Give Advanced Micro Devices (NYSE:AMD) CEO Hector Ruiz some credit. At least he'll tell it like it is. In describing his disappointment in his company's fourth-quarter results, he said it was a "freaking dismal quarter in flash." I'll say.

AMD's flash memory business incurred a $39 million loss during the fourth quarter, more than $50 million worse than its showing the prior quarter and $36 million worse than the same period a year ago.

That, in a nutshell, is how AMD could break records by booking $1.26 billion in revenue but incur a $30 million, or $0.08 per share, net loss during the quarter. Sure, there were also $49 million in one-time charges to convert and retire debt, which reduced per-share earnings by $0.13. But even without the charges, AMD's earnings were still 56% lower than the year-ago period and 57% lower than last quarter. There's a direct correlation between that downturn and the downdraft in the flash business, which accounted for 40% of AMD's total revenue during the quarter.

There was little mention of rival Intel (NASDAQ:INTC) in explaining why the flash business did so poorly. Instead, the more generic "pricing pressure" was listed as a key factor. But let's give Intel some credit. AMD's flash revenue for the December quarter at $504 million was down 11% from last year's fourth quarter. Over the same period, Intel saw its flash revenue rise 61%. How did that happen? Intel probably dropped prices dramatically to win back market share in flash and stick it to its much smaller rival.

When AMD first warned of its flash backlash a week ago, the stock took a more than 20% haircut and hasn't moved much since. Indeed, one analyst even -- wait for it -- upgraded AMD's shares today. An upgrade? Seriously? We here at the Fool have our doubts about Street analysts. But I can see the point here. I mean, really, can it get much worse for AMD? CEO Ruiz said the company believes there's room for more cost-cutting and that it has yet to yield all the benefits from its MirrorBit flash technology. Assuming AMD does no worse than break even in flash in future quarters, it can let the processor business, which grew 8% sequentially and 26% year over year, continue to carry the momentum.

But that won't be easy either, and AMD knows it. For example, during the conference call, Ruiz expressed admiration for Intel's recently unveiled platform strategy. He then said that, to counter, AMD will create "ecosystems" of partners that will combine technologies to create platforms. That's a reasonable alternative, but I have my doubts, especially after seeing how well the Centrino wireless package has done for Intel.

Do I lack faith in AMD? Maybe, but I still find the company's frankness in its conference call refreshing, especially when compared with the hype dished from its larger rival. Yet numbers are numbers, and none are more important than free cash flow. AMD's capital expenditures exceeded its cash from operations by more than $300 million during 2004. That can't continue, especially if, as Ruiz says, AMD really wants to change the competitive dynamics in its industry.

Perhaps someday AMD will become the Rule Breaker it wants to be. But it isn't now, and I wouldn't bet on it happening soon.

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What do you think? How badly has Intel wounded AMD? Will the upstart chip maker come back strongly in the first quarter, or will Intel continue to punish its smaller rival? Debate all this and more at the AMD and Intel discussion boards. Only at

Fool contributor Tim Beyers admires AMD's fight, but not enough to invest in the firm's shares. Tim had no positions in any of the stocks mentioned in this story at the time of publication. To find out what stocks he owns, check out his Fool profile, which is here. The Motley Fool has a disclosure policy.