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, set top boxes, or STBs, MP3 players and automotive electronics such as navigation systems. This demand is driving a rapid transition to digital storage media and away from traditional storage media such as film, tape or CDs. 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.

Flash memory is one of the largest semiconductor markets, and according to iSuppli, it reached total worldwide sales of $16.0 billion in 2004, of which 58.4% was classified as sales of NOR-based Flash memory products and 41.6% was classified as sales of NAND-based Flash memory products. The Flash memory market can also be divided into three major categories based on application: wireless, embedded and removable storage. Portable, battery-powered communications applications are categorized as “wireless,” and solid-state removable memory applications are categorized as “removable storage.” All other applications, such as consumer and automotive electronics, are categorized as “embedded.”.

Overall, the Flash memory market has grown significantly over the past five years, from worldwide sales of $2.9 billion in 1998 to $16.0 billion in 2004. iSuppli projects that the Flash memory market will reach sales of $23.3 billion in 2008, representing a compound annual growth rate of 9.9 percent from 2004 to 2008.

The Company’s products for wireless applications, especially for mobile phones, offer a combination of low power consumption with fast performance and competitive cost structure for different customer platforms with different interface requirements. Key wireless products include the PL Family, the WS Family and the GL Family.

The PL product family, with a 3-volt interface, is used for a broad range of mobile phones, from entry level, basic audio-only handsets to audio and data capable phones with higher resolution color displays. The WS product family, with 1.8 volt interface, is optimized for higher-end mobile phones with capabilities such as polyphonic ring tones, enhanced color displays, higher resolution cameras and larger internal storage for multimedia content including music, videos and pictures. The GL product family, with a 1.8-volt and/or 3-volt interface, enables code and data applications in low-end, mid-range and higher-end mobile phones.

The Company offers a variety of general purpose as well as highly optimized products to serve the diverse needs of the embedded market. Key embedded products include the AL and GL Families, the CD Family and the FL Family.

The AL and GL product families address markets where high reliability coupled with low cost are important, including consumer, networking and telecommunication applications. The AL product family offers densities as low as 4-megabits, supports a simpler feature set and provides a standard interface for value-focused applications, such as DVD players. The GL product family offers densities up to 512 megabits, includes a page-mode interface and Advanced Sector Protection to support high performance consumer applications, such as STBs. 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 Read Write and Advanced Sector Protection at 16- and 32-megabit densities. The FL product family addresses the need for continued cost reduction in markets such as PC and peripherals for applications such as hard disk drives and graphics cards and in consumer markets for applications such as DVD players.

Gross margin increased to 19% for the twelve months ended December 26, 2004 compared to 9% for the nine months ended December 28, 2003.

Research and development expenses of $281 million for the twelve months ended December 26, 2004 increased 91% compared to $147 million for the nine months ended December 28, 2003.

Interest expense of $40 million for the twelve months ended December 26, 2004 increased 90% compared to $21 million for the nine months ended December 28, 2003.

The Company recorded an income tax benefit of $14 million for the twelve months ended December 26, 2004, an income tax benefit of $4.4 million for the nine months ended December 28, 2003.