Updated from March 31

AMD

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and Fujitsu are combining flash operations to create a new company called FASL, with AMD holding a 60% stake and Fujitsu a 40% interest.

The new company builds on an existing 50-50 manufacturing joint venture between the two companies, known as Fujitsu AMD Semiconductor Limited. It will have gross assets with a net book value of over $2.5 billion and a global work force of 7,000.

AMD and Fujitsu are the No. 4 and No. 5 vendors of the type of memory known as flash that is used in cell phones, though their combined revenues would have put them in the second leading position in 2002. Intel claims the top spot in the market.

"We expect this new company to be a more formidable competitor in the flash memory business," said Masamichi Ogura, group president of Fujitsu's electronic devices business group. "By joining together in a more comprehensive alliance, we can improve our market position through consolidated research and development efforts, as well as benefit from greater access to each other's technology and manufacturing expertise."

In a conference call, AMD CEO Hector Ruiz said there are no plans to spin off the new company as a separate stock.

FASL aims to open for business in the third quarter of 2003. AMD and Fujitsu will be the sole distributors of its flash memory products.

FASL will be headed by CEO Bertrand Cambou, most recently senior vice president of AMD's memory group. Of its board of 10 directors, six will be named by AMD and four by Fujitsu.

FASL will be based in Sunnyvale, Calif., with Japan headquarters in Tokyo.

"I think in general, the market likely views this as a positive move on AMD's part. It will probably be more effective in manufacturing and marketing flash, and to some extent it helps them combine and keep operating costs under control," says JMP Securities analyst Krishna Shankar.

That's important, he points out, because "flash longer-term is going to be a commodity memory market, paralleling DRAM over time." JMP has no banking relations with AMD.

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"In a rough market where memory demand is not going up as fast as companies wish it would, about the best the biggest players can do is minimize their costs," agrees Jim Cantore, principal memory analyst at iSuppli.

"This is something that's been long overdue," said Mario Morales, vice president of the semiconductor group at IDC, a market research firm. "Over the past two years, AMD and Fujitsu had become more competitive toward each other. That needed to stop. This will also allow AMD to be more focused in their core business of microprocessors."

Over the past couple of years, AMD's share has stayed relatively stagnant, he adds.

But more recently, Intel opened a window of opportunity for rivals with its ill-advised price hike on flash products. Its sharp price increase in January

backfired, alienating customers and apparently causing it to lose share. For example, number-one handset maker

Nokia

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has been "aggressively qualifying other

flash suppliers" besides Intel, Morales says.

So far, the beneficiaries of Intel's troubles appear to have been Samsung and

STMicroelectronics

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, but AMD could also potentially pick up some share, he adds.