The company, which will post results on Jan. 23, also said that quarterly sales will be well below market expecations.
AMD expects fourth quarter revenues, excluding ATI, to rise about 3% from $1.33 billion reported in the third quarter. That would translate to about $1.37 billion. Analysts predicted revenue of $1.44 billion, excluding revenues from ATI, Reuters reported.
"The fourth quarter gross margin and operating income were impacted by significantly lower microprocessor average selling prices, which largely offset a significant increase in unit sales," the company said in a statement.
Several analysts downgraded AMD's stock, including Bear Stearns, Lehman Brothers, Morgan Stanley and Citigroup.
Some of AMD's woes in the quarter can be traced to a price war with Intel , the largest chip-maker, as AMD battles inch-by-inch to capture new customers and market share.
AMD has steadily stolen market share away from Intel with processors that some customers and analysts have viewed as faster and more energy-efficient than Intel's offerings.
AMD has also inked deals with once-exclusive Intel customers like computer-maker Dell .
But Intel has taken dramatic steps to halt AMD's encroachment and reverse falling profits.
Intel has slashed the price on the company's older chips and introduced powerful new chips with a new design that vastly reduces energy consumption while boosting power.
In September, Intel announced a massive restructuring calling for the elimination of 10,500 positions to streamline its operations. The cuts are expected to save Intel $3 billion per year by 2008.
AMD's "relationship with Dell, while long anticipated, really got signed at a tough time for both companies, even as Intel enjoys the surprisingly strong fruits of its supply deal with Apple," CNBC's Jim Goldman said.