreement with Fujitsu grants limited stock rotation rights to Fujitsu and allows Fujitsu to provide similar limited rights to some of its distributors. However, to date, Fujitsu has not extended these rights to its distributors. Accordingly, the Company recognizes revenue for sale of products sold to Fujitsu when Fujitsu sells the Company’s products to its distributors. The Company recognizes revenue net of sales taxes, use taxes and value-added taxes directly imposed by governmental authorities on the Company’s revenue producing transactions with its customers. The Company includes shipping costs related to products shipped to customers in cost of sales. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are provided on a straightline basis over the estimated useful lives of the assets. 75 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The estimated useful lives of property, plant and equipment for financial reporting purposes are as follows: machinery and equipment, two to seven years; buildings and building improvements, from five to twenty-six years; and leasehold improvements, the shorter of the remaining terms of the leases or the estimated economic useful lives of the improvements. The Company capitalized interest costs of $16.9 million during fiscal 2007 in connection with its SP1 construction activities in Japan. Impairment of Long-Lived Assets For long-lived assets used in operations, the Company records impairment losses when indicators of impairment are present and the carrying value of the assets are not recoverable. Carrying values are not recoverable when the undiscounted cash flows estimated to be generated by those assets are less than their carrying value. If assets are determined to not be recoverable, impairment losses are measured based on the excess, if any, of the carrying value of these assets over their respective fair value. If impairment losses are recorded, the fair value of the assets would become the new cost basis. Fair value is determined by discounted future cash flow modeling, appraisals or other methods. For assets held for sale, impairment losses are measured as the excess of the carrying amount of the assets over their fair value less costs to sell. For assets to be disposed of other than by sale, impairment losses are measured as their carrying amount less salvage value, if any, at the time the assets cease to be used. Impairment losses were not material in any of the periods presented. Product Warranties The Company offers a one-year limited warranty for Spansion Flash memory devices (See Note 8). At the time revenue is recognized, the Company provides for estimated costs that may be incurred under product warranty, with the corresponding expense recognized in cost of sales. Estimates of warranty expense are based on the Company’s historical experience. Warranty accruals are evaluated periodically and are adjusted for changes in experience. Foreign Currency Translation/Transactions The functional currency of the Company and its foreign subsidiaries, except for its wholly owned subsidiary in Japan (Spansion Japan), is the U.S. dollar. Adjustments resulting from remeasuring the foreign currency denominated transactions and balances of these subsidiaries, other than Spansion Japan, into U.S. dollar are included in operations. Adjustments resulting from translating the foreign currency financial statements of Spansion Japan, for which the functional currency is the Japanese yen, into U.S. dollar denominations are included as a separate component of accumulated other comprehensive loss. Gains or losses resulting from transactions denominated in currencies other than the functional currencies of the Company and its subsidiaries are recorded in cost of sales. The aggregate exchange gain (loss) included in determining net loss was $6.2 million, $(0.9) million and $(4.7) million for the years ended December 30, 2007, December 31, 2006 and December 25, 2005, respectively. Derivative Financial Instruments The Company has sales, expenses, assets and liabilities denominated in Japanese yen and other foreign currencies. Therefore, movements in exchange rates could cause net sales and expenses to fluctuate, affecting the Company’s profitability and cash flows. The Company’s general practice is to use foreign currency forward contracts to reduce its exposure to foreign currency exchange rate fluctuations. Realized and unrealized gains and 76 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) losses associated with these foreign currency contracts are reflected in the Company’s balance sheet and recorded in other current assets or accrued liabilities. Changes in fair value and premiums paid for foreign currency contracts are recorded directly in cost of sales. The objective of these contracts is to reduce the impact of foreign currency exchange rate movements on the Company’s operating results. All of the Company’s foreign currency forward contracts mature within twelve months. The Company does not use derivatives for speculative or trading purposes, nor does the Company designate its derivative instruments as hedging instruments, as defined by the Financial Accounting Standard Board (FASB) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Research and Development Expenses The Company expenses research and development costs in the period in which such costs are incurred. Advertising Expenses Advertising costs are expensed as incurred. Advertising expenses for the year ended December 30, 2007, December 31, 2006 and December 25, 2005 were approximately $7.4 million, $8.1 million and $4.8 million, respectively. Net Loss per Share Basic net loss per share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. Weighted average shares for fiscal 2005 reflect the exchange of AMD’s and Fujitsu’s contributed capital for the Company’s Series A common stock in connection with the IPO, as if the exchange had occurred at the beginning of fiscal 2005. For the years ended December 30, 2007, December 31, 2006 and December 25, 2005, respectively, the Company excluded approximately 18.4 million, 16.8 million and 5.5 million potential dilutive shares issuable upon exercise of outstanding stock options, upon vesting of outstanding restricted stock units and upon conversion of Spansion LLC’s 2.25% Exchangeable Senior Subordinated Debentures because they had an antidilutive effect due to net losses recorded in each of those periods. Income Taxes In determining taxable income for financial statement reporting purposes, the Company must make estimates and judgments. These estimates and judgments are applied in the calculation of specific tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes. The Company must assess the likelihood that it will be able to recover its deferred tax assets. Unless recovery of these deferred tax assets is considered more likely than not, the Company must increase its provision for taxes by recording a charge to income tax expense, in the form of a valuation allowance against those deferred tax assets for which it believes it is more likely than not they will be realized. The Company considers past performance, future expected taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. 77 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) In addition, the calculation of the Company’s tax liabilities involves the application of complex tax rules and the potential for future adjustment by the relevant tax jurisdiction. If the Company’s estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result. Accumulated Other Comprehensive Loss The following are the components of accumulated other comprehensive loss: Dec. 30, Dec. 31, 2007 2006 (in thousands) Unrecognized pension expense, net of tax benefits of ($5,429) in 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,971 (38,166) $ Total accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(36,195) $(79,706) (298) (79,408) Stock-Based Compensation Accounting Treatment for AMD Options Held by Spansion Employees Prior to the IPO, the Company did not provide stock-based compensation to its employees or third parties. However, certain of the Company’s employees received stock options to purchase shares of AMD common stock from the Company’s then majority and controlling member, AMD who consolidated Spansion’s financial statements for financial reporting purposes. The Company accounted for AMD’s stock option grants and restricted stock unit, or RSU, awards to its employees under the intrinsic value recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, consistent with the accounting method followed by AMD for stock options and RSU awards issued to employees of the consolidated AMD group. The exercise price of these stock options was equal to the market price of AMD’s common stock on the date of grant. The Company reimbursed AMD for these stock options based on an agreed amount equal to the grant-date fair value of the stock options calculated using the Black-Scholes-Merton valuation model, less a 15 percent discount (the “grant-date fair value”). The Company recorded a liability for amounts due to AMD under this arrangement with a corresponding reduction to additional paid-in capital. Reimbursements to AMD, which commenced on the last day of the quarter following the quarter in which the stock options were granted, were payable in sixteen equal quarterly installments through fiscal 2009 (See Note 4). Subsequent to the Company’s IPO and the cessation of AMD’s consolidation of Spansion’s financial statements, these awards were being accounted for under variable fair value accounting following the guidance in Emerging Issues Task Force (EITF) Issue No. 96-18 (Issue 96-18), “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Good or Services,” and EITF Issue No. 00-12 (Issue 00-12), “Accounting by an Investor for Stock-Based Compensation Granted to Employee of an Equity Method Investee,” and continue to be remeasured to their fair value in future periods until they are fully vested (See Note 4). 78 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Spansion Stock-Based Incentive Compensation Plans The Company adopted FASB Statement No. 123 (revised 2004) (Statement 123(R)), Shared-Based Payment, using the modified prospective transition method, which requires the application of the accounting standard as of December 26, 2005, the first day of the Company’s fiscal year ending December 31, 2006. The Company’s consolidated financial statements as of and for the years ended December 30, 2007 and December 31, 2006 reflect the impact of Statement 123(R). In accordance with the modified prospective transition method, the Company’s consolidated financial statements for the year ended December 25, 2005 have not been restated to reflect, and do not include, the impact of Statement 123(R). In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 regarding the SEC’s interpretation of Statement 123(R) and the valuation of share-based payments for public companies. The Company applied the provisions of SAB 107 in its adoption of Statement 123(R). The Company estimated the fair value of its stock-based awards to employees using Black-Scholes-Merton option pricing model. Stock-based compensation expense recognized during a period is based on the higher of the grant-date fair value of the portion of share-based payment awards that is ultimately expected to vest, or actually vests, during the period. Stock-based compensation expense recognized in the Company’s consolidated statements of operations for the year ended December 30, 2007 and December 31, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of December 25, 2005 based on the grant-date fair value estimated in accordance with the pro forma provisions of FASB Statement No. 123 (statement 123), Accounting for Stock-Based Compensation, and compensation expense for the share-based payment awards granted subsequent to December 25, 2005 based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Compensation expense for all share-based payment awards was recognized using the straight-line attribution method reduced for estimated forfeitures. Prior to the fourth quarter of 2007, the Company did not have sufficient historical forfeiture experience related to its own stockbased awards and therefore, estimated its forfeitures based on the average of its own fiscal 2006 forfeiture rate and AMD’s historical forfeiture rates, as the Company believed these forfeiture rates to be the most indicative of its own expected forfeiture rate. Beginning the fourth quarter of fiscal 2007, the Company estimated forfeitures based on the weighted average of its own fiscal 2007 and 2006 forfeiture rates. Statement 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information for the year ended December 25, 2005, the Company accounted for forfeitures as they occurred. Pension and Post-Retirement Benefits The Company provides a pension plan for certain employees of Spansion Japan, and as a result, the Company has significant pension benefit costs and credits that are computed and recorded in our financial statements based on actuarial valuations. The actuarial valuations require assumptions and methods which must be used to develop the best estimate of the benefit costs. These valuation assumptions include salary growth, long-term return on plan assets, discount rates and other factors. The salary growth assumptions reflect our future and near-term outlook for salary growth within the industry. Long-term return on plan assets is determined based on historical results in the debt and equity markets and management’s expectation of the current economic environment and the allocation target and expected future yields of each asset class. The discount rate assumption is based on current investment yields on Japanese government long-term bonds, as no deep corporate market exists for high quality corporate debt instruments. Actual results that differ from these assumptions are accumulated and amortized over the future life of the plan participants. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect the pension costs and obligations. 79 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) New Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) ratified the Emerging Issue Task Force (EITF) Issue No. 06-2 (Issue 06-2), Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43. Issue 06-2 provides guidelines under which sabbatical leave or other similar benefits provided to an employee are considered to accumulate. If such benefits are deemed to accumulate, they should be accrued for as compensation expense over the employee’s requisite service period. The provisions of this Issue are effective for fiscal years beginning after December 15, 2006 and allow for either retrospective application or a cumulative effect adjustment approach upon adoption. Prior to December 30, 2007, the Company’s Sabbatical Program provided for eight weeks of paid leave for exempt US employees, and its Recognition Trip Program provided for one week of paid leave and a fixed cash compensation for non-exempt US employees, upon the completion of seven years of credited service. Effective December 29, 2007, the Company discontinued these programs, and implemented a new Sabbatical Program that provides for two weeks of paid leave for all regular US employees upon the completion of five years of credited service. Prior to the adoption of the Issue, the Company accounted for benefits under the old Sabbatical and Recognition programs only after the completion of the seven years by the eligible employees because none of the benefits vest or accrete to the employee until completion of the full seven years of service. The Company adopted this Issue beginning January 1, 2007 using the cumulative effect adjustment approach. With the adoption of Issue 06-2, the Company began accounting for those programs, and it now accounts for benefits under the new Sabbatical Program by recording the estimated total program payouts upon attaining the requisite service conditions as compensation expense ratably over each employee’s requisite service period. The adoption of this Issue resulted in an increase to the Company’s accumulated deficit of approximately $10.2 million as of the beginning of fiscal 2007. The effect of this change on the Company’s consolidated statement of operations for the year ended December 30, 2007 was not material. In July 2006, the FASB issued Financial Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Adoption on January 1, 2007 did not have a material effect on the Company’s consolidated financial statements. As of the date of adoption, the Company’s total gross unrecognized tax benefits were $2.7 million, of which $0.2 million, if recognized, would affect the Company’s effective tax rate. The recognition of the remaining unrecognized tax benefits would be offset by a change in valuation allowance. In September 2006, the FASB issued Statement No. 157 (Statement 157), Fair Value Measurements. Statement 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of Statement 157 are effective for the fiscal years beginning after November 15, 2007; and the Company determined upon adoption of this standard as of January 1, 2008 that it did not have a material impact on our consolidated financial statements. In February 2007, the FASB issued Statement No. 159 (Statement 159), The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. Under Statement 159, a company may choose, at specified election dates, to measure eligible financial instrument and certain other items 80 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) at fair value that are not otherwise required to be so measured. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. Statement 159 is effective as of the beginning of the fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact, if any, of Statement 159 on its financial position, results of operations and cash flows. In December 2007, the FASB issued Statement No. 160 (Statement 160), Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. Statement 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. Statement 160 is effective for the Company on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal year 2009. As of December 30, 2007, the Company did not have any minority interests. The adoption of Statement 160 will not impact the Company’s consolidated financial statements. In December 2007, the FASB issued Statement No. 141 (revised 2007), (Statement 141(R)), Business Combinations, which will change the accounting for business combinations. Under Statement 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions and will also change the accounting treatment and disclosure for certain specific items in a business combination. Statement 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted and Statement 141(R) will apply to the Company for the fiscal year beginning January 1, 2009. The Company expects Statement 141(R) to have an impact on accounting for business combinations once adopted. Accordingly, any business combinations the Company engages in prior to the adoption of Statement 141(R) will be recorded and disclosed following existing GAAP until January 1, 2009. In December 2007, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 110 (SAB 110), which clarified the views of the SEC staff regarding the continued use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R). Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of a share option. The use of the “simplified” method, which was first described in Staff Accounting Bulletin No. 107, Share-Based Payment, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. The Company has used the simplified method since its initial public offering on December 21, 2005 and believes that it will continue to use this method upon the adoption of SAB 110, which is effective January 1, 2008, as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of share options since its initial public offering. 4. Stock-Based Compensation AMD Stock Options Through December 25, 2005, AMD granted stock options to the Company’s employees with an aggregate grant-date value of approximately $19.4 million. The Company paid AMD approximately $8.5 million and $0.9 million for stock options during the years ended December 31, 2006 and December 25, 2005, respectively. The Company’s outstanding liability to AMD for stock option reimbursements as of December 25, 2005 was approximately $17.1 million. On November 21, 2006, the Company closed a public offering of its Class A 81 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) common stock held by AMD and Fujitsu. As a result of the offering, AMD’s ownership interest in the Company dropped below 30 percent and, by their terms all unvested AMD stock options and AMD RSU awards held by the Company’s employees were forfeited and cancelled. The Company wrote off its remaining liability to AMD of approximately $9.2 million against additional paid-in capital, a component of stockholders’ equity, because the original agreed upon value of these awards to be paid to AMD was recorded as a reduction of contributed capital, a component of stockholders’ equity. In addition, upon cancellation of the options in the fourth quarter of fiscal 2006, the Company reversed approximately $6 million of previously recorded compensation expense associated with these forfeited and cancelled awards against additional paid-in capital, which had been recorded using variable fair value accounting pursuant to EITF Issues 96-18 and 00-12. Spansion Stock-Based Incentive Compensation Plans Plan Descriptions 2005 Equity Incentive Plan In fiscal 2005, the Company’s stockholders approved the Spansion Inc. 2005 Equity Incentive Plan (the 2005 Plan) under which 9,500,000 shares of Class A common stock had been reserved and made available for issuance in the form of equity awards, including incentive and nonqualified stock options and RSU awards. On May 29, 2007, the Company’s stockholders approved the Spansion Inc. 2007 Equity Incentive Plan (the 2007 Plan) (see below); at that time, the Company discontinued granting awards under the 2005 Plan. The 2005 Plan was administered by the Compensation Committee of the Company’s Board of Directors, and with respect to that plan, the Committee had the authority to, among other things, grant awards, delegate certain of its powers, accelerate or extend the vesting or exercisability of awards and determine the date of grant of an award. Shares that are subject to or underlie awards that expired or for any reason were cancelled, terminated or forfeited, or failed to vest prior to implementation of the 2007 Plan were again available for grant under the 2005 Plan. Shares that are subject to or underlie awards that expired or for any reason were cancelled, terminated or forfeited, or failed to vest after implementation of the 2007 Plan are again available for grant under the 2007 Plan. The maximum term of any stock option granted under the 2005 Plan is 10 years from the date of grant and the exercise price of each option is determined under the applicable terms and conditions as approved by the Compensation Committee. The 2005 Plan provided for awards that may be granted to an officer or employee, a consultant or advisor, or a non-employee director of the Company or its subsidiaries; provided that, the incentive stock options granted under the 2005 Plan could be granted only to employees of the Company or its subsidiaries. The exercise price of each incentive stock option was required to be not less than 100 percent of the fair market value of our Class A common stock on the date of grant (not less than 110 percent if such stock option is granted to a person who has more than 10 percent of the total voting power of all classes of our stock). The 2005 Plan provided for payment of the exercise price of options in the form of, among other things, cash, services rendered, notice and third party payments as authorized by the Compensation Committee, delivery of shares of common stock and cashless exercise with a third party who provides financing for the purposes of the purchase or exercise of the award. The Compensation Committee could, in its discretion, accelerate vesting of awards under the plan under certain circumstances, including: • the acquisition by a person other than AMD or its affiliates of more than 33 percent of either the then outstanding shares of our common stock or the combined voting power entitled to vote in the election of 82 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) directors, except for any such acquisition by Fujitsu or its affiliates so long as such level of ownership is (1) less than AMD’s level of ownership in such securities and (2) not more than 40 percent of our outstanding shares of our common stock or the combined power entitled to vote in the election of directors; • a change in the Board such that individuals who comprised the Board at the effective date of the 2005 Equity Incentive Plan cease to constitute at least a majority of the Board; and • the consummation of a reorganization, share exchange, merger, consolidation, or a sale or other dispositions of all or substantially all of our assets. Although grants are no longer awarded under the 2005 Plan, outstanding grants that were awarded under that plan continue to be administered by the Compensation Committee. 2007 Equity Incentive Plan On May 29, 2007, the Company’s stockholders approved the Spansion Inc. 2007 Equity Incentive Plan (the 2007 Plan). The 2007 Plan is administered by the Compensation Committee of the Company’s Board of Directors, and with respect to this plan, the Committee has the authority to, among other things, grant awards, delegate certain of its powers, accelerate or extend the vesting or exercisability of awards and determine the date of grant of an award subject to certain restrictions. The 2007 Plan provides that grants may be awarded to an officer or employee, a consultant or advisor, or a non-employee director of the Company or its subsidiaries. Stock options and RSU awards issued under the 2007 Plan generally vest 25 percent after one year, and the balance vest ratably on a quarterly basis over the following three years and expire if not exercised by the seventh anniversary of the grant date. RSU awards have no exercise price or expiration date. The maximum number of shares of the Company’s Class A Common Stock that may be issued or transferred pursuant to awards under the 2007 Plan equals the sum of: (1) 6,675,000 shares, plus (2) the number of shares that were available for award grant purposes under the 2005 Plan as of May 29, 2007, plus (3) the number of any shares subject to stock options and restricted stock or RSU awards granted under the 2005 Plan and outstanding as of May 29, 2007 which expire, or for any reason are cancelled or terminated, after that date without being exercised or paid. As of May 29, 2007, approximately 920,523 shares were available for award grant purposes under the 2005 Plan, and approximately 7,091,852 shares were subject to options and restricted stock or RSU awards then outstanding under the 2005 Plan. The Compensation Committee may, in its discretion, accelerate vesting of awards under the plan under certain circumstances, including: • the acquisition by a person of more than 33 percent of either the then outstanding shares of our common stock or the combined voting power entitled to vote in the election of directors. • a change in the Board such that individuals who comprised the Board at the effective date of the 2005 Equity Incentive Plan cease to constitute at least a majority of the Board; and • the consummation of a reorganization, share exchange, merger, consolidation, or a sale or other dispositions of all or substantially all of our assets. 83 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Shares Available to Grant Number of shares available for grant under the 2007 Plan: Number of shares available for grant under the 2007 Equity Incentive Plan: Amount reserved for grant(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares available under the 2005 Plan(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options granted through December 30, 2007, net of cancelled stock options . . . . . . RSU awards granted through December 30, 2007, net of cancelled RSU awards . . . . . . . . 7,595,523 360,839 (209,250) (240,685) Shares available for grant under the 2007 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,506,427 (1) The 7,595,523 shares reserved for grant under the 2007 Plan consisted of 6,675,000 shares approved for grant under the 2007 Plan and 920,523 shares transferred from the 2005 Plan. (2) The shares available under the 2005 Plan were related to stock options or RSU awards, which were cancelled subsequent to May 29, 2007 and thus available for grant under the 2007 Plan. Valuation and Expense Information The following table sets forth the total recorded stock-based compensation expense, by financial statement caption, resulting from the Company’s stock options and restricted stock unit awards for the years ended December 30, 2007 and December 31, 2006: Year Ended Year Ended Dec. 30, 2007 Dec. 31, 2006 (in thousands) Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,539 4,335 7,263 $ 5,650 4,667 6,988 Stock-based compensation expense before income taxes . . . . . . . . . . . . . . 16,137 17,305 Income tax benefit(1) .......................................... Stock-based compensation expense after income taxes(1) .............. — $16,137 — $17,305 (1) There is no income tax benefit relating to stock option expenses because all of the Company’s U.S. deferred tax assets, net of U.S. deferred tax liabilities, continue to be subjected to a full valuation allowance. The weighted average fair value of the Company’s stock options granted in the years ended December 30, 2007 and December 31, 2006 was $4.81 and $7.82 per share, respectively. The fair value of each stock option was estimated at the date of grant using a Black-Scholes-Merton option pricing model, with the following assumptions for grants: Weighted Average for the Year Ended Dec. 30, 2007 Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 49% 4.73% 4.61 0% Weighted Average for the Year Ended Dec. 31, 2006 58% 4.82% 4.60 0% Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The Company’s dividend yield is zero because the Company has never paid dividends and does not have plans to do so over the expected life of the stock options. The expected volatility is based on the Company’s historical volatility since its initial public offering in December 2005 and the volatilities of the Company’s competitors who are in the same industry sector with similar characteristics (“guideline” companies) given the limited historical realized volatility data of the Company. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bond with a remaining term equal to the expected stock option life. The expected term is based on the “shortcut approach” provided in SAB 107 for developing the estimate of the expected life of a “plain vanilla” stock option. Under this approach, the expected term is presumed to be the mid-point between the average vesting date and the end of the contractual term. As of December 30, 2007, the total unrecognized compensation cost related to unvested stock options and RSU awards was approximately $46.2 million after reduction for estimated forfeitures, and such stock options and RSU awards will generally vest ratably through 2011. Pro Forma Stock-Based Compensation The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provision of Statement 123 to options granted under the Company’s stock option plan for fiscal 2005. The pro forma stock-based compensation includes the impact for AMD stock options awarded to Spansion employees. Year Ended Dec. 25, 2005 (in thousands, except per share amounts) Net loss—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense related to stock-based awards, net of tax . . . . $(304,116) (3,421) Net loss, including the effect of stock-based compensation expense . . . . . . . . . . . . $(307,537) Basic and diluted net loss per common share—as reported . . . . . . . . . . . . . . . . . . . Basic and diluted net loss per common share—pro forma . . . . . . . . . . . . . . . . . . . . $ $ (4.15) (4.19) Stock Option and Restricted Stock Unit Activity The following table summarizes stock option activity and related information for the period presented: Number of Shares Options: Outstanding as of December 26, 2005(1) . . . . . . . . . . . . . . 1,949,750 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462,500 Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (277,344) Outstanding as of December 31, 2006 . . . . . . . . . . . . . . . 2,134,906 Average Exercise Price Remaining Contractual Life (in years) Intrinsic Value (in thousands) $12.00 $14.93 $12.00 $12.63 6.08 $4,761 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding as of December 30, 2007 . . . . . . . . . . . . . . . 1,770,062 (363,000) (5,000) 3,536,968 $10.39 $12.45 $12.00 $11.53 5.66 $ — Exercisable as of December 30, 2007(2) . . . . . . . . . . . . . . 841,359 $12.39 5.03 $ — 85 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) (1) Outstanding shares at the beginning of fiscal 2006 were the shares granted upon the Company’s initial public offering (IPO) on December 15, 2005. (2) There were 841,359 shares vested and exercisable as of December 30, 2007, with a total grant date fair value of approximately $10.4 million. The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $3.99 as of December 28, 2007, which was the last trading day prior to December 30, 2007, which would have been received by the stock option holders had all stock option holders exercised their stock options as of that date. The following table summarizes RSU award activity and related information for the period presented: Number of Shares Restricted Stock Untis: Unvested as of December 26, 2005(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested as of December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . WeightedAverage Grant-date Fair Value 3,604,090 362,434 (217,021) (825,888) $12.00 $15.23 $13.02 $12.00 2,923,615 $12.33 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,680,532 Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (303,430) Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,147,291) $10.35 $11.95 $12.27 Unvested as of December 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.33 3,153,426 (1) Unvested shares at the beginning of fiscal 2006 were the shares granted upon the Company’s IPO on December 15, 2005. Employee Stock Purchase Plan The 2005 Employee Stock Purchase Plan was approved by the Company’s Board of Directors but has not been implemented. This plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code with the purpose of providing eligible employees (including officers) and eligible employees of participating subsidiaries with an opportunity to purchase Class A common stock through payroll deductions. The 2005 Employee Stock Purchase Plan would allow eligible and participating employees to purchase, through payroll deductions, shares of Class A common stock at a discount, not to exceed 15 percent, applied to either (1) the fair market value per share of Class A common stock on the first business date of an offering period, or (2) the fair market value per share of Class A common stock on the last business date of that offering period. The Company has reserved 2,250,000 shares of Class A common stock available for issuance under this plan. As of December 30, 2007, no shares have been issued under this plan and the Company has not determined whether it will issue shares under this plan in the future. If an employee stock plan as described here is implemented in the future, it will be administered by the Compensation Committee. 86 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) 5. Related Party Transactions Prior to the second quarter of fiscal 2006, the Company relied on AMD and Fujitsu as sole distributors of its products. In the second quarter of fiscal 2006, the Company began selling its products directly to the customers previously served by AMD. The Company receives certain administrative services from AMD and Fujitsu. The charges for these services are negotiated annually between the Company and AMD and Fujitsu based on the Company’s expected requirements and the estimated future costs of the services to be provided. AMD has the right to review the proposed services to be provided by Fujitsu, and Fujitsu has the right to review the proposed services to be provided by AMD. The service charges are billed monthly on net 45 days terms. The following tables present significant related party transactions and account balances between the Company and AMD (see Note 9 for separate disclosure of borrowing arrangements with related parties): Year Ended Dec. 30, 2007 Year Ended Dec. 31, 2006 (in thousands) Year Ended Dec. 25, 2005 $336,172 $1,114,150 Net sales to AMD(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Cost of sales: Royalties to AMD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,184 $ 6,228 $ 13,760 Service fees to AMD(2): Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,395) 205 476 $ 3,276 11,591 19,981 $ 21,397 21,213 50,229 Total service fees to AMD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (714) $ 34,848 $ 92,839 $ $ $ 1,199 Cost of employees seconded from AMD Sales, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (1) In the second quarter of fiscal 2006, the Company began selling its products directly to the customers previously served by AMD. (2) Service fees to AMD are net of reimbursements from AMD, primarily for facility related charges. Dec. 30, 2007 Dec. 31, 2006 (in thousands) Trade accounts receivable from AMD, net of allowance for doubtful accounts . . . . . . Other receivables from AMD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable to AMD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties payable to AMD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities to AMD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 $2,976 $6,488 $3,597 $1,629 $ — $3,400 $2,325 $1,513 $3,130 $ 43 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The following tables present the significant related party transactions and account balances between the Company and Fujitsu (see Note 9 for separate disclosure of borrowing arrangements with related parties): Net sales to Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales: Royalties to Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other purchases of goods and services from Fujitsu and rental expense to Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subcontract manufacturing and commercial die purchases from Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wafer purchases, processing and sort services from Fujitsu(1) . . . . . Net gain recognized on sale of assets to Fujitsu on April 2, 2007(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reimbursement on costs of employees seconded to Fujitsu(1) . . . . . Pension curtailment loss(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment rental income from Fujitsu(1) . . . . . . . . . . . . . . . . . . . . . . Administrative services income from Fujitsu(1) . . . . . . . . . . . . . . . . Service fees to Fujitsu: Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . Service fees to Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of employees seconded from Fujitsu: Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of employees seconded from Fujitsu . . . . . . . . . . . . . . . . . . . . Year Ended Dec. 30, 2007 Year Ended Dec. 31, 2006 (in thousands) Year Ended Dec. 25, 2005 $873,560 $932,623 $888,655 $ $ 6,228 $ 13,760 75,515 117,999 69,219 22,110 188,133 66,095 — 129,477 — 3,184 (30,191) (21,040) 2,010 (5,848) (1,138) — — — — — — — — — — $232,735 $190,322 $212,456 $ 739 950 1,079 $ 2,269 2,453 4,220 $ $ 2,768 $ 8,942 $ 20,111 $ — — — $ 27 61 95 $ 742 4,280 2,135 $ — $ 183 $ 7,157 3,271 6,501 10,339 (1) These amounts relate to the JV1/JV2 Transaction which was consummated on April 2, 2007. Dec. 30, 2007 Dec. 31, 2006 (in thousands) Trade accounts receivable from Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables from Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable to Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties payable to Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities to Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $183,670 $ 5,385 $ 53,332 $ 1,629 $ 6,461 $190,328 $ — $ 13,046 $ 3,130 $ 4,970 The Company licenses certain intellectual property from AMD and Fujitsu in exchange for the payment of royalties to both AMD and Fujitsu. These royalty expenses are recognized in cost of sales. The Company is required to pay AMD and Fujitsu semi-annual royalties based on net sales (minus the costs of commercial die). The royalty as a percentage of sales will decline to zero over a specified time. The term of the agreement expires in 2013. 88 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Fujitsu provides test and assembly services to the Company on a contract basis. The Company also purchases commercial die from Fujitsu, which is packaged together with the Company’s Flash memory devices. Fujitsu seconded certain employees to the Company until the second quarter of fiscal 2006. The Company paid these employees directly. JV1/JV2 Transaction and Related Agreements On April 2, 2007, Spansion Japan closed the JV1/JV2 Transaction pursuant to the Asset Purchase Agreement dated as of September 28, 2006 (the “JV1/JV2 Closing”). Under the terms of the Asset Purchase Agreement, Spansion Japan sold two wafer fabrication facilities located in Aizu-Wakamatsu, Japan (“JV1/JV2 Facilities”), to Fujitsu together with its manufacturing equipment, inventory and other tangible assets located at the JV1/JV2 Facilities and received proceeds of approximately $170.0 million in cash from Fujitsu. In conjunction with the JV1/JV2 Transaction on April 2, 2007, Spansion Japan also sold certain equipment located at the JV1/JV2 Facilities to an unrelated third party Japanese corporation for approximately $24.0 million who is leasing the equipment to Fujitsu. In connection with the JV1/JV2 Transaction, Spansion Japan and Fujitsu also entered into the following agreements: Foundry Agreement Spansion Japan and Fujitsu entered into a Foundry Agreement, pursuant to which Fujitsu provides the Company certain foundry services for the manufacture of the Company’s products at the JV1/JV2 Facilities. Fujitsu began to provide foundry services to the Company commencing on April 2, 2007. The terms of the Foundry Agreement commit the Company to purchase a minimum specified number of wafers (within a range) over an initial period from April 2007 to June 2008 and provide for financial penalties if such purchase commitments are not achieved. The initial term of the Foundry Agreement ends on December 31, 2009. Spansion Japan and Fujitsu have agreed to enter into discussions in the first half of 2008 in order to decide whether or not to extend the initial term of the Foundry Agreement and Fujitsu has agreed to give Spansion Japan at least 12 months prior notice of its intent to cease providing foundry services to Spansion Japan under the Foundry Agreement. Either Spansion Japan or Fujitsu may terminate the Foundry Agreement in the event that the other party fails to correct or cure its material breach under the Foundry Agreement within 60 days of receipt of written notice from the non-defaulting party specifying such breach. Secondment and Transfer Agreement Spansion Japan and Fujitsu entered into a Secondment and Transfer Agreement, (the “Secondment Agreement”), pursuant to which Spansion Japan seconded certain employees to Fujitsu commencing April 2, 2007. In addition, certain employees will ultimately be transferred to Fujitsu. Unless the parties otherwise agree, the period of secondment for seconded employees not designated for transfer will end no later than June 30, 2008, and no later than December 31, 2009 for seconded employees designated for transfer. The seconded employees remain employees of Spansion Japan and remain eligible to participate in Spansion Japan’s various benefit plans through the term of the secondment. Fujitsu is required to reimburse Spansion Japan for all compensation and expenses associated with such seconded employees and incurred by Spansion Japan during the secondment period. 89 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The Secondment Agreement can be terminated (i) by the mutual written agreement of Spansion Japan and Fujitsu, (ii) by either Spansion Japan or Fujitsu in the event that the other party materially defaults in the performance of a material obligation under the Secondment Agreement and the breaching party has not cured such breach within 120 days after receipt of notice of default by the non-breaching party and (iii) by either Spansion Japan or Fujitsu in the event that the other party is subject to bankruptcy or insolvency proceedings. The Secondment Agreement automatically terminates (i) on the transfer date of the last of the transferred employees or (ii) upon the termination of the Foundry Agreement unless otherwise agreed by Spansion Japan and Fujitsu. Master Lease Agreement Spansion Japan and Fujitsu entered into a Master Lease Agreement for certain equipment located at the JV1/JV2 Facilities. On April 2, 2007, Spansion Japan began to lease to Fujitsu the equipment under the Master Lease Agreement. Fujitsu has the option to renew or extend the lease term for any or all of the equipment at the end of the initial term or any extension thereof for up to six months. Subject to the terms of the Master Lease Agreement, at the expiration of the applicable term, Fujitsu will have a right of first refusal in the event of the sale by Spansion Japan of any equipment for a purchase price equal to the highest offer received from a third party. In addition, Fujitsu will have the option to purchase any or all of the equipment at the expiration of the applicable term, upon any early lease termination or if any equipment is not returned in its proper condition, for a purchase price equal to the fair market value of the equipment at the time of purchase or any other purchase price as may be set forth in the applicable schedule. Wafer Processing Services Agreement Spansion Japan and Fujitsu entered into a Wafer Processing Services Agreement (the “Wafer Processing Agreement”), pursuant to which Fujitsu will provide certain wafer processing services to Spansion Japan at the JV1/JV2 Facilities. The term of the Wafer Processing Agreement commenced on April 2, 2007 and is effective until December 31, 2009. The Wafer Processing Agreement will automatically terminate upon termination or expiration of the Foundry Agreement. Either Spansion Japan or Fujitsu may terminate the Wafer Processing Agreement in the event that the other party fails to correct or cure any material breach by such other party of any covenant or obligation under the Wafer Processing Agreement within 60 days of receipt of written notice from the non-defaulting party specifying such breach. Sort Services Agreement Spansion Japan and Fujitsu entered into a Sort Services Agreement (the “Sort Services Agreement”), pursuant to which Fujitsu will provide probe testing services of Spansion Japan’s wafers at the JV1/JV2 Facilities (the “Sort Services”). The term of the Sort Services Agreement commenced on April 2, 2007 and is effective until December 31, 2009. Spansion Japan may terminate the Sort Services Agreement in its sole discretion with 60 days’ prior written notice to Fujitsu, and either Spansion Japan or Fujitsu may terminate the Sort Services Agreement in the event that the other party fails to correct or cure any material breach by such other party of any covenant or obligation under the Sort Services Agreement within 60 days of receipt of written notice from the non-defaulting party specifying such breach. 90 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Rental Agreement Spansion Japan and Fujitsu, entered into a Rental Agreement (the “Rental Agreement”), pursuant to which Spansion Japan will rent certain equipment (the “Rental Equipment”) to Fujitsu for the sole purpose of fulfilling the obligations of Fujitsu in the Sort Services Agreement. Spansion Japan will retain title to the Rental Equipment at all times, and Fujitsu is prohibited from selling, pledging or otherwise encumbering or disposing of the Rental Equipment. The term of the Rental Agreement commenced on April 2, 2007 and is effective until the termination or expiration of the Sort Services Agreement. Services Agreement Spansion Japan and Fujitsu entered into a Services Agreement (the “Services Agreement”), pursuant to which Spansion Japan will provide certain human resource services and information technology services to Fujitsu (collectively, the “Services”). Any services are to be provided pursuant to statements of works, which may be updated by Spansion Japan and Fujitsu from time to time upon mutual agreement. Spansion Japan will provide the Services to Fujitsu at cost plus five percent. The term of the Services Agreement commenced on April 2, 2007 and is effective until March 31, 2009. Fujitsu may terminate all or a part of any individual Service at any time with six months’ advance notice to Spansion Japan. The total gain from the Transaction, which was the difference between the sales proceeds and the net book value of the assets sold under the terms of the agreement, was approximately $72.5 million. The Company accounted for the Transaction as a sale of real estate that included property improvements and integral equipment in accordance with FASB Statement No. 66, Accounting for Sales of Real Estate, because the building was subject to an existing lease of the underlying land. The Company determined that continuing involvement existed with Fujitsu under the Foundry Agreement effective until December 2009 and, accordingly, will recognize the gain as a reduction of cost of sales over the term of the Foundry Agreement (i.e., over the period of continuing involvement). Amendment of Fujitsu Distribution Agreement On December 28, 2007, the Company entered into Amendment No. 1 to the Amended and Restated Fujitsu Distribution Agreement effective as of October 1, 2007 (the “Amendment”) with Fujitsu, which amends the Amended and Restated Distribution Agreement between the Company and Fujitsu (the “Fujitsu Agreement”) dated December 21, 2005. Among other terms, the Amendment provides the following changes to the Fujitsu Agreement: • Fujitsu will no longer have territorial exclusivity in Japan, but subject to certain performance criteria, will continue to have exclusive distribution rights to certain accounts in Japan. • Beginning on April 1, 2008, the Company may enter into distribution agreements with Fujitsu’s sub-distributors in Japan. • Certain provisions that contained contingencies related to Fujitsu’s level of stock ownership in the Company were deleted. • The Company agreed to negotiate in good faith a successor distribution agreement with Fujitsu Electronics, Inc., or such other semiconductor sales group affiliate of Fujitsu. • The Fujitsu Agreement will have a termination date of September 30, 2008 unless earlier terminated. 91 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) 6. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, marketable securities, trade receivables and foreign currency forward contracts. The Company places its investments in cash equivalents and marketable securities with high quality credit financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. Concentration of credit risk with respect to trade receivables exists because the Company sells a significant portion of its products directly to Fujitsu. Trade accounts receivable from Fujitsu comprised approximately 50 percent and 48 percent of the total consolidated trade accounts receivable balance as of December 30, 2007 and December 31, 2006, respectively. However, the Company does not believe the receivable balances from Fujitsu subject the Company to significant credit risk as historical losses have not been significant and Fujitsu’s own customer base represents a large number of geographically diverse companies. Fujitsu is required to pay its trade receivables regardless of whether it can collect from its customers. The Company does not require collateral or other security from Fujitsu or other customers. The counterparties relating to the Company’s financial activities, including investing, borrowing and foreign exchange hedging, consist of large international financial institutions. The Company does not believe that there is significant risk of nonperformance by these counterparties because the Company monitors their credit ratings and limits the financial exposure and the notional amount of agreements entered into with any one financial institution. While the notional amounts of derivative 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 Company’s obligations to the counterparties. As of December 30, 2007 and December 31, 2006, the Company had a total notional amount of approximately $120.5 million and $10.9 million in outstanding foreign currency forward exchange contracts, respectively. As of December 30, 2007 and December 31, 2006, the fair values of the Company’s foreign currency forward contracts were not significant. 7. Financial Instruments Cash equivalents and marketable securities held by the Company as of December 30, 2007 and December 31, 2006 are as follows: Amortized Cost Gross Unrealized Gains Fair Value (in thousands) 2007 Cash equivalents: Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,500 29,869 $— — $ 66,500 29,869 Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,369 — 96,369 Marketable securities: Auction rate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,650 — 216,650 Total marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,650 — 216,650 Total cash equivalents and marketable securities . . . . . . . . . . . . . . . . . . . . . . . $313,019 $— $313,019 92 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Amortized Cost Gross Unrealized Gains Fair Value (in thousands) 2006 Cash equivalents: Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,000 565,660 $— — $ 67,000 565,660 Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632,660 — 632,660 Marketable securities: Auction rate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,975 — 125,975 Total marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,975 — 125,975 Total cash equivalents and marketable securities . . . . . . . . . . . . . . . . . . . . . . . $758,635 $— $758,635 As of December 30, 2007, all investments in the Company’s portfolio were either cash equivalents or marketable securities. Marketable securities include auction rate securities, which underlying assets are municipal bonds and student loans, with scheduled rate and liquidity resets of 35 days or less. There were no disruptions in the auction process of these securities during fiscal 2007 or fiscal 2006. These marketable securities are classified as current as they are intended to be used in current operations. As of December 30, 2007 and December 31, 2006, the Company’s amortized cost of the cash equivalents and marketable securities approximated the fair values of the securities and the unrealized gains and losses on these securities were not significant. The commercial paper instruments all have contractual maturities of less than one year. The auction rate securities have underlying assets of municipal bonds and student loans not due at a single maturity date. The money market funds are available on demand. Fair Value of Other Financial Instruments Substantially all of the Company’s long-term debt is traded in the market and the fair value is based on the quoted market price as of December 28, 2007. The fair value of the Company’s long-term debt that is not traded in the market is estimated by considering the Company’s credit rating, the interest rates and the terms of the debt. The carrying amounts and estimated fair values of the Company’s debt instruments are as follows: Dec. 30, 2007 Dec. 31, 2006 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (in thousands) Debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt obligations to related parties . . . . . . . . . . . . . . . . . . . . . $1,327,321 — $1,152,207 — $980,307 500 $1,024,926 500 Total debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,327,321 $1,152,207 $980,807 $1,025,426 The fair value of the Company’s accounts receivable and accounts payable approximate their carrying value based on existing payment terms. 8. Warranties and Indemnities The Company generally offers a one-year limited warranty for its Flash memory products. 93 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Changes in the Company’s liability for product warranty during the years ended December 30, 2007, December 31, 2006 and December 25, 2005 are as follows: Dec. 30, 2007 Dec. 31, 2006 (in thousands) Dec. 25, 2005 Balance, beginning of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for warranties issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in liability for pre-existing warranties during the period, including expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,350 4,593 (2,065) $ 1,000 4,529 (5,562) (2,573) 1,383 3,228 Balance, end of fiscal year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,305 $ 1,350 $ 1,000 $ 600 2,418 (5,246) 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, directors, 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 infringement claims or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, there have been no indemnification claims. 9. Debt and Capital Lease Obligations The Company’s debt and capital lease obligations consist of: Dec. 30, 2007 Dec. 31, 2006 (in thousands) Debt obligations to related parties: Promissory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 500 Total debt obligations to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt obligations to third parties: Spansion China Bank Enterprise Cooperation Loan Facility . . . . . . . . . . . . . . . . . Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spansion Japan 2006 Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . Spansion Penang Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spansion Japan 2006 Merged Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . Exchangeable Senior Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . Spansion Japan 2006 Uncommitted Revolving Credit Facility . . . . . . . . . . . . . . . Senior Secured Term Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spansion Japan 2007 Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Secured Floating Rate Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,405 230,628 — 2,028 — 207,000 — — 256,503 625,757 74,012 7,925 228,231 8,402 3,543 16,804 207,000 8,402 500,000 — — 137,240 Total debt obligations to third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,401,333 1,117,547 Total debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,401,333 101,797 1,118,047 108,374 Long-term debt and capital lease obligations, less current portion . . . . . . . . . . . . . . . . . $1,299,536 $1,009,673 94 — $ 500 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Debt Obligations to Related Parties Promissory Note On February 27, 2006, the Company purchased a software license from AMD and, as payment, the Company issued a $3.0 million Promissory Note to AMD. In October, 2007, the Company repaid the remaining outstanding principal of $0.5 million. Debt Obligations to Third Parties Spansion China Bank Enterprise Cooperation Loan Facility On December 1, 2005, Spansion China entered into a bank enterprise cooperation agreement with a local financial institution, effective as of October 24, 2005. Under the terms of the agreement, Spansion China may draw under two credit facilities, equal to U.S. $26 million and RMB 176 million (approximately $22 million as of October 24, 2005), respectively. Borrowings must be used for working capital purposes. The two credit facilities terminate on June 22, 2008. The interest rate for each loan denominated in RMB is a floating rate per annum and is set at the time each loan agreement is entered into. The interest rate may thereafter be adjusted every 12 months at a rate equal to the benchmark rate published by the People’s Bank of China for RMB loans of the same term less a ten percent discount. The interest rate for each loan denominated in U.S. dollars is a floating rate per annum and is initially set at the time each revolving loan agreement is entered into, ranging from 5.75 percent to 6.24 percent for the outstanding balance as of December 30, 2007. The interest rate is thereafter adjusted every six months at a rate equal to the six-month LIBOR plus one percent. The U.S. dollar denominated loan agreements are unsecured. Under the terms of the agreements, Spansion China is prohibited from encumbering any of its assets. As of December 30, 2007 and December 31, 2006, the amounts outstanding under the U.S. dollar denominated loan agreement were approximately $5.4 million and $7.9 million, respectively. There was no amount outstanding under the RMB credit facility as of December 30, 2007 and as of December 31, 2006. Senior Notes On December 21, 2005, the Company completed an offering of $250 million aggregate principal amount of 11.25% Senior Notes due 2016. The Senior Notes were issued at 90.302 percent of face value, resulting in net proceeds to the Company of approximately $218.1 million after deducting the initial purchasers’ discount and estimated offering expenses. The Senior Notes are general unsecured senior obligations of Spansion LLC and will rank equal in right of payment with any of the Company’s existing and future senior debt. Interest is payable on January 15 and July 15 of each year beginning July 15, 2006 until the maturity date of January 15, 2016. Certain events may result in the accelerated maturity of the Senior Notes, including a default in any interest, principal or premium amount payment; a merger, consolidation or sale of all or substantially all of the Company’s property; a breach of covenants in the senior notes or the respective indenture; a default in certain debts; or if a court enters certain orders or decrees under any bankruptcy law. Upon occurrence of one of these events, the principal of and accrued interest on all of the senior notes, as the case may be, may become immediately due and payable. If the Company incurs any judgment for the payment of money in an aggregate amount in excess of $50 million or takes certain voluntary actions in connection to insolvency, all amounts on the Senior Notes shall become due and payable immediately. 95 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Spansion Japan 2006 Revolving Credit Facility On December 26, 2005, Spansion Japan entered into an uncommitted revolving credit facility agreement with a certain Japanese financial institution in the aggregate principal amount of up to 3.0 billion yen. On December 15, 2006, Spansion Japan borrowed 1.0 billion yen (approximately $8.4 million as of December 31, 2006) under this facility. In March 2007, Spansion Japan repaid the remaining principal balance of approximately $8.4 million and accrued interest under this facility and voluntarily terminated the facility. Spansion Penang Loan On January 29, 2004, Spansion Penang entered into a financial arrangement with AMD. Under the terms of the arrangement, Spansion Penang borrowed approximately 29.0 million Malaysian ringgit (approximately $8.0 million based on the exchange rate as of January 29, 2004) from AMD to fund the purchase of manufacturing equipment. In January 2006, this loan was transferred from AMD to a third-party financial institution. The loan bears a fixed annual interest rate of 5.9 percent and is payable in equal, consecutive, monthly principal and interest installments through February 2009. As of December 30, 2007, the amount outstanding under this loan facility was approximately 6.7 million Malaysian ringgit (approximately $2.0 million). Spansion Japan 2006 Merged Revolving Credit Facility On March 31, 2006, Spansion Japan entered into an Amended and Restated Uncommitted Revolving Credit Facility Agreement with a Japanese financial institution (the Spansion Japan 2006 Merged Revolving Credit Facility), which provided for a revolving credit facility in the aggregate principal amount of up to 8.0 billion yen. On December 15, 2006, Spansion Japan borrowed 2.0 billion yen (approximately $16.8 million as of December 31, 2006) under this facility. In April 2007, Spansion Japan repaid the remaining principal balance of approximately $16.8 million and accrued interest under this facility. On December 28, 2007, Spansion Japan voluntarily terminated this facility. Exchangeable Senior Subordinated Debentures In June 2006, Spansion LLC, the wholly owned operating subsidiary of the Company, issued $207.0 million of aggregate principal amount of 2.25% Exchangeable Senior Subordinated Debentures due 2016. The Debentures are general unsecured senior subordinated obligations and rank subordinate in right of payment to all of the Company’s senior indebtedness, including the Senior Notes, and senior in right of payment to all of the Company’s subordinated indebtedness. The Debentures bear interest at 2.25 percent per annum. Interest is payable on June 15 and December 15 of each year beginning December 15, 2006 until the maturity date of June 15, 2016. The Debentures were not exchangeable prior to January 6, 2007. On January 6, 2007, the Debentures became exchangeable for shares of the Company’s Class A common stock, cash or a combination of cash and shares of such Class A common stock, at the Company’s option. Full conversion of the Debentures into shares would result in an initial exchange rate of 56.7621 shares of Class A common stock per debenture representing an initial exchange price of approximately $17.6174 per share of Spansion Inc. Class A common stock. The debentures have not been exchanged for Class A common stock as of December 30, 2007. The Company, at any time prior to maturity may make an irrevocable election to satisfy the exchange obligation in cash up to 100 percent of the principal amount of the debentures exchanged, with any remaining amount to be satisfied in shares of Class A common stock or a combination of cash and shares of Class A 96 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) common stock at the above exchange ratio. In the event that the Company makes this irrevocable election, debenture holders may exchange their debentures only under the following circumstances: • during any fiscal quarter after our fiscal quarter ending April 1, 2007 (and only during such fiscal quarter) if the sale price of Spansion Inc. Class A common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than or equal to 120 percent of the conversion price per share of the Spansion Inc. Class A common stock; • subject to certain exceptions, during the five business day period following any five consecutive trading day period in which the trading price of the debentures for each day of such period was less than 98 percent of the product of the sale price of the Spansion Inc. Class A common stock and the number of shares issuable upon exchange of $1,000 principal amount of the debentures; or • Upon the occurrence of specified corporate events that constitute a fundamental change of the Company under certain circumstances. The holders of the Debentures will have the ability to require the Company to repurchase the Debentures in whole or in part for cash in the event of a fundamental change of the Company. In such case, the repurchase price would be 100 percent of the principal amount of the Debentures plus any accrued and unpaid interest. Spansion Japan 2006 Uncommitted Revolving Credit Facility On September 29, 2006, Spansion Japan entered into the Spansion Japan 2006 Uncommitted Revolving Credit Facility Agreement with a Japanese financial institution, which provided for a revolving credit facility in the aggregate principal amount of up to 2.0 billion yen. On December 15, 2006, Spansion Japan borrowed 1.0 billion yen under this facility. In April 2007, Spansion Japan repaid the remaining principal balance of approximately $8.4 million and accrued interest under this facility. On December 28, 2007, Spansion Japan voluntarily terminated this facility. Senior Secured Term Loan Facility On November 1, 2006, Spansion LLC entered into a Senior Secured Term Loan Facility with a certain domestic financial institution, in the aggregate amount of $500 million. In May 2007, the Company repaid and cancelled the Senior Secured Term Loan Facility of $500.0 million principal amount. The Company recognized a loss on early extinguishment of debt of approximately $3.4 million as a result of the write-off of unamortized Senior Secured Term Loan Facility issuance costs. Spansion Japan 2007 Credit Facility On March 30, 2007, Spansion Japan entered into a committed senior facility agreement with certain Japanese financial institutions that provides Spansion Japan with a 48.4 billion yen senior secured term loan facility (approximately $431.0 million as of December 30, 2007). Spansion Japan may, pursuant to the terms of this facility, borrow amounts in increments of 1.0 billion yen (approximately $8.9 million as of December 30, 2007). Amounts borrowed under this facility bear interest at a rate equal to the three-month TIBOR, at the time of the drawdown, plus a margin of two percent per annum, which will reset quarterly. Borrowing availability is based on capital deliveries for Spansion Japan’s SP1 facility. Pursuant to the terms of Spansion Japan 2007 Credit Facility, Spansion Japan is not permitted, among other things, to create any security interests or liens on any of its pledged assets and to sell or dispose of any of its 97 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) pledged assets, subject to certain exceptions. This facility may be terminated in the event of default in accordance with the terms of this facility. Events of default under the facility include, among other things, the following: a default in performance of payment; if any of debt obligations of Spansion LLC exceeding $25.0 million, or of Spansion Japan exceeding 1.0 billion yen, are not paid when due; or if any debt obligations of Spansion Japan or Spansion LLC are accelerated or otherwise become due and payable, in each case if not cured within applicable time periods set forth in the Spansion Japan 2007 Credit Facility. As of December 30, 2007, the outstanding balance under this facility is 28.8 billion yen (approximately $256.5 million). This amount bears interest at approximately 2.87 percent and 80 percent of the balance will be repaid in ten equal, consecutive, quarterly principal installments starting from the second quarter of fiscal 2008 through the third quarter of fiscal 2010 and the remaining balance will be paid in the fourth quarter of fiscal 2010. This facility is collateralized by the assets of Spansion Japan with a net book value of 125.6 billion yen (approximately $1.1 billion as of December 30, 2007). The drawdown period will expire on March 31, 2008. Senior Secured Floating Rate Notes In May 2007, Spansion LLC, the wholly owned operating company subsidiary of the Company, issued $625.0 million aggregate principal amount of the Senior Secured Floating Rate Notes due 2013 (the Notes). Interest on the Notes accrues at a rate per annum, reset quarterly, equal to the 3-month London Interbank Offered Rate plus 3.125 percent. Interest is payable on March 1, June 1, September 1 and December 1 of each year beginning September 1, 2007 until the maturity date of June 1, 2013. As of December 30, 2007, the Notes bear interest at approximately 8.25 percent. In connection with the issuance of the Notes, the Company, Spansion LLC and Spansion Technology Inc. executed a pledge and security agreement pursuant to which and subject to exceptions specified therein, the Notes are secured by a first priority lien on all of Spansion LLC’s inventory (excluding returned inventory), equipment and real property and proceeds thereof (excluding receivables or proceeds arising from sales of inventory in the ordinary course of business), presently owned or acquired in the future by Spansion LLC and by each of the current and any future guarantors. The Notes are also secured by a second-priority lien that is junior to the liens securing Spansion LLC’s Senior Secured Revolving Credit Facility agreement, as amended, on substantially all other real and personal property and proceeds thereof, including receivables or proceeds arising from sales of inventory in the ordinary course of business presently owned or acquired in the future by the Company and by each of the current and any future guarantors. The Notes are further secured by certain deeds of trust related to real property owned by Spansion LLC in California and Texas. As of December 30, 2007, the Notes are collateralized by a first priority lien on our inventory and property, plant and equipment with a total net book value of approximately $1.2 billion, and by a second priority lien on our accounts receivables with a net book value of approximately $217.0 million. Upon the occurrence of a change of control of Spansion LLC, holders of the Notes may require Spansion LLC to repurchase the Notes for cash equal to 101 percent of the aggregate principal amount to be repurchased plus accrued and unpaid interest. Beginning June 1, 2008, Spansion LLC may redeem all or any portion of the Notes, at any time or from time to time at redemption prices specified therein. Prior to June 1, 2008, Spansion LLC may redeem up to 35 percent of the Notes from the proceeds of certain equity offerings at a redemption price of 100 percent. Certain events are considered “Events of Default,” which may result in the accelerated maturity of the Notes, including: • Spansion LLC’s failure to pay when due the principal or premium amount on any of the Notes at maturity, upon acceleration, redemption, optional redemption, required repurchase or otherwise; 98 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) • Spansion LLC’s failure to pay interest on any of the Notes for 30 days after the date when due; • Spansion LLC’s or the guarantors’ failure to comply with certain restrictions on Spansion LLC’s or Guarantors’ ability to merge, consolidate or sell substantially all of its assets; • Spansion LLC’s failure to perform or observe any other covenant or agreement in the Notes or in the Indenture for a period of 45 days after receiving notice of such failure; • A default by Spansion LLC or any restricted subsidiary (as defined in the Indenture) under any indebtedness that results in acceleration of such indebtedness, or the failure to pay any such indebtedness at maturity, in an aggregate principal amount in excess of $50.0 million (or its foreign equivalent at the time); • If any judgment or judgments for the payment of money in an aggregate amount in excess of $50.0 million (or its foreign equivalent at the time) is rendered against Spansion LLC, the guarantors or any significant subsidiary and is not waived, satisfied or discharged for any period of 60 consecutive days during which a stay of enforcement is not in effect; • Certain events of bankruptcy, insolvency or reorganization with respect to Spansion LLC or any significant subsidiary; • If any note guaranty ceases to be in full force and effect, other than in accordance with the terms of the Indenture, or a guarantor denies or disaffirms its obligations under its note guaranty, other than in accordance with the terms of the Indenture; or • Any lien securing the collateral underlying the Notes at any time ceases to be in full force and effect, and does not constitute a valid and perfected lien on any material portion of the collateral intended to be covered thereby, if such default continues for 30 days after notice. Senior Secured Revolving Credit Facility On May 9, 2007, Spansion LLC, the agent and the other lenders party to the Senior Secured Revolving Credit Facility amended the credit agreement and the security agreement in connection therewith, and we, STI and Spansion International entered into certain new security agreements. Pursuant to the amendment to the revolving facility credit agreement, lenders consented to the incurrence of the Senior Secured Floating Rate Notes and the grant of related liens. This resulted in the revolving credit facility lenders and the Senior Secured Floating Rate Notes holders holding substantially similar security. The relative priorities of the classes of lenders in various types of collateral is set forth in an intercreditor agreement between the agent for the revolving credit facility lenders and the trustee and collateral agent for the Senior Secured Floating Rate Notes holders. As of December 30, 2007, Spansion LLC has not borrowed any amounts under this revolving credit facility. Spansion LLC had approximately $97.5 million available under this facility at the end of fiscal year 2007. This facility will expire on September 19, 2010. Spansion Japan 2007 Revolving Credit Facility On December 28, 2007, Spansion Japan entered into the Spansion Japan 2007 Revolving Credit Facility agreement with the several financial institutions that provides for a revolving credit facility in the aggregate principal amount of up to 14.0 billion yen (approximately $124.7 million as of December 30, 2007). Available amounts for borrowing under this credit facility are limited to the amount of trade receivables held by Spansion Japan. If at anytime the aggregate amount of borrowings under this credit facility exceeds the amount of the trade receivables, Spansion Japan is obligated to prepay an amount such that borrowings 99 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) outstanding after such prepayment are below the level of the trade receivables. Borrowings may be for a term of one week or more, but not more than three months, as determined by Spansion Japan. Amounts borrowed under this credit facility bear interest at a rate equal to TIBOR, at the specified date preceding or at the time of the borrowing in accordance with the terms of this credit facility, plus a margin of 0.50 percent per annum. Pursuant to the terms of this credit facility, Spansion Japan is not permitted, among other things, to create any security interests or liens on the trade receivables; change its primary business; subordinate the payment of its debt under this credit facility to the payment of any unsecured debts; and enter into any merger, company partition, exchange or transfer of shares, assign all or a part of its business or assets to a third party, or otherwise transfer all or a material part of its assets to a third party, subject to certain exceptions. As of December 30, 2007, Spansion Japan has not borrowed any amounts under this revolving credit facility. Subject to certain limitation under Spansion Japan 2007 Credit Facility, the Company had 10 billion yen (approximately $89.1 million as of December 30, 2007) available under this facility as of December 30, 2007. This facility will expire on December 28, 2009 and is extendable at each anniversary with an extension fee 0.2% of the commitment amount. Obligations under Capital Leases As of December 30, 2007 and December 31, 2006, the Company had aggregate outstanding capital lease obligations, net of imputed interest, of approximately $74.0 million and $137.2 million, respectively. The aggregate weighted average interest rate for the capital lease obligations was 8.08 percent as of December 30, 2007. Obligations under these lease agreements are collateralized by the assets leased and are payable through 2011. Leased assets consist principally of machinery and equipment. The gross amount of assets recorded under capital leases totaled approximately $169 million and $320 million as of December 30, 2007 and December 31, 2006, respectively and accumulated amortization of these leased assets was approximately $86 million and $177 million as of December 30, 2007 and December 31, 2006, respectively. These leased assets are included in the related property, plant and equipment category. Amortization of assets recorded under capital leases is included in depreciation expense. Scheduled Maturities of Debt and Future Minimum Capital Lease Payments For each of the next five years and beyond, the Company’s debt and capital lease obligations outstanding as of December 30, 2007 are as follows: Other Debt Capital Leases (in thousands) Fiscal 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,705 Fiscal 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,371 Fiscal 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,861 Fiscal 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Fiscal 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2013 and beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,082,000 Less amount representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less amount representing discount, net of premium . . . . . . . . . . . . . . . . . . . . . . . . . . 1,345,937 — (18,616) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,327,321 100 $37,642 29,178 9,728 6,765 — — 83,313 (9,301) — $74,012 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) 10. Commitments Certain equipment and facilities are leased under various operating leases expiring at various dates through the year 2013. Certain of these leases contain renewal options. Rental expense was approximately $33.3 million, $28.9 million, and $35.7 million for the years ended December 30, 2007, December 31, 2006, and December 25, 2005, respectively. Future minimum lease payments under operating leases and unconditional commitments to purchase manufacturing supplies and services as of December 30, 2007 are as follows: Unconditional Purchase Operating Leases Commitments (in thousands) Fiscal 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 & beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,888 8,085 2,205 805 625 903 $313,644 190,061 61,510 31,845 15,025 220 $25,511 $612,305 Unconditional purchase commitments include all commitments to purchase goods or services of either a fixed or minimum quantity at fixed, minimum or variable price provisions that meet any of the following criteria: (1) they are noncancelable, (2) the Company would incur a penalty if the agreement was cancelled, or (3) the Company must make specified minimum payments even if it does not take delivery of the contracted products or services (“take-or-pay”). If the obligation to purchase goods or services is noncancelable, the entire value of the contract was included in the above table. Contracted minimum amounts specified in take-or-pay contracts are also included in the table as they represent the portion of each contract that is a firm commitment. These unconditional purchase commitments are related principally to inventory and other items. The Company also has made available a ten year $12.5 million loan commitment facility to an investee which was undrawn as of December 30, 2007. Drawdowns on this facility are subject to the completion of pre-determined milestones. 11. Interest Income and Other Income, Net Year Ended Dec. 30, 2007 Year Ended Dec. 31, 2006 Year Ended Dec. 26, 2005 (in thousands) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 $28,410 7,477 143 $21,738 — 369 $3,017 — 156 $36,030 $22,107 $3,173 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) 12. Income Taxes The benefit for income taxes consists of: Year Ended Dec. 30, 2007 Current: U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. State and Local . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign National and Local . . . . . . . . . . . . . . . . . . . . . $ — 237 (3,179) (2,942) Deferred: U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. State and Local . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign National and Local . . . . . . . . . . . . . . . . . . . . . Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended Dec. 31, 2006 (In thousands) Year Ended Dec. 25, 2005 $(2,065) 24 2,373 $ 3,826 150 1,105 332 5,081 — — (22,202) 2,253 — (4,800) (2,637) (959) (24,111) (22,202) (2,547) (27,707) $(25,144) $(2,215) $(22,626) Pre-tax profit from foreign operations was $27 million and $10 million for the fiscal years ended December 30, 2007 and December 31, 2006, respectively. Pre-tax losses from foreign operations were $41 million for the year ended December 25, 2005. Deferred income taxes reflect the net tax effects of tax carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting and the balances for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 30, 2007 and December 31, 2006 are as follows: Dec. 30, Dec. 31, 2007 2006 (In thousands) Deferred tax assets: Net operating loss carryovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred distributor income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses not currently deductible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal and state tax credit carryovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 $ 213,145 9,747 37,145 11,772 5,691 88,846 17,539 3,495 1,519 $ 88,633 16,489 6,604 11,322 6,342 31,929 13,346 2,850 9,855 388,899 (273,713) 187,370 (158,168) 115,186 29,202 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Dec. 30, Dec. 31, 2007 2006 (In thousands) Deferred tax liabilities: Expensed inventory costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on balance sheet translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,290) (38,444) (11,382) (398) 16 (493) — (8,703) (4,452) — (1,096) (188) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59,991) (14,439) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,195 $ 14,763 For 2007, the net deferred tax assets of $55.2 million consist of $26.6 million of current deferred tax assets and $30.0 million of noncurrent tax assets and current deferred tax liabilities of $1.4 million. For 2006, the net deferred tax assets of $14.8 million consist of $1.4 million of current deferred tax assets and $13.6 million of noncurrent deferred tax assets and $0.2 million of noncurrent deferred tax liabilities. In 2007, the net valuation allowance increased by $116 million over that of 2006 primarily due to losses and tax credits generated in the U.S. There was also a decrease of $21.0 million in the valuation allowance associated with the deferred tax assets of the Company’s Japanese subsidiary due to the Company’s change in judgment about the realizability of the Company’s Japanese deferred tax assets. In 2006, the net valuation allowance increased by $94 million primarily due to losses and tax credits generated in the U.S. and the net reversal of certain deferred tax liabilities from the prior year. In 2005, the net valuation allowance increased by $50 million primarily due to losses incurred in the U.S. and an increase in reinvestment allowances in Malaysia. In all periods discussed above, management concluded that valuation allowances were necessary in certain jurisdictions due to the Company’s historic net operating losses in those jurisdictions. As of December 30, 2007, the Company had U.S. federal and state net operating loss carryforwards of approximately $594 million and $85 million respectively. These net operating losses, if not utilized, expire from 2016 to 2027. The Company also had U.S. federal and state tax credit carryovers of $23 million which expire from 2015 to 2027. Included in this amount are California state tax credits of $9.3 million which can be carried forward indefinitely. If the Company conducts an offering of its common stock, it may experience an “ownership change” as defined in the Internal Revenue Code such that its ability to utilize its federal net operating loss carryforwards of approximately $594 million as of December 30, 2007 may be limited under certain provisions of the Internal Revenue Code. As a result, the Company may incur greater tax liabilities than it would in the absence of such a limitation and any incurred liabilities could materially adversely affect it. 103 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The table below displays the reconciliation between statutory federal income taxes and the total provision (benefit) for income taxes. For purposes of the reconciliation between the provision (benefit) for income taxes and the effective rate for the period prior to the IPO in the year ended December 25, 2005, a notional U.S. rate of 35 percent is applied. Tax Rate (In thousands, except for percentages) Year Ended December 30, 2007 Statutory federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign income at other than U.S. rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign losses and deductions utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . US net operating losses not benefited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(101,024) 237 (13,594) (21,076) 110,313 35.0% (0.1)% 4.7% 7.3% (38.2)% Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (25,144) 8.7% Year Ended December 31, 2006 Statutory federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign income at other than U.S. rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (52,493) 24 (7,677) (6,399) 64,330 35.0% 0.0% 5.1% 4.3% (42.9)% Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Year Ended December 25, 2005 Statutory federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign income at other than U.S. rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(114,360) 150 (8,500) 100,084 35.0% (0.1)% 2.6% (30.6)% Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (22,626) 6.9% (2,215) 1.5% The Company’s operations in China and Malaysia currently operate under tax holidays, which will expire in whole or in part at various dates through 2013. Certain of the tax holidays may be extended if specific conditions are met. The net impact of these tax holidays was to decrease the Company’s net loss by approximately $4.1 million in fiscal year 2007 (less than $0.03 per share, diluted), $2.3 million in fiscal year 2006 (less than $0.02 per share, diluted), $2.3 million in fiscal year 2005 (less than $0.035 per share, diluted). The Company has made no provision for U.S. income taxes on approximately $405 million of cumulative undistributed earnings of certain foreign subsidiaries at December 30, 2007 because it is the Company’s intention to reinvest such earnings permanently. If such earnings were distributed, the Company would incur additional income taxes of approximately $13 million (subject to an adjustment for foreign tax credits and after utilizing NOL tax attributes). These additional income taxes may not result in income tax expense or a cash payment to the Internal Revenue Service, but may result in the utilization of deferred tax assets that are currently subject to a valuation allowance. 104 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The Company adopted the provisions of FIN 48 on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Gross Unrecognized Tax Benefit (in thousands) Balance at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . . Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,688 566 122 (617) (185) Balance at December 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,574 The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense and such amounts were immaterial in fiscal 2007. For the year ended December 30, 2007, the Company’s total gross unrecognized tax benefits were approximately $2.6 million, of which $0.2 million, if recognized, would affect the effective tax rate. The recognition of the remaining unrecognized tax benefits would be offset by a change in valuation allowance. The gross amount of the increase in unrecognized tax benefits from the date of adoption to the year ended December 30, 2007 was primarily due to an increase in unrecognized tax credits. The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company’s tax years 2003 through 2007 are subject to examination by the tax authorities. With few exceptions, the Company is not subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2003. The Company does not believe that it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. 13. Employee Benefit Plans Establishment of Spansion Japan Pension Plan Through August 2005, certain employees of Spansion Japan were enrolled in a defined benefit pension plan and/or a lump-sum retirement benefit plan sponsored by Fujitsu (Fujitsu Group Employee Pension Fund or “EPF”). The Company, by agreement with Fujitsu, is required to fund those proportional benefit obligations attributable to the Company’s employees enrolled in these plans. Until September 1, 2005, the Company accounted for its participation in the plan as multiemployer plans wherein the expense recorded for the plan was equal to its annual cash contributions. The Company recorded estimated pension expense of approximately $5.7 for the year ended December 25, 2005. There were no unpaid contributions for the year ended December 25, 2005. On September 1, 2005, the Company adopted a new pension plan (Spansion Japan Pension Plan) and changed the formula to a cash balance formula. On September 9, 2005, this plan was approved by the Japanese government. The Spansion Japan Pension Plan has two components. The first component provides a lump-sum payment, or twenty-year certain annuity or twenty-year guaranteed life annuity. The second component consists of a lump-sum payment or an optional period certain annuity. Participants have the option to choose a cash 105 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) payment in lieu of participation in the second component. The assets and obligations were transferred from the “EPF” to the newly adopted Spansion Japan Pension Plan. As part of the transfer of benefits from the EPF, the Spansion Japan Pension Plan also received approximately $48.7 million in pension assets directly from the EPF trust. As a result of the adoption of the Spansion Japan Pension Plan and amendment to a cash balance formula, a prior service cost base was established for approximately $12.5 million an unrecognized net loss base was established for approximately $7.7 million and an additional minimum liability was recognized for $20.3 million. Adoption of Statement 158 On December 31, 2006, the Company adopted the recognition and disclosure provisions of FASB Statement No. 158 (Statement 158), Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans— an amendment of FASB Statements No. 87, 88, 106 and 132(R). Statement 158 required the Company to recognize the funded status (i.e., the difference between the fair value of Spansion Japan Pension Plan assets and the projected benefit obligations) of its pension plan in its consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive loss, net of tax. The adjustment to accumulated other comprehensive loss at adoption represents the net unrecognized actuarial gains, unrecognized prior service costs, and unrecognized transition obligation remaining from the initial adoption of Statement 87, all of which were previously netted against Spansion Japan Pension Plan’s funded status in the Company’s consolidated balance sheet pursuant to the provisions of Statement 87. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive loss. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in accumulated other comprehensive loss at adoption of Statement 158. The tables below summarize the funded status of the Spansion Japan Pension Plan and the related amounts recognized in the consolidated balance sheets as of December 30, 2007 and December 31, 2006: Dec. 30, Dec. 31, 2007 2006 (in thousands) Projected Benefit Obligation Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fujitsu contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Curtailments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(80,056) (4,548) (1,625) (855) 466 3,451 96 (4,976) $(76,024) (5,123) (1,517) — 87 628 — 1,893 End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(88,047) $(80,056) 106 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Dec. 30, Dec. 31, 2007 2006 (in thousands) Fair Value of Plan Assets: Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fujitsu contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,264 2,945 7,410 855 (3,451) 5,050 $ 63,705 4,566 11,448 — (628) (1,827) End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,073 $ 77,264 Dec. 30, Dec. 31, 2007 2006 (in thousands) Funded status: Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,073 (88,047) $ 77,264 (80,056) Funded status of plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,026 $ (2,792) Amount Recognized in the Statement of Financial Position Consist of: Noncurrent asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,026 — $ $ 2,026 $ (2,792) $ $ Amount Recognized in Accumulated Other Comprehensive Income Consist of: Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 8,173 $ 8,483 — (2,792) 127 10,626 $ 10,753 The Spansion Japan Pension Plan’s accumulated benefit obligation was $85.3 million as of December 30, 2007. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with an accumulated benefit obligation in excess of plan assets as of December 30, 2007 and December 31, 2006 were as follows: Dec. 30, 2007 Dec. 31, 2006 (in thousands) Projected benefit obligation, end of year* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated benefit obligation, end of year* . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets, end of year* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * There are no unfunded accumulated benefit obligations as of December 30, 2007. 107 $— $— $— $80,056 $79,534 $77,264 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The below table summarizes the weighted average assumptions used for purposes of calculating the benefit obligations as of December 30, 2007 and December 31, 2006: Dec. 30, 2007 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash balance interest crediting rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dec. 31, 2006 2.00% 2.70% 2.00% 2.00% 2.70% 2.00% The Company uses Japanese government bonds for setting the discount rate. The discount rate is determined by currently looking to Japanese government bond yields of approximately the same duration as plan obligations. Given that the plan covers substantially active employees and the historically low turnover experience of covered participants, the Company currently looks to 20-year Japanese government bonds when setting the discount rate. As of December 30, 2007 the yield on 20-year Japanese government bonds was approximately 2.10 percent. Consequently, the Company believes that a discount rate of 2.0 percent is appropriate as of December 31, 2007. The below table summarizes the components of the net periodic pension expense: Dec. 30, 2007 Period from Dec. 31, Sept. 1, 2005 to 2006 Dec. 25, 2005 (in thousands) Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . Curtailment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,548 1,625 (3,610) 601 2,010 $ 5,123 1,517 (2,818) 741 — $1,612 376 (488) 243 — Total net periodic pension expense . . . . . . . . . . . . . . . . . . . . . . . $ 5,174 $ 4,563 $1,743 Dec. 30, 2007 (in thousands) Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: Curtailment effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current year actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of prior service credit/(cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,010) 183 (601) (2,428) Total recognized in net periodic benefit cost and other comprehensive income . . . . . . . . $ 2,746 On April 2, 2007, in accordance with FASB Statement No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, the Company recorded a curtailment loss of approximately $2.0 million relating to the Spansion Japan Pension Plan as a result of entering into the Employer Secondment and Transfer Agreement with Fujitsu under the JV1/JV2 Transaction (See Note 5 for details of this transaction). 108 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The estimated amount that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2008 is as follows (in thousands): Actuarial loss/(gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior service cost/(credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— 599 $599 The table below summarizes the weighted average assumptions used for purposes of calculating the net periodic pension expense: Dec. 30, 2007 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . Average rate of compensation increase . . . . . . . . . . . . . . . . . . . . . Cash balance interest crediting rate . . . . . . . . . . . . . . . . . . . . . . . . 2.00% 4.40% 2.70% 2.00% Period from Sept. 1, 2005 to Dec. 25, 2005 Dec. 31, 2006 2.00% 4.40% 2.70% 2.00% 1.50% 2.50% 2.70% 1.50% The Spansion Japan Pension Plan’s investment policy is to invest in assets to best match liabilities and minimize underfunding and risks to the employer related to additional pension contributions. The Company is not currently anticipating investing in non-traditional investments. The long-term rate of return on plan assets is 4.40 percent. This assumption was determined using the building block approach based upon the best estimate range of equity securities (both foreign and domestic) earning 5.0 percent to 8.0 percent and debt securities (both foreign and domestic) earning 0.5 percent to 6.0 percent as summarized below: Target Allocation of Plan Assets Asset Category Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 57% 3% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% Expected Return by Asset Class 6.30% 3.40% The weighted-average asset allocations by asset category at December 30, 2007 and December 31, 2006 are as follows: Dec. 30, 2007 Dec. 31, 2006 Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 56% 4% 42% 55% 3% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% Asset Category No Spansion Japan Pension Plan assets are invested in employer securities and no future benefits are currently covered by insurance contracts issued by the insurer or related parties. The Company expects to contribute $7.8 million to the Spansion Japan Pension Plan during the fiscal year ending December 30, 2008. Fujitsu also is expected to contribute $1.2 million to the Spansion Japan Pension 109 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) Plan as a result of entering into the Employer Secondment and Transfer Agreement under the JV1/JV2 Transaction (See Note 5). The table below summarizes the benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter: Expected Benefit Payments Fiscal Year 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 528,000 $ 632,000 $ 777,000 $ 967,000 $1,133,000 $8,905,000 Profit Sharing Program In 2005, until its IPO in December 2005, the Company participated as a separate Employer in the Advanced Micro Devices, Inc. profit sharing program, under which the Company could allocate profit-sharing contributions with respect to its own profit on a quarterly basis. All regular employees of the Company and its affiliated companies who had been employed for at least three months were eligible to participate in the program. From the time of the IPO until January 2007, the Company did not have or participate in any profit sharing program. Effective January 1, 2007, the Company implemented its own profit sharing program, under which it can allocate profit sharing contributions on an annual basis in any year in which its operating profit objectives are met or exceeded. During 2007, all regular employees of the Company and its affiliated companies below vice president level were eligible to participate in the program from the inception of their employment. There was no profit sharing for fiscal 2007, and as a result, no profit sharing expense was recorded. Retirement Savings Plan Effective June 30, 2003 and through January 11, 2007, the Company elected to participate in AMD’s retirement saving program, commonly known as a 401(k) plan. Effective January 12, 2007, the Company adopted its own retirement savings plan, also known as a 401(k) plan. Under these plans, the Company’s U.S. employees were able to contribute up to 100 percent of their pre-tax salary subject to Internal Revenue Service limits. The Company matches employee contributions at a rate of 50 cents on each dollar of the first six percent of participants’ contributions, to a maximum of three percent of eligible compensation. The Company’s total matching contributions to these 401(k) plans, collectively, were approximately $6.3 million, $5.3 million and $4.3 million for the years ended December 30, 2007, December 31, 2006 and December 25, 2005, respectively. 14. Segment Reporting The Company operates and tracks its results in one reportable segment. The Company primarily designs, develops, manufactures, markets and sells Flash memory products for the wireless and embedded applications in the integrated category of the Flash memory market. The Company’s Chief Operating Decision Maker, the Chief Executive Officer, evaluates performance of the Company and makes decisions regarding allocation of resources based on total Company results. 110 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) The following table presents a summary of net sales by business units for fiscal 2007 and 2006: Year Ended Dec. 30, 2007 Dec. 31, 2006 (in thousands) Wireless Solutions Division (WSD)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer, Set Top Box and Industrial Division (CSID)* . . . . . . . . . . . . . . . . . . . . . . . Other* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,362,508 1,130,265 8,040 $1,549,155 1,025,229 4,890 Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500,813 $2,579,274 * The breakdown of business units’ net sales for fiscal 2005 is not available. The following table presents a summary of net sales by geographic areas for the periods presented: Dec. 30, 2007 Geographical sales(1): Net sales to end customers(2): North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 295,632 China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658,205 Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,854 EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333,430 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,132 Net sales to related parties: United States (net sales to AMD)(3) . . . . . . . . . . . . . . . . . . . . . . — Japan (net sales to Fujitsu) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 873,560 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500,813 Year Ended Dec. 31, 2006 (in thousands) $ 174,930 479,040 282,596 312,114 61,799 Dec. 25, 2005 $ — — — — — 336,172 932,623 1,114,150 888,655 $2,579,274 $2,002,805 (1) Geographical sales are based on the customer’s bill-to location. (2) Net sales to end customers represent sales since the end of the first quarter of fiscal 2006 to AMD’s former customers and customers not served solely by Fujitsu. (3) For fiscal year 2006, these represent sales during the first quarter. In the second quarter of fiscal 2006, the Company began to sell directly to AMD’s former customers and customers not served solely by Fujitsu (end customers). Among those customers, Nokia Corporation accounted for approximately 10 percent and 12 percent of the Company’s net sales in fiscal 2007 and 2006, respectively. Long-lived assets information is based on the physical location of the assets at the end of each fiscal year. The following table presents a summary of long-lived assets by geography: Dec. 30, 2007 Dec. 31, 2006 (in thousands) Geographical long-lived assets: Net property, plant and equipment United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,029,930 939,437 302,597 $ 967,568 420,870 347,256 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,271,964 $1,735,694 111 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) 15. Capital Structure Common Stock In November 2006, the Company completed a secondary offering of Class A common stock held by AMD and Fujitsu. In connection with this offering, the Company also sold 5,247,000 shares of Class A common stock for which it received net proceeds of approximately $68 million. All of the outstanding shares of Class D common stock held by Fujitsu were converted into shares of Class A common stock on a one-for-one basis immediately prior to the completion of this offering by resolution of the Board of Directors. In fiscal 2007, the Company repurchased the one share of Class B held by AMD. As of December 30, 2007, the common stock outstanding consists of two classes of stock: Class A common stock and Class C common stock. • 135,371,515 shares of Class A common stock issued and outstanding, • one share of Class C common stock issued and outstanding and beneficially held by Fujitsu. The purpose of the Class C common stock is solely to entitle Fujitsu to elect such number of members to the Company’s board of directors as set forth in the certificate of incorporation, which depends on the holder’s aggregate ownership interest in the Company. Except as described below or as required by law, the holders of the Company’s common stock are entitled to one vote per share on all matters to be voted on by stockholders and shall vote together as a single class. Stockholders are not entitled to cumulative voting rights, and, accordingly, the holders of a majority of the shares voting for the election of directors can elect the entire board if they choose to do so and, in that event, the holders of the remaining shares will not be able to elect any person to the board of directors. Amendments to the Company’s certificate of incorporation that would alter or change the powers, preferences or special rights of any class of the Company’s common stock, so as to affect the holders of such class adversely, must be proposed in a resolution adopted by the Company’s board of directors, declaring its advisability, and must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class. The terms of the Company’s current credit arrangements and the indenture governing the senior notes restrict the Company’s ability to declare or pay dividends on its common stock. Holders of the common stock are entitled to receive such dividends, if any, as may be declared from time to time by the board of directors, in its discretion, from funds legally available therefore and subject to prior dividend rights of holders of any shares of preferred stock which may be outstanding. The Company does not anticipate paying dividends on the common stock in the foreseeable future. Upon liquidation or dissolution of the Company, subject to prior liquidation rights of the holders of any shares of preferred stock which may be outstanding, the holders of common stock are entitled to receive on a pro rata basis the Company’s remaining assets available for distribution. Holders of the Class A common stock have no preemptive or other subscription rights, and there are no redemption or sinking fund provisions with respect to such shares. There are no conversion rights with respect to the Company’s Class A common stock. Class C common stock is convertible automatically into Class A common stock upon the occurrence of specific events. The Class C common stock will convert automatically on a one-for-one basis into Class A common stock in the event that: • Fujitsu’s aggregate ownership interest in the Company falls below ten percent of the outstanding shares of our capital stock, as calculated on an as-converted to common stock basis; or • Fujitsu transfers its share of Class C common stock to any person other than a Fujitsu affiliate. 112 Spansion Inc. Notes to Consolidated Financial Statements—(Continued) In the event of any such conversion, any rights specifically granted to the holders of Class C common stock, as the case may be, shall cease to exist, and the Company shall not be authorized to reissue such shares of Class C common stock, as the case may be. In the event of the Company’s merger or consolidation with or into another company in connection with which shares of common stock are converted into or exchangeable for shares of stock, other securities or property (including cash), all holders of common stock, regardless of class, will be entitled to receive the same kind and amount of shares of stock, other securities or property (including cash). Preferred Stock The Company’s board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, such as dividend rates, dividend rights, liquidation preferences, voting rights and the number of shares constituting any series and designation of such series, which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things: • restricting dividends on the common stock; • diluting the voting power of the common stock; • impairing the liquidation rights of the common stock; or • delaying or preventing a change of control of Spansion Inc. without further action by the stockholders. 16. Subsequent Event Pending Acquisition Agreement with Saifun Semiconductors Ltd. (“Saifun”) On October 8, 2007, the Company and Saifun entered into an Agreement and Plan of Merger and Reorganization, dated as of October 7, 2007, of which certain terms, including the cash distribution, were amended as of December 12, 2007 (the “Acquisition Agreement”). Upon the consummation of the acquisition, each Saifun shareholder will receive 0.7429 shares of the Company’s Class A common stock and approximately $6.05 per share (based on Saifun’s capitalization as of the amendment date of the Acquisition Agreement) in cash (representing a distribution of approximately $189.7 million of Saifun’s existing cash to all holders of record immediately prior to the consummation of the acquisition) for each Saifun Ordinary Share. In addition, Saifun’s stock options will convert into stock options with respect to the Company’s Class A common stock, after giving effect to the exchange ratio in the acquisition and the cash distribution. On December 20, 2007, Saifun’s shareholders approved the Acquisition Agreement. The acquisition is expected to be completed no later than the first quarter of fiscal 2008. Consummation of the acquisition is subject to certain conditions, including, among others, (i) approval of the Acquisition by an Israeli court, (ii) receipt of certain regulatory and tax approvals, (iii) the absence of any law or order prohibiting the closing, (iv) the accuracy of the representations and warranties of the other party at the time of execution of the Acquisition Agreement (most of which are subject to an overall material adverse effect qualification), and (iv) compliance in all material respects by the other party with its covenants. Concurrently with execution of the Acquisition Agreement, certain affiliates of Saifun entered into Affiliate Agreements pursuant to which such affiliates agreed not to make any sale, transfer or other disposition of Spansion securities that they receive as a result of the acquisition in violation of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 113 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Spansion Inc. We have audited the accompanying consolidated balance sheets of Spansion Inc. as of December 30, 2007 and December 31, 2006, and the related consolidated statements of operations, stockholders’ equity / members’ capital, and cash flows for each of the three fiscal years in the period ended December 30, 2007. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 Spansion Inc. as of December 30, 2007 and December 31, 2006, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 30, 2007, in conformity with U.S. generally accepted accounting principles. As discussed in Notes 3 and 14 to the consolidated financial statements, the Company changed its method of accounting for uncertain tax positions as of January 1, 2007, its method of accounting for sabbatical leave as of January 1, 2007, its method of accounting for stock-based compensation as of December 26, 2005, and its method of accounting for its defined benefit pension plan as of December 31, 2006. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Spansion Inc.’s internal control over financial reporting as of December 30, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2008 expressed an unqualified opinion thereon. /S/ San Jose, California February 27, 2008 114 ERNST & YOUNG LLP Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Spansion Inc. We have audited Spansion Inc.’s internal control over financial reporting as of December 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Spansion Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material misstatement exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Spansion Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2007, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Spansion Inc. as of December 30, 2007 and December 31, 2006, and the related consolidated statements of operations, stockholders’ equity/members’ capital and cash flows for each of the three fiscal years in the period ended December 30, 2007 and our report dated February 27, 2008 expressed an unqualified opinion thereon. /S/ San Jose, California February 27, 2008 115 ERNST & YOUNG LLP Management’s Report on Internal Control Over Financial Reporting Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of December 30, 2007. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting, which appears on page 115 of this Annual Report on Form 10-K. /s/ BERTRAND F. CAMBOU Bertrand F. Cambou President and Chief Executive Officer February 28, 2008 /s/ DARIO SACOMANI Dario Sacomani Executive Vice President and Chief Financial Officer February 28, 2008 116 Supplementary Financial Data (Unaudited) (in thousands, except per share amounts) Dec. 30, 2007 Sep. 30 2007 Jul. 1 2007 Apr. 1 2007 Dec. 31, 2006 Oct. 1, 2006 Jul. 2, 2006 Mar. 26, 2006 Net sales . . . . . . . . . . . . . . . . $429,983 $408,605 $373,710 $414,955 $455,004 $458,740 $396,735 $ — Net sales to related parties/ members . . . . . . . . . . . . . . 222,818 202,464 235,462 212,816 232,271 215,978 258,617 561,929 Total net sales . . . . . . . . . . . . 652,801 Cost of sales(*) . . . . . . . . . . . 526,382 611,069 499,758 609,172 501,033 627,771 537,970 687,275 557,157 674,718 531,974 655,352 522,539 561,929 451,969 Gross profit . . . . . . . . . . . . . . 126,419 Other expenses: Research and development(*) . . . . 112,646 Sales, general and administrative(*) . . . 59,937 111,311 108,139 89,801 130,118 142,744 132,813 109,960 111,248 110,900 101,991 78,680 89,188 90,106 84,059 59,193 61,947 58,240 67,139 63,525 69,755 63,939 Operating loss . . . . . . . . . . . . Gain on sale of marketable securities . . . . . . . . . . . . . . Loss on early extinguishment of debt . . . . . . . . . . . . . . . . Interest and other income, net . . . . . . . . . . . . Interest expense . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . . . . Provision (benefit) for income taxes . . . . . . . . . . . (46,164) (59,130) (64,708) (70,430) (15,701) — (9,969) (27,048) (38,038) — — — — 6,884 — — (3,435) — — (17,310) — 5,157 6,835 15,107 8,931 7,940 3,888 4,300 5,979 (15,487) (23,628) (17,542) (24,146) (20,698) (13,020) (18,391) (18,794) (56,494) (75,923) (70,578) (85,645) (28,459) (19,101) (51,565) (50,853) (6,981) (4,320) (3,676) (10,167) (3,446) 3,013 (2,806) 1,024 Net loss . . . . . . . . . . . . . . . . . $ (49,513) (71,603) (66,902) (75,478) (25,013) $ (22,114) $ (48,759) $ (51,877) Net income (loss) per share Basic and diluted . . . . . $ (0.37) $ Shares used in per share calculation Basic and diluted . . . . . 135,283 Common stock market price range: High . . . . . . . . . . . . . . . $ Low . . . . . . . . . . . . . . . $ 8.68 $ 3.96 $ (0.53) $ 135,049 12.64 $ 7.86 $ (0.50) $ 134,827 12.83 $ 9.49 $ (0.56) $ 134,539 15.05 $ 11.32 $ (0.19) $ 130,489 17.94 $ 13.35 $ (0.17) $ 128,800 18.50 $ 13.18 $ (0.38) $ 128,464 18.59 $ 12.90 $ (*) Certain prior period amounts have been reclassified to conform to the current period presentation. 117 (0.40) 128,146 16.19 12.31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed with the objective of providing reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of December 30, 2007, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level. See Management’s Report on Internal Control Over Financial Reporting in Item 8, which is incorporated herein by reference. Changes in Internal Control over Financial Reporting There was no change in our internal controls over financial reporting during our fourth quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. ITEM 9B. OTHER INFORMATION None. 118 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information under the captions, “Election of Directors,” “Corporate Governance,” “Committees and Meetings of the Board of Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2008 Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions, “Director Compensation” and “Executive Compensation” in our 2008 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information under the captions, “Security Ownership” and “Equity Compensation Plan Information” in our 2008 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information under the captions, “Certain Relationships and Related Transactions” and “Corporate Governance” in our 2008 Proxy Statement is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information under the captions, “Ratification of Independent Registered Public Accounting Firm” in our 2008 Proxy Statement is incorporated herein by reference. With the exception of the information specifically incorporated by reference in Part III of this Form 10-K from our 2008 Proxy Statement, our 2008 Proxy Statement shall not be deemed to be filed as part of this report. 119 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1. Financial Statements The financial statements are set forth in Item 8 of this report on Form 10-K. 2. Exhibits The exhibits listed in the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K (except for such exhibits that are marked on such exhibit list as furnished and not filed). The following is a list of such Exhibits: Exhibit Number Description of Exhibits 2.1(a) Agreement and Plan of Merger and Reorganization, dated as of October 7, 2007, by and among Spansion Inc., Atlantic Star Merger Sub Ltd. and Saifun Semiconductors Ltd., filed as Exhibit 2.1 to Spansion’s Current Report on Form 8-K dated October 9, 2007, is hereby incorporated by reference. 2.1(b) Amendment to Agreement and Plan of Merger and Reorganization, dated as of December 12, 2007, by and among Spansion Inc., Atlantic Star Merger Sub Ltd. and Saifun Semiconductors Ltd., filed as Exhibit 2.1 to Spansion’s Current Report on Form 8-K dated December 13, 2007, is hereby incorporated by reference. 3.1 Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 3.2 Amended and Restated Bylaws of Spansion Inc., as amended. 4.1 Specimen of Class A Common Stock Certificate, filed as Exhibit 4.1 to Spansion’s Amendment No. 6 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 4.2 Indenture, dated as of December 21, 2005, between Spansion LLC, Spansion Inc., Spansion Technology Inc. and Wells Fargo Bank, N.A., governing the 11.25% Senior Notes due 2016, filed as Exhibit 4.1 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 4.3 Specimen of 11.25% Senior Notes due 2016, filed as Exhibit 4.2 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 4.4 Indenture, dated as of June 12, 2006, between Spansion LLC, Spansion Inc., Spansion Technology Inc. and Wells Fargo Bank, N.A, including the form of 2.25% Exchangeable Senior Subordinated Debenture due 2016, filed as Exhibit 4.1 to Spansion’s Current Report on Form 8-K dated June 15, 2006, is hereby incorporated by reference. 4.5 Indenture, dated May 18, 2007, by and among Spansion LLC, Spansion Inc., Spansion Technology Inc. and Wells Fargo Bank, National Association, including the form of Senior Secured Floating Rate Note due 2013, filed as Exhibit 4.1 to Spansion’s Current Report on Form 8-K dated May 21, 2007, is hereby incorporated by reference. 10.1 Spansion Inc. 2005 Employee Stock Purchase Plan, filed as Exhibit 10.18 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 10.2(a)*** Spansion Inc. 2005 Equity Incentive Plan, filed as Exhibit 10.17 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 10.2(b)*** U.S. Employees Stock Option Terms and Conditions for Grants on or after December 15, 2005. 120 Exhibit Number 10.2(c)*** 10.2(d)*** 10.2(e)*** 10.3(a)*** 10.3(b)*** 10.3(c)*** 10.3(d)*** 10.3(e)*** 10.3(f)*** 10.3(g)*** 10.4 10.5 10.6* 10.7 10.8 10.9 10.10 10.11 10.12 10.13 Description of Exhibits U.S. Employees Restricted Stock Unit Terms and Conditions for Grants on or after December 15, 2005. Non-U.S. Employees Stock Option Terms and Conditions for Grants on or after December 15, 2005. Non-U.S. Employees Restricted Stock Unit Terms and Conditions for Grants on or after December 15, 2005. Spansion 2007 Equity Incentive Plan, filed as Exhibit 10.73 to Spansion’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, is hereby incorporated by reference. U.S. Employees Stock Option Terms and Conditions for Awards Under 2007 Equity Plan. U.S. Employees Restricted Stock Unit Terms and Conditions for Awards Under 2007 Equity Plan. Non-U.S. Employees Stock Option Terms and Conditions for Awards Under 2007 Equity Plan. Non-U.S. Employees Restricted Stock Unit Terms and Conditions for Awards Under 2007 Equity Plan. U.S. Non-Employee Directors Stock Option Terms and Conditions for Awards Under 2007 Equity Incentive Plan U.S. Non-Employee Directors Restricted Stock Unit Terms and Conditions for Awards Under 2007 Equity Incentive Plan Form of Indemnification Agreement with Directors and Executive Officers, filed as Exhibit 10.3 to Spansion’s Amendment No. 4 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. Stockholders Agreement, dated as of December 21, 2005, by and among AMD Investments, Spansion Inc., Advanced Micro Devices, Inc., and Fujitsu Limited, filed as Exhibit 10.3 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. Amended and Restated Distribution Agreement between Spansion Inc. and Fujitsu Limited, filed as Exhibit 10.4 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. Memorandum of Understanding, dated as of March 31, 2007, between Spansion Inc. and Fujitsu Limited. Amendment No. 1 to the Amended and Restated Fujitsu Distribution Agreement effective as of October 1, 2007 between Spansion Inc. and Fujitsu Limited. Amended and Restated Fujitsu-Spansion Patent Cross-License Agreement between Fujitsu Limited and Spansion Inc., filed as Exhibit 10.5 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. Amended and Restated AMD-Spansion Patent Cross-License Agreement between Advanced Micro Devices, Inc. and Spansion Inc., filed as Exhibit 10.6 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement among Fujitsu Limited, Advanced Micro Devices, Inc., AMD Investments, Inc. and Spansion Inc., filed as Exhibit 10.7 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. Amended and Restated Information Technology Services Agreement between Spansion Inc. and Fujitsu Limited, filed as Exhibit 10.8 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. Amended and Restated General Administrative Services Agreement between Spansion Inc. and Fujitsu Limited, filed as Exhibit 10.10 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 121 Exhibit Number Description of Exhibits 10.14 Amended and Restated General Administrative Services Agreement between Spansion Inc. and Advanced Micro Devices, Inc., filed as Exhibit 10.11 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 10.15 Amended and Restated Reverse General Administrative Services Agreement between Spansion Inc. and Advanced Micro Devices, Inc., filed as Exhibit 10.12 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 10.16* Amended and Restated Non-Competition Agreement among Spansion Inc., Advanced Micro Devices, Inc. and Fujitsu Limited, filed as Exhibit 10.13 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 10.17 Remediation Agreement among Advanced Micro Devices, Inc., Fujitsu Limited and FASL LLC, dated as of June 30, 2003, filed as Exhibit 10.15 to Spansion’s Amendment No. 1 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.18 Manufacturing Services Agreement, dated June 30, 2003, between FASL LLC and Fujitsu Limited, filed as Exhibit 10.30 to Spansion’s Amendment No. 2 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.19 Amendment to Manufacturing Services Agreement between FASL LLC and Fujitsu Limited, filed as Exhibit 10.35 to Spansion’s Amendment No. 3 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.20* Master Semiconductor Foundry and Technology Transfer Agreement, dated August 11, 2005, between Spansion LLC and Taiwan Semiconductor Manufacturing Company, filed as Exhibit 10.33 to Spansion’s Amendment No. 9 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.21* Foundry Agreement, dated March 31, 2005, between Spansion Japan and Fujitsu Limited, filed as Exhibit 10.34 to Spansion’s Amendment No. 3 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.22 Executive Investment Account Plan, filed as Exhibit 10.36 to Spansion’s Amendment No. 6 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.23 Credit Agreement, dated September 19, 2005, among Spansion LLC, Bank of America, N.A., and the lenders party thereto, filed as Exhibit 10.41 to Spansion’s Amendment No. 4 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.24 Security Agreement, dated September 19, 2005, between Spansion LLC, as Grantor, and Bank of America, N.A., as Agent, filed as Exhibit 10.42 to Spansion’s Amendment No. 4 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.25 Stock Pledge, dated September 19, 2005, between Spansion LLC, as Pledgor, and Bank of America, N.A., as Agent, filed as Exhibit 10.43 to Spansion’s Amendment No. 4 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.26 Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement, dated as of September 13, 2005, effective as of September 19, 2005, by Spansion LLC in favor of Bank of America, N.A., filed as Exhibit 10.44 to Spansion’s Amendment No. 4 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.27(a) Form of Spansion Inc. Change of Control Severance Agreement. 10.27(b) Form of Amended and Restated Spansion Inc. Change of Control Severance Agreement, filed as Exhibit 10.30 to Spansion’s Form 10-Q for the quarter ended September 30, 2007, is hereby incorporated by reference. 122 Exhibit Number Description of Exhibits 10.28 Contribution Agreement, dated as of December 13, 2005, by and among Spansion Inc., Spansion LLC, Advanced Micro Devices, Inc., AMD Investments, Fujitsu Limited, and Fujitsu Microelectronics Holding, Inc., filed as Exhibit 10.1 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 10.29 Purchase and Sale Agreement, dated as of December 21, 2005, between Advanced Micro Devices, Inc. and Spansion LLC, filed as Exhibit 10.15 to Spansion’s Current Report on Form 8-K dated December 21, 2005, is hereby incorporated by reference. 10.30(a) Lease Agreement, dated as of September 30, 2005, between Banc of America Leasing & Capital, LLC and Spansion LLC, filed as Exhibit 10.1(a) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(b) Amended Schedule to Lease Agreement, dated as of December 23, 2005, between General Electric Capital Corporation and Spansion LLC, filed as Exhibit 10.1(b) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(c) Amended Schedule to Lease Agreement, dated as of December 23, 2005, between Banc of America Leasing & Capital, LLC and Spansion LLC, filed as Exhibit 10.1(c) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(d) Amended Schedule to Lease Agreement, dated as of December 23, 2005, between Banc of America Leasing & Capital, LLC and Spansion LLC, filed as Exhibit 10.1(d) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(e) Amended Schedule to Lease Agreement, dated as of December 23, 2005, between General Electric Capital Corporation and Spansion LLC, filed as Exhibit 10.1(e) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(f) Amended Schedule to Lease Agreement, dated as of December 23, 2005, between ORIX Financial Services, Inc. and Spansion LLC, filed as Exhibit 10.1(f) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(g) Amended Schedule to Lease Agreement, dated as of December 23, 2005, between Merrill Lynch Capital and Spansion LLC, filed as Exhibit 10.1(g) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(h) Amended Schedule to Lease Agreement, dated as of December 23, 2005, between Macquarie Electronics USA Inc. and Spansion LLC, filed as Exhibit 10.1(h) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(i) Amended Schedule to Lease Agreement, dated as of December 21, 2005, between Macquarie Electronics USA Inc. and Spansion LLC, filed as Exhibit 10.1(i) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.30(j) Amended Schedule to Lease Agreement, dated as of December 21, 2005, between Merrill Lynch Capital and Spansion LLC, filed as Exhibit 10.1(j) to Spansion’s Current Report on Form 8-K dated December 27, 2005, is hereby incorporated by reference. 10.31 Registration Rights Agreement, dated June 12, 2006, between Spansion Inc., Spansion LLC, Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC, filed as Exhibit 10.1 to Spansion’s Current Report on Form 8-K dated June 15, 2006, is hereby incorporated by reference. 10.32 Amendment Agreement dated December 30, 2005 to Master Lease Agreement dated January 5, 2005, between Spansion Japan Limited and Sumicrest Leasing Limited, filed as Exhibit 10.1 to Spansion’s Current Report on Form 8-K dated January 5, 2006, is hereby incorporated by reference. 123 Exhibit Number Description of Exhibits 10.33 Amendment No. 1 to Credit Agreement, dated April 7, 2006, among Spansion LLC, Bank of America, N.A., and the lenders party thereto, filed as Exhibit 10.41(a) to Spansion’s Form 10-Q for the quarter ended March 26, 2006, is hereby incorporated by reference. 10.34 Joinder Agreement to the Credit Agreement, dated April 21, 2006, among Spansion Inc., Bank of America, N.A., and the lenders party to the Credit Agreement, filed as Exhibit 10.41(b) to Spansion’s Form 10-Q for the quarter ended March 26, 2006, is hereby incorporated by reference. 10.35 Continuing Guaranty to the Credit Agreement, dated April 21, 2006, between Spansion Inc. and Bank of America, N.A., filed as Exhibit 10.41(c) to Spansion’s Form 10-Q for the quarter ended March 26, 2006, is hereby incorporated by reference. 10.36 Master Lease Agreement, dated as of September 28, 2006, by and among Spansion Japan Limited, Spansion Inc., Spansion Technology Inc. and Spansion LLC, in their capacities as guarantors of Spansion Japan Limited, and Fujitsu Limited, filed as Exhibit 10.73 to Spansion’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, is hereby incorporated by reference. 10.37 Foundry Agreement, effective as of September 28, 2006, by and among Spansion Japan Limited, Spansion Inc., Spansion Technology Inc. and Spansion LLC, in their capacities as guarantors of Spansion Japan Limited, and Fujitsu Limited, filed as Exhibit 10.74 to Spansion’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, is hereby incorporated by reference. 10.38 Secondment and Transfer Agreement, dated as of September 28, 2006, between Spansion Japan Limited and Fujitsu Limited, filed as Exhibit 10.75 to Spansion’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, is hereby incorporated by reference. 10.39(a) Schedule to Lease Agreement, dated as of September 28, 2006, between Banc of America Leasing & Capital, LLC and Spansion LLC, filed as Exhibit 10.62(k) to Spansion’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, is hereby incorporated by reference. 10.39(b) Schedule to Lease Agreement, dated as of September 28, 2006, between Banc of America Leasing & Capital, LLC and Spansion LLC, filed as Exhibit 10.62(l) to Spansion’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, is hereby incorporated by reference. 10.39(c) Schedule to Lease Agreement, dated as of September 28, 2006, between Banc of America Leasing & Capital, LLC and Spansion LLC, filed as Exhibit 10.62(m) to Spansion’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, is hereby incorporated by reference. 10.39(d) Schedule to Lease Agreement, dated as of September 28, 2006, between Banc of America Leasing & Capital, LLC and Spansion LLC, filed as Exhibit 10.62(n) to Spansion’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2006, is hereby incorporated by reference. 10.40(a) Facility Agreement, dated as of March 30, 2007, among Spansion Japan Limited, GE Capital Leasing Corporation, Sumisho Lease Co., Ltd., Mitsui Leasing & Development, Ltd., and certain lenders thereto, filed as Exhibit 10.65 to Spansion’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2007, is hereby incorporated by reference. 124 Exhibit Number Description of Exhibits 10.40(b) Amendment No. 3 to Facility Agreement, dated as of August 1, 2007, among Spansion Japan Limited, GE Capital Leasing Corporation, Sumisho Lease Co., Ltd., Mitsui Leasing & Development, Ltd., and certain lenders thereto, filed as Exhibit 10.65(b) to Spansion’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, is hereby incorporated by reference. 10.41 Security Agreement, dated as of March 30, 2007, between Spansion Japan Limited and GE Capital Leasing Corporation filed as Exhibit 10.66 to Spansion’s Annual Report on Form 10-K dated February 27, 2007, is hereby incorporated by reference. 10.42(a) Security Agreement, dated as of March 30, 2007, among Spansion Japan Limited, GE Capital Leasing Corporation, and certain secured parties thereto, filed as Exhibit 10.67 to Spansion’s Annual Report on Form 10-K dated February 27, 2007, is hereby incorporated by reference. 10.42(b) Amendment to Security Agreement, dated as of April 26, 2007, among Spansion Japan Limited, GE Capital Leasing Corporation and the Finance Parties, filed as Exhibit 10.67(b) to Spansion’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2007, is hereby incorporated by reference. 10.43 Pledge and Security Agreement, dated May 18, 2007, by and among Spansion Inc., Spansion LLC, Spansion Technology Inc. and Wells Fargo, National Association, filed as Exhibit 10.1 to Spansion’s Current Report on Form 8-K dated May 21, 2007, is hereby incorporated by reference. 10.44(a) Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement (Santa Clara County, California), effective as of May 18, 2007, by Spansion LLC to First American Title Insurance Company, as trustee, for the benefit of Wells Fargo Bank, National Association, as collateral agent, filed as Exhibit 10.2 to Spansion’s Current Report on Form 8-K dated May 21, 2007, is hereby incorporated by reference. 10.44(b) Amendment No. 1 to Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement (Santa Clara County, California), effective as of June 7, 2007, by Spansion LLC to First American Title Insurance Company, as trustee, for the benefit of Wells Fargo Bank, National Association, as collateral agent, filed as Exhibit 10.1 to Spansion’s Current Report on Form 8-K dated June 7, 2007, is hereby incorporated by reference. 10.45 Second Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement (Santa Clara County, California), effective as of May 18, 2007, by Spansion LLC to PRLAP, Inc., as Trustee, for the benefit of Bank of America, N.A., as administrative agent, filed as Exhibit 10.3 to Spansion’s Current Report on Form 8-K dated May 21, 2007, is hereby incorporated by reference. 10.46(a) Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement (Travis County, Texas), effective as of May 18, 2007, by Spansion LLC to R. J. Dold, as trustee, for the benefit of Wells Fargo Bank, National Association, as collateral agent, filed as Exhibit 10.4 to Spansion’s Current Report on Form 8-K dated May 21, 2007, is hereby incorporated by reference. 10.46(b) Amendment No. 1 to Deed of Trust, Security Agreement, Assignment of Rents and Financing Statement (Travis County, Texas), effective as of June 7, 2007, by Spansion LLC to R. J. Dold, as trustee, for the benefit of Wells Fargo Bank, National Association, as collateral agent, filed as Exhibit 10.2 to Spansion’s Current Report on Form 8-K dated June 7, 2007, is hereby incorporated by reference. 10.47 Form of Voting Undertaking between Spansion and certain shareholders of Saifun Semiconductors Ltd., filed as Exhibit 10.1 to Spansion’s Current Report on Form 8-K dated October 9, 2007, is hereby incorporated by reference. 125 Exhibit Number Description of Exhibits 10.48 Revolving Credit Facility Agreement by and among Spansion Japan Limited, The Bank of Tokyo-Mitsubishi UFJ, Ltd. and the lenders party thereto, dated as of December 28, 2007. 10.49*** Spansion LLC Employment Offer Letter to Bertrand F. Cambou, dated as of April 6, 2005, filed as Exhibit 10.52 to Spansion’s Amendment No. 4 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.50*** Spansion LLC Employment Offer Letter to Thomas T. Eby, dated as of September 15, 2005, filed as Exhibit 10.53 to Spansion’s Amendment No. 4 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.51*** Spansion LLC Employment Offer Letter to Robert C. Melendres, dated as of December 17, 2004, filed as Exhibit 10.54 to Spansion’s Amendment No. 4 to Form S-1 Registration Statement (No. 333-124041), is hereby incorporated by reference. 10.52*** Employment Offer Letter, dated as of February 9, 2006, between Spansion LLC and Dario Sacomani, filed as Exhibit 10.65 to Spansion’s Annual Report on Form 10-K dated March 15, 2006, is hereby incorporated by reference. 21 Subsidiaries of Spansion Inc. 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Registrant has been granted confidential treatment pursuant to Rule 406 for portions of the referenced exhibit. ** Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing. *** Management Agreement or Compensation Plan. 126 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPANSION INC. By: /S/ DARIO SACOMANI Dario Sacomani Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dario Sacomani and Robert C. Melendres, and each of them, their true and lawful attorneys-in-fact, each with full power of substitution, for them in any and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1933, this report has been signed below by the following persons, on behalf of the registrant and in the capacities and on the dates indicated. Signature /S/ BERTRAND F. CAMBOU Bertrand F. Cambou /S/ DARIO SACOMANI Dario Sacomani /S/ DONALD L. LUCAS Title Date President, Chief Executive Officer and Director (Principal Executive Officer) February 28, 2008 Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) February 28, 2008 Chairman of the Board of Directors February 28, 2008 Director February 28, 2008 Director February 28, 2008 Director February 28, 2008 Director February 28, 2008 Director February 28, 2008 Director February 28, 2008 Donald L. Lucas /S/ DAVID K. CHAO David K. Chao /S/ GILLES DELFASSY Gilles Delfassy /S/ ROBERT L. EDWARDS Robert L. Edwards /S/ PATTI S. HART Patti S. Hart /S/ DAVID E. ROBERSON David E. Roberson /S/ JOHN M. STICH John M. Stich 127 Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Bertrand F. Cambou, certify that: 1. I have reviewed this annual report on Form 10-K of Spansion Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 28, 2008 /S/ BERTRAND F. CAMBOU Bertrand F. Cambou President and Chief Executive Officer Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Dario Sacomani, certify that: 1. I have reviewed this annual report on Form 10-K of Spansion Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 28, 2008 /S/ DARIO SACOMANI Dario Sacomani Executive Vice President and Chief Financial Officer Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted as Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Spansion Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that: (i.) the Annual Report on Form 10-K of the Company for the year ended December 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii.) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 28, 2008 /S/ BERTRAND F. CAMBOU Bertrand F. Cambou President and Chief Executive Officer Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted as Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Spansion Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that: (i.) the Annual Report on Form 10-K of the Company for the year ended December 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (ii.) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 28, 2008 /S/ DARIO SACOMANI Dario Sacomani Executive Vice President and Chief Financial Officer [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK]
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