e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, 2007


o		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 0-19032

ATMEL CORPORATION

(Registrant)


Delaware		77-0051991
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2325 Orchard Parkway
San Jose, California 95131
(Address of principal executive offices)

(408) 441-0311
(Registrant’s telephone number)

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 þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

On June 4, 2007, the Registrant had 488,843,018 outstanding shares of Common Stock.

EXPLANATORY NOTE REGARDING RESTATEMENTS

This Quarterly Report on Form 10-Q for our quarter ended March 31, 2007, includes a restatement of our condensed consolidated financial statements for our quarter ended March 31, 2006 (and related disclosures). The restatement is a result of an independent stock option investigation commenced by the Audit Committee of the Board of Directors. See Note 2, “Restatements of Consolidated Financial Statements,” to Condensed Consolidated Financial Statements for a detailed discussion of the effect of the restatements.

Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K filed by us prior to August 10, 2006, and all earnings press releases and similar communications issued by us prior to August 10, 2006, should not be relied upon and are superseded in their entirety by our December 31, 2006 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed by us with the Securities and Exchange Commission on or after June 8, 2007.

Audit Committee Investigation of Historical Stock Option Practices

In early July 2006, the Company began a voluntary internal review of its historical stock option granting practices. Following a review of preliminary findings to the Audit Committee of the Company’s Board of Directors, the Company announced on July 25, 2006, that the Audit Committee had initiated an independent investigation regarding the timing of the Company’s past stock option grants and other related issues. The Audit Committee, with the assistance of independent legal counsel and forensic accountants, determined that the actual measurement dates for certain stock option grants differed from the recorded measurement dates used for financial accounting purposes for such stock option grants.

On October 30, 2006, the Company announced that financial statements for all annual and interim periods prior to that date should no longer be relied upon due to errors in recording stock-based compensation expense. Specifically, this notice of non-reliance applied to the three year period ended December 31, 2005, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, the financial statements for the interim periods contained in the Quarterly Reports on Form 10-Q filed with respect to each of these years, the financial statements included in the Company’s Quarterly Report on Form 10-Q for the first quarter of 2006, as well as financial statements for fiscal years prior to December 31, 2003.

Results of Audit Committee Investigation

The Audit Committee’s investigation was completed in April 2007. The investigation covered 110 stock option grants to approximately 4,250 recipients for all grant dates during the period from January 1, 1997 through August 3, 2006. The Audit Committee extended the scope of the original review by having the Company conduct an analysis of approximately 92 additional stock option grants during the period from March 19, 1991, the date of the Company’s initial public offering, to December 31, 1996.

In connection with the investigation, independent legal counsel and the forensic accountants analyzed more than 1,000,000 pages of hard copy documents, over 600,000 electronic documents, and conducted interviews of 63 current and former directors, officers, and employees. Based on the investigation, the Audit Committee concluded that:

	(1)		Certain stock option grants were priced retroactively,

	(2)		These incorrectly recorded stock option grants had incorrect measurement dates for financial accounting purposes and were not accounted for correctly in the Company’s previously issued financial statements,

	(3)		During 1998, in two separate repricing programs, employees were allowed to elect stock options to be repriced after the stated repricing deadlines had expired,

	(4)		There was evidence that the October 1998 repricing offer was not communicated to employees until after the October 12, 1998 deadline to accept the repricing offer,

	(5)		Certain employees were allowed to record stock option exercises on dates other than the actual transaction date, thereby potentially reducing the taxable gain to the employee and reducing the tax deduction available to the Company,

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	(6)		Stock option cancellation dates were changed to allow certain employees to both continue vesting and exercise stock options beyond the standard 30-day period following termination from the Company,

	(7)		All of the above actions were taken without required approvals, including approval by the Board of Directors, or the Compensation Committee of the Board of Directors, and

	(8)		Atmel’s internal controls relating to the stock option granting process were inadequate, and there was an inadequate and inconsistent procedure at the Company for processing stock option grants.

As a result of the findings of the Audit Committee’s investigation, the Company determined that material stock-based compensation adjustments were required due to measurement date errors resulting from retroactive pricing of stock options for the period beginning in April 1993 and continuing through January 2004. The Audit Committee found that such retroactive pricing was intentional and violated the terms of the Company’s stock option plans. The Audit Committee found that, after January 2004, the Company improved stock option granting processes, and since that time, has granted stock options in accordance with the Company’s stock option plans and approval procedures. The Company did not identify any material stock-based compensation adjustments that were required for grants made in periods after January 2004.

In accordance with Accounting Principles Bulletin (“APB”) No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations, with respect to periods through December 31, 2005, the Company should have recorded stock-based compensation expense to the extent that the fair market value of the Company’s common stock on the stock option grant measurement date exceeded the exercise price of each stock option granted. For periods commencing January 1, 2006 (the beginning of fiscal year 2006), the Company has recorded stock-based compensation expense in accordance with SFAS No. 123(R), “Share-Based Payment,” (“SFAS No. 123R”). Beginning in 2006, the incremental stock-based compensation expense resulting from errors identified in the investigation and subsequent management review is included in stock-based compensation expense under the provisions of SFAS No. 123R. Under the provisions of SFAS No. 123R, incremental stock-based compensation expense resulting from errors identified related to previous stock option practices did not have a material impact to the consolidated statement of operations for the year ended December 31, 2006.

As a result of the measurement date and other errors identified in the Audit Committee’s investigation and subsequent management review, the Company recorded aggregate non-cash stock-based compensation expenses for the period from 1993 through 2005 of approximately $116 million, plus associated payroll tax expense of $2 million, less related income tax benefit of $12 million, for total stock-based compensation expense, net of income tax of $106 million. As part of the restatement of the consolidated financial statements, the Company also recorded additional non-cash adjustments that were previously identified and considered to be immaterial. The cumulative after-tax benefit from the recording of these adjustments was $11 million for the period from 1993 through 2005. These adjustments related primarily to the timing of revenue recognition and related reserves, recognition of grant benefits, accruals for litigation and other expenses, reversal of income tax expense related to unrealized foreign exchange translation gains and asset impairment charges. The total impact of all restatement adjustments resulted in net cumulative expenses through 2005 of $94 million. These expenses had the effect of decreasing net income or increasing net loss and decreasing retained earnings or increasing accumulated deficit as previously reported in the Company’s historical financial statements.

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The financial statement impact of the restatement of stock-based compensation expense and related payroll and income taxes, as well as other accounting adjustments, by year, is as follows (in thousands):


						Adjustment to
						Income Tax
						Expense (Benefit)			Adjustment to
						Relating to Stock-			Stock-Based			Other
	Adjustment to		Adjustment to			Based			Compensation			Adjustments,			Total
	Stock-Based		Payroll Tax			Compensation			Expense, Net of			Net of			Restatement
Fiscal	Compensation		Expense			and Payroll Tax			Payroll and			Income			Expense
Year	Expense		(Benefit)			Expense			Income Taxes			Taxes			(Benefit)
1993	$	268	$	1		$	(110	)	$	159
1994		556		151			(293	)		414
1995		1,944		688			(799	)		1,833
1996		3,056		1,735			(1,449	)		3,342
1997		5,520		1,968			(2,516	)		4,972
1998		18,695		671			(6,147	)		13,219
1999		18,834		1,832			(6,955	)		13,711
2000		27,379		7,209			(11,576	)		23,012
2001		19,053		1,655			(5,988	)		14,720
2002		5,555		1,603			23,477			30,635
2003		12,416		(1,980	)		—			10,436

Cumulative through December 31, 2003		113,276		15,533			(12,356	)		116,453		$	(13,638	)	$	102,815

2004		1,405		(10,395	)		—			(8,990	)		184			(8,806	)
2005		1,561		(3,190	)		—			(1,629	)		2,082			453

Total	$	116,242	$	1,948		$	(12,356	)	$	105,834		$	(11,372	)	$	94,462

For more information regarding the investigation and findings relating to stock option practices and the restatement, refer to Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2, “Restatements of Consolidated Financial Statements” to Condensed Consolidated Financial Statements.

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Atmel Corporation

Condensed Consolidated Balance Sheets
(Unaudited)


	March 31,			December 31,
*(In thousands, except per share data)*	2007			2006

ASSETS
Current assets
Cash and cash equivalents	$	419,982		$	410,480
Short-term investments		58,713			56,264
Accounts receivable, net of allowance for doubtful accounts of $3,299 and $3,605, respectively		215,926			227,031
Inventories		363,538			339,799
Other current assets		103,689			118,965

Total current assets		1,161,848			1,152,539
Fixed assets, net		505,759			514,349
Non-current assets held for sale		125,706			123,797
Intangible and other assets, net		26,362			27,854

Total assets	$	1,819,675		$	1,818,539

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	36,357		$	38,311
Trade accounts payable		130,036			145,079
Accrued and other liabilities		236,110			231,237
Liabilities related to assets held for sale		119,830			133,893
Deferred income on shipments to distributors		16,864			18,856

Total current liabilities		539,197			567,376
Long-term debt less current portion		51,830			60,020
Non-current liabilities related to assets held for sale		191			313
Other long-term liabilities		236,685			236,936

Total liabilities		827,903			864,645

Commitments and contingencies (Note 16)
Stockholders’ equity
Common stock; par value $0.001; Authorized: 1,600,000 shares; Shares issued and outstanding: 488,840 at March 31, 2007 and 488,844 at December 31, 2006		489			489
Additional paid-in capital		1,421,279			1,418,004
Accumulated other comprehensive income		112,900			107,237
Accumulated deficit		(542,896	)		(571,836	)

Total stockholders’ equity		991,772			953,894

Total liabilities and stockholders’ equity	$	1,819,675		$	1,818,539

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Atmel Corporation

Condensed Consolidated Statements of Operations
(Unaudited)


	Three Months Ended
	March 31,
	2007		2006
*(In thousands, except per share data)*			As restated (1)
Net revenues	$	391,313	$	400,784
Operating expenses
Cost of revenues		251,376		274,402
Research and development		67,299		68,151
Selling, general and administrative		58,059		45,411
Restructuring charges		1,782		151

Total operating expenses		378,516		388,115

Income from operations		12,797		12,669
Interest and other income (expenses), net		979		(6,619	)

Income from continuing operations before income taxes		13,776		6,050
Benefit from (provision for) income taxes		15,164		(7,204	)

Income (loss) from continuing operations		28,940		(1,154	)
Income from discontinued operations, net of income taxes		—		5,862

Net income	$	28,940	$	4,708

Basic income (loss) per common share:
Income (loss) from continuing operations	$	0.06	$	(0.00	)
Income from discontinued operations, net of income taxes		—		0.01

Net income	$	0.06	$	0.01

Weighted-average shares used in basic income (loss) per share calculations		488,842		485,576

Diluted income (loss) per common share:
Income (loss) from continuing operations	$	0.06	$	(0.00	)
Income from discontinued operations, net of income taxes		—		0.01

Net income	$	0.06	$	0.01

Weighted-average shares used in diluted income (loss) per share calculations		494,198		485,576


(1)		See Note 2, “Restatements of Consolidated Financial Statements” to Condensed Consolidated Financial Statements for further discussion

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Atmel Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Three Months Ended March 31,
	2007			2006
*(In thousands)*				As restated (1)
Cash flows from operating activities
Net income	$	28,940		$	4,708
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		31,940			59,825
Gain (loss) on sale of fixed assets		17			(1,465	)
Provision for doubtful accounts receivable		132			84
Other non-cash losses		428			4,170
Accrued interest on zero coupon convertible debt		—			1,688
Accrued interest on other long-term debt		278			461
Stock-based compensation expense		3,310			2,958
Changes in operating assets and liabilities
Accounts receivable		10,993			(17,970	)
Inventories		(23,267	)		(5,837	)
Current and other assets		12,732			6,486
Trade accounts payable		(8,027	)		12,991
Accrued and other liabilities		3,736			13,414
Deferred income on shipments to distributors		(1,992	)		1,298

Net cash provided by operating activities		59,220			82,811

Cash flows from investing activities
Acquisitions of fixed assets		(26,206	)		(17,787	)
Proceeds from the sale of fixed assets		11			2,323
Proceeds from the sale of interest in privately-held companies		—			1,799
Acquisitions of intangible assets		—			(209	)
Purchases of short-term investments		(4,114	)		(6,590	)
Sales or maturities of short-term investments		2,000			1,054

Net cash used in investing activities		(28,309	)		(19,410	)

Cash flows from financing activities
Principal payments on capital leases and other debt		(22,806	)		(27,969	)
Issuance of common stock		—			5,983

Net cash used in financing activities		(22,806	)		(21,986	)

Effect of exchange rate changes on cash and cash equivalents		1,397			1,662

Net increase in cash and cash equivalents		9,502			43,077

Cash and cash equivalents at beginning of period		410,480			300,323

Cash and cash equivalents at end of period	$	419,982		$	343,400

Supplemental cash flow disclosures:
Interest paid	$	2,314		$	3,938
Income taxes paid, net		16,893			1,116
Decreases in accounts payable related to fixed asset purchases		(6,441	)		(2,900	)
Fixed assets acquired under capital leases		—			715


(1)		See Note 2, “Restatements of Consolidated Financial Statements” to Condensed Consolidated Financial Statements for further discussion

The accompanying notes are an integral part of these Condensed Consolidated Financial statements.

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Atmel Corporation

Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)

Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to state fairly, in all material respects, the financial position of Atmel Corporation (“the Company” or “Atmel”) and its subsidiaries as of March 31, 2007 and the results of operations and cash flows for the three months ended March 31, 2007 and 2006. All intercompany balances have been eliminated. Because all of the disclosures required by generally accepted accounting principles are not included, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The December 31, 2006 year-end condensed balance sheet data was derived from the audited consolidated financial statements and does not include all of the disclosures required by generally accepted accounting principles. The condensed consolidated statements of operations for the periods presented are not necessarily indicative of results to be expected for any future period, nor for the entire year.

In the third quarter of 2006, the Company completed the divestiture of its Grenoble, France, subsidiary. Results from the Grenoble subsidiary are excluded from the amounts from continuing operations for the three months ended March 31, 2006 disclosed herein, and have been reclassified as Results from Discontinued Operations. See Note 8 for further discussion.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include reserves for inventory, sales return reserves, restructuring charges, stock-based compensation expense, allowances for doubtful accounts receivable, warranty reserves, estimates for useful lives associated with long-lived assets, asset impairments, certain accrued liabilities and income taxes and tax valuation allowances. Actual results could differ from those estimates.

Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis for raw materials and purchased parts; and an average-cost basis for work in progress and finished goods) or market. Market is based on estimated net realizable value. The Company establishes lower of cost or market reserves, aged inventory reserves and obsolescence reserves. Inventory reserves are generally recorded when the inventory product exceeds nine months of demand or twelve months of backlog for that product. Inventory reserves are not relieved until the related inventory has been sold or scrapped. Inventories are comprised of the following as of March 31, 2007 and December 31, 2006, respectively:


	2007		2006

Raw materials and purchased parts	$	16,629	$	13,434
Work-in-progress		254,188		245,760
Finished goods		92,721		80,605

	$	363,538	$	339,799

Grant Recognition

Subsidy grants from government organizations are amortized as a reduction of expenses over the period the related obligations are fulfilled. In fiscal 2006, Atmel entered into new grant agreements and modified existing

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agreements, with several European government agencies. Recognition of future subsidy benefits will depend on Atmel’s achievement of certain capital investment, research and development spending and employment goals. The Company recognized the following amount of subsidy grant benefits as a reduction of either cost of revenues or research and development expenses, depending on the nature of the grant:


	March 31,		March 31,
	2007		2006
Three Months Ended			As restated
Cost of revenues	$	297	$	1,816
Research and development expenses		5,467		3,762

Total	$	5,764	$	5,578

Stock-Based Compensation

Upon adoption of SFAS No. 123R, the Company reassessed its equity compensation valuation method and related assumptions. The Company’s determination of the fair value of share-based payment awards on the date of grant utilizes an option-pricing model, and is impacted by its common stock price as well as a change in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: expected common stock price volatility over the term of the option awards, as well as the projected employee option exercise behaviors (expected period between stock option vesting date and stock option exercise date).

Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2007 and 2006 included a combination of payment awards granted prior to January 1, 2006 and payment awards granted subsequent to January 1, 2006. For stock-based payment awards granted prior to January 1, 2006, the Company attributes the value of stock-based compensation, determined under SFAS No. 123R, to expense using the accelerated multiple-option approach. Compensation expense for all stock-based payment awards granted subsequent to January 1, 2006 is recognized using the straight-line single-option method. Stock-based compensation expense included in the three months ended March 31, 2007 and 2006 includes the impact of estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the periods prior to 2006, the Company accounted for forfeitures as they occurred. The adoption of SFAS No. 123R requires the Company to reflect the net cumulative impact of estimating forfeitures in the determination of period expense by reversing the previously recognized cumulative compensation expense related to those forfeitures, rather than recording forfeitures when they occur as previously permitted. The Company did not record this cumulative impact upon adoption, as the amount was insignificant. Stock options granted in periods prior to 2006 were measured based on SFAS No. 123 requirements, whereas stock options granted subsequent to January 1, 2006 were measured based on SFAS No. 123R requirements. See Note 10 for further discussion.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except in limited circumstances. The Company expects to adopt SFAS No. 157 beginning January 1, 2008. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the

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entity also elects to apply the provisions of SFAS No. 157. The Company expects to adopt SFAS No. 159 beginning January 1, 2008. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial statements.

Note 2 RESTATEMENTS OF CONSOLIDATED FINANCIAL STATEMENTS

Audit Committee Investigation of Historical Stock Option Practices

In early July 2006, the Company began a voluntary internal review of its historical stock option granting practices. Following a review of preliminary findings, the Company announced on July 25, 2006, that the Audit Committee of the Company’s Board of Directors had initiated an independent investigation regarding the timing of the Company’s past stock option grants and other related issues. The Audit Committee, with the assistance of independent legal counsel and forensic accountants, determined that the actual measurement dates for certain stock option grants differed from the recorded measurement dates used for financial accounting purposes for such stock option grants.

Results of Audit Committee Investigation

The Audit Committee’s investigation was completed in April 2007. The investigation covered 110 stock option grants to approximately 4,250 recipients for all grant dates during the period from January 1, 1997 through August 3, 2006. The Audit Committee extended the scope of the original review by having the Company conduct an analysis of 92 additional stock option grants during the period from March 19, 1991, the date of the Company’s initial public offering, to December 31, 1996.

(1) Certain stock option grants were priced retroactively,

(2) These incorrectly recorded stock option grants had incorrect measurement dates for financial accounting purposes and were not accounted for correctly in the Company’s previously issued financial statements,

(3) During 1998, in two separate repricing programs, employees were allowed to elect stock options to be repriced after the stated repricing deadlines had expired,

(4) There was evidence that the October 1998 repricing offer was not communicated to employees until after the October 12, 1998 deadline to accept the repricing offer,

(5) Certain employees were allowed to record stock option exercises on dates other than the actual transaction date, thereby potentially reducing the taxable gain to the employee and reducing the tax deduction available to the Company,

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(6) Stock option cancellation dates were changed to allow certain employees to both continue vesting and exercise stock options beyond the standard 30-day period following termination from the Company,

(7) All of the above actions were taken without required approvals, including approval by the Board of Directors, or the Compensation Committee of the Board of Directors, and

(8) Atmel’s internal controls relating to the stock option granting process were inadequate, and there was an inadequate and inconsistent procedure at the Company for processing stock option grants.

In accordance with Accounting Principles Bulletin (“APB”) No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations, with respect to periods through December 31, 2005, the Company should have recorded stock-based compensation expense to the extent that the fair market value of the Company’s common stock on the stock option grant measurement date exceeded the exercise price of each stock option granted. For periods commencing January 1, 2006 (the beginning of fiscal year 2006), the Company has recorded stock-based compensation expense in accordance with SFAS No. 123(R), “Share-Based Payment,” (“SFAS No. 123R”). Beginning in 2006, the incremental stock-based compensation expense resulting from errors identified in the investigation and subsequent management review is included in stock-based compensation expense accounted for under the provisions of SFAS No. 123R. Under the provisions of SFAS No. 123R, incremental stock-based compensation expense resulting from errors identified related to previous stock option practices did not have a material impact to the consolidated statement of operations for the year ended December 31, 2006.

The stock compensation expense amounts were determined primarily utilizing guidance under APB No. 25 (intrinsic value-based expense), and were amortized ratably over the vesting term of the stock options. If a stock option was forfeited prior to vesting, the compensation expense recorded in the consolidated statement of operations in prior periods was reversed, as well as any remaining unamortized unearned stock-based compensation associated with the forfeited stock options. Accordingly, the net stock-based compensation expense amortized in the consolidated statement of operations is lower than the gross stock-based compensation expense calculated based on APB No. 25 (intrinsic-value based expense) at the grant date. A substantial portion of these revised compensation amounts would have been expensed in the consolidated statements of operations during the fiscal years from 1993 through 2005. As of December 31, 2005, the remaining APB No. 25 (intrinsic value-based) unamortized unearned stock-based compensation balance related to the errors identified during the investigation and subsequent management review was approximately $2,942. Following the adoption of SFAS No. 123R on January 1, 2006, this unamortized unearned stock-based compensation balance amount was eliminated against additional paid-in capital in the consolidated balance sheet.

The Company determined that the measurement date and other errors identified in the investigation involved the falsification of the Company’s records, resulting in false information and representations provided to the Company’s independent registered public accounting firm and erroneous financial statements previously filed with the SEC.

The types of errors identified were as follows:

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Improper Measurement Dates for Stock Option Grants. The Company determined that material stock-based compensation adjustments were required in connection with certain stock option grants that the Company made during fiscal years 1993 through 2004. During the period under review, the Company determined that 101 out of 202 stock option grants resulted in a correction to the previously used measurement dates, of which 53 of the grants resulted in recording additional stock compensation expense. For those grants determined to have been retroactively recorded, the time period between the grant date and the corrected measurement date ranged from one day to over three years.

Evidence of incorrect measurement dates included, but was not limited to, several different versions of stock option grant lists, “change-of-status” forms and “request for stock-options-grant” forms dated subsequent to original stock option measurement dates, delays in entering grant information into the Company’s stock administration database, Equity Edge, email correspondence, and handwritten comments on various documents. The investigation revealed that certain individual stock option grants were not finalized at the time they were approved by the Board of Directors or were never approved by the Board of Directors. There was no evidence that the Board approved the backdating of any stock options. Stock-based compensation expenses related to stock option grants with improper measurement dates included in restated financial statements for prior years, up to and including fiscal year 2005, totaled approximately $72,326, net of forfeitures.

Stock Option Repricing Programs. During 1998, the Company offered employees two opportunities to reprice outstanding stock options with exercise prices above certain values (commonly referred to as “out of the money” or “underwater” options) at the time of the repricing. Stock option repricing programs were offered with effective dates of January 14, 1998 and October 9, 1998 for all stock options priced above $4.25 and $1.98, respectively (adjusted for stock splits). Employees elected to reprice 6.7 million and 14.1 million stock options in the January and October 1998 repricing programs, respectively.

As a result of the investigation, the Audit Committee determined that some employees were allowed to elect stock options to be repriced after the stated effective dates, without the approval of the Board of Directors, thereby allowing employees to reprice their stock options retroactively below the fair market value at the time of their acceptance of the repricing offer, which should have resulted in the Company recording compensation expense.

Based on the revised measurement dates, the January 1998 repricing did not result in material compensation amounts related to employee elections to reprice stock options below fair market value on the date of election. However, the October 1998 repricing resulted in compensation expense of $23,778 as determined under APB No. 25, net of forfeitures, for stock options repriced below market value on the date of election.

Delays in finalizing repricing elections for employee stock options also resulted in additional compensation expense attributable to FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation,” (“FIN 44”), which became effective for any stock options repriced after December 15, 1998. The results of the investigation revealed that, due to the delay in communicating the stock option repricing program to employees, no employees elected to reprice their stock options before the effective date, and that 98% of employees elected to reprice their stock options after the December 15, 1998 transition date for FIN 44 accounting requirements. FIN 44 requires that the value of these stock option awards be remeasured at the end of each reporting period until the award is exercised, forfeited, or expires unexercised. The special transition rules for FIN 44 stipulated that the financial impact from stock option repricings after December 15, 1998 be delayed until the first reporting period after July 1, 2000, from which time compensation expense related to any increase in value for stock options which were earlier repriced, and were outstanding and unvested at July 1, 2000, was to be recorded, utilizing variable accounting provisions under FIN 44.

The October 1998 repricing resulted in additional cumulative compensation expenses totaling $13,278 related to the FIN 44 transition rules where variable accounting provisions applied, based on the difference between the repricing value of $1.98 per share and the fair market value at the FIN 44 transition date of June 30, 2000 of $18.44 per share for unvested stock options outstanding as of June 30, 2000. Stock options repriced after December 15, 1998, which were outstanding and unvested at July 1, 2001, were subject to variable accounting adjustments for each reporting period after June 30, 2000 based on the fair market value of the Company’s shares at the end of each period. Variable accounting adjustments could result in either an increase or a reduction to compensation expense,

- 13 -

depending on whether the Company’s share price increased or declined during the period. As a result, compensation expenses (credits) of $(472), $(773), $8,539, $(5,601), $4,478, and $7,107 were recorded related to variable accounting for the October 1998 repricing program for the fiscal years 2005, 2004, 2003, 2002, 2001, and 2000, respectively.

In summary, stock-based compensation expenses related to stock option repricing programs included in restated financial statements for prior years, up to and including fiscal year 2005, totaled approximately $37,109, net of forfeitures.

Modifications to Stock Options for Terminated Employees and Other Related Issues. The investigation also identified a number of instances where Company actions resulted in modifications to stock option terms beyond those specified in the original terms of the grants, resulting in additional compensation expense. The investigation found that most of these modifications were not approved by the Board of Directors or the Compensation Committee and resulted from:

	•		Stock option cancellation dates that were changed to allow employees to exercise stock options beyond the standard 30-day period following termination of employment from the Company,

	•		Severance agreements offered to certain employees that allowed for continued vesting and rights to exercise stock options beyond the standard terms of the Company’s stock option plans,

	•		Additional vesting and ability to exercise stock options for certain employees not terminated from the Company’s Equity Edge database in a timely manner following their departure from the Company, due to administrative errors,

	•		Stock options awarded to certain employees after their date of termination, primarily due to administrative delays in processing stock option requests and the lack of systems to monitor employee status, and

	•		Exercises of stock options after expiration of the 10-year term of the options.

The investigation also identified instances where certain employees’ stock option exercises were backdated to dates other than the actual transaction date, thereby reducing the taxable gain to the employee and reducing the tax deduction available to the Company. In addition, there were instances where employee stock option grant dates preceded employee hire dates. Finally, certain employees were allowed to exercise stock options and defer settling with the Company for share purchase amounts and related payroll taxes under non-recourse loan arrangements.

Compensation expense from such modifications to stock options resulted from actions approved by former executives of the Company and inadvertent errors arising from the Company’s lack of centralized personnel tracking systems. The cumulative compensation expenses for modifications to stock options and other related issues included in restated financial statements for prior years, up to and including fiscal year 2005, were approximately $6,807.

Evaluation of the Conduct of Management and the Board of Directors

The Audit Committee considered the involvement of former and current members of management and the Board of Directors in the stock option grant process and concluded:

	•		The evidence did not give rise to concern about the integrity of any current or former outside director,

	•		The evidence did not give rise to concern about the integrity of any current officer, and

	•		The individuals who were primarily responsible for directing the backdating of stock options were George Perlegos, the Company’s former Chief Executive Officer, and Mike Ross, the Company’s former General Counsel.

George Perlegos was one of the Company’s founders, and was Atmel’s Chief Executive Officer and Chairman of the Board from 1984 until August 2006. Based on evidence from the stock option investigation, the Audit Committee concluded that Mr. Perlegos was aware of, and often directed, the backdating of stock option grants. The evidence included testimony from stock administration employees and handwritten notations from Mr. Perlegos expressly directing stock administration employees to use prior Board meeting dates to determine stock option pricing for many employees’ stock option grants. The evidence showed that Mr. Perlegos circumvented the Company’s stock option plan requirements and granting procedures. The evidence indicated that Mr. Perlegos knew that stock option grants had to be approved by the Board and that the price for stock options should be set as of the

- 14 -

date on which the Board approved the grant. There was evidence that, at least by 2002, Mr. Perlegos was informed about the accounting consequences of backdating stock options. However, the Audit Committee was unable to reach a conclusion as to whether Mr. Perlegos understood the accounting principles that apply to stock options, or whether he intended to manipulate the financial statements of the Company. Mr. Perlegos did not fully cooperate in the investigation. The evidence showed that Mr. Perlegos did not receive a direct personal benefit from the backdating of stock options, and that Mr. Perlegos did not receive any backdated stock options. Because of his involvement in the intentional backdating of stock options, the Audit Committee believed the evidence raised serious concerns regarding George Perlegos’s management integrity with respect to the stock option process.

On August 5, 2006, George Perlegos and three other Atmel senior executives were terminated for cause by a special independent committee of Atmel’s Board of Directors following an unrelated eight-month long investigation into the misuse of corporate travel funds.

Mike Ross was the Company’s General Counsel from 1989 until August 2006. Based on evidence from the stock option investigation, the Audit Committee concluded that Mr. Ross handled communications with the Board of Directors regarding stock options and, during certain periods, supervised Atmel’s stock administration department. The Audit Committee also concluded that Mr. Ross was aware of, and participated in the backdating of stock options. The evidence included witness testimony and documents that showed that Mr. Ross directed numerous changes to stock option lists approved by the Board of Directors, without the Board’s knowledge or approval. Stock administration employees stated, and records showed, that Mr. Ross directed stock administration employees to issue backdated stock option grants to employees and directed or permitted other actions to be taken contrary to the terms of Atmel’s stock option plans. The evidence from the investigation showed that Mr. Ross circumvented the Company’s stock option plan requirements and granting procedures. The evidence indicated that Mr. Ross knew that the stock option grants must be approved by the Board and that the price for stock options should be set as of the date on which the Board approved the grant. There was evidence that, at least by 2002, Mr. Ross was informed about accounting consequences of backdating stock options. The Committee was unable to conclude, however, whether Mr. Ross was aware of the accounting consequences of backdating stock options prior to 2002. The Committee was also unable to conclude whether Mr. Ross intended to manipulate the financial statements of the Company. There also was evidence that Mr. Ross personally benefited from the receipt of backdated stock options that were not approved by the Board of Directors, and that he backdated his exercises of his own stock options to dates on which the Company’s stock price was at a period low, thereby potentially reducing his tax liability. Mr. Ross did not cooperate in the investigation. Because of his involvement in the intentional backdating of stock options and his other conduct, the Audit Committee believed the evidence indicated that Mike Ross lacked management integrity with respect to the stock option process.

Mr. Ross was one of the four Atmel senior executives who were terminated for cause on August 5, 2006, based upon the unrelated investigation into the misuse of corporate travel funds.

The evidence from the Audit Committee investigation did not raise similar concerns about other former officers.

Grant Date Determination Methodology

As part of its investigation, the Audit Committee determined whether the correct measurement dates had been used under applicable accounting principles for stock option awards. The measurement date corresponds to the date on which the option is deemed granted under applicable accounting principles, namely APB 25 and related interpretations, and is the first date on which all of the following are known: (1) the individual employee who is entitled to receive the option grant, (2) the number of options that an individual employee is entitled to receive, and (3) the option’s exercise price.

For the period from March 1991 through July 2006, the Company maintained a practice of awarding stock options at monthly Board of Director meetings. During this period, approximately 186 monthly Board of Director meetings were held, each of which included approval of a schedule of employee stock option grants. In addition, there were 16 stock option grants approved by unanimous written consent during this same period. The Audit Committee’s investigation and subsequent management review found that, during this period, certain stock option grant lists approved by the Board of Directors were changed after the meeting dates and the changes were not communicated to the Board of Directors. The changes included adding or removing employee names, increasing or decreasing the number of stock options awarded and changing grant dates. As a result, the Company has determined that 101 out of 202 stock option awards were not finalized until after the original Board of Director meeting dates, or unanimous written consent effective dates, resulting in alternative measurement dates for accounting purposes. Of the 101 original award dates where stock option grant terms were not finalized, 53 grant dates resulted in a correction to the previously used measurement dates with fair market values above the original award’s exercise price.

- 15 -

The Company found that contemporaneous documentation in the form of emails, faxes, or internal forms were sufficient to provide a basis for determining the most likely date when stock option grants were finalized for many grants, resulting in alternative measurement dates. However, for certain stock option grants, no reliable objective evidence could be located supporting a specific date on which the number of stock options, and the specific employees to be awarded stock options, were finalized. For these cases, the Company determined the date of entry into the Equity Edge database to be the most reliable measurement date for determining when the terms of the stock option grants were finalized.

The Chief Accountant of the SEC, Conrad Hewitt, published a letter on September 19, 2006 outlining the SEC staff’s interpretation of specific accounting guidance under APB No. 25. In his letter, Mr. Hewitt advised registrants that “when changes to a list [of stock option award recipients] are made subsequent to the preparation of the list that was prepared on the award approval date, based on an evaluation of the facts and circumstances, the staff believes companies should conclude that either (a) the list that was prepared on the award approval date did not constitute a grant, in which case the measurement date for the entire award would be delayed until a final list has been determined or (b) the list that was prepared on the award approval date constituted a grant, in which case any subsequent changes to the list would be evaluated to determine whether a modification (such as a repricing) or cancellation has occurred [on an individual award basis].” The Company believes that application of conclusion (a) is appropriate under the circumstances observed during the period from 1993 through 2004.

Finalization of certain stock option grants was extended such that some employees exercised their stock options before the respective grant dates were finalized. In cases where exercises occurred before grant date finalization, the fair market value of the Company’s common stock on the exercise date of the stock options was utilized to determine the related amount of compensation expense. For these stock options, the Company concluded that the date of exercise was the most appropriate date for determining that the stock option grant was finalized, and the Company used the fair market value on the stock option exercise date to calculate compensation expense. There were 922 stock options found to have been exercised before the revised measurement dates were finalized.

For the repricings offered to employees in 1998, alternative measurement dates were required because employee elections to reprice stock options were not finalized at the time of the stated repricing effective dates. For the January 1998 repricing, dated employee election forms served as the primary basis for determining the alternative measurement dates for each employee. For the October 1998 repricing, the date of entry into the Equity Edge database was deemed the most appropriate date for each employee’s repricing election date.

Use of Judgment

In light of the significant judgment used by management in establishing revised measurement dates, alternative approaches to those used by the Company could have resulted in different stock-based compensation expenses than those recorded in the restated consolidated financial statements. The Company considered various alternative approaches and believes that the approaches used were the most appropriate under the circumstances.

Costs of Restatement and Legal Activities

The Company has incurred substantial expenses for legal, accounting, tax and other professional services in connection with the Audit Committee’s investigation, the Company’s internal review and recertification procedures, the preparation of the consolidated financial statements and the restated consolidated financial statements, the SEC and other government agency inquiries, and the derivative litigation. These expenses were approximately $5,100 for the three months ended March 31, 2007.

Restatement and Impact on Consolidated Financial Statements

As part of the restatement of the consolidated financial statements, the Company also recorded additional non-cash adjustments that were previously identified and considered to be immaterial. The cumulative after-tax benefit from recording these adjustments was $11,372 for the period from 1993 through 2005. These adjustments related primarily to the timing of revenue recognition and related reserves, recognition of grant benefits, accruals for litigation and other expenses, reversal of income tax expense related to unrealized foreign exchange translation gains and asset impairment charges.

- 16 -

As a result of the errors identified, the Company restated its historical results of operations from fiscal year 1993 through fiscal year 2005 to record $94,462 of additional stock-based compensation expense, and associated payroll tax expense, together with other accounting adjustments, net of related income tax effects. For 2005 and 2004, these errors resulted in an after-tax expense (benefit) to the statement of operations of $453 and $(8,806), respectively. Additionally, the cumulative effect of the related after-tax expenses for periods prior to 2004 was $102,815. These additional stock-based compensation and other expenses were non-cash and had no impact on our reported revenue, cash, cash equivalents or marketable securities for each of the restated periods.

Prior to fiscal year 2002, the Company determined that it was more likely than not that it would realize the benefits of the future deductible amounts related to stock-based compensation expense. As a result, the Company recorded a cumulative tax benefit of $37,888 through March 31, 2002. In fiscal year 2002, the Company recorded a valuation allowance of approximately $25,532, related to tax benefits recognized in prior periods on the incremental stock-based compensation expense, as management believed at that time, based on the weight of available evidence, it was more likely than not that the deferred tax assets would not be realized. As a result of the valuation allowance, the Company recorded no income tax benefit in periods subsequent to 2002 relating to the incremental stock-based compensation expense. The cumulative income tax benefit recorded by the Company for periods prior to 2006 was $12,356.

For those stock option grants determined to have incorrect measurement dates for accounting purposes and that had been originally issued as incentive stock options, or ISOs, the Company recorded a liability for payroll tax contingencies in the event such grants would not be respected as ISOs under the principles of the Internal Revenue Code (“IRC”) and the regulations thereunder. The Company recorded expense and accrued liabilities for certain payroll tax contingencies related to incremental stock-based compensation totaling $1,948 for all annual periods from our fiscal year 1993 through December 31, 2005. The Company recorded net payroll tax benefits in the amounts of $3,190 and $10,395 for our fiscal years 2005 and 2004, respectively. These benefits resulted from expiration of the related statute of limitations following payroll tax expense recorded in previous periods. The cumulative payroll tax expense for periods prior to fiscal year 2004 was $15,533.

The Company also considered the application of Section 409A of the IRC to certain stock option grants where, under APB No. 25, intrinsic value existed at the time of grant. In the event such stock options grants are not considered as issued at fair market value at the original grant date under principles of the IRC and the regulations thereunder and are subject to Section 409A, the Company is considering potential remedial actions that may be available. The Company does not expect to incur a material expense as a result of any such potential remedial actions.

Three of the Company’s stock option holders were subject to the December 31, 2006 deadline for Section 409A purposes. The Company is evaluating certain actions with respect to the outstanding options granted to non-officers and affected by Section 409A, as soon as possible after the filing of this Report.


					Adjustment to
					Income Tax
					Expense
					(Benefit)			Adjustment to
					Relating to			Stock-Based
	Adjustment to		Adjustment to		Stock-Based			Compensation		Other	Total
	Stock-Based		Payroll Tax		Compensation			Expense, Net of		Adjustments,	Restatement
	Compensation		Expense		and Payroll			Payroll and		Net of Income	Expense
Fiscal Year	Expense		(Benefit)		Tax Expense			Income Taxes		Taxes	(Benefit)
1993	$	268	$	1	$	(110	)	$	159
1994		556		151		(293	)		414
1995		1,944		688		(799	)		1,833
1996		3,056		1,735		(1,449	)		3,342
1997		5,520		1,968		(2,516	)		4,972

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The financial statement impact of the restatement on previously reported stock-based compensation expense, including income tax impact by year, is as follows (in thousands):


							Income Tax
	Stock-Based						Expense (Benefit)
	Compensation		Stock-Based		Stock-Based		Relating to			Stock-Based
	Expense		Compensation		Compensation		Stock-Based			Compensation
	as Previously		Expense		Expense, as		Compensation			Expense, Net of
Fiscal Year	Reported		Adjustments		Restated		Expense			Income Tax
1993	$	—	$	268	$	268	$	(110	)	$	158
1994		—		556		556		(230	)		326
1995		—		1,944		1,944		(527	)		1,417
1996		—		3,056		3,056		(780	)		2,276
1997		—		5,520		5,520		(1,740	)		3,780
1998		—		18,695		18,695		(5,889	)		12,806
1999		—		18,834		18,834		(6,228	)		12,606
2000		—		27,379		27,379		(8,770	)		18,609
2001		—		19,053		19,053		(5,385	)		13,668
2002		—		5,555		5,555		23,477			29,032
2003		3,301		12,416		15,717		—			15,717

Cumulative through December 31, 2003		3,301		113,276		116,577		(6,182	)		110,395

2004		—		1,405		1,405		—			1,405
2005		289		1,561		1,850		—			1,850

Total	$	3,590	$	116,242	$	119,832	$	(6,182	)	$	113,650

As a result of these adjustments, the Company’s audited consolidated financial statements and related disclosures as of December 31, 2005 and for the two years ended December 31, 2005, have been restated.

For explanatory purposes and to assist in analysis of the Company’s consolidated financial statements, the impact of the stock option and other adjustments that were affected by the restatement are summarized below:


	Total									Total
	Cumulative									Cumulative
	Adjustments									Adjustments
	through									through
	December 31,									December 31,
	2005			2005			2004			2003
Net loss as previously reported				$	(32,898	)	$	(2,434	)
Total additional stock-based compensation expense (benefit) resulting from:
Improper measurement dates for stock options	$	72,326			1,778			2,110		$	68,438
Stock option repricing errors		37,109			(472	)		(773	)		38,354
Other modifications to stock options		6,807			255			68			6,484
Payroll tax expense (benefit)		1,948			(3,190	)		(10,395	)		15,533

Total pre-tax stock option related adjustments		118,190			(1,629	)		(8,990	)		128,809
Income tax impact of stock option related adjustments		(12,356	)		—			—			(12,356	)

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The following table summarizes the stock-based compensation expenses and related payroll and income tax impact for the fiscal years 1993 through 2003 (in thousands):


Years Ended December 31,	2003			2002			2001			2000			1999			1998
Total additional stock-based compensation expense resulting from:
Improper measurement dates for stock options	$	3,368		$	10,032		$	12,249		$	14,574		$	12,622		$	5,275
Stock option repricing errors		8,539			(5,154	)		6,547			10,423			4,829			13,170
Other modifications to stock options		509			677			257			2,382			1,383			250
Payroll tax expense (benefit)		(1,980	)		1,603			1,655			7,209			1,832			671

Total pre-tax stock option related adjustments		10,436			7,158			20,708			34,588			20,666			19,366
Income tax charge (benefit)		—			23,477			(5,988	)		(11,576	)		(6,955	)		(6,147	)

Total stock option related adjustments, net of income taxes	$	10,436		$	30,635		$	14,720		$	23,012		$	13,711		$	13,219


Years Ended December 31,	1997			1996			1995			1994			1993
Total additional stock-based compensation expense resulting from:
Improper measurement dates for stock options	$	4,494		$	3,056		$	1,944		$	556		$	268
Stock option repricing errors		—			—			—			—			—
Other modifications to stock options		1,026			—			—			—			—
Payroll tax expense		1,968			1,735			688			151			1

Total pre-tax stock option related adjustments		7,488			4,791			2,632			707			269
Income tax benefit		(2,516	)		(1,449	)		(799	)		(293	)		(110	)

Total stock option related adjustments, net of income taxes	$	4,972		$	3,342		$	1,833		$	414		$	159

Government Inquiries Relating to Historical Stock Option Practices

In January 2007, the Company received a subpoena from the Department of Justice (“DOJ”) requesting information relating to its past stock option grants and related accounting matters. In August 2006, the Company received a letter from the SEC making an informal inquiry and request for information on the same subject matters. In August 2006, Atmel received Information Document Requests from the Internal Revenue Service (“IRS”) regarding Atmel’s investigation into misuse of corporate travel funds and investigation into backdating of stock options. The Company is cooperating fully with DOJ, SEC and IRS inquiries and intends to continue to do so. These inquiries likely will require the Company to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against the Company and the payment of significant fines and penalties by the Company, which may adversely affect the Company’s results of operations and cash flow. The Company cannot predict how long it will take or how much more time and resources it will have to expend to resolve these government inquiries, nor can the Company predict the outcome of these inquiries.

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Late SEC Filings and NASDAQ Delisting Proceedings

Due to the Audit Committee investigation and the resulting restatements, the Company did not file on time the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, the Annual Report on Form 10-K for the year ended December 31, 2006 and the Quarterly Reports on Form 10-Q for the quarter ended June 30, 2006 and the quarter ended March 31, 2007. As a result, the Company received four NASDAQ Staff Determination letters, dated May 14, 2007, March 8, 2007, November 14, 2006, and August 14, 2006, respectively, stating that it was not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that its stock was subject to delisting from the NASDAQ Global Select Market. In response to the first notice of non-compliance, the Company requested a hearing before a NASDAQ Listing Qualifications Panel (the “Panel”). Following the hearing, the Panel granted the Company’s request for continued listing subject to the requirements that Atmel provides the Panel with certain information relating to the Audit Committee’s investigation, which was subsequently submitted to the Panel, and that the Company files the Quarterly Reports on Form 10-Q for the quarters ended June 30 and September 30, 2006 and any necessary restatements by February 9, 2007. On January 22, 2007, the NASDAQ Listing and Hearing Review Council (the “Listing Council”) determined to call the matter for review. The Listing Council also determined to stay the Panel decision that required the Company to file the Quarterly Reports on Form 10-Q for the quarters ended June 30 and September 30, 2006, by February 9, 2007. In connection with the call for review, the Listing Council requested that the Company provide an update on its efforts to file the delayed reports, which it did on March 2, 2007. On May 10, 2007, the Company received the decision of the Listing Council in response to its request for continued listing on the NASDAQ Global Select Market. Specifically, the Listing Council granted the Company’s request for an extension within which to satisfy NASDAQ’s filing requirement, through June 8, 2007. On June 4, 2007, the Board of Directors of The NASDAQ Stock Market (the “Nasdaq Board”) informed the Company that it had been called the Listing Council’s decision for review and had determined to stay any decision to suspend the Company’s securities from trading, pending consideration by the Nasdaq Board in July 2007.

The following tables reflect the impact of the restatement on the Company’s condensed consolidated financial statements for the three months ended March 31, 2006:

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Condensed Consolidated Statement of Operations


													As Restated and
	As									Discontinued			Adjusted for
	Previously			Restatement			As			Operations			Discontinued
Quarter Ended March 31, 2006	Reported			Adjustments(2)			Restated			Adjustments(1)			Operations
(In thousands, except per share data)
Net revenues	$	436,784		$	—		$	436,784		$	(36,000	)	$	400,784
Operating expenses
Cost of revenues*		295,103			54			295,157			(20,755	)		274,402
Research and development*		70,698			(336	)		70,362			(2,211	)		68,151
Selling, general and administrative*		47,166			(111	)		47,055			(1,644	)		45,411
Restructuring charges		202			(51	)		151			—			151

Total operating expenses		413,169			(444	)		412,725			(24,610	)		388,115

Income from operations		23,615			444			24,059			(11,390	)		12,669
Interest and other expenses, net		(6,375	)		—			(6,375	)		(244	)		(6,619	)

Income from continuing operations before income taxes		17,240			444			17,684			(11,634	)		6,050
Benefit from (provision for) income taxes		(7,606	)		(5,370	)		(12,976	)		5,772			(7,204	)

Income (loss) from continuing operations		9,634			(4,926	)		4,708			(5,862	)		(1,154	)
Income from discontinued operations, net of income taxes		—			—			—			5,862			5,862

Net income (loss)	$	9,634		$	(4,926	)	$	4,708		$	—		$	4,708

Basic and diluted net income (loss) per common share:
Income (loss) from continuing operations	$	0.02		$	(0.01	)	$	0.01		$	(0.01	)	$	(0.00	)
Income from discontinued operations, net of income taxes		—			—			—			0.01			0.01

Net income (loss)	$	0.02		$	(0.01	)	$	0.01		$	—		$	0.01

Weighted-average shares used in basic net and diluted income (loss) per share calculations		485,576			485,576			485,576			485,576			485,576


*		Includes the following amounts related to stock-based compensation expense (benefit) (excluding payroll taxes):


	As
	Previously		Restatement			As
	Reported		Adjustments			Restated
Cost of revenues*	$	259	$	(346	)	$	(87	)
Research and development*		1,095		(336	)		759
Selling, general and administrative*		1,604		(163	)		1,441


(1)		Amounts have been adjusted to reflect the divestiture of the Company’s Grenoble, France, subsidiary. Results from the Grenoble subsidiary are classified as Discontinued Operations. See Note 8 of Notes to Consolidated Financial Statements for further discussion.

(2)		Restatement adjustments for stock-based compensation expense (benefit), relating to improper measurement dates, repricing errors, other stock option modifications and related payroll and income tax expense (benefit) impacts, as well as adjustments to accrued grant benefits.

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Condensed Consolidated Statement of Cash Flows

Three Months Ended March 31, 2006


	As
	previously			Adjustments			As
(In thousands)	reported			(2)			restated
Cash flows from operating activities
Net income	$	9,634		$	(4,926	)	$	4,708
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		59,825			—			59,825
Gain on sale of fixed assets		(1,465	)		—			(1,465	)
Provision for doubtful accounts receivable		84			—			84
Other non-cash losses		4,170			—			4,170
Accrued interest on zero coupon convertible debt		1,688			—			1,688
Accrued interest on other long-term debt		461			—			461
Stock-based compensation expense		2,958			—			2,958
Changes in operating assets and liabilities
Accounts receivable		(17,970	)		—			(17,970	)
Inventories		(5,399	)		(438	)		(5,837	)
Current and other assets		13,077			(6,591	)		6,486
Trade accounts payable		12,991			—			12,991
Accrued and other liabilities		1,459			11,955			13,414
Deferred income on shipments to distributors		1,298			—			1,298

Net cash provided by operating activities		82,811			—			82,811

Cash flows from investing activities
Acquisitions of fixed assets		(17,787	)		—			(17,787	)
Proceeds from the sale of fixed assets		2,323			—			2,323
Proceeds from the sale of interest in privately-held companies and other		1,799			—			1,799
Acquisitions of intangible assets		(209	)		—			(209	)
Purchases of short-term investments		(6,590	)		—			(6,590	)
Sales or maturities of short-term investments		1,054			—			1,054

Net cash used in investing activities		(19,410	)		—			(19,410	)

Cash flows from financing activities
Principal payments on capital leases and other debt		(27,969	)		—			(27,969	)
Issuance of common stock		5,983			—			5,983

Net cash used in financing activities		(21,986	)		—			(21,986	)

Effect of exchange rate changes on cash and cash equivalents		1,662			—			1,662

Net increase in cash and cash equivalents		43,077			—			43,077

Cash and cash equivalents at beginning of period		300,323			—			300,323

Cash and cash equivalents at end of period	$	343,400		$	—		$	343,400


(1)		Amounts have been adjusted to reflect the divestiture of the Company’s Grenoble, France, subsidiary. Results from the Grenoble subsidiary are reclassified as Results from Discontinued Operations. See Note 8 for further discussion.

(2)		Restatement adjustments for stock options relating to improper measurement dates, repricing errors, modifications and related payroll tax expense (benefit) impacts, as well as adjustments to accrued grant benefits and other inventory adjustments.

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Note 3 SHORT-TERM INVESTMENTS

Short-term investments at March 31, 2007 and December 31, 2006 primarily comprise U.S. and foreign corporate debt securities, U.S. Government and municipal agency debt securities, commercial paper, and guaranteed variable annuities.

All marketable securities are deemed by management to be available-for-sale and are reported at fair value. Net unrealized gains or losses that are not deemed to be other than temporary are reported within stockholders’ equity on the Company’s condensed consolidated balance sheets and as a component of accumulated other comprehensive income. Realized gains are recorded based on the specific identification method. During the three months ended March 31, 2007 and the year ended December 31, 2006, the Company had no net realized gains on short-term investments. The carrying amount of the Company’s investments is shown in the table below:


	March 31, 2007					December 31, 2006
	Book Value			Market Value		Book Value			Market Value

U.S. Government debt securities	$	1,106		$	1,104	$	1,400		$	1,396
State and municipal debt securities		3,450			3,450		3,450			3,450
Corporate equity securities		87			1,050		87			892
Corporate debt securities and other obligations		51,906			53,109		49,170			50,526

		56,549			58,713		54,107			56,264
Unrealized gains		2,172			—		2,176			—
Unrealized losses		(8	)		—		(19	)		—

Net unrealized gains		2,164			—		2,157			—

Total	$	58,713		$	58,713	$	56,264		$	56,264

Contractual maturities (at book value) of available-for-sale debt securities as of March 31, 2007, were as follows:


Due within one year	$	11,516
Due in 1-5 years		6,821
Due in 5-10 years		—
Due after 10 years		38,212

Total	$	56,549

Atmel has classified all investments with maturity dates of 90 days or more as short-term since it has the ability to redeem them within the year.

The following table shows the gross unrealized losses and fair value of the Company’s investments that have been in a continuous unrealized loss position for less than and greater than 12 months, aggregated by investment category as of March 31, 2007:


	Less than 12 months					Greater than 12 months
	Fair		Unrealized			Fair		Unrealized
	Value		losses			Value		losses

U.S. government and agency securities	$	—	$	—		$	998	$	(2	)
Corporate and municipal debt securities		8,125		(6	)		—		—

	$	8,125	$	(6	)	$	998	$	(2	)

The Company considers the unrealized losses in the table above to not be “other than temporary” due primarily to their nature, quality and short-term holding.

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Note 4 INTANGIBLE ASSETS

Intangible assets as of March 31, 2007, consisted of the following:


	Gross		Accumulated			Net
	Assets		Amortization			Assets
Core / licensed technology	$	89,804	$	(84,972	)	$	4,832
Non-compete agreement		306		(306	)		—
Patents		1,377		(1,377	)		—

Total Intangible Assets	$	91,487	$	(86,655	)	$	4,832

Intangible assets as of December 31, 2006, consisted of the following:


	Gross		Accumulated			Net
	Assets		Amortization			Assets
Core / licensed technology	$	89,581	$	(83,557	)	$	6,024
Non-compete agreement		306		(306	)		—
Patents		1,377		(1,377	)		—

Total intangible assets	$	91,264	$	(85,240	)	$	6,024

Amortization expense for intangible assets for the three months ended March 31, 2007 and 2006, totaled $1,193 and $1,578, respectively. The following table presents the estimated future amortization of the intangible assets:


Years Ending December 31:
2007 (April 1 through December 31)	$	3,430
2008		1,203
2009		149
2010		45
2011		5

Total future amortization	$	4,832

Note 5 BORROWING ARRANGEMENTS

Information with respect to Atmel’s debt and capital lease obligations as of March 31, 2007 and December 31, 2006 is shown in the following table:


	2007			2006
Various interest-bearing notes	$	67,091		$	80,550
Bank lines of credit		25,000			25,000
Capital lease obligations		54,337			63,434

Total		146,428			168,984
Less: current portion of long-term debt		(36,357	)		(38,311	)
Less: debt obligations included in current liabilities related to assets held for sale		(58,050	)		(70,340	)

Long-term debt and capital lease obligations due after one year	$	52,021		$	60,333

Long-term debt and capital lease obligations due after one year at March 31, 2007 and December 31, 2006 consist of the following:

- 26 -


	2007		2006
Long-term debt less current portion	$	51,830	$	60,020
Debt obligations included in non-current liabilities related to assets held for sale		191		313

Long-term debt and capital lease obligations due after one year	$	52,021	$	60,333

Maturities of long-term debt and capital lease obligations are as follows:


Year ending December 31,
2007 (April 1 through December 31)	$	95,161
2008		44,166
2009		6,901
2010		5,735
2011		4,632
Thereafter		3,070

		159,665
Less: amount representing interest		(13,237	)

Total	$	146,428

Certain of the Company’s debt facilities contain terms that subject the Company to financial and other covenants. The Company was not in compliance with covenants requiring timely filing of U.S. GAAP financial statements as of March 31, 2007, and, as a result, the Company requested waivers from its lenders to avoid default under these facilities. Waivers were not received from all lenders, and as a result, the Company reclassified $15,499 of non-current liabilities related to assets held for sale to current liabilities related to assets held for sale on the condensed consolidated balance sheet as of March 31, 2007.

On June 30, 2006, the Company entered into a 3-year term loan agreement for $25,000 with a European bank to finance equipment purchases. The interest rate on this loan is based on the London Interbank Offered Rate (“LIBOR”) plus 2.5%. Principal repayments are to be made in equal quarterly installments beginning September 30, 2006. The loan is collateralized by the financed assets and is subject to certain cross-default provisions. As of March 31, 2007, the outstanding balance on the term loan was $18,750 and was classified as an interest bearing note in the summary debt table above. As of March 31, 2007, the Company was not in compliance with this facility’s covenants and did not obtain a waiver from the lender. As a result of not receiving a waiver, the Company reclassified $10,417 (included within the $15,499 above) from non-current liabilities related to assets held for sale to current liabilities related to assets held for sale on the condensed consolidated balance sheet as of March 31, 2007.

On March 15, 2006, the Company entered into a five-year asset-backed credit facility for up to $165,000 with certain European lenders. This facility is secured by the Company’s non-U.S. trade receivables. At March 31, 2007, the amount available under this facility was $112,278, based on eligible non-U.S. trade receivables. Borrowings under the facility bear interest at LIBOR plus 2% per annum, while the undrawn portion is subject to a commitment fee of 0.375% per annum. The terms of the facility subject the Company to certain financial and other covenants and cross-default provisions. As of March 31, 2007, there were no amounts outstanding under this facility. Commitment fees and amortization of up-front fees paid related to the Facility for the three months ended March 31, 2007 and 2006 totaled $402 and $54, respectively, and are included in interest and other expenses, net, in the condensed consolidated statements of operations. As of March 31, 2007, the Company was not in compliance with the facility’s covenants but obtained a waiver from the lender.

In September 2005, the Company obtained a $15,000 term loan with a domestic bank. This term loan matures in September 2008. The interest rate on this term loan is LIBOR plus 2.25%. In December 2004, the Company had obtained a term loan with the same domestic bank in the amount of $20,000. Concurrent to this, the Company established a $25,000 revolving line of credit with this domestic bank, which has been extended until September 2008. The term loan matures in December 2007. The interest rate on the revolving line of credit is determined by the Company and must be either the domestic bank’s prime rate or LIBOR plus 2%. The interest rate on the term loan is 90-day euro Interbank Offered Rate (“EURIBOR”) plus 2.0%. All U.S. domestic account receivable balances secure amounts borrowed. The revolving line of credit and both term loans require the Company to meet certain financial ratios and to comply with other covenants on a periodic basis. As of March 31, 2007, the full $25,000 of

- 27 -

the revolving line of credit was outstanding and $12,536 of the term loans was outstanding and was classified as an interest bearing note in the summary debt table above. As of March 31, 2007, the Company was not in compliance with the Facility’s covenants but obtained a waiver from the lender effective through August 31, 2007.

In June 2005, the Company entered into a euro 43,156 ($52,237) term loan agreement with a domestic bank. The interest rate is fixed at 4.10%. The Company has pledged certain manufacturing equipment as collateral. The loan is required to be repaid in equal installments of euro 3,841($4,649) per calendar quarter commencing on September 30, 2005, with the final payment due on June 28, 2008. As of March 31, 2007, the outstanding balance on the loan was $24,899 and was classified as an interest-bearing note in the summary debt table above. As of March 31, 2007, the Company was not in compliance with this facility’s covenants and did not obtain a waiver from the lender. As a result of not receiving a waiver, the Company reclassified $5,082 (included in the $15,499 above) from non-current liabilities related to assets held for sale to current liabilities related to assets held for sale on the condensed consolidated balance sheet as of March 31, 2007.

In February 2005, the Company entered into an equipment financing arrangement in the amount of euro 40,685 ($54,005) which is repayable in quarterly installments over three years. The stated interest rate is EURIBOR plus 2.25%. This equipment financing is collateralized by the financed assets. As of March 31, 2007, the balance outstanding under the arrangement was $18,931 and was classified as a capital lease.

In September 2004, the Company entered into a euro 32,421 ($40,274) loan agreement with a European bank. The loan is to be repaid in equal principal installments of euro 970 ($1,205) per month plus interest on the unpaid balance, with the final payment due on October 1, 2007. The interest rate is fixed at 4.85%. The Company has pledged certain manufacturing equipment as collateral. This note requires Atmel to meet certain financial ratios and to comply with other covenants on a periodic basis. As of March 31, 2007, the outstanding balance on the loan was $8,927 and was classified in current liabilities as an interest-bearing note in the summary debt table above. The Company was not in compliance with the covenants as of March 31, 2007.

The Company’s remaining $37,384 in outstanding debt obligations as of March 31, 2007 are comprised of $35,406 in capital leases and $1,978 in an interest bearing note. Included within the outstanding debt obligations are $99,008 of variable-rate debt obligations where the interest rates are based on either the LIBOR plus a spread ranging from 2.0% to 2.5% or the short-term EURIBOR plus a spread ranging from 0.9% to 2.25%. Approximately $109,044 of the Company’s total debt obligations have cross default provisions.

Note 6 RETIREMENT PLANS

The Company sponsors defined benefit pension plans that cover substantially all French and German employees. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. The plans are unfunded. Pension liabilities and charges to expense are based upon various assumptions, updated quarterly, including discount rates, future salary increases, employee turnover, and mortality rates.

Retirement Plans consist of two types of plans. The first plan type provides for termination benefits paid to employees only at retirement, and consists of approximately one to five months of salary. This structure covers the Company’s French employees. The second plan type provides for defined benefit payouts for the remaining employee’s post-retirement life, and covers the Company’s German employees.

The aggregate net pension expense relating to the two plan types for the three months ended March 31, 2007 and 2006, are as follows:

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	Three Months Ended March 31,
	2007		2006
Service costs-benefits earned during the period	$	1,097	$	727
Interest cost on projected benefit obligation		380		574
Amortization of actuarial loss		43		134

Net pension cost	$	1,520	$	1,435


Distribution of pension costs
Continuing operations	$	1,520	$	1,300
Discontinued operations		—		135

Net pension cost	$	1,520	$	1,435

Amounts for the three months ended March 31, 2006 have been adjusted to reflect the divestiture of the Company’s Grenoble, France, subsidiary in July 2006. Results from the Grenoble subsidiary were classified within Results from Discontinued Operations for the three months ended March 31, 2006. See Note 8 for further discussion.

The Company made $976 and $510 in benefit payments during the three months ended March 31, 2007 and 2006, respectively.

The Company’s pension liability represents the present value of estimated future benefits to be paid. With respect to the Company’s unfunded plans in Europe, during 2007, an increase in the discount rate assumption and a decrease in inflation rate assumptions used to calculate the present value of the pension obligation resulted in a decrease in the pension liability of $2,496. This result in a benefit net of tax, of $1,589, which was credited to stockholders’ equity in the condensed consolidated balance sheet as of March 31, 2007, in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

Executive Deferred Compensation Plan

The Atmel Executive Deferred Compensation Plan is a non-qualified deferred compensation plan allowing certain executives to defer a portion of their salary and bonus. Participants are credited with returns based on the allocation of their account balances among mutual funds. The Company utilizes an investment advisor to control the investment of these funds and the participants remain general creditors of the Company. Distributions from the plan commence in the quarter following a participant’s retirement or termination of employment. The Company accounts for the Executive Deferred Compensation Plan in accordance with EITF No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested” (“EITF No. 97-14”). In accordance with EITF No. 97-14, the liability associated with the other diversified assets is being marked to market with the offset being recorded as compensation expense, primarily selling, general and administrative expense, to the extent there is an increase in the value, or a reduction of operating expense, primarily selling, general and administrative expense, to the extent there is a decrease in value. The other diversified assets are marked to market with the offset being recorded as other income (expense), net.

At March 31, 2007, and December 31, 2006, the Company’s deferred compensation plan assets totaled $3,758 and $3,771, respectively, and are included in other current assets on the condensed consolidated balance sheets and the corresponding deferred compensation plan liability at March 31, 2007, and December 31, 2006, totaled $3,578 and $3,771, respectively, and are included in other current liabilities on the condensed consolidated balance sheets.

- 29 -

Note 7 RESTRUCTURING AND OTHER CHARGES AND LOSS ON SALE

The following table summarizes the activity related to the accrual for restructuring and other charges and loss on sale detailed by event for the three months ended March 31, 2007 and the year ended December 31, 2006.


	January 1,							March 31,
	2007							2007
*(in thousands)*	Accrual		Charges		Payments			Accrual
Third quarter of 2002
Termination of contract with supplier	$	8,896	$	—	$	(249	)	$	8,647
Fourth quarter of 2005
Nantes fabrication facility sale		115		—		—			115
Fourth quarter of 2006
Employee termination costs		7,490		—		(1,436	)		6,054
Grant contract termination costs		30,034		—		—			30,034
First quarter of 2007
Employee termination costs		—		1,782		(307	)		1,475

Total 2007 activity	$	46,535	$	1,782	$	(1,992	)	$	46,325


	January 1,							December 31,
	2006							2006
*(in thousands)*	Accrual		Charges		Payments			Accrual

Third quarter of 2002
Termination of contract with supplier	$	9,833	$	—	$	(937	)	$	8,896
Third quarter of 2005
Employee termination costs		1,246		—		(1,246	)		—
Fourth quarter of 2005
Nantes fabrication facility sale		1,310		—		(1,195	)		115
Employee termination costs		1,223		—		(1,223	)		—
First quarter of 2006
Employee termination costs		—		151		(151	)		—
Fourth quarter of 2006									—
Employee termination costs		—		8,578		(1,088	)		7,490
Grant contract termination costs		—		30,034		—			30,034

Total 2006 activity	$	13,612	$	38,763	$	(5,840	)	$	46,535	(1)


(1)		As a result of the expected timing of payments, $26,475 is recorded in current liabilities related to assets held for sale, $12,185 of this accrual is recorded in accrued and other liabilities, and $7,875 is recorded in other long-term liabilities.

2007 Restructuring Charges

In the first quarter of 2007, the Company continued to implement the restructuring initiative announced in the fourth quarter of 2006 and incurred restructuring charges of $1,782. The charges directly relating to this initiative consist of the following:

	•		$1,285 in termination benefits recorded in accordance with SFAS No. 112, “Employers’ Accounting for Post Employment Benefits” (“SFAS No. 112). These costs related to additional employee severance costs for employees in Europe.

	•		$497 in severance costs related to the involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities” (SFAS No. 146”).

- 30 -

2006 Restructuring Activities

In the first quarter of 2006, the Company incurred $151 in restructuring charges primarily comprised of severance and one-time termination benefits.

In the fourth quarter of 2006, the Company announced a restructuring initiative to focus on high growth, high margin proprietary product lines and optimize manufacturing operations. This restructuring plan will impact employees across multiple business functions and in several locations. The charges directly relating to this initiative consist of the following:

	•		$6,897 in one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112. These costs related to the termination of employees in Europe.

	•		$1,681 in one-time severance costs related to the involuntary termination of employees primarily in manufacturing, research and development and administration. These benefits costs were recorded in accordance with SFAS No. 146.

In 2006, the Company paid $1,239 related to employee termination costs incurred in 2006.

In conjunction with the Company’s restructuring efforts in the third quarter of 2002, the Company incurred a $12,437 charge related to the termination of a contract with a supplier. The charge was estimated using the present value of the future payments which totaled approximately $18,112 at the time. At March 31, 2007, the remaining restructuring accrual was $8,647 and will be paid over the next 7 years. The current balance is recorded with current liabilities in accrued and other liabilities on the condensed consolidated balance sheet. The long-term balance is recorded in other long-term liabilities on the condensed consolidated balance sheet.

Other Charges

In the fourth quarter of 2006, the Company announced its intention to close its design facility in Greece and its intention to sell its facility in North Tyneside, United Kingdom. The Company recorded a charge of $30,034 in the fourth quarter of 2006 associated with the expected future repayment of subsidy grants pursuant to the grant agreements with government agencies at these locations.

Note 8 DISCONTINUED OPERATIONS

Grenoble, France, Subsidiary Sale

The Company’s condensed consolidated financial statements and related footnote disclosures reflect the results of the Company’s Grenoble, France, subsidiary as Discontinued Operations, net of applicable income taxes, for all reporting periods presented.

In July 2006, Atmel completed the sale of its Grenoble, France, subsidiary to e2v technologies plc, a British corporation (“e2v”). On August 1, 2006, the Company received $140,000 in cash upon closing ($120,073, net of working capital adjustments and costs of disposition).

The facility was originally acquired in May 2000 from Thomson-CSF, and was used to manufacture image sensors, as well as analog, digital and radio frequency ASICs.

Technology rights and certain assets related to biometry or “Finger Chip” technology were excluded from the sale. As of July 31, 2006, the facility employed a total of 519 employees, of which 14 employees primarily involved with the Finger Chip technology were retained, and the remaining 505 employees were transferred to e2v.

- 31 -

In connection with the sale, Atmel agreed to provide certain technical support, foundry, distribution and other services extending up to four years following the completion of the sale, and in turn e2v has agreed to provide certain design and other services to Atmel extending up to 5 years following the completion of the sale. The financial statement impact of these agreements is not expected to be material to the Company. The ongoing cash flows between Atmel and e2v are not significant and as a result, the Company has no significant continuing involvement in the operations of the subsidiary. Therefore, the Company has met the criteria in SFAS No. 144, which were necessary to classify the Grenoble, France, subsidiary as discontinued operations.

Included in other currents assets on the condensed consolidated balance sheet as of March 31, 2007, is an outstanding receivable balance due from e2v of $11,618 related to payments advanced to e2v to be collected from customers of e2v by Atmel. The transitioning of the collection of trade receivables on behalf of e2v is expected to be completed in 2007.

The following table summarizes results from Discontinued Operations for the periods indicated included in the condensed consolidated statement of operations:


	March 31,
Three Months Ended:	2006

Net revenues	$	36,000
Operating costs and expenses		24,366

Income from discontinued operations, before income taxes		11,634
Less: provision for income taxes		(5,772	)

Income from discontinued operations, net of income taxes	$	5,862

Income from discontinued operations, net of income taxes, per common share:
Basic and Diluted	$	0.01

Weighted-average shares used in basic and diluted income per share calculations		485,576

Note 9 ASSETS HELD FOR SALE AND IMPAIRMENT CHARGES

Under Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) the Company assesses the recoverability of long-lived assets with finite useful lives whenever events or changes in circumstances indicate that the Company may not be able to recover the asset’s carrying amount. The Company measures the amount of impairment of such long-lived assets by the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. The Company classifies long-lived assets to be disposed of other than by sale as held and used until they are disposed. The Company reports assets and liabilities to be disposed of by sale as held for sale and recognizes those assets and liabilities on the condensed consolidated balance sheet at the lower of carrying amount or fair value, less cost to sell. These assets are not depreciated.

The Company classified the assets and liabilities of the North Tyneside, United Kingdom, facility and the assets of the Irving, Texas, facility as held for sale during the quarter ended December 31, 2006. Following the sale of the North Tyneside facility, the Company expects to incur significant continuing cash flows with the disposed entity and, as a result, does not expect to meet the criteria to classify the results of operations as well as assets and liabilities as discontinued operations. The Irving facility does not qualify as discontinued operations as it is an idle facility and does not constitute a component of an entity in accordance with SFAS No. 144.

The following table details the items which are reflected as assets and liabilities held for sale in the condensed consolidated balance sheets as of March 31, 2007 and December 31, 2006:

- 32 -

Held for Sale at March 31, 2007:


	North
	Tyneside		Irving		Total
Non-current assets
Fixed assets, net	$	89,970	$	35,040	$	125,010
Intangible and other assets		696		—		696

Total non-current assets held for sale	$	90,666	$	35,040	$	125,706


Current liabilities
Current portion of long-term debt	$	58,050	$	—	$	58,050
Trade accounts payable		16,958		—		16,958
Accrued liabilities and other		44,822		—		44,822

Total current liabilities related to assets held for sale		119,830		—		119,830

Long-term debt and capital lease obligations less current portion		191		—		191

Total non-current liabilities related to assets held for sale		191		—		191

Total liabilities related to assets held for sale	$	120,021	$	—	$	120,021

Held for Sale at December 31, 2006:


	North
	Tyneside		Irving		Total

Non-current assets
Fixed assets, net	$	87,941	$	35,040	$	122,981
Intangible and other assets		816		—		816

Total non-current assets held for sale	$	88,757	$	35,040	$	123,797


Current liabilities
Current portion of long-term debt	$	70,340	$	—	$	70,340
Trade accounts payable		17,329		—		17,329
Accrued liabilities and other		46,224		—		46,224

Total current liabilities related to assets held for sale		133,893		—		133,893
Long-term debt and capital lease obligations less current portion		313		—		313

Total non-current liabilities related to assets held for sale		313		—		313

Total liabilities related to assets held for sale	$	134,206	$	—	$	134,206

Irving, Texas, Facility

The Company acquired its Irving, Texas, wafer fabrication facility in January 2000 for $60,000 plus $25,000 in additional costs to retrofit the facility after the purchase. Following significant investment and effort to reach commercial production levels, the Company decided to close the facility in 2002 and it has been idle since then. Since 2002, we recorded various impairment charges, including $3,980 during the quarter ended December 31, 2005. In the quarter ended December 31, 2006, the Company performed an assessment of the market value for this facility based on management’s estimate, which considered a current offer from a willing third party to purchase the facility, among other factors, in determining fair market value. Based on this assessment, an additional impairment charge of $10,305 was recorded.

On May 1, 2007, the Company announced the sale of its Irving, Texas, wafer fabrication facility for approximately $36,500 in cash. The sale of the facility includes approximately 39 acres of land, the fabrication facility building, and related offices, and remaining equipment. An additional 17 acres was retained by the Company. The Company does not expect to record a material gain or loss on the sale, following the impairment charge recorded in the fourth quarter of 2006.

North Tyneside, United Kingdom, and Heilbronn, Germany, Facilities

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In December 2006, the Company announced its decision to sell its wafer fabrication facilities in North Tyneside, United Kingdom, and Heilbronn, Germany. It is expected these actions will increase manufacturing efficiencies by better utilizing remaining wafer fabrication facilities, while reducing future capital expenditure requirements. The Company has classified assets of the North Tyneside site with a net book value of approximately $90,666 and $88,757 (excluding cash and inventory which will not be included in any sale of the facility) as assets held-for-sale on the condensed consolidated balance sheet as of March 31, 2007 and December 31, 2006, respectively. Following the announcement of intention to sell the facility in the fourth quarter of 2006, the Company assessed the fair market value of the facility compared to the carrying value recorded, including use of an independent appraisal, among other factors. The fair value was determined using a market-based valuation technique and estimated future cash flows. The Company recorded a net impairment charge of $72,277 in the quarter ended December 31, 2006 related to the write-down of long lived assets to their estimated fair values, less costs to dispose of the assets. The charge included an asset write-down of $170,002 for equipment, land and buildings, offset by related currency translation adjustment associated with the assets, of $97,725, as the Company intends to sell its United Kingdom entity, which contains the facility, and hence the currency translation adjustment related to the assets is included in the impairment calculation.

The Company acquired the North Tyneside, United Kingdom, facility in September 2000, including an interest in 100 acres of land and the fabrication facility of approximately 750,000 square feet, for approximately $100,000. The Company will have the right to acquire title to the land in 2016 for a nominal amount. The Company sold 40 acres in 2002 for $13,900. The Company recorded an asset impairment charge of $317,927 in the second quarter of 2002 to write-down the carrying value of equipment in the fabrication facilities in North Tyneside, United Kingdom, to its estimated fair value. The estimate of fair value was made by management based on a number of factors, including an independent appraisal.

The Heilbronn, Germany, facility did not meet the criteria for classification as held-for-sale as of March 31, 2007 or December 31, 2006, due to uncertainties relating to the likelihood of completing the sale within the next twelve months. After an assessment of expected future cash flows generated by the Heilbronn, Germany facility, the Company concluded that no impairment exists.

Note 10 STOCK-BASED COMPENSATION

Option and Employee Stock Purchase Plans

Atmel has two stock option plans — the 1986 Stock Plan and the 2005 Stock Plan (an amendment and restatement of the 1996 Stock Plan). The 1986 Stock Plan expired in April 1996. The 2005 Stock Plan was approved by stockholders on May 11, 2005. As of March 31, 2007, of the 56,000 shares authorized for issuance under the 2005 Stock Plan, 12,913 shares of common stock remain available for grant. Under Atmel’s 2005 Stock Plan, Atmel may issue common stock directly or grant options to purchase common stock to employees, consultants and directors of Atmel. Options, which generally vest over four years, are granted at fair market value on the date of the grant and generally expire ten years from that date.

Activity under Atmel’s 1986 Stock Plan and 2005 Stock Plan is set forth below:


				Outstanding Options
												Weighted-
							Exercise		Aggregate			Average
	Available			Number of			Price		Exercise			Exercise Price
	For Grant			Options			Per Share		Price			Per Share
Balances, December 31, 2006		13,300			31,320		$	1.68 – 24.44	$	181,480		$	5.79
Options granted		(608	)		608			5.20 – 6.05		3,632			5.97
Options forfeited		221			(221	)		1.98 – 19.81		(1,111	)		5.03
Options exercised		—			—			—		—			—

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Outstanding Options

Weighted-

Exercise

Aggregate

Average

Available

Number of

Price

Exercise

Exercise Price

For Grant

Options

Per Share

Price

Per Share

Balances, March 31, 2007

12,913

31,707

1.68 – 24.44

184,001

5.80

The following table summarizes the stock options outstanding at March 31, 2007:


	Options Outstanding										Options Exercisable
					Weighted-								Weighted-
					Average		Weighted-						Average		Weighted-
	Range of				Remaining		Average		Aggregate				Remaining		Average		Aggregate
	Exercise		Number		Contractual		Exercise		Intrinsic		Number		Contractual		Exercise		Intrinsic
	Prices		Outstanding		Term (years)		Price		Value		Exercisable		Term (years)		Price		Value
	$	1.68 – 2.06		2,623		2.19	$	1.98	$	8,000		2,456		1.79	$	1.98	$	7,491
		2.11 – 2.13		3,493		5.78		2.11		10,200		2,539		5.70		2.11		7,414
		2.26 – 3.29		3,684		7.89		3.09		7,147		1,455		7.74		3.06		2,866
		3.33 – 5.03		3,916		7.91		4.61		1,645		1,033		4.58		4.06		1,002
		5.05 – 5.73		2,925		9.05		5.63		—		453		6.72		5.42		—
		5.75 – 6.05		4,395		6.89		5.79		—		2,609		6.35		5.76		—
		6.09 – 7.38		5,153		8.46		6.40		—		1,203		4.64		6.73		—
		7.69 – 24.44		5,518		3.52		12.16		—		5,422		3.49		12.24		—

Totals	$	1.68 – 24.44		31,707		6.49	$	5.80	$	26,992		17,170		4.60	$	6.45	$	18,773

No options were exercised during the three months ended March 31, 2007.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


	Three Months Ended
	March 31,			March 31,
	2007			2006

Risk-free interest rate		4.54	%		4.83	%
Expected life (years)		5.98			5.99
Expected volatility		64	%		72	%
Expected dividend yield		0.0	%		0.0	%

The Company’s weighted-average assumptions during the three months ended March 31, 2007 and 2006 were determined in accordance with SFAS No. 123R and are further discussed below.

The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and was derived based on an evaluation of the Company’s historical settlement trends, including an evaluation of historical exercise and expected post-vesting employment-termination behavior. The expected life of employee stock options impacts all underlying assumptions used in the Company’s Black-Scholes option-pricing model, including the period applicable for risk-free interest and expected volatility.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the Company’s employee stock options.

The Company calculates the historic volatility over the expected life of the employee stock options and believes this to be representative of the Company’s expectations about its future volatility over the expected life of the option.

The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

The weighted-average estimated fair values of options granted in the three months ended March 31, 2007 and 2006 were $3.74 and $2.73, respectively.

The adoption of SFAS No. 123R did not impact the Company’s methodology to estimate the fair value of share-based payment awards under the Company’s ESPP. The fair value of each purchase under the ESPP is estimated on

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the date of the beginning of the offering period using the Black-Scholes option pricing model. There were no ESPP offering periods that began in the three months ended March 31, 2007 or 2006.

The components of the Company’s stock-based compensation expense, net of amounts capitalized in inventory, for the three months ended March 31, 2007 and 2006 are summarized below:


	Three Months Ended
	March 31,		March 31,
	2007		2006

Employee stock options	$	3,275	$	2,527
Employee stock purchase plan		—		302
Non-employee stock option modifications		—		29
Amounts liquidated from (capitalized in) inventory		35		(438	)

	$	3,310	$	2,420

SFAS No. 123R requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. The future realizability of tax benefits related to stock compensation is dependent upon the timing of employee exercises and future taxable income, among other factors. The Company did not realize any tax benefit from the stock-based compensation expense incurred during the three months ended March 31, 2007 or 2006, as the Company believes it is more likely than not that it will not realize the benefit from tax deductions related to equity compensation.

The following table summarizes the distribution of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS No. 123R for the three months ended March 31, 2007 and 2006 which was recorded as follows:


	Three Months Ended
	March 31,		March 31,
	2007		2006

Cost of revenues	$	526	$	287
Research and development		780		712
Selling, general and administrative		2,004		1,392

Total stock-based compensation expense, before income taxes		3,310		2,391
Tax benefit		—		—

Total stock-based compensation expense, net of income taxes	$	3,310	$	2,391

Non-employee stock-based compensation expense (based on fair value) included in net income for the three months ended March 31, 2007 and 2006 was $0 and $29, respectively.

Employee Stock Purchase Plan

Under the 1991 Employee Stock Purchase Plan (“ESPP”), qualified employees are entitled to purchase shares of Atmel’s common stock at the lower of 85 percent of the fair market value of the common stock at the date of commencement of the six-month offering period or at the last day of the offering period. Purchases are limited to 10% of an employee’s eligible compensation. There were no purchases under the ESPP for the three months ended March 31, 2007. Purchases under the ESPP were 2,096 shares of common stock during the three months ended March 31, 2006 at a price of $1.84 per share. Of the 42,000 shares authorized for issuance under this plan, 9,320 shares were available for issuance at March 31, 2007.

Note 11 ACCUMULATED OTHER COMPREHENSIVE INCOME

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Comprehensive income (loss) is defined as a change in equity of a company during a period, from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The primary difference between net income (loss) and comprehensive income for Atmel arises from foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains on investments.

The components of accumulated other comprehensive income at March 31, 2007 and December 31, 2006, net of tax are as follows:


	March 31,			December 31,
	2007			2006

Foreign currency translation	$	114,833		$	110,766
Defined benefit pension plans		(4,097	)		(5,686	)
Net unrealized gains on investments		2,164			2,157

Total accumulated other comprehensive income	$	112,900		$	107,237

The components of comprehensive income (loss) for the three months ended March 31, 2007 and 2006, are as follows:


	Three Months ended
	March 31,
	2007		2006
			As restated
Net income	$	28,940	$	4,708

Other comprehensive income:
Foreign currency translation adjustments		4,067		19,387
Unrecognized gains related to defined benefit pension plans		1,589		1,404
Unrealized gain on investments		7		1,079

Other comprehensive income		5,663		21,870

Total comprehensive income	$	34,603	$	26,578

Note 12 NET INCOME PER SHARE

Basic net income per share is calculated by using the weighted-average number of common shares outstanding during that period. Diluted net income per share is calculated giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options and convertible securities for all periods. No dilutive potential common shares were included in the computation of any diluted per share amount when a loss from continuing operations was reported by the Company. The Company utilizes income or loss from continuing operations as the “control number” in determining whether potential common shares are dilutive or anti-dilutive.

A reconciliation of the numerator and denominator of basic and diluted net income per share for both continuing and discontinued operations is provided as follows:


Three Months Ended March 31,	2007		2006
			As restated
Income (loss) from continuing operations	$	28,940	$	(1,154	)
Income from discontinued operations, net of income taxes		—		5,862

Net income	$	28,940	$	4,708


Weighted-average common shares — basic		488,842		485,576
Incremental common shares attributable to exercise of outstanding options		5,356		—

Weighted-average common shares — diluted		494,198		485,576

Earnings per share:

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Three Months Ended March 31,	2007		2006
			As restated
Basic
Income (loss) from continuing operations	$	0.06	$	(0.00	)
Discontinued operations		—		0.01

Net income per common share — basic	$	0.06	$	0.01
	2007		2006
Diluted
Income (loss) from continuing operations	$	0.06	$	(0.00	)
Discontinued operations		—		0.01
	2007		2006
Net income per common share — diluted	$	0.06	$	0.01
	2007		2006

The following table summarizes securities which were not included in the “Weighted-average shares — diluted” used for calculation of diluted net income per share, as their effect would have been antidilutive:


Three Months Ended March 31,	2007			2006
				As restated
Employee stock options outstanding		31,747			29,687
Incremental common shares attributable to exercise of outstanding options		(5,356	)		—
	2007			2006
Employee stock options excluded from per share calculation		26,391			29,687
	2007			2006
Common stock equivalent shares associated with:
Convertible notes due 2018		—			17
Convertible notes due 2021		—			3,299
	2007			2006
Total shares excluded from per share calculation		26,391			33,003
	2007			2006

The calculation of dilutive or potentially dilutive common shares related to the Company’s convertible securities considers the conversion features associated with these securities. Conversion features were considered, as at the option of the holders, the 2018 and 2021 convertible notes are convertible at any time, into the Company’s common stock at the rate of 55.932 shares per $1 (one thousand dollars) principal amount and 22.983 shares per $1 (one thousand dollars) principal amount, respectively. In this scenario, the “if converted” calculations are based upon the average outstanding convertible note balance for the three months ended March 31, 2006 and the respective conversion ratios. These convertible notes were redeemed in full in 2006.

Note 13 INTEREST AND OTHER INCOME (EXPENSES), NET

Interest and other income (expenses), net, is summarized in the following table:


	Three months ended
	March 31,
	2007			2006

Interest and other income	$	4,896		$	5,183
Interest expense		(3,489	)		(6,199	)
Foreign exchange transaction losses		(428	)		(5,603	)

Total	$	979		$	(6,619	)

For the three months ended March 31, 2006, interest and other expenses, net related to the Company’s Grenoble, France, subsidiary and included in Discontinued Operations totaled $244 (see Note 8 for further discussion).

Note 14 INCOME TAXES

For the three months ended March 31, 2007, the Company recorded an income tax benefit of $15,164, compared to an income tax expense of $7,204 for the three months ended March 31, 2006.

The provision for income taxes for these periods was determined using the annual effective tax rate method for Atmel entities that are profitable. Entities that had operating losses with no tax benefit were excluded. As a result, excluding the impact of discrete tax events during the quarter, the provision for income taxes was at a higher consolidated effective rate than would have resulted if all entities were profitable or if losses produced tax benefits.

In the three months ended March 31, 2007, the Company recognized a tax benefit of $19,549 resulting from the refund of French research tax credits for years 1999 through 2002, which was received during the quarter. In addition, in the three months ended March 31, 2007, the Hong Kong tax authorities completed a review of the Company’s tax returns for the years 2001 through 2004, which resulted in no adjustments. As a result, during the quarter, the Company recognized a tax benefit relating to a tax refund of $1,500 received in prior years.

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In 2005, the Internal Revenue Service (“IRS”) proposed adjustments to the Company’s U.S. income tax returns for the years 2000 and 2001. In January 2007, after subsequent discussions with the Company, the IRS revised the proposed adjustments for these years. The Company has protested these proposed adjustments and is currently pursuing administrative review with the IRS Appeals Division.

In May 2007, the IRS proposed adjustments to the Company’s U.S. income tax returns for the years 2002 and 2003. The Company will file a protest to these proposed adjustments and will pursue administrative review with the IRS Appeals Division.

In addition, the Company has various tax audits in progress in certain U.S. states and foreign jurisdictions. The Company has accrued taxes, and related interest and penalties that may be due upon the ultimate resolution of these examinations and for other matters relating to open U.S. Federal, state and foreign tax years in accordance with FIN 48.

While the Company believes that the resolution of these audits will not have a material adverse impact on the Company’s results of operations, cash flows or financial position, the outcome is subject to uncertainty. Should the Company be unable to reach agreement with the IRS, U.S. state or foreign tax authorities on the various proposed adjustments, there exists the possibility of an adverse material impact on the results of operations, cash flows and financial position of the Company.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more-likely- than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Upon review of the Company’s reserves, there were no changes to its reserves for uncertain tax positions upon adoption. At the adoption date of January 1, 2007, the Company had $176,309 of unrecognized tax benefits, all of which would affect its income tax expense if recognized. In the quarter ended March 31, 2007, the Company released $1,500 of tax reserves due to the completion of a review of the Company’s tax returns by the Hong Kong tax authority. In addition, the Company recognized a tax benefit of $19,549 resulting from the refund of research and development credits from the French tax authority. As of March 31, 2007, the Company has $155,260 of unrecognized tax benefits.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007, the Company had approximately $30,866 of accrued interest and penalties related to uncertain tax positions.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 1999. Tax years for significant foreign jurisdictions including Germany, France, United Kingdom, and Switzerland are closed through 2002, 2001, 2004 and 2001 respectively; subsequent tax years for these jurisdictions remain subject to tax authority review. Hong Kong tax years are closed for years through 2004 and subsequent tax years remain subject to tax authority review.

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Note 15 OPERATING AND GEOGRAPHICAL SEGMENTS

The Company designs, develops, manufactures and sells a wide range of semiconductor integrated circuit products. The segments represent management’s view of the Company’s businesses and how it allocates Company resources and measures performance of its major components. In addition, each segment comprises product families with similar requirements for design, development and marketing. Each segment requires different design, development and marketing resources to produce and sell semiconductor integrated circuits. Atmel’s four reportable segments are as follows:

	•		Application specific integrated circuit (“ASIC”) segment includes custom application specific integrated circuits designed to meet specialized single-customer requirements for their high performance devices in a broad variety of applications. This segment also encompasses a range of products which provide security for digital data, including smart cards for mobile phones, set top boxes, banking and national identity cards. The Company also develops customer specific ASICs, some of which have military applications. This segment also includes products with military and aerospace applications.

	•		Microcontrollers segment includes a variety of proprietary and standard microcontrollers, the majority of which contain embedded nonvolatile memory and integrated analog peripherals.

	•		Nonvolatile Memories segment consists predominantly of serial interface electrically erasable programmable read-only memory (“SEEPROM”) and serial interface Flash memory products. This segment also includes parallel interface Flash memories as well as mature parallel interface EEPROM and EPROM devices. This segment also includes products with military and aerospace applications.

	•		Radio Frequency (“RF”) and Automotive segment includes products designed for the automotive industry. This segment produces and sells wireless and wired devices for industrial, consumer and automotive applications and it also provides foundry services which produce radio frequency products for the mobile telecommunications market.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on revenues and income or loss from operations excluding impairment and restructuring charges. Interest and other expenses, net, nonrecurring gains and losses, foreign exchange gains and losses and income taxes are not measured by operating segment.

The Company’s wafer manufacturing facilities fabricate integrated circuits for segments as necessary and their operating costs are reflected in the segments’ cost of revenues on the basis of product costs. Because segments are defined by the products they design and sell, they do not make sales to each other. The Company does not allocate assets by segment, as management does not use asset information to measure or evaluate a segment’s performance.

Information about Reportable Segments


				Micro-		Nonvolatile		RF and
	ASIC			controllers		Memories		Automotive		Total

Three months ended March 31, 2007:
Net revenues from external customers	$	110,977		$	108,022	$	86,028	$	86,286	$	391,313
Segment income (loss) from operations		(8,758	)		3,136		9,561		10,640		14,579
Three months ended March 31, 2006 – as restated:
Net revenues from external customers	$	123,968		$	91,085	$	95,629	$	90,102	$	400,784
Segment income (loss) from operations		(12,823	)		8,391		9,016		8,236		12,820

Amounts for the three months ended March 31, 2006 have been adjusted to reflect the divestiture of the Company’s Grenoble, France, subsidiary in July 2006. For the three months ended March 31, 2006, net revenues related to this subsidiary and included in Discontinued Operations totaled $36,000. These amounts were previously reported in the Company’s ASIC operating segment. See Note 8 for further discussion.

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Reconciliation of segment information to Condensed Consolidated Statements of Operations


Three months ended March 31,	2007			2006
				As restated
Total segment income from operations	$	14,579		$	12,820
Unallocated amounts:
Restructuring charges		(1,782	)		(151	)

Consolidated income from operations	$	12,797		$	12,669

Geographic sources of revenues were as follows:


	Three months ended
	March 31,
	2007		2006

United States	$	49,786	$	63,767
Germany		56,873		42,857
France		37,923		40,771
United Kingdom		6,992		4,027
Japan		21,999		13,570
China including Hong Kong		82,882		84,545
Singapore		45,218		61,626
Rest of Asia-Pacific		43,840		49,443
Rest of Europe		41,322		36,963
Rest of the World		4,478		3,215

Total net revenues	$	391,313	$	400,784

Net revenues are attributed to countries based on delivery locations.

Locations of long-lived assets as of March 31, 2007 and December 31, 2006 were as follows:


	March 31,		December 31,
	2007		2006
United States	$	188,687	$	159,998
Germany		29,828		30,733
France		280,740		285,469
United Kingdom		19,106		19,753
Japan		185		181
China, including Hong Kong		771		716
Rest of Asia-Pacific		22,924		19,018
Rest of Europe		12,661		12,095

Total	$	554,902	$	527,963

At March 31, 2007, long-lived assets totaling $90,666 and $35,040 classified as held for sale, and excluded from the table above, were located in the United Kingdom and United States, respectively. At December 31, 2006, long-lived assets totaling $88,757 and $35,040 classified as held for sale, and excluded from the table above, were located in the United Kingdom and United States, respectively.

Note 16 COMMITMENTS AND CONTINGENCIES

Commitments

Employment Agreements

The Company entered into an employment agreement with Mr. Steven Laub, President and Chief Executive Officer, effective August 7, 2006. The agreement provides for certain payments and benefits to be provided in the

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event that Mr. Laub is terminated without “cause” or that he resigns for “good reason,” including a “change of control.” The agreement initially called for the Company to issue restricted stock to Mr. Laub on January 2, 2007. However, due to the Company’s non-timely status regarding reporting obligations under the Securities Exchange Act of 1934 (“Exchange Act”), the Company has been unable to issue these shares. On March 13, 2007, Mr. Laub’s agreement was amended to provide for issuing these shares after the Company becomes current with its reporting obligations under the Exchange Act, or for an amount in cash if Mr. Laub’s employment terminates prior to issuance, equal to the portion that would have vested had these shares been issued on January 2, 2007, as originally intended.

Indemnifications

As is customary in the Company’s industry, as provided for in local law in the United States and other jurisdictions, the Company’s standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of the Company’s products. From time to time, the Company will indemnify customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of the Company’s products and services, usually up to a specified maximum amount. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws permit the indemnification of the Company’s agents. In the Company’s experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.

Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees in connection with the investigation of the Company’s historical stock option practices and related government inquiries and litigation. These obligations arise under the terms of the Company’s certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. The Company is currently paying or reimbursing legal expenses being incurred in connection with these matters by a number of its current and former directors, officers and employees. The Company believes the fair value of any required future payments under this liability is adequately provided for within the reserves it has established for currently pending legal proceedings.

Purchase Commitments

At March 31, 2007, the Company had outstanding capital purchase commitments of $1,459.

Contingencies

Litigation

Atmel currently is party to various legal proceedings. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations, cash flows and financial position of Atmel. The estimate of the potential impact on the Company’s financial position or overall results of operations or cash flows for the legal proceedings described below could change in the future. The Company has accrued for all losses related to litigation that the Company considers probable and for which the loss can be reasonably estimated.

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from their positions for cause, and sought an order declaring that they continue in their positions as President and Chief Executive Officer, and Executive Vice President, Office of the President, respectively. For both actions, plaintiffs sought costs, reasonable attorneys’ fees and any other appropriate relief. The Section 220 action, which sought access to corporate records, was dismissed in 2006.

Regarding the Delaware actions, a trial was held in October 2006, the court held argument in December 2006, issued a Memorandum Opinion in February 2007, and granted a Final Order on March 15, 2007. Regarding the Section 211 action, the Court ruled in favor of the plaintiffs with regards to calling a Special Meeting of Stockholders. The Perlegoses subsequently made a motion in the Chancery Court for attorneys’ fees and expenses, based on their having prevailed in the Section 211 action. Atmel intends to oppose the motion.

Pursuant to the order of the Delaware Chancery Court, the Company held a Special Meeting of Stockholders on May 18, 2007 to consider and vote on a proposal by George Perlegos, our former Chairman, President and Chief Executive Officer, to remove five members of our Board of Directors and to replace them with five persons nominated by Mr. Perlegos. On June 1, 2007, following final tabulation of votes and certification by IVS Associates, Inc., the independent inspector of elections for the Special Meeting, the Company announced that stockholders had rejected the proposal considered at the Special Meeting.

Prior to the Special Meeting, Atmel also received a notice from Mr. Perlegos indicating his intent to nominate eight persons for election to our Board of Directors at our Annual Meeting of Stockholders to be held on July 25, 2007. On June 5, 2007, the Company received notice that Mr. Perlegos will not solicit proxies from the Company’s shareholders as to any issue, including the makeup of the Company’s Board of Directors, in connection with the Company’s annual meeting to be held in July 2007.

In the Section 225 action, the court found that the plaintiffs had not demonstrated any right to hold any office of Atmel. On April 13, 2007, George Perlegos and Gust Perlegos filed an appeal to the Supreme Court of the State of Delaware with respect to the Section 225 action. On April 27, 2007, Atmel filed a cross-appeal in the Supreme Court of the State of Delaware relating to the Section 225 claims. On May 23, 2007, George Perlegos and Gust Perlegos withdrew their appeal with respect to the Section 225 action. On May 25, 2007, Atmel withdrew its cross-appeal with respect to this action.

In January 2007, the Company received a subpoena from the Department of Justice (“DOJ”) requesting information relating to its past stock option grants and related accounting matters. Also, in August 2006, the Company received a letter from the SEC making an informal inquiry and request for information on the same subject matters. In August 2006, the Company received Information Document Requests from the IRS regarding the Company’s investigation into misuse of corporate travel funds and investigation into backdating of stock options. The Company is cooperating fully with the DOJ, SEC and IRS inquiries and intends to continue to do so. These inquiries likely will require the Company to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against the Company and the payment of significant fines and penalties by the Company, which may adversely affect our results of operations and cash flows. The Company cannot predict how long it will take or how much more time and resources it will have to expend to resolve these government inquiries, nor can the Company predict the outcome of these inquiries.

On November 3, 2006, George Perlegos filed an administrative complaint against Atmel with the federal Occupational Safety & Health Administration (“OSHA”) asserting that he was wrongfully terminated by Atmel’s Board of Directors in violation of the Sarbanes-Oxley Act. More specifically, Mr. Perlegos alleged that Atmel terminated him in retaliation for his providing information to Atmel’s Audit Committee regarding suspected wire fraud and mail fraud by Atmel’s former travel manager and its third-party travel agent. Mr. Perlegos sought reinstatement, costs, attorneys’ fees, and damages in an unspecified amount. On December 11, 2006, Atmel responded to the complaint, asserting that Mr. Perlegos’ claims were without merit and that he was terminated, along with three other senior executives, for the misuse of corporate travel funds. By letter dated June 6, 2007, Atmel received notice that Mr. Perlegos had withdrawn his complaint.

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From July through September 2006, six stockholder derivative lawsuits were filed (three in the U.S. District Court for the Northern District of California and three in Santa Clara County Superior Court) by persons claiming to be Company stockholders and purporting to act on Atmel’s behalf, naming Atmel as a nominal defendant and some of its current and former officers and directors as defendants. The suits contain various causes of action relating to the timing of stock option grants awarded by Atmel. The federal cases were consolidated and an amended complaint was filed on November 3, 2006. Atmel and the individual defendants have each moved to dismiss the consolidated amended complaint on various grounds. The motions have been argued and taken under submission by the Court. The state derivative cases have been consolidated. In April 2007, a consolidated derivative complaint was filed in the state court action and the Company moved to stay it. The court granted Atmel’s motion to stay on June 14, 2007. Atmel believes that the filing of the derivative actions was unwarranted and intends to vigorously contest them.

On March 23, 2007, Atmel filed a complaint in the U.S. District Court for the Northern District of California against George Perlegos and Gust Perlegos. In the lawsuit, Atmel asserts that the Perlegoses are using false and misleading proxy materials in violation of Section 14(a) of the federal securities laws to wage their proxy campaign to replace Atmel’s President and Chief Executive Officer and all of Atmel’s independent directors. Further, Atmel asserts that the Perlegos group, in violation of federal securities laws, has failed to file a Schedule 13D as required, leaving stockholders without the information about the Perlegoses and their plans that is necessary for stockholders to make an informed assessment of the Perlegoses’ proposal. In its complaint, Atmel has asked the Court to require the Perlegoses to comply with their disclosure obligations, and to enjoin them from using false and misleading statements to improperly solicit proxies as well as from voting any Atmel shares acquired during the period the Perlegoses were violating their disclosure obligations under the federal securities laws. On April 11, 2007, George Perlegos and Gust Perlegos filed a counterclaim with respect to such matters in the U.S. District Court for the Northern District of California seeking an injunction (a) prohibiting Atmel from making false and misleading statements and (b) requiring Atmel to publish and publicize corrective statements, and requesting an award of reasonable expenses and costs of this action. Atmel disputes, and intends to vigorously defend, this counterclaim.

In October 2006, an action was filed in First Instance labour court, Nantes, France on behalf of 46 former employees of Atmel’s Nantes facility, claiming that the sale of the Nantes facility to MHS (XbyBus SAS) in December 2005 was not a valid sale, and that these employees should still be considered employees of Atmel, with the right to claim social benefits from Atmel. The action is for unspecified damages. Atmel believes that the filing of this action is without merit and intends to vigorously defend the terms of the sale to MHS.

In January 2007, Quantum World Corporation filed a patent infringement suit in the United States District Court, Eastern District of Texas naming Atmel as a co-defendant, along with a number of other electronics manufacturing companies. The plaintiff claims that the asserted patents allegedly cover a true random number generator and that the patents are infringed in the manufacture, use importation and offer for sale of certain Atmel products. The suit seeks damages for infringement and recovery of attorneys’ fees and costs incurred. In March 2007, Atmel filed a counterclaim for declaratory relief that the patents are neither infringed nor valid. Atmel believes that the filing of this action is without merit and intends to vigorously defend against this action.

In March 2006, Atmel filed suit against AuthenTec in the United States District Court, Northern District of California, San Jose Division, alleging infringement of U.S. Patent No. 6,289,114, and on November 1, 2006, Atmel filed a First Amended Complaint adding claims for infringement of U.S. Patent No. 6,459,804. In November 2006, AuthenTec answered denying liability and counterclaimed seeking a declaratory judgment of non-infringement and invalidity, its attorneys’ fees and other relief. In May 2007, AuthenTec filed a motion to dismiss for lack of subject matter jurisdiction, which the court denied in June 2007. In April 2007, AuthenTec filed, but has not served, an action against Atmel for declaratory relief in the United States District Court for the Middle District of Florida that the patents asserted against it by Atmel in the action pending in the Northern District of California are neither infringed nor valid, and amended that complaint in May 2007 to add claims for alleged interference with business relationships and abuse of process. Authentec seeks declaratory relief and unspecified damages. On June 25, 2007, the action pending in the Middle District of Florida was transferred to the Northern District of California. Atmel believes that AuthenTec’s claims are without merit and intends to vigorously pursue and defend these actions.

From time to time, the Company may be notified of claims that the Company may be infringing patents issued to other parties and may subsequently engage in license negotiations regarding these claims.

Other Investigations

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In addition to the investigation into stock option granting practices, the Audit Committee of the Company’s Board of Directors, with the assistance of independent legal counsel and forensic accountants, conducted independent investigations into (a) certain proposed investments in high yield securities that were being contemplated by the Company’s former Chief Executive Officer during the period from 1999 to 2002 and bank transfers related thereto, and (b) alleged payments from certain of the Company’s customers to employees at one of the Company’s Asian subsidiaries. The Audit Committee has completed its investigations, including its review of the impact on the Company’s condensed consolidated financial statements for the quarter ended March 31, 2007 and prior periods, and concluded that there was no impact on such condensed consolidated financial statements.

Other Contingencies

For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, the Company is subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and trade sanctions against embargoed countries and destinations administered by the Office of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury. The Company has recently discovered shortcomings in its export compliance procedures. The Company is currently analyzing product shipments and technology transfers, working with U.S. government officials to ensure compliance with applicable U.S. export laws and regulations, and developing an enhanced export compliance system. A determination by the U.S. government that the Company has failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of significant fines, denial of export privileges, loss of revenues from certain customers, and debarment from U.S. participation in government contracts. Any one or more of these sanctions could have a material adverse effect on the Company’s business, financial condition and results of operations.

Income Tax Contingencies

In 2005, the Internal Revenue Service (“IRS”) completed its audit of the Company’s U.S. income tax returns for the years 2000 and 2001 and has proposed various adjustments to these income tax returns, including carryback adjustments to 1996 and 1999. In January 2007, after subsequent discussions with the Company, the IRS revised its proposed adjustments for these years. The Company has protested these proposed adjustments and is currently working through the matter with the IRS Appeals Division.

In May 2007, the IRS completed its audit of the Company’s U.S. income tax returns for the years 2002 and 2003 and has proposed various adjustments to these income tax returns. The Company intends to file a protest to these proposed adjustments and to work through the matter with the IRS Appeals Division.

While the Company believes that the resolution of these audits will not have a material adverse impact on the Company’s results of operations, cash flows or financial position, the outcome is subject to uncertainties. Should the Company be unable to reach agreement with the IRS on the various proposed adjustments, there exists the possibility of an adverse material impact on the results of operations, cash flows and financial position of the Company.

The Company’s French subsidiary’s income tax return for the 2003 tax year is currently under examination by the French tax authorities. The examination has resulted in an additional income tax assessment and the Company is currently pursuing administrative appeal of the assessment. While the Company believes the resolution of this matter will not have a material adverse impact on its results of operations, cash flows or financial position, the outcome is subject to uncertainty. The Company has provided its best estimate of income taxes and related interest and penalties due for potential adjustments that may result from the resolution of this examination, as well as for examinations of other open tax years.

In addition, the Company has various tax audits in progress in certain U.S. states and foreign jurisdictions. The Company has provided its best estimate of taxes and related interest and penalties due for potential adjustments that may result from the resolution of these examinations, and examinations of open U.S. Federal, state and foreign tax years.

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The Company’s income tax calculations are based on application of the respective U.S. Federal, state or foreign tax law. The Company’s tax filings, however, are subject to audit by the respective tax authorities. Accordingly, the Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense.

Product Warranties

The Company accrues for warranty costs based on historical trends of product failure rates and the expected material and labor costs to provide warranty services. The majority of products are generally covered by a warranty typically ranging from 90 days to two years.

The following table summarizes the activity related to the product warranty liability during the three months ended March 31, 2007, and the year ended December 31, 2006:


	2007			2006

Balance at beginning of period	$	4,773		$	6,184
Accrual for warranties during the period (including foreign exchange rate impact)		1,710			5,800
Change in accrual relating to preexisting warranties (including change in estimates)		574			(5,634	)
Settlements made (in cash or in kind) during the period		(1,730	)		(1,577	)

Balance at end of period	$	5,327		$	4,773

Guarantees

During the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either our subsidiaries or us. As of March 31, 2007, the maximum potential amount of future payments that we could be required to make under these guarantee agreements is approximately $12,000. The Company has not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, the Company believes it will not be required to make any payments under these guarantee arrangements.

Note 17 SUBSEQUENT EVENTS

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Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations

You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2006.

Forward Looking Statements

You should read the following discussion of our financial condition and results of operations in conjunction with our Condensed Consolidated Financial Statements and the related “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding compliance with SEC reporting requirements and NASDAQ listing requirements, our outlook for fiscal 2007, our anticipated revenues, operating expenses and liquidity, the effect of our restructuring and other strategic efforts and our expectations regarding the effects of exchange rates. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, and in Item 1A – Risk Factors, and elsewhere in this Form 10-Q and similar discussions in our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K. Generally, the words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-Q.

Restatements of Consolidated Financial Statements

This Quarterly Report on Form 10-Q for our quarter ended March 31, 2007, includes restatements of our condensed consolidated financial statements for our quarter ended March 31, 2006 (and related disclosures), all restatements as a result of an independent stock option investigation conducted by the Audit Committee of the Company’s Board of Directors. See Note 2, “Restatements of Consolidated Financial Statements,” to Condensed Consolidated Financial Statements for a detailed discussion of the effect of the restatements.

Audit Committee Investigation of Historical Stock Option Practices

In early July 2006, we began a voluntary internal review of its historical stock option granting practices. Following a review of preliminary findings, the Company announced on July 25, 2006, that the Audit Committee of our Board of Directors had initiated an independent investigation regarding the timing of the Company’s past stock option grants and other related issues. The Audit Committee, with the assistance of independent legal counsel and forensic accountants, determined that the actual measurement dates for certain stock option grants differed from the recorded measurement dates used for financial accounting purposes for such stock option grants.

On October 30, 2006, we announced that financial statements for all annual and interim periods prior to that date should no longer be relied upon due to errors in recording stock-based compensation expense. Specifically, this notice of non-reliance applied to the three year period ended December 31, 2005, included in our Annual Report on Form 10-K for the year ended December 31, 2005, the financial statements for the interim periods contained in the

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Quarterly Reports on Form 10-Q filed with respect to each of these years, the financial statements included in our Quarterly Report on Form 10-Q for the first quarter of 2006, as well as financial statements for fiscal years prior to December 31, 2003.

Results of Audit Committee Investigation

The Audit Committee’s investigation was completed in April 2007. The investigation covered 110 stock option grants to approximately 4,250 recipients for all grant dates during the period from January 1, 1997 through August 3, 2006. The Audit Committee extended the scope of the original review by having the Company conduct an analysis of 92 additional stock option grants during the period from March 19, 1991, the date of the Company’s initial public offering, to December 31, 1996.

(1) Certain stock option grants were priced retroactively,

(3) During 1998, in two separate repricing programs, employees were allowed to elect stock options to be repriced after the stated repricing deadlines had expired,

(4) There was evidence that the October 1998 repricing offer was not communicated to employees until after the October 12, 1998 deadline to accept the repricing offer,

(7) All of the above actions were taken without required approvals, including approval by the Board of Directors, or the Compensation Committee of the Board of Directors, and

As a result of the findings of the Audit Committee’s investigation, we determined that material stock-based compensation adjustments were required due to measurement date errors resulting from retroactive pricing of stock options for the period beginning in April 1993 and continuing through January 2004. The Audit Committee found that such retroactive pricing was intentional and violated the terms of our stock option plans. The Audit Committee found that, after January 2004, the we improved stock option granting processes, and since that time, has granted stock options in accordance with our stock option plans and approval procedures. We did not identify any material stock-based compensation adjustments that were required for grants made in periods after January 2004.

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identified in the investigation and subsequent management review is included in stock-based compensation expense accounted for under the provisions of SFAS No. 123R. Under the provisions of SFAS No. 123R, incremental stock-based compensation expense resulting from errors identified related to previous stock option practices did not have a material impact to the consolidated statement of operations for the year ended December 31, 2006.

As a result of the measurement date and other errors identified in the Audit Committee’s investigation and subsequent management review, we recorded aggregate non-cash stock-based compensation expenses for the period from 1993 through 2005 of approximately $116 million, plus associated payroll tax expense of $2 million, less related income tax benefit of $12 million, for total stock compensation expense, net of income tax of $106 million. These expenses had the effect of decreasing net income or increasing net loss and decreasing retained earnings or increasing accumulated deficit as previously reported in our historical financial statements.

The stock compensation expense amounts were determined primarily utilizing guidance under APB No. 25 (intrinsic value-based expense), and were amortized ratably over the vesting term of the stock options. If a stock option was forfeited prior to vesting, the compensation expense recorded in the consolidated statement of operations in prior periods was reversed, as well as any remaining unamortized unearned stock-based compensation associated with the forfeited stock options. Accordingly, the net stock-based compensation expense amortized in the consolidated statement of operations is lower than the gross stock-based compensation expense calculated based on APB No. 25 (intrinsic-value based expense) at the grant date. A substantial portion of these revised compensation amounts would have been expensed in the consolidated statements of operations during the fiscal years from 1993 through 2005. As of December 31, 2005, the remaining APB No. 25 (intrinsic value-based) unamortized unearned stock-based compensation balance related to the errors identified during the investigation and subsequent management review was approximately $3 million. Following the adoption of SFAS No. 123R on January 1, 2006, this unamortized unearned stock-based compensation balance amount was eliminated against additional paid-in capital in the consolidated balance sheet.

We determined that the measurement date and other errors identified in the investigation involved the falsification of company records, resulting in false information and representations provided to our independent registered public accounting firm and erroneous financial statements previously filed with the SEC.

The types of errors identified were as follows:

Improper Measurement Dates for Stock Option Grants. We determined that material stock-based compensation adjustments were required in connection with certain stock option grants that we made during fiscal years 1993 through 2004. During the period under review, we determined that 101 out of 202 stock option grants resulted in a correction to the previously used measurement dates, of which 53 of the grants resulted in recording additional stock-based compensation expense. For those grants determined to have been retroactively recorded, the time period between the grant date and the corrected measurement date ranged from 1 day to over three years.

Evidence of incorrect measurement dates included, but was not limited to, several different versions of stock option grant lists, “change-of-status” forms and “request for stock-options-grant” forms dated subsequent to original stock option measurement dates, delays in entering grant information into our stock administration database, Equity Edge, email correspondence, and handwritten comments on various documents. The investigation revealed that certain individual stock option grants were not finalized at the time they were approved by the Board of Directors or were never approved by the Board of Directors. There was no evidence that the Board approved the backdating of any stock options. Stock-based compensation expenses related to stock option grants with improper measurement dates included in restated financial statements for prior years, up to and including fiscal year 2005, totaled approximately $72 million, net of forfeitures.

Stock Option Repricing Programs. During 1998, we offered employees two opportunities to reprice outstanding stock options with exercise prices above certain values (commonly referred to as “out of the money” or “underwater” options) at the time of the repricing. Stock option repricing programs were offered with effective dates of January 14, 1998 and October 9, 1998 for all stock options priced above $4.25 and $1.98, respectively (adjusted for stock splits). Employees elected to reprice 6.7 million and 14.1 million stock options in the January and October 1998 repricing programs, respectively.

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Based on the revised measurement dates, the January 1998 repricing did not result in material compensation amounts related to employee elections to reprice stock options below fair market value on the date of election. However, the October 1998 repricing resulted in compensation expense of $24 million as determined under APB No. 25, net of forfeitures, for stock options repriced below market value on the date of election.

The October 1998 repricing resulted in additional cumulative compensation expenses totaling $13 million related to the FIN 44 transition rules where variable accounting provisions applied, based on the difference between the repricing value of $1.98 per share and the fair market value at the FIN 44 transition date of June 30, 2000 of $18.44 per share for unvested stock options outstanding as of June 30, 2000. Stock options repriced after December 15, 1998, which were outstanding and unvested at July 1, 2001, were subject to variable accounting adjustments for each reporting period after June 30, 2000 based on the fair market value of our shares at the end of each period. Variable accounting adjustments could result in either an increase or a reduction to compensation expense, depending on whether the our share price increased or declined during the period. As a result, compensation expenses (credits) of $(0.5) million, $(1) million, $9 million, $(6) million, $4 million, and $7 million were recorded related to variable accounting for the October 1998 repricing program for the fiscal years 2005, 2004, 2003, 2002, 2001, and 2000, respectively.

Modifications to Stock Options for Terminated Employees and Other Related Issues. The investigation also identified a number of instances where management actions resulted in modifications to stock option terms beyond those specified in the original terms of the grants, resulting in additional compensation expense. The investigation found that most of these modifications were not approved by the Board of Directors or the Compensation Committee and resulted from:

	•		Stock option cancellation dates that were changed to allow employees to exercise stock options beyond the standard 30-day period following termination of employment,

	•		Severance agreements offered to certain employees that allowed for continued vesting and rights to exercise stock options beyond the standard terms of our stock option plans,

	•		Additional vesting and ability to exercise stock options for certain employees not terminated from the Company’s Equity Edge database in a timely manner following their departure from the Company, due to administrative errors,

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	•		Stock options awarded to certain employees after their date of termination, primarily due to administrative delays in processing stock option requests and the lack of systems to monitor employee status, and

	•		Exercises of stock options after expiration of the 10-year term of the options.

The investigation also identified instances where certain employees’ stock option exercises were backdated to dates other than the actual transaction date, thereby reducing the taxable gain to the employee and reducing the tax deduction available to us. In addition, there were instances where employee stock option grant dates preceded employee hire dates. Finally, certain employees were allowed to exercise stock options and defer settling with us for share purchase amounts and related payroll taxes under non-recourse loan arrangements.

Compensation expense from such modifications to stock options resulted from actions approved by former executives of the Company and inadvertent errors arising from our lack of centralized personnel tracking systems. The cumulative compensation expenses for modifications to stock options and other related issues included in restated financial statements for prior years, up to and including fiscal year 2005, were approximately $7 million.

Evaluation of the Conduct of Management and the Board of Directors:

The Audit Committee considered the involvement of former and current members of management and the Board of Directors in the stock option grant process and concluded:

	•		The evidence did not give rise to concern about the integrity of any current or former outside director,

	•		The evidence did not give rise to concern about the integrity of any current officer, and

	•		The individuals who were primarily responsible for directing the backdating of stock options were George Perlegos, our former Chief Executive Officer, and Mike Ross, our former General Counsel.

George Perlegos was one of our founders, and was Atmel’s Chief Executive Officer and Chairman of the Board from 1984 until August 2006. Based on evidence from the stock option investigation, the Audit Committee concluded that Mr. Perlegos was aware of, and often directed, the backdating of stock option grants. The evidence included testimony from stock administration employees and handwritten notations from Mr. Perlegos expressly directing stock administration employees to use prior Board meeting dates to determine stock option pricing for many employees’ stock option grants. The evidence showed that Mr. Perlegos circumvented our stock option plan requirements and granting procedures. The evidence indicated that Mr. Perlegos knew that stock option grants had to be approved by the Board and that the price for stock options should be set as of the date on which the Board approved the grant. There was evidence that, at least by 2002, Mr. Perlegos was informed about the accounting consequences of backdating stock options. However, the Audit Committee was unable to reach a conclusion as to whether Mr. Perlegos understood the accounting principles that apply to stock options, or whether he intended to manipulate the financial statements of the Company. Mr. Perlegos did not fully cooperate in the investigation. The evidence showed that Mr. Perlegos did not receive a direct personal benefit from the backdating of stock options, and that Mr. Perlegos did not receive any backdated stock options. Because of his involvement in the intentional backdating of stock options, the Audit Committee believed the evidence raised serious concerns regarding George Perlegos’s management integrity with respect to the stock option process.

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issue backdated stock option grants to employees and directed or permitted other actions to be taken contrary to the terms of Atmel’s stock option plans. The evidence from the investigation showed that Mr. Ross circumvented our stock option plan requirements and granting procedures. The evidence indicated that Mr. Ross knew that the stock option grants must be approved by the Board and that the price for stock options should be set as of the date on which the Board approved the grant. There was evidence that, at least by 2002, Mr. Ross was informed about accounting consequences of backdating stock options. The Committee was unable to conclude, however, whether Mr. Ross was aware of the accounting consequences of backdating stock options prior to 2002. The Committee was also unable to conclude whether Mr. Ross intended to manipulate the financial statements of the Company. There also was evidence that Mr. Ross personally benefited from the receipt of backdated stock options that were not approved by the Board of Directors, and that he backdated his exercises of his own stock options to dates on which the our stock price was at a period low, thereby potentially reducing his tax liability. Mr. Ross did not cooperate in the investigation. Because of his involvement in the intentional backdating of stock options and his other conduct, the Audit Committee believed the evidence indicated that Mike Ross lacked management integrity with respect to the stock option process.

Mr. Ross was one of the four Atmel senior executives who were terminated for cause on August 5, 2006, based upon the unrelated investigation into the misuse of corporate travel funds.

The evidence from the Audit Committee investigation did not raise similar concerns about other former officers.

Grant Date Determination Methodology

For the period from March 1991 through July 2006, we maintained a practice of awarding stock options at monthly Board of Director meetings. During this period, approximately 186 monthly Board of Director meetings were held, each of which included approval of a schedule of employee stock option grants. In addition, there were 16 stock option grants approved by unanimous written consent during this same period. The Audit Committee’s investigation and subsequent management review found that, during this period, certain stock option grant lists approved by the Board of Directors were changed after the meeting dates and the changes were not communicated to the Board of Directors. The changes included adding or removing employee names, increasing or decreasing the number of stock options awarded and changing grant dates. As a result, we determined that 101 out of 202 stock option awards were not finalized until after the original Board of Director meeting dates, or unanimous written consent effective dates, resulting in alternative measurement dates for accounting purposes. Of the 101 original award dates where stock option grant terms were not finalized, 53 grant dates resulted in a correction to the previously used measurement dates with fair market values above the original award’s exercise price.

We found that contemporaneous documentation in the form of emails, faxes, or internal forms were sufficient to provide a basis for determining the most likely date when stock option grants were finalized for many grants, resulting in alternative measurement dates. However, for certain stock option grants, no reliable objective evidence could be located supporting a specific date on which the number of stock options, and the specific employees to be awarded stock options, were finalized. For these cases, we determined the date of entry into the Equity Edge database to be the most reliable measurement date for determining when the terms of the stock option grants were finalized.

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determined or (b) the list that was prepared on the award approval date constituted a grant, in which case any subsequent changes to the list would be evaluated to determine whether a modification (such as a repricing) or cancellation has occurred [on an individual award basis].” We believe that application of conclusion (a) is appropriate under the circumstances observed during the period from 1993 through 2004.

Finalization of certain stock option grants was extended such that some employees exercised their stock options before the respective grant dates were finalized. In cases where exercises occurred before grant date finalization, the fair market value of the Company’s common stock on the exercise date of the stock options was utilized to determine the related amount of compensation expense. For these stock options, we concluded that the date of exercise was the most appropriate date for determining that the stock option grant was finalized, and we used the fair market value on the stock option exercise date to calculate compensation expense. There were 922 stock options found to have been exercised before the revised measurement dates were finalized.

Use of Judgment

In light of the significant judgment used by us in establishing revised measurement dates, alternative approaches to those we used could have resulted in different stock-based compensation expenses than those recorded in the restated consolidated financial statements. We considered various alternative approaches and believe that the approaches used were the most appropriate under the circumstances.

Costs of Restatement and Legal Activities

We have incurred substantial expenses for legal, accounting, tax and other professional services in connection with the Audit Committee’s investigation, our internal review and recertification procedures, the preparation of our consolidated financial statements and the restated consolidated financial statements, the SEC and other government agency inquiries, and the derivative litigation. These expenses were approximately $5 million for the three months ended March 31, 2007.

Restatement and Impact on Consolidated Financial Statements

As part of the restatement of the consolidated financial statements, we also recorded additional non-cash adjustments that were previously identified and considered to be immaterial. The cumulative after-tax benefit from recording these adjustments was $11 million for the period from 1993 through 2005. The accounting adjustments related primarily to the timing of revenue recognition and related reserves, recognition of grant benefits, accruals for litigation and other expenses, reversal of income tax expense related to unrealized foreign exchange translation gains, and asset impairment charges.

As a result of the errors identified, we restated its historical results of operations from fiscal year 1993 through fiscal year 2005 to record $94 million of additional stock-based compensation expense, and associated payroll tax expense, together with other accounting adjustments, net of related income tax effects. For 2005 and 2004, these errors resulted in an after-tax expense (benefit) to the statement of operations of $0.5 million and $(9) million, respectively. Additionally, the cumulative effect of the related after-tax expenses for periods prior to 2004 was $103 million. These additional stock-based compensation and other expenses were non-cash and had no impact on our reported cash, cash equivalents or marketable securities for each of the restated periods.

Prior to fiscal year 2002, we determined that it was more likely than not that we would realize the benefits of the future deductible amounts related to stock-based compensation expense. As a result, we recorded a cumulative tax benefit of $38 million through March 31, 2002. In fiscal year 2002, we recorded a valuation allowance of $26 million, related to tax benefits recognized in prior periods on the incremental stock-based compensation expense, as management believed at that time, based on the weight of available evidence, it was more likely than not that the deferred tax assets would not be realized. As a result of the valuation allowance, we recorded no income tax

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benefit in periods subsequent to 2002 relating to the incremental stock-based compensation expense. The cumulative income tax benefit recorded by us for periods prior to 2006 was $12 million.

For those stock option grants determined to have incorrect measurement dates for accounting purposes and that had been originally issued as incentive stock options, or ISOs, we recorded a liability for payroll tax contingencies in the event such grants would not be respected as ISOs under the principles of the Internal Revenue Code (“IRC”) and the regulations thereunder. We recorded expense and accrued liabilities for certain payroll tax contingencies related to incremental stock-based compensation totaling $2 million for all annual periods from our fiscal year 1993 through December 31, 2005. We recorded net payroll tax benefits in the amounts of $3 million and $10 million for our fiscal years 2005 and 2004, respectively. These benefits resulted from expiration of the related statute of limitations following payroll tax expense recorded in previous periods. The cumulative payroll tax expense for periods prior to fiscal year 2004 was $16 million.

We also considered the application of Section 409A of the IRC to certain stock option grants where, under APB No. 25, intrinsic value existed at the time of grant. In the event such stock options grants are not considered as issued at fair market value at the original grant date under principles of the IRC and the regulations thereunder and are subject to Section 409A, we are considering potential remedial actions that may be available. We do not expect to incur a material expense as a result of any such potential remedial actions.

Three of our stock option holders were subject to the December 31, 2006 deadline for Section 409A purposes. We are evaluating certain actions with respect to the outstanding options granted to non-officers and affected by Section 409A, as soon as possible after the filing of this Report. We estimate that the total cash payments required related to the adverse tax consequences of retroactively priced stock options granted to non-officers will be less than $1 million. These payment obligations are prospective and discretionary and will be recognized as expense in the period in which we make the decision to reimburse the employee.


						Adjustment to
						Income Tax
						Expense (Benefit)			Adjustment to
						Relating to			Stock-Based			Other
	Adjustment to		Adjustment to			Stock-Based			Compensation			Adjustments,			Total
	Stock-Based		Payroll Tax			Compensation			Expense, Net of			Net of			Restatement
	Compensation		Expense			and Payroll			Payroll and			Income			Expense
Fiscal Year	Expense		(Benefit)			Tax Expense			Income Taxes			Taxes			(Benefit)
1993	$	268	$	1		$	(110	)	$	159
1994		556		151			(293	)		414
1995		1,944		688			(799	)		1,833
1996		3,056		1,735			(1,449	)		3,342
1997		5,520		1,968			(2,516	)		4,972
1998		18,695		671			(6,147	)		13,219
1999		18,834		1,832			(6,955	)		13,711
2000		27,379		7,209			(11,576	)		23,012
2001		19,053		1,655			(5,988	)		14,720
2002		5,555		1,603			23,477			30,635
2003		12,416		(1,980	)		—			10,436

Cumulative through December 31, 2003		113,276		15,533			(12,356	)		116,453		$	(13,638	)	$	102,815

2004		1,405		(10,395	)		—			(8,990	)		184			(8,806	)
2005		1,561		(3,190	)		—			(1,629	)		2,082			453

Total	$	116,242	$	1,948		$	(12,356	)	$	105,834		$	(11,372	)	$	94,462

As a result of these adjustments, our audited consolidated financial statements and related disclosures as of December 31, 2005 and for each of the two years in the period ended December 31, 2005, have been restated.

For explanatory purposes and to assist in analysis of our consolidated financial statements, we have summarized below the stock option and other adjustments that were affected by the restatement (in thousands):

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	Total									Total
	Cumulative									Cumulative
	Adjustments									Adjustments
	through									through
	December 31,									December 31,
	2005			2005			2004			2003			2003			2002
Net loss as previously reported				$	(32,898	)	$	(2,434	)				$	(117,996	)	$	(641,796	)
Total additional stock-based compensation expense (benefit) resulting from:
Improper measurement dates for stock options	$	72,326			1,778			2,110		$	68,438			3,368			10,032
Stock option repricing errors		37,109			(472	)		(773	)		38,354			8,539			(5,154	)
Other modifications to stock options		6,807			255			68			6,484			509			677
Payroll tax expense (benefit)		1,948			(3,190	)		(10,395	)		15,533			(1,980	)		1,603

Total pre-tax stock option related adjustments		118,190			(1,629	)		(8,990	)		128,809			10,436			7,158
Income tax impact of stock option related adjustments		(12,356	)		—			—			(12,356	)		—			23,477

Total stock option related adjustments, net of income taxes		105,834			(1,629	)		(8,990	)		116,453			10,436			30,635

Other adjustments, net of income taxes		(11,372	)		2,082			184			(13,638	)		(7,849	)		6,751

Total expense (benefit)	$	94,462			453			(8,806	)	$	102,815			2,587			37,386

Net income (loss), as restated				$	(33,351	)	$	6,372					$	(120,583	)	$	(679,182	)

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The following table summarizes the stock-based compensation expenses and related payroll and income tax impact for the fiscal years 1993 through 2001 (in thousands):


	Years Ended December 31,
	2001			2000			1999			1998			1997
Total additional stock-based compensation expense resulting from:
Improper measurement dates for stock options	$	12,249		$	14,574		$	12,622		$	5,275		$	4,494
Stock option repricing errors		6,547			10,423			4,829			13,170			—
Other modifications to stock options		257			2,382			1,383			250			1,026
Payroll tax expense		1,655			7,209			1,832			671			1,968

Total pre-tax stock option related adjustments		20,708			34,588			20,666			19,366			7,488
Income tax benefit		(5,988	)		(11,576	)		(6,955	)		(6,147	)		(2,516	)

Total stock option related adjustments, net of income taxes	$	14,720		$	23,012		$	13,711		$	13,219		$	4,972


	Years Ended December 31,
	1996			1995			1994			1993
Total additional stock-based compensation expense resulting from:
Improper measurement dates for stock options	$	3,056		$	1,944		$	556		$	268
Stock option repricing errors		—			—			—			—
Other modifications to stock options		—			—			—			—
Payroll tax expense		1,735			688			151			1

Total pre-tax stock option related adjustments		4,791			2,632			707			269
Income tax benefit		(1,449	)		(799	)		(293	)		(110	)

Total stock option related adjustments, net of income taxes	$	3,342		$	1,833		$	414		$	159

Government Inquiries Relating to Historical Stock Option Practices

In January 2007, we received a subpoena from the Department of Justice (“DOJ”) requesting information relating to its past stock option grants and related accounting matters. In August 2006, we received a letter from the SEC making an informal inquiry and request for information on the same subject matters. In August 2006, we received Information Document Requests from the Internal Revenue Service (“IRS”) regarding Atmel’s investigation into misuse of corporate travel funds and investigation into backdating of stock options. We are cooperating fully with DOJ, SEC and IRS inquiries and intend to continue to do so. These inquiries likely will require us to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against us and the payment of significant fines and penalties by us, which may adversely affect our results of operations and cash flow. We cannot predict how long it will take or how much more time and resources we will have to expend to resolve these government inquiries, nor can we predict the outcome of these inquiries.

Late SEC Filings and NASDAQ Delisting Proceedings

Due to the Audit Committee investigation and the resulting restatements, we did not file on time this Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, the Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Reports on Form 10-Q for the quarter ended June 30, 2006 and the quarter ended September 30, 2006. As a result, we received four NASDAQ Staff Determination letters, dated May 14, 2007, March 8, 2007, November 14, 2006, and August 14, 2006, respectively, stating that we were not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that our stock was subject to delisting from the NASDAQ Global Select Market. In response to the first notice of non-compliance, we requested a hearing before a NASDAQ Listing Qualifications Panel (the “Panel”). Following the hearing, the Panel granted our request for continued listing subject to the requirements that Atmel provide the Panel with certain information relating to the Audit Committee’s investigation, which was subsequently submitted to the Panel, and that we file the Quarterly Reports on Form 10-Q for the quarters ended June 30 and September 30, 2006 and any necessary restatements by February 9, 2007. On January 22, 2007, the NASDAQ Listing and Hearing Review Council (the “Listing Council”) determined to call our matter for review. The Listing Council also determined to stay the Panel decision that required us to file the Quarterly Reports on Form 10-Q for the quarters ended June 30 and September 30, 2006, by February 9, 2007. In connection with the call for review, the Listing Council requested that the Company provide an update on its efforts to file the delayed reports, which it did on March 2, 2007. On May 10, 2007, we received the

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decision of the Listing Council in response to our request for continued listing on the NASDAQ Global Select Market. Specifically, the Listing Council granted our request for an extension within which to satisfy NASDAQ’s filing requirement, through June 8, 2007. On June 4, 2007, the Board of Directors of The NASDAQ Stock Market (the “Nasdaq Board”) informed us that it had called the Listing Council’s decision for review and had determined to stay any decision to suspend our securities from trading, pending consideration by the Nasdaq Board in July 2007.

On June 8, 2007, we filed our Annual Report on Form 10-K for the year ended December 31, 2006, and our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006. With the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, we believe that we have returned to full compliance with SEC reporting requirements and NASDAQ listing requirements. However, SEC comments on these Reports (or other reports that we previously filed) or other factors could render us unable to maintain an effective listing of our common stock on the NASDAQ Global Select Market or any other national securities exchange.

Shareholder Litigation Relating to Historical Stock Option Practices

From July through September 2006, six stockholder derivative lawsuits were filed (three in the U.S. District Court for the Northern District of California and three in Santa Clara County Superior Court) by persons claiming to be our stockholders and purporting to act on Atmel’s behalf, naming Atmel as a nominal defendant and some of its current and former officers and directors as defendants. The suits contain various causes of action relating to the timing of stock option grants awarded by Atmel. The federal cases were consolidated and an amended complaint was filed on November 3, 2006. Atmel and the individual defendants have each moved to dismiss the consolidated amended complaint on various grounds. The state derivative cases have been consolidated and Atmel expects an amended consolidated complaint to be filed timely pursuant to a stipulation among the parties. Atmel believes that the filing of the derivative actions was unwarranted and intends to vigorously contest them.

We cannot predict the outcome of the shareholder class action cases described above and we cannot estimate the likelihood or potential dollar amount of any adverse results. However, an unfavorable outcome in this litigation could have a material adverse impact upon the financial position, results of operations or cash flows for the period in which the outcome occurs and in future periods.

Other Investigations

In addition to the investigation into stock option granting practices, the Audit Committee of Atmel’s Board of Directors, with the assistance of independent legal counsel and forensic accountants, conducted independent investigations into (a) certain proposed investments in high yield securities that were being contemplated by our former Chief Executive Officer during the period from 1999 to 2002 and bank transfers related thereto, and (b) alleged payments from certain of our customers to employees at one of our Asian subsidiaries. The Audit Committee has completed its investigations, including its review of the impact on our condensed consolidated financial statements for the three months ended March 31, 2007, and prior periods, and concluded that there was no impact on such consolidated financial statements. However, we can give no assurances that subsequent information will not be discovered that may cause the Audit Committee to reopen such reviews. In addition, government agencies, including local authorities in Asia, may initiate their own review into these and related matters. At this time, we cannot predict the outcome of such reviews, if any. An adverse finding in any of these matters could lead to future delays in filing our subsequent SEC reports and delisting of our common stock from the NASDAQ Global Select Market, and result in additional management time being diverted and additional legal and other costs that could have a material adverse effect on our business, financial condition and results of operations.

OVERVIEW

We are a leading designer, developer and manufacturer of a wide range of semiconductor products. Our diversified product portfolio includes our proprietary AVR microcontrollers, security and smart card integrated circuits, and a diverse range of advanced logic, mixed-signal, nonvolatile memory and radio frequency devices. Leveraging our broad intellectual property portfolio, we are able to provide our customers with complete system solutions. Our solutions target a wide range of applications in the communications, computing, consumer

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electronics, storage, security, automotive, military and aerospace markets, and are used in products such as mobile handsets, automotive electronics, GPS systems and batteries.

We design, develop, manufacture and sell our products. We develop process technologies to ensure our products provide the maximum possible performance. During the three months ended March 31, 2007, we manufactured approximately 94% of our products in our own wafer fabrication facilities.

Our operating segments comprise: (1) application specific integrated circuits (ASICs); (2) microcontroller products (Microcontroller); (3) nonvolatile memory products (Nonvolatile Memory); and (4) radio frequency and automotive products (RF and Automotive).

During the three months ended March 31, 2007, net revenues decreased by 2%, or approximately $10 million, to $391 million, as compared to $401 million for the three months ended March 31, 2006, as a result of declines in our ASIC, Nonvolatile Memory and RF and Automotive segments, partially offset by growth in our Microcontroller segment. The increase in net revenues in our Microcontroller segment was primarily driven by growth of our AVR microcontroller products. ASIC and Nonvolatile Memory net revenues decreased in the three months ended March 31, 2007 as both smart card products and flash memory products experienced lower revenue compared to the three months ended March 31, 2006 due to competitive pricing pressures. The decrease in net revenues in the RF and Automotive segment is primarily related to reduced shipment quantities for BiCmos foundry products related to communication chipsets for CDMA phones partially offset by growth in Audio Radio products.

During the three months ended March 31, 2007, gross margin improved to 36%, compared to 32% for the three months ended March 31, 2006, primarily due to a more favorable mix of higher margin products sold, higher factory utilization rates, improved manufacturing yields, as well as lower depreciation expense following the December 2006 reclassification of assets at our North Tyneside, UK facility as held for sale.

We had income from operations of $13 million in the three months ended March 31, 2007, compared to income from operations of $13 million for the three months ended March 31, 2006. The decrease in income from operations from the comparable prior period resulted primarily from higher restructuring expense and higher selling, general and administrative costs related to increased stock-based compensation expense and legal expense related to the audit committee’s investigation into prior stock option practices and other related matters, offset by lower manufacturing costs and lower depreciation expense.

We recognized a benefit of $20 million resulting from the receipt of French research and development tax credits related to prior tax years for the three months ended March 31, 2007, resulting in a net tax benefit of $15 million for the three months ended March 31, 2007.

During the three months ended March 31, 2007, we generated positive cash flow from operations and continued to strengthen our liquidity position. At March 31, 2007, our cash, cash equivalents and short-term investments totaled $479 million, up from approximately $467 million at December 31, 2006, while total indebtedness decreased to approximately $146 million at March 31, 2007, from $169 million at December 31, 2006.

RESULTS OF OPERATIONS


	Three Months Ended March 31,
	2007				2006
					As restated
	(amounts in thousands and as a percent of net revenues)
Net revenues	$	391,313	100.0	%	$	400,784	100.0	%
Gross profit		139,937	35.8	%		126,382	31.5	%
Research and development expenses		67,299	17.2	%		68,151	17.0	%
Selling, general and administrative expenses		58,059	14.8	%		45,411	11.3	%
Restructuring charges		1,782	0.5	%		151	0.0	%

Income from operations	$	12,797	3.3	%	$	12,669	3.2	%

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Net Revenues

During the three months ended March 31, 2007, net revenues decreased by 2%, or approximately $10 million, to $391 million, as compared to $401 million for the three months ended March 31, 2006, as a result of declines in our ASIC, Nonvolatile Memory and RF and Automotive segments, partially offset by growth in our Microcontroller segment. The increase in net revenues in our Microcontroller segment was primarily driven by growth of our AVR microcontroller products. ASIC and Nonvolatile Memory net revenues decreased in the three months ended March 31, 2007 as both smart card products and flash memory products experienced lower revenue compared to the three months ended March 31, 2006 due to competitive pricing pressures. The decrease in net revenues in the RF and Automotive segment is primarily related to reduced quantity shipments for BiCmos foundry products related to communication chipsets for CDMA phones partially offset by growth in Audio Radio products.

Net Revenues — By Operating Segment

Our net revenues by segment for the three months ended March 31, 2007 compared to the three months ended March 31, 2006 are summarized as follows (in thousands):


	Three Months Ended
	March 31,
Segment	2007		2006		Change			% Change

ASIC	$	110,977	$	123,968	$	(12,991	)		(10	%)
Microcontroller		108,022		91,085		16,937			19	%
Nonvolatile Memory		86,028		95,629		(9,601	)		(10	%)
RF and Automotive		86,286		90,102		(3,816	)		(4	%)

Total net revenues	$	391,313	$	400,784	$	(9,471	)		(2	%)

Net revenue amounts have been adjusted to reflect the divestiture of our Grenoble, France, subsidiary. Net revenues from the Grenoble subsidiary of $36 million for the three months ended March 31, 2006 are excluded from consolidated net revenues, and are reclassified to Results from Discontinued Operations. See Note 8 to Notes to Condensed Consolidated Financial Statements for further discussion. Certain product families have been reassigned within the ASIC and Microcontroller segments as part of reorganization efforts to improve organizational efficiency. As a result, prior period net revenues and income from operating segments have been reclassified to conform to the current presentation of operating segment information.

ASIC

ASIC segment net revenues decreased by 10% or $13 million to $111 million for the three months ended March 31, 2007, compared to $124 million for the three months ended March 31, 2006. ASIC segment net revenues decreased during the three months ended March 31, 2007 as smart card product net revenues declined $9 million, or 18%, compared to the three months ended March 31, 2006 due primarily to reduced shipments of lower margin commodity telecommunication-market products.

Microcontroller

Microcontroller segment net revenues increased by 19% or $17 million to $108 million for the three months ended March 31, 2007, compared to $91 million for the three months ended March 31, 2006. The significant growth in net revenues for the three months ended March 31, 2007 compared to the three months ended March 31, 2006 resulted primarily from new customer designs utilizing both our proprietary AVR microcontroller products as well as our ARM-based microcontroller products. AVR microcontroller revenue grew 18% in the first quarter of 2007, while other non-proprietary microcontroller families increased revenue by 21% when compared to the first quarter of 2006. Increased test capacity added in the second half of 2006 allowed us to increase shipment rates in 2007 compared to the level of test capacity available in the first quarter of 2006 for AVR microcontrollers. In addition, market share gains in the 8-bit microcontroller market and ARM-based microcontrollers contributed to higher shipment levels in 2007. Demand for microcontrollers is largely driven by increased use of embedded control systems in consumer, industrial and automotive products.

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Nonvolatile Memory

Nonvolatile Memory segment revenues decreased by 10% or $10 million to $86 million for the three months ended March 31, 2007, compared to $96 million for the three months ended March 31, 2006. The decrease in the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006 is primarily due to reduced shipments of lower margin commodity flash memory products. For the quarter ended March 31, 2007, revenues for flash-based products declined by 22% compared to the quarter ended March 31, 2006. Markets for our nonvolatile memory products are more competitive than other markets we sell in, and as a result, our memory products are subject to greater declines in average selling prices than products in our other segments. Competitive pressures and rapid obsolescence of products are among several factors causing continued pricing declines in 2007. During the quarter ended March 31, 2007, serial EEPROM-based product revenues were flat when compared to revenue levels experienced for the quarter ended March 31, 2006. While pricing for this segment remained steady, unit shipments declined by 2% compared to the first quarter of 2006. This product family benefits from significant market share resulting from competitive pricing and a broad range of offerings. Conditions in the non volatile memory segment are expected to remain challenging for the foreseeable future. In an attempt to mitigate the pricing fluctuations in this market, we have shifted our focus away from lower margin commodity parallel Flash products, which tend to experience greater than average sales price fluctuations, to other serial interface nonvolatile memory products.

RF and Automotive

RF and Automotive segment revenues decreased by 4% or $4 million to $86 million for the three months ended March 31, 2007, compared to $90 million for the three months ended March 31, 2006. The decrease in net revenues in the RF and Automotive segment is primarily related to reduced shipment quantities for BiCmos foundry products related to communication chipsets for CDMA phones partially offset by growth in other automotive products. For the three months ended March 31, 2006, net revenues decreased approximately $10 million for BiCmos foundry products, offset by a $6 million increase in revenue from other automotive products.

Net Revenues — By Geographic Area

Our net revenues by geographic areas for the three months ended March 31, 2007 compared to the three months ended March 31, 2006 are summarized as follows (revenues are attributed to countries based on delivery locations):


	Three Months Ended
	March 31,
Segment	2007		2006		Change			% Change

United States	$	49,786	$	63,767	$	(13,981	)		(21.9	%)
Europe		143,109		124,618		18,491			14.8	%
Asia		193,942		209,184		(15,242	)		(7.3	%)
Other *		4,476		3,215		1,261			39.2	%

Total net revenues	$	391,313	$	400,784	$	(9,471	)		(2.4	%)


*		Primarily includes Philippines, South Africa, and Central and South America

Sales outside the United States accounted for 87% of our net revenues for the three months ended March 31, 2007, as compared to 84% of our net revenues for the three months ended March 31, 2006.

Our sales in the United States decreased by $14 million, or 22%, for the three months ended March 31, 2007, compared to the three months ended March 31, 2006 due to United States based customers continuing to reduce deliveries to domestic operations and reduced shipments to United States based distributors.

Our sales in Europe increased by $18 million, or 15%, for the three months ended March 31, 2007, as compared to the three months ended March 31, 2006, due to both higher volume shipments of ARM-based microcontrollers

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and automotive products, as well as higher revenues related to the increase in the value of the euro relative to the U.S. dollar.

Our sales in Asia decreased by $15 million, or 7%, for the three months ended March 31, 2007, as compared to the three months ended March 31, 2006, primarily due to lower average selling prices.

The trend over the last several years has been an increase in revenues in Asia, while revenues in the United States and Europe have either declined or grown at a much slower rate. We believe that part of this shift reflects changes in customer manufacturing trends, with many customers increasing production in Asia due to lower labor costs. While revenues in Asia declined in 2007 compared to 2006, we expect that Asia revenues will grow more rapidly than other regions in the future. However, in the short-term our revenues in Asia may decrease further as we optimize our distributor base in Asia. It may take time for us to identify financially viable distributors and help them develop high quality support services. This process may result in short-term revenue loss, particularly in the third and fourth quarters of fiscal 2007. There can be no assurances that we will be able to manage this optimization process in an efficient and timely manner.

Revenues and Costs – Impact from Changes to Foreign Exchange Rates

During the three months ended March 31, 2007, approximately 23% of net revenues were denominated in foreign currencies, primarily the euro. Sales in euros amounted to approximately 22% and 18% of net revenues for the three months ended March 31, 2007 and 2006, respectively. Sales in Japanese yen accounted for approximately 1% of net revenues for both the three months ended March 31, 2007 and March 31, 2006.

Average exchange rates utilized to translate foreign currency revenues and expenses were $1.32 to the euro for the three months ended March 31, 2007, compared to $1.19 to the euro for the three months ended March 31, 2006.

During the three months ended March 31, 2007, changes in foreign exchange rates had an unfavorable impact on operating costs and income from operations. Had average exchange rates remained the same during the three months ended March 31, 2007 as the average exchange rates in effect for the three months ended March 31, 2006, our reported revenues for the three months ended March 31, 2007, would have been $8 million lower. However, our foreign currency expenses exceed foreign currency revenues. For the three months ended March 31, 2007, 55% of our operating expenses were denominated in foreign currencies, primarily the euro. Had average exchange rates for the three months ended March 31, 2007 remained the same as the average exchange rates for the three months ended March 31, 2006, our operating expenses would have been $19 million lower (relating to cost of revenues of $12 million; research and development expenses of $5 million; and sales, general and administrative expenses of $2 million). The net effect resulted in a decrease to income from operations of $11 million as a result of unfavorable exchange rates in effect for the three months ended March 31, 2007 when compared to the three months ended March 31, 2006.

Cost of Revenues and Gross Margin

Our cost of revenues includes the costs of wafer fabrication, assembly and test operations, changes in inventory reserves and freight costs. Our gross margin as a percentage of net revenues fluctuates, depending on product mix, manufacturing yields, utilization of manufacturing capacity, and average selling prices, among other factors.

During the three months ended March 31, 2007, gross margin improved to 36%, compared to 32% for the three months ended March 31, 2006, primarily due to a more favorable mix of higher margin products sold, higher factory utilization rates, improved manufacturing yields, as well as lower depreciation expense following the December 2006 decision to reclassify assets at our North Tyneside, UK facility as held for sale.

In recent periods, average selling prices for certain semiconductor products have been below manufacturing costs, which has adversely affected our results of operations, cash flows and financial condition. Because inventory reserves are recorded in advance of when the related inventory is sold, subsequent gross margins in the period of sale may be higher than they would be absent the effect of the previous write-downs. The impact on gross margins of the sale of previously written down inventory was not material in the three months ended March 31, 2007 and 2006. Our excess and obsolete inventory reserves taken in prior years relate to all of our product categories, while

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lower-of-cost or market reserves relate primarily to our non-volatile memory products and smart card products.

We receive economic assistance grants in some locations as an incentive to achieve certain hiring and investment goals related to manufacturing operations, the benefit for which is recognized as an offset to related costs. We recognized a reduction to cost of revenues for such grants of approximately $0.3 million and approximately $2 million during the three months ended March 31, 2007 and 2006, respectively, following the elimination of grant benefits as a result of our December 2006 decision to sell our North Tyneside, UK facility.

Research and Development

During the three months ended March 31, 2007 and 2006, research and development (“R&D”) expenses were $67 million and $68 million, respectively. The unfavorable impact of foreign exchange rate fluctuations of $5 million was offset by lower depreciation expense and higher research grant benefits. As a percentage of net revenues, research and development expenses totaled 17% for both the three months ended March 31, 2007 and March 31, 2006.

We have continued to invest in a variety of product areas and process technologies, including embedded EEPROM CMOS technology, logic and nonvolatile memory to be manufactured at 0.13 and 0.09 micron line widths, as well as investments in SiGe BiCMOS technology to be manufactured at 0.18 micron line widths. We have also continued to purchase or license technology when necessary in order to bring products to market in a timely fashion. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve. However, we are seeking to reduce our R&D costs by focusing on fewer, more profitable development projects.

We receive R&D grants from various European research organizations, the benefit for which is recognized as an offset to related costs. For the three months ended March 31, 2007, we recognized $5 million in research grant benefits, compared to $4 million recognized for the three months ended March 31, 2006.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses increased by 29% or $13 million to $58 million for the three months ended March 31, 2007, from $45 million for the three months ended March 31, 2006. The increase in SG&A expenses for the three months ended March 31, 2007, as compared to the three months ended March 31, 2006, was due to increased legal and accounting services expenses of $7 million, increased employee salaries and benefits of $3 million, and a $1 million increase in stock option compensation charges. As a percentage of net revenues, SG&A expenses increased to 15% for the three months ended March 31, 2007, compared to 11% for the three months ended March 31, 2006.

Selling, general and administrative expenses are expected to remain higher than in previous periods for the second quarter of 2007 due to legal and accounting services costs associated with the audit committee investigations, and various SEC filings which were delayed as a result of these investigations, as well as expenses associated with the May 2007 special shareholder meeting. These expenses are expected to decline in the second half of 2007 following the conclusion of these matters to levels more consistent with prior periods.

Stock-Based Compensation

Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award which is computed using a Black-Scholes option valuation model, and is recognized as expense over the employee’s requisite service period.

During the three months ended March 31, 2007 and 2006, we recorded stock-based compensation expense of $3 million and $2 million, respectively. Compensation expense recognized in connection with the employee stock purchase plans were not significant during these periods due to suspension of stock purchase activity after February of 2006 as a result of the audit committee investigation into prior stock option practices.

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Upon adoption of SFAS No. 123R, we reassessed our equity compensation valuation method and related assumptions. Our determination of the fair value of stock-based payment awards on the date of grant utilizes an option-pricing model, and is impacted by its common stock price as well as a change in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: expected common stock price volatility over the term of the option awards, as well as the projected employee option exercise behaviors (expected period between stock option vesting date and stock option exercise date). Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because employee stock options have certain characteristics that are significantly different from traded options, and changes in the subjective assumptions can materially affect the estimated fair value, in our opinion, the existing Black-Scholes option-pricing model may not provide an accurate measure of the fair value of employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123R using an option-pricing model that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Stock-based compensation expense recognized in our condensed consolidated statements of operations for the three months ended March 31, 2007 and 2006 included a combination of stock option awards granted prior to January 1, 2006 and stock option awards granted subsequent to January 1, 2006. In conjunction with the adoption of SFAS No. 123R, we changed our method of attributing the value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for all stock-based payment awards granted subsequent to January 1, 2006 is recognized using the straight-line single-option method. Stock-based compensation expense included in the three months ended March 31, 2007 and 2006 includes the impact of estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the periods prior to 2006, we accounted for forfeitures as they occurred.

Assets Held for Sale and Impairment Charges

Under SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we assess the recoverability of long-lived assets with finite useful lives whenever events or changes in circumstances indicate that we may not be able to recover the asset’s carrying amount. We measure the amount of impairment of such long-lived assets by the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We present impairment charges as a separate line item within operating expenses in our condensed consolidated statements of operations. We classify long-lived assets to be disposed of other than by sale as “held-and-used” until they are disposed. We report long-lived assets to be disposed of by sale as “held-for-sale” and recognize those assets on the condensed consolidated balance sheet at the lower of carrying amount or fair value less cost to sell.

We reclassified the assets and liabilities of the North Tyneside, United Kingdom, facility and the assets of the Irving, Texas, facility as held for sale during the quarter ended December 31, 2006. Following the sale of the North Tyneside facility, we expect to incur significant continuing cash flows with the disposed entity and, as a result, we do not expect to meet the criteria to classify the results of operations as well as assets and liabilities as discontinued operations. The Irving facility does not qualify as discontinued operations as it is an idle facility and does not constitute a component of an entity in accordance with SFAS No. 144.

The following table details the items which are reflected as assets and liabilities held for sale in the condensed consolidated balance sheets as of March 31, 2007 and December 31, 2006:

Held for Sale at March 31, 2007:


	North
	Tyneside		Irving		Total

Non-current assets
Fixed assets, net		89,970		35,040		125,010
Intangible and other assets		696		—		696

Total non-current assets held for sale	$	90,666	$	35,040	$	125,706


Current liabilities

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	North
	Tyneside		Irving		Total

Current portion of long-term debt	$	58,050	$	—	$	58,050
Trade accounts payable		16,958		—		16,958
Accrued liabilities and other		44,822		—		44,822

Total current liabilities related to assets held for sale		119,830		—		119,830

Long-term debt and capital lease obligations less current portion		191		—		191

Total non-current liabilities related to assets held for sale		191		—		191

Total liabilities related to assets held for sale	$	120,021	$	—	$	120,021



Held for Sale at December 31, 2006:

	North
	Tyneside		Irving		Total

Non-current assets
Fixed assets, net	$	87,941	$	35,040	$	122,981
Intangible and other assets		816		—		816

Total non-current assets held for sale	$	88,757	$	35,040	$	123,797


Current liabilities
Current portion of long-term debt	$	70,340	$	—	$	70,340
Trade accounts payable		17,329		—		17,329
Accrued liabilities and other		46,224		—		46,224

Total current liabilities related to assets held for sale		133,893		—		133,893

Long-term debt and capital lease obligations less current portion		313		—		313

Total non-current liabilities related to assets held for sale		313		—		313

Total liabilities related to assets held for sale	$	134,206	$	—	$	134,206

Irving, Texas, Facility

We acquired our Irving, Texas, wafer fabrication facility in January 2000 for $60 million plus $25 million in additional costs to retrofit the facility after the purchase. Following significant investment and effort to reach commercial production levels, we decided to close the facility in 2002 and it has been idle since then. Since 2002, we recorded various impairment charges, including $4 million during the quarter ended December 31, 2005. In the quarter ended December 31, 2006, we performed an assessment of the market value for this facility based on our estimate, which considered a current offer from a willing third party to purchase the facility, among other factors, in determining fair market value. Based on this assessment, an additional impairment charge of $10 million was recorded.

On May 1, 2007, we announced the sale of our Irving, Texas, wafer fabrication facility for $37 million in cash. The sale of the facility includes 39 acres of land, the fabrication facility building, and related offices, and remaining equipment. An additional 17 acres was retained by us. We do not expect to record a material gain or loss on the sale, following the impairment charge recorded in the fourth quarter of 2006.

North Tyneside, United Kingdom, and Heilbronn, Germany, Facilities

In December 2006, we announced our decision to sell our wafer fabrication facilities in North Tyneside, United Kingdom, and Heilbronn, Germany. It is expected these actions will increase manufacturing efficiencies by better utilizing remaining wafer fabrication facilities, while reducing future capital expenditure requirements. We have classified assets of the North Tyneside site as assets held-for-sale on the condensed consolidated balance sheets as of March 31, 2007 and December 31, 2006. Following the announcement of intention to sell the facility in the fourth quarter of 2006, we assessed the fair market value of the facility compared to the carrying value recorded, including use of an independent appraisal, among other factors. The fair value was determined using a market-based valuation technique and estimated future cash flows. We recorded a net impairment charge of $72 million in the quarter

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ended December 31, 2006 related to the write-down of long lived assets to their estimated fair values, less costs to dispose of the assets. The charge included an asset write-down of $170 million for equipment, land and buildings, offset by related currency translation adjustment associated with the assets, of $98 million, as we intend to sell our United Kingdom entity, which contains the facility, and hence the currency translation adjustment related to the assets is included in the impairment calculation.

We acquired the North Tyneside, United Kingdom, facility in September 2000, including an interest in 100 acres of land and the fabrication facility of approximately 750,000 square feet, for $100 million. We will have the right to acquire title to the land in 2016 for a nominal amount. We sold 40 acres in 2002 for $14 million. We recorded an asset impairment charge of $318 million in the second quarter of 2002 to write-down the carrying value of equipment in the fabrication facilities in North Tyneside, United Kingdom, to its estimated fair value. The estimate of fair value was made by management based on a number of factors, including an independent appraisal.

The Heilbronn, Germany, facility did not meet the criteria for classification as held-for-sale as of March 31, 2007 and December 31, 2006, due to uncertainties relating to the likelihood of completing the sale within the next twelve months. Long-lived assets of this facility at March 31, 2007 and at December 31, 2006, remain classified as held-and-used. After an assessment of expected future cash flows generated by the Heilbronn, Germany facility, we concluded that no impairment exists.

See Note 9 to Notes to Condensed Consolidated Financial Statements for further discussion of assets held for sale as of March 31, 2007 and December 31, 2006.

Restructuring Charges and Loss on Sale

2007 Restructuring Charges

In the first quarter of 2007, we continued to implement the restructuring initiatives announced in the fourth quarter of 2006 and incurred additional restructuring charges of $2 million. The charges consist of the following:

	•		$1 million in termination benefits recorded in accordance with SFAS No. 112, “Employers’ Accounting for Post Employment Benefits” (“SFAS No. 112). These costs related to additional employee severance costs for employees in Europe.

	•		$0.5 million in severance costs related to the involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities” (SFAS No. 146”).

2006 Restructuring Activities

In the first quarter of 2006, we incurred $0.2 million in restructuring charges primarily comprised of severance and one-time termination benefits.

In the fourth quarter of 2006, we announced a restructuring initiative to focus on high growth, high margin proprietary product lines and optimize manufacturing operations. This restructuring plan will impact employees across multiple business functions and in several locations. The charges directly relating to this initiative consist of the following:

	•		$7 million in one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112, “Employers’ Accounting for Post Employment Benefits.” These costs related to the termination of employees in Europe.

	•		$2 million in one-time severance costs related to the involuntary termination of 51 employees, primarily in manufacturing, research and development and administration. These benefits costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities.”

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All termination benefit charges were recorded in accordance with SFAS No. 146 and SFAS No. 112 “Employers’ Accounting for Postemployment Benefits—an amendment of FASB Statements No. 5 and 43.”

In conjunction with our restructuring efforts in the third quarter of 2002, we incurred a $12 million charge related to the termination of a contract with a supplier. The charge was estimated using the present value of the future payments which totaled $18 million at the time. At March 31, 2007, the remaining restructuring accrual was $9 million and will be paid over the next 7 years.

Other Charges

In the fourth quarter of 2006, we announced our intention to close the design facility in Greece and to sell our facility in North Tyneside, United Kingdom. We recorded a charge of $30 million in the fourth quarter of 2006 associated with the expected future repayment of subsidy grants pursuant to the grant agreements with government agencies at these locations.

Interest and Other Income (Expenses), Net

Interest and other income (expenses), net, improved to $1 million of income for the three months ended March 31, 2007 compared to $7 million of expense for the three months ended March 31, 2006. The decrease in interest expense is primarily due to long-term debt reductions in fiscal 2006. Interest and other income (expenses), net also improved as a result of increased interest income from higher average cash balances during the three months ended March 31, 2007 following the repayment of our convertible bonds in May 2006 as well as the receipt of proceeds from the sale of our Grenoble, France subsidiary in July 2006. As a percentage of net revenues, interest and other income (expenses), net totaled 0% and 2% for the three months ended March 31, 2007 and 2006, respectively.

Interest rates on our outstanding borrowings did not change significantly in the three months ended March 31, 2007, as compared to the three months ended March 31, 2006.

Income Taxes

For the three months ended March 31, 2007, we recorded an income tax benefit of $15 million, compared to an income tax expense of $7 million for the three months ended March 31, 2006.

In the three months ended March 31, 2007, we recognized a tax benefit of approximately $20 million resulting from the refund of French research tax credits for years 1999 through 2002, which was received during the quarter. In addition, in the three months ended March 31, 2007, the Hong Kong tax authorities completed a review of our tax returns for the years 2001 through 2004, which resulted in no adjustments. As a result, during the quarter, we recognized a tax benefit relating to a tax refund of approximately $2 million received in prior years.

In 2005, the Internal Revenue Service ("IRS") proposed adjustments to our U.S. income tax returns for the years 2000 and 2001. In January 2007, after subsequent discussions with us, the IRS revised the proposed adjustments for these years. We have protested these proposed adjustments and are currently pursuing administrative review with the IRS Appeals Division.

In May 2007, the IRS proposed adjustments to our U.S. income tax returns for the years 2002 and 2003. We will file a protest to these proposed adjustments and will pursue administrative review with the IRS Appeals Division.

In addition, we have various tax audits in progress in certain U.S. states and foreign jurisdictions. We have accrued taxes, and related interest and penalties that may be due upon the ultimate resolution of these examinations and for other matters relating to open U.S. Federal, state and foreign tax years in accordance with FIN 48.

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While we believe that the resolution of these audits will not have a material adverse impact on our results of operations, cash flows or financial position, the outcome is subject to uncertainty. Should we be unable to reach agreement with the IRS, U.S. state or foreign tax authorities on the various proposed adjustments, there exists the possibility of an adverse material impact on our results of operations, cash flows and financial position.

On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Upon review of our reserves, there were no changes to our reserves for uncertain tax positions upon adoption. At the adoption date of January 1, 2007, we had $176 million of unrecognized tax benefits, all of which would affect our income tax expense if recognized. In the quarter ended March 31, 2007, we released $2 million of tax reserves due to the completion of a review of our tax returns by the Hong Kong tax authority. In addition, we recognized a benefit of $20 million resulting from the refund of research and development credits from the French tax authority. As of March 31, 2007, we have $155 million of unrecognized tax benefits.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007, we had approximately $31 million of accrued interest and penalties related to uncertain tax positions.

We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. We are no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 1999. Tax years for significant foreign jurisdictions including Germany, France, United Kingdom, and Switzerland are closed through 2002, 2001, 2004 and 2001 respectively; subsequent tax years for these jurisdictions remain subject to tax authority review. Hong Kong tax years are closed for years through 2004 and subsequent tax years remain subject to tax authority review.

Discontinued Operations

Grenoble, France, Subsidiary Sale

Our condensed consolidated financial statements and related footnote disclosures reflect the results of our Grenoble, France, subsidiary as Discontinued Operations, net of applicable income taxes, for all reporting periods presented.

In July 2006, we completed the sale of our Grenoble, France, subsidiary to e2v technologies plc, a British corporation (“e2v”). On August 1, 2006, we received $140 million in cash upon closing ($120 million, net of working capital adjustments and costs of disposition).

The facility was originally acquired in May 2000 from Thomson-CSF, and was used to manufacture image sensors, as well as analog, digital and radio frequency ASICs.

In connection with the sale, we agreed to provide certain technical support, foundry, distribution and other services extending up to four years following the completion of the sale, and in turn e2v has agreed to provide certain design and other services to us extending up to 5 years following the completion of the sale. The financial statement impact of these agreements is not expected to be material to us. The ongoing cash flows between us and e2v are not significant and as a result, the Company has no significant continuing involvement in the operations of the subsidiary. Therefore, we have met the criteria in SFAS No. 144, which were necessary to classify the Grenoble, France, subsidiary as discontinued operations.

Included in other currents assets on the condensed consolidated balance sheet as of March 31, 2007, is an outstanding receivable balance due from e2v of $12 million related to payments advanced to e2v to be collected

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from customers of e2v by Atmel. The transitioning of the collection of trade receivables on behalf of e2v is expected to be completed in 2007.

The following table summarizes results from Discontinued Operations for the periods indicated included in the condensed consolidated statement of operations (in thousands, except per share data) :


	March 31,
Three Months Ended:		2006

Net revenues	$	36,000
Operating costs and expenses		24,366

Income from discontinued operations, before income taxes		11,634
Less: provision for income taxes		(5,772	)

Income from discontinued operations, net of income taxes	$	5,862

Income from discontinued operations, net of income taxes, per common share:
Basic and Diluted	$	0.01

Weighted-average shares used in basic and diluted income per share calculations		485,576

Liquidity and Capital Resources

At March 31, 2007, we had $479 million of cash and cash equivalents and short-term investments compared to $467 million at December 31, 2006. Our current ratio, calculated as total current assets divided by total current liabilities, was 2.15 at March 31, 2007, an increase of 0.12 from 2.03 at December 31, 2006. We continue to generate positive cash flow from operating activities. We have reduced our net debt obligations to $146 million at March 31, 2007, from $169 million at December 31, 2006, a decrease of $23 million. Working capital (total current assets less total current liabilities) increased by $38 million to $623 million at March 31, 2007, compared to $585 million at December 31, 2006.

Operating Activities: Net cash provided by operating activities was $59 million for the three months ended March 31, 2007, compared to $83 million in the three months ended March 31, 2006. We generated positive operating cash flow due primarily to positive net income of $29 million adjusted for depreciation and amortization expense of $32 million along with other non-cash charges reflected in the condensed consolidated statements of operations and movements in working capital as discussed below.

Accounts receivable decreased by 5% or $11 million to $216 million at March 31, 2007, from $227 million at December 31, 2006. The average days of accounts receivable outstanding (“DSO”) was 50 days at March 31, 2007, even with the level of 50 days for the three months ended December 31, 2006. Our accounts receivable and DSO are primarily impacted by shipment linearity, payment terms offered, and collection performance. Should we need to offer longer payment terms in the future due to competitive pressures or longer customer payment patterns, our DSO and cash flows from operating activities would be negatively affected.

Increases in inventories utilized $23 million of operating cash flows in the three months ended March 31, 2007 compared to $6 million of cash flows utilized in for the same period in 2006. Inventory levels increased to 130 days at March 31, 2007, compared to 116 days at December 31, 2006. This increase is primarily related to higher stock levels required to improve customer delivery times, and reduced shipment levels experienced during the first quarter of 2007. Inventories consist of raw wafers, purchased specialty wafers, work-in-process and finished units. We are continuing to take measures to reduce manufacturing cycle times and improve production planning efficiency. However, the strategic need to offer competitive lead times may result in an increase in inventory levels in the future.

Decreases in current and other assets generated $13 million of operating cash flows in the three months ended March 31, 2007, primarily due to payments received for trade receivables advanced to e2v technologies PLC related to the sale of the Grenoble, France, subsidiary and the receipt of $20 million in research and development income tax credits.

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Decreases in accounts payable utilized $8 million of operating cash flows in the three months ended March 31, 2007, primarily related to payments to suppliers for fixed asset acquisitions and lower production activity levels in 2007.

Increases in accrued and other liabilities generated $4 million of operating cash flows in the three months ended March 31, 2007, primarily related to higher legal fees and related accruals.

Investing Activities: Net cash used in investing activities was $28 million at March 31, 2007, compared to $19 million at March 31, 2006. During the three months ended March 31, 2007, we made additional investments in wafer fabrication equipment to advance our process technologies and in test equipment to process higher unit volumes. For the three months ended March 31, 2007 and 2006, we paid $26 million and $18 million, respectively, for capital acquisitions primarily related to additional fabrication and testing equipment.

Financing Activities: Net cash used in financing activities was $23 million at March 31, 2007, compared to $22 million at March 31, 2006. We continued to pay down debt, with repayments of principal balances on capital leases and other debt totaling $23 million for the three months ended March 31, 2007, compared to $28 million for the three months ended March 31, 2006. Issuance of common stock totaled $6 million for the three months ended March 31, 2006. No stock issuance amounts were received under either employee stock option or employee stock purchase plans during the three months ended March 31, 2007 due to the suspension of employee stock plans during the period where we were not timely in filing our quarterly and annual reports to the SEC.

We believe that our existing balances of cash, cash equivalents and short-term investments, together with anticipated cash flow from operations, equipment lease financing, and other short-term and medium-term bank borrowings, will be sufficient to meet our liquidity and capital requirements over the next twelve months.

The increase in cash and cash equivalents for the three months ended March 31, 2007 and 2006 due to the effect of exchange rate changes on cash balances was $1 million and $2 million, respectively. These cash balances were primarily held in certain subsidiaries in euro denominated accounts and increased in value due to the strengthening of the euro compared to the U.S. dollar during these periods.

During the next twelve months, we expect our operations to generate positive cash flow; however, a significant portion of cash will be used to repay debt and make capital investments. We expect that we will have sufficient cash from operations and financing sources to meet all debt obligations. We made $26 million in cash payments for capital equipment in the three months ended March 31, 2007, and we expect our cash payments for capital expenditures in the next twelve months to be approximately $60 to $80 million. Debt obligations outstanding at March 31, 2007 and expected to be repaid for the twelve months ended March 31, 2008 total $94 million. In 2007 and future years, our capacity to make necessary capital investments will depend on our ability to continue to generate sufficient cash flow from operations and on our ability to obtain adequate financing if necessary.

There were no material changes in our contractual obligations and rights outside of the ordinary course of business or other material changes in our financial condition during the first quarter of 2007, other than the unrecognized tax benefits associated with the adoption of Financial Accounting Standards Board Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes.” The unrecognized tax benefits at March 31, 2007 were approximately $176 million, the timing of the resolution of which is uncertain.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for income taxes

In calculating our income tax expense, it is necessary to make certain estimates and judgments for financial statement purposes that affect the recognition of tax assets and liabilities.

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We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the net deferred tax asset would decrease income tax expense in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the net deferred tax asset would increase income tax expense in the period such determination is made.

Effective January 1, 2007, we adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement no. 109. FIN 48 prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of this Interpretation. FIN 48 also provides guidance on accounting for derecognition, interest and penalties, and classification and disclosure of matters related to uncertainty in income taxes.

Income tax positions are recorded based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that other than the adoption of FIN 48, there have been no significant changes during the three months ended March 31, 2007 to the items that we had disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. See Note 14 to Notes to Condensed Consolidated Financial Statements for further discussion of the adoption of FIN 48.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except in limited circumstances. We expect to adopt SFAS No. 157 beginning January 1, 2008. We are currently evaluating the impact that this pronouncement may have on our consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We maintain investment portfolio holdings of various issuers, types and maturities whose values are dependent upon short-term interest rates. We generally classify these securities as available-for-sale, and consequently record them on the condensed consolidated balance sheet at fair value with unrealized gains and losses being recorded as a separate part of stockholders’ equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our investment portfolio or statements of operations through March 31, 2008. In addition, certain of our borrowings are at floating rates, so this would act as a natural hedge.

We have short-term debt, long-term debt and capital leases totaling $146 million at March 31, 2007. Approximately $47 million of these borrowings have fixed interest rates. We have $99 million of floating interest rate debt, of which approximately $46 million is euro denominated. We do not hedge against the risk of interest rate changes for our floating rate debt and could be negatively affected should these rates increase significantly. While there can be no assurance that these rates will remain at current levels, we believe that any rate increase will not cause a significant adverse impact to our results of operations, cash flows or to our financial position.

The following table summarizes our variable-rate debt exposed to interest rate risk as of March 31, 2007. All fair market values are shown net of applicable premium or discount, if any (dollars in thousands):


									Total
									Variable-rate
									Debt
									Outstanding at
	Payments due by year								March 31,
	2007*		2008		2009		Thereafter		2007

30 day USD LIBOR weighted-average interest rate basis (1) — Capital Leases	$	2,222	$	—	$	—	$	—	$	2,222

90 day USD LIBOR weighted-average interest rate basis (1) - Revolving Line of Credit Due 2008	$	—	$	25,000	$	—	$	—	$	25,000
Senior Secured Term Loan Due 2009		6,250		8,333		4,167		—		18,750

Total of 90 day USD LIBOR rate debt	$	6,250	$	33,333	$	4,167	$	—	$	43,750
90 day USD LIBOR weighted-average interest rate basis (1) — Capital Leases	$	17,355	$	9,125	$	4,314	$	9,705	$	40,499

360 day USD LIBOR weighted - -average interest rate basis (1) - Senior Secured Term Loan Due 2008	$	3,750	$	3,750	$	—	$	—	$	7,500

30/60/90 day EURIBOR interest rate basis (1) — Senior Secured Term Loan Due 2007	$	5,037	$	—	$	—	$	—	$	5,037

Total variable-rate debt	$	34,614	$	46,208	$	8,481	$	9,705	$	99,008


*		Represents payments due over the nine months remaining for 2007.

(1)		Actual interest rates include a spread over the basis amount.

The following table presents the hypothetical changes in interest expense, for the three month period ended March 31, 2007, related to the $99 million in outstanding borrowings that are sensitive to changes in interest rates as of March 31, 2007. The modeling technique used measures the change in interest expense arising from hypothetical parallel shifts in yield, of plus or minus 50 Basis Points (“BPS”), 100 BPS and 150 BPS (in thousands).

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For the three months ended March 31, 2007:


							Interest
							expense with
	Interest expense given an interest rate						no change in		Interest expense given an interest rate
	decrease by X basis points						interest rate		increase by X basis points
	150 BPS		100 BPS		50 BPS				50 BPS		100 BPS		150 BPS

Interest expense	$	3,142	$	3,258	$	3,373	$	3,489	$	3,605	$	3,720	$	3,836

Foreign Currency Risk

When we take an order denominated in a foreign currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we ship our product, which will reduce revenue. Conversely, revenues will be positively impacted if the local currency strengthens against the dollar. In Europe, where our significant operations have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, costs will increase if the local currency strengthens against the dollar. The net effect of unfavorable exchange rates for the three months ended March 31, 2007, compared to the average exchange rates for the three months ended March 31, 2006, resulted in a decrease in income from operations of $11 million (as discussed in this report in Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations). This impact is determined assuming that all foreign currency denominated transactions that occurred in the three months ended March 31, 2007 were recorded using the average foreign currency exchange rates for the same period in 2006. Sales denominated in foreign currencies were 23% and 18% for the three months ended March 31, 2007 and 2006, respectively. Sales denominated in euros were 22% and 17% for the three months ended March 31, 2007 and 2006, respectively. Sales denominated in yen were 1% and 1% for the three months ended March 31, 2007 and 2006, respectively. Costs denominated in foreign currencies, primarily the euro, were 55% and 61% for the three months ended March 31, 2007 and 2006, respectively.

We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Approximately 26% of our accounts receivable are denominated in foreign currency as of both March 31, 2007 and December 31, 2006, respectively.

We also face the risk that our accounts payable and debt obligations denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. Approximately 50% and 48% of our accounts payable were denominated in foreign currency as of March 31, 2007 and December 31, 2006, respectively. Approximately 54% and 60% of our debt obligations were denominated in foreign currency as of March 31, 2007 and December 31, 2006, respectively.

Item 4. Controls and Procedures

Evaluation of Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934 (“Disclosure Controls”). Based on this evaluation our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

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Limitations on the Effectiveness of Controls

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s Disclosure Controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control Over Financial Reporting.

During the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

On August 7, 2006, George Perlegos, Atmel’s former President and Chief Executive Officer, and Gust Perlegos, Atmel’s former Executive Vice President, Office of the President, filed three actions in Delaware Chancery Court against Atmel and some of its officers and directors under Sections 211, 220 and 225 of the Delaware General Corporation Law. In the Section 211 action, plaintiffs alleged that on August 6, 2006, the Board of Directors wrongfully cancelled or rescinded a call for a special meeting of Atmel’s stockholders, and sought an order requiring the holding of the special meeting of stockholders. In the Section 225 action, plaintiffs alleged that their termination was the product of an invalidly noticed board meeting and improperly constituted committees acting with gross negligence and in bad faith. They further alleged that there was no basis in law or fact to remove them from their positions for cause, and sought an order declaring that they continue in their positions as President and Chief Executive Officer, and Executive Vice President, Office of the President, respectively. For both actions, plaintiffs sought costs, reasonable attorneys’ fees and any other appropriate relief. The Section 220 action, which sought access to corporate records, was dismissed in 2006.

Pursuant to the order of the Delaware Chancery Court, the Company held a Special Meeting of Stockholders on May 18, 2007 to consider and vote on a proposal by George Perlegos, our former Chairman, President and Chief Executive Officer, to remove five members of our Board of Directors and to replace them with five persons nominated by Mr. Perlegos. On June 1, 2007, following final tabulation of votes and certification by IVS Associates, Inc., the independent inspector of elections for the Special Meeting, we announced that stockholders had rejected the proposal considered at the Special Meeting.

Prior to the Special Meeting, Atmel also received a notice from Mr. Perlegos indicating his intent to nominate eight persons for election to the Company’s Board of Directors at its Annual Meeting of Stockholders to be held on

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July 25, 2007. On June 5, 2007, Atmel received notice that Mr. Perlegos will not solicit proxies from Atmel’s shareholders as to any issue, including the makeup of Atmel’s Board of Directors, in connection with Atmel’s annual meeting to be held in July 2007.

In January 2007, we received a subpoena from the Department of Justice (“DOJ”) requesting information relating to Atmel’s past stock option grants and related accounting matters. In August 2006, the Company received a letter from the SEC making an informal inquiry and request for information on the same subject matters. In August 2006, Atmel received Information Document Requests from the Internal Revenue Service (“IRS”) regarding Atmel’s investigation into misuse of corporate travel funds and investigation into backdating of stock options. We are cooperating fully with the DOJ, SEC and IRS inquiries and intends to continue to do so. These inquiries likely will require us to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against Atmel and the payment of significant fines and penalties by Atmel, which may adversely affect its results of operations and cash flows. We cannot predict how long it will take or how much more time and resources we will have to expend to resolve these government inquiries, nor can we predict the outcome of these inquiries.

From July through September 2006, six stockholder derivative lawsuits were filed (three in the U.S. District Court for the Northern District of California and three in Santa Clara County Superior Court) by persons claiming to be Company stockholders and purporting to act on Atmel’s behalf, naming Atmel as a nominal defendant and some of its current and former officers and directors as defendants. The suits contain various causes of action relating to the timing of stock option grants awarded by Atmel. The federal cases were consolidated and an amended complaint was filed on November 3, 2006. Atmel and the individual defendants have each moved to dismiss the consolidated amended complaint on various grounds. The motions have been argued and taken under submission by the Court. The state derivative cases have been consolidated. In April 2006, a consolidated derivative complaint was filed in the state court action and Atmel moved to stay it. The court granted Atmel’s motion to stay on June 14, 2007. Atmel believes that the filing of the derivative actions was unwarranted and intends to vigorously contest them.

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statements and (b) requiring Atmel to publish and publicize corrective statements, and requesting an award of reasonable expenses and costs of this action. Atmel disputes, and intends to vigorously defend, this counterclaim.

In October 2006, an action was filed in First Instance labour court, Nantes, France on behalf of 46 former employees of Atmel’s Nantes facility, claiming that the sale of the Nantes facility to MHS (XbyBus SAS) in December, 2005 was not a valid sale, and that these employees should still be considered employees of Atmel, with the right to claim social benefits from Atmel. The action is for unspecified damages. Atmel believes that the filing of this action is without merit and intends to vigorously defend the terms of the sale to MHS.

In January 2007, Quantum World Corporation filed a patent infringement suit in the United States District Court, Eastern District of Texas, naming Atmel as a co-defendant, along with a number of other electronics manufacturing companies. The plaintiff claims that the asserted patents allegedly cover a true random number generator and that the patents are infringed in the manufacture, use, importation and offer for sale of certain Atmel products. The suit seeks damages for infringement and recovery of attorneys’ fees and costs incurred. In March 2007, Atmel filed a counterclaim for declaratory relief that the patents are neither infringed nor valid. Atmel believes that the filing of this action is without merit and intends to vigorously defend against this action.

From time to time, the Company may be notified of claims that the Company may be infringing patents issued to other parties and may subsequently engage in license negotiations regarding these claims.

Indemnification Obligations.

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Item 1A. Risk Factors

The following trends, uncertainties and risks may impact the “forward-looking” statements described elsewhere in this Form 10-Q and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.

THE RESULTS OF OUR AUDIT COMMITTEE INVESTIGATION INTO OUR HISTORICAL STOCK OPTION PRACTICES AND RESULTING RESTATEMENTS MAY CONTINUE TO HAVE ADVERSE EFFECTS ON OUR FINANCIAL RESULTS.

The Audit Committee investigation into our historical stock option practices and the resulting restatement of our historical financial statements have required us to expend significant management time and incur significant accounting, legal, and other expenses. The resulting restatements have had a material adverse effect on our results of operations. We have recorded additional non-cash, stock-based compensation expense of $116 million for the periods from 1993 to 2005 (excluding the impact of related payroll and income taxes). See the “Explanatory Note” immediately preceding Part I and Note 2, “Restatements of Consolidated Financial Statements,” to Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further discussion. In addition, several lawsuits have been filed against us, our current directors and officers and certain of our former directors and officers relating to our historical stock option practices and related accounting. See Part I, Item 1 Legal Proceedings, for a more detailed description of these proceedings. We may become the subject of additional private or government actions regarding these matters in the future. These actions are in the preliminary stages, and their ultimate outcome could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price for our securities. Litigation may be time-consuming, expensive and disruptive to normal business operations, and the outcome of litigation is difficult to predict. The defense of these lawsuits will result in significant expenditures and the continued diversion of our management’s time and attention from the operation of our business, which could impede our business. All or a portion of any amount we may be required to pay to satisfy a judgment or settlement of any or all of these claims may not be covered by insurance.

JUDGMENT AND ESTIMATES UTILIZED BY US IN DETERMINING STOCK OPTION GRANT DATES AND RELATED ADJUSTMENTS MAY BE SUBJECT TO CHANGE DUE TO SUBSEQUENT SEC GUIDANCE OR OTHER DISCLOSURE REQUIREMENTS.

In determining the restatement adjustments in connection with the stock option investigation, management used all reasonably available relevant information to form conclusions it believes are appropriate as to the most likely option granting actions that occurred, the dates when such actions occurred, and the determination of grant dates for financial accounting purposes based on when the requirements of the accounting standards were met. We considered various alternatives throughout the course of the review and restatement, and we believe the approaches used were the most appropriate, and the choices of measurement dates used in our review of stock option grant accounting and restatement of our financial statements were reasonable and appropriate in our circumstances. However, the SEC may issue additional guidance on disclosure requirements related to the financial impact of past stock option grant measurement date errors that may require us to amend this filing or other filings with the SEC to provide additional disclosures pursuant to such additional guidance. Any such circumstance could also lead to future delays in filing our subsequent SEC reports and delisting of our common stock from the NASDAQ Global Select Market. Furthermore, if we are subject to adverse findings in any of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.

OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO A VARIETY OF FACTORS, WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN OUR STOCK PRICE.

Our future operating results will be subject to quarterly variations based upon a wide variety of factors, many of which are not within our control. These factors include:

	•		the cyclical nature of both the semiconductor industry and the markets addressed by our products;

	•		our transition to a fab-lite strategy;

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	•		our increased dependence on outside foundries and their ability to meet our volume, quality, and delivery objectives, particularly during times of increasing demand;

	•		inventory excesses or shortages due to reliance on third party manufacturers;

	•		our compliance with U.S. trade and export laws and regulations;

	•		fluctuations in currency exchange rates;

	•		ability of independent assembly contractors to meet our volume, quality, and delivery objectives;

	•		success with disposal or restructuring activities, including disposition of our North Tyneside and Heilbronn facilities;

	•		fluctuations in manufacturing yields;

	•		possible delisting from NASDAQ Global Select Market;

	•		third party intellectual property infringement claims;

	•		the highly competitive nature of our markets;

	•		the pace of technological change;

	•		political and economic risks;

	•		natural disasters or terrorist acts;

	•		assessment of internal controls over financial reporting;

	•		ability to meet our debt obligations;

	•		availability of additional financing;

	•		our ability to maintain good relationships with our customers;

	•		integration of new businesses or products;

	•		our compliance with international, federal and state export, environmental, privacy and other regulations;

	•		personnel changes;

	•		business interruptions;

	•		system integration disruptions; and

	•		changes in accounting rules, such as recording expenses for employee stock option grants.

Any unfavorable changes in any of these factors could harm our operating results.

We believe that our future sales will depend substantially on the success of our new products. Our new products are generally incorporated into our customers’ products or systems at their design stage. However, design wins may precede volume sales by a year or more. We may not be successful in achieving design wins or design wins may not result in future revenues, which depend in large part on the success of the customer’s end product or system. The average selling price of each of our products usually declines as individual products mature and competitors enter

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the market. To offset average selling price decreases, we rely primarily on reducing costs to manufacture those products, increasing unit sales to absorb fixed costs and introducing new, higher priced products which incorporate advanced features or integrated technologies to address new or emerging markets. Our operating results could be harmed if such cost reductions and new product introductions do not occur in a timely manner. From time to time, our quarterly revenues and operating results can become more dependent upon orders booked and shipped within a given quarter and, accordingly, our quarterly results can become less predictable and subject to greater variability.

In addition, our future success will depend in large part on the continued economic growth generally and of growth in various electronics industries that use semiconductors, including manufacturers of computers, telecommunications equipment, automotive electronics, industrial controls, consumer electronics, data networking equipment and military equipment. The semiconductor industry has the ability to supply more products than demand requires. Our ability to return to profitability will depend heavily upon a better supply and demand balance within the semiconductor industry.

THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY CREATES FLUCTUATIONS IN OUR OPERATING RESULTS.

The semiconductor industry has historically been cyclical, characterized by wide fluctuations in product supply and demand. The industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. The semiconductor industry faced severe business conditions with global semiconductor revenues for the industry declining 32% to $139 billion in 2001, compared to revenues in 2000. The semiconductor industry began to turn around in 2002 with global semiconductor sales increasing modestly by 1% to $141 billion. Global semiconductor sales increased 18% to $166 billion in 2003, 27% to $211 billion in 2004, 8% to $228 billion in 2005, 9% to $248 billion in 2006 and are estimated to increase 2% to $252 billion in 2007.

Atmel’s operating results have been harmed by industry-wide fluctuations in the demand for semiconductors, which resulted in under-utilization of our manufacturing capacity and declining gross margins. In the past we have recorded significant charges to recognize impairment in the value of our manufacturing equipment, the cost to reduce workforce, and other restructuring costs. Our business may be harmed in the future not only by cyclical conditions in the semiconductor industry as a whole but also by slower growth in any of the markets served by our products.

WE COULD EXPERIENCE DISRUPTION OF OUR BUSINESS AS WE TRANSITION TO A FAB-LITE STRATEGY.

As part of our fab-lite strategy, we have reduced and plan to further reduce the number of our owned manufacturing facilities. In December 2005, we sold our Nantes, France fabrication facility and the related foundry activities, to XybyBus SAS. In July 2006, we sold our Grenoble, France subsidiary (including the fabrication facility in Grenoble) to e2v technologies plc. In December 2006, we announced the planned sale of our North Tyneside, United Kingdom and Heilbronn, Germany wafer fabrication facilities. On May 1, 2007, we announced the sale of our Irving, Texas, wafer fabrication facility. As a result of the sale (or planned sale) of such fabrication facilities, we will be increasingly relying on the utilization of third-party foundry manufacturing and assembly and test capacity. As part of such transition we must expand our foundry relationships by entering into new agreements with such third-party foundries. If such agreements are not completed on a timely basis, manufacturing of certain of our products could be disrupted, which would harm our business. In addition, difficulties in production yields can often occur when transitioning to a new third-party manufacturer. If such foundries fail to deliver quality products and components on a timely basis, our business could be harmed.

Implementation of our new fab-lite strategy will expose us to the following risks:

	•		reduced control over delivery schedules and product costs;

	•		manufacturing costs that are higher than anticipated;

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AS WE INCREASE DEPENDENCE ON OUTSIDE FOUNDRIES, SUCH FOUNDRIES MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS AND MAY NOT MEET OUR QUALITY AND DELIVERY OBJECTIVES OR MAY ABANDON FABRICATION PROCESSES THAT WE REQUIRE.

We expect to increase our utilization of outside foundries to expand our capacity in the future, especially for high volume commodity type products and certain aggressive technology ASIC products. Reliance on outside foundries to fabricate wafers involves significant risks, including reduced control over quality and delivery schedules, a potential lack of capacity, and a risk the subcontractor may abandon the fabrication processes we need from a strategic standpoint, even if the process is not economically viable. We hope to mitigate these risks with a strategy of qualifying multiple subcontractors. However, there can be no guarantee that any strategy will eliminate these risks. Additionally, since most of such outside foundries are located in foreign countries, we are subject to certain risks generally associated with contracting with foreign manufacturers, including currency exchange fluctuations, political and economic instability, trade restrictions and changes in tariff and freight rates. Accordingly, we may experience problems in timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.

INCREASING DEPENDENCE ON THIRD PARTY MANUFACTURERS COULD HARM OUR BUSINESS IN TIMES OF INCREASING DEMAND IN OUR INDUSTRY.

We currently manufacture our products at our facilities in Colorado Springs, Colorado; Heilbronn, Germany; Rousset, France; and North Tyneside, United Kingdom. In December 2006, we announced our plan to sell the Heilbronn and North Tyneside facilities to optimize our manufacturing operations as part of our adoption of a fab-lite strategy. In order to shift from a manufacturing-based business model to an outsourcing business model, we will need to substantially expand our foundry relationships. The terms on which we will be able to obtain wafer production for our products, and the timing and volume of such production will be substantially dependent on agreements to be negotiated with semiconductor foundries. We cannot be certain that the agreements we reach with such foundries will be on terms reasonable to us. Therefore, any agreements reached with semiconductor foundries may be short-term and possibly non-renewable, and hence provide less certainty regarding the supply and pricing of wafers for our products.

During economic upturns in the semiconductor industry we will not be able to guarantee that our third party foundries will be able to increase manufacturing capacity to a level that meets demand for our products, which would prevent us from meeting increased customer demand and harm our business. Also during times of increased demand for our products, if such foundries are able to meet such demand, it may be at higher wafer prices, which would reduce our gross margins on such products or require us to offset the increased price by increasing prices for our customers, either of which would harm our business and operating results.

AS A RESULT OF INCREASED DEPENDENCE ON THIRD PARTY MANUFACTURERS, WE MAY INCUR INVENTORY EXCESSES OR SHORTAGES

As we increase our reliance on third party manufacturers and subcontractors, we acknowledge that the lead times required by such foundries have increased in recent years and is likely to increase in the future. However, market conditions and intense competition in the semiconductor industry require that we be prepared to ship products to our customers with much shorter lead times. Consequently, to have product inventory to meet potential customer purchase orders, we may have to place purchase orders for wafers from our manufacturers in advance of having firm purchase orders from our customers, which from time-to-time will cause us to have an excess or shortage of wafers for a particular product. If we do not have sufficient demand for our products and cannot cancel our current and future commitments without material impact, we may experience excess inventory, which will result in a write-off affecting gross margin and results of operations. If we cancel a purchase order, we may have to pay cancellation penalties based on the status of work in process or the proximity of the cancellation to the delivery date. As a result of the long lead-time for manufacturing wafers and the increase in “just in time” ordering by customers, semiconductor companies from time-to-time may need to record additional expense for the write-down of excess inventory. Significant write-downs of excess inventory could have a material adverse effect on our consolidated financial condition and results of operations.

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OUR INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO APPLICABLE LAWS RELATING TO TRADE AND EXPORT CONTROLS, THE VIOLATION OF WHICH COULD ADVERSELY AFFECT OUR OPERATIONS.

For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and trade sanctions against embargoed countries and destinations administered by the Office of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury. We have recently discovered shortcomings in our export compliance procedures. We are currently analyzing product shipments and technology transfers, working with U.S. government officials to ensure compliance with applicable U.S. export laws and regulations, and developing an enhanced export compliance system. A determination by the U.S. government that we have failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of significant fines, denial of export privileges, and debarment from U.S. participation in government contracts. Any one or more of these sanctions could have a material adverse effect on our business, financial condition and results of operations.

WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES THAT COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS AND CASH FLOWS.

Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flows. Our primary exposure relates to operating expenses in Europe, where a significant amount of our manufacturing is located.

We have in the past entered into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on certain foreign currency assets and liabilities. In addition, we have periodically hedged certain anticipated foreign currency cash flows. We do not plan to hedge against either of these risks in the foreseeable future, but if we should, our attempts to hedge against these risks may not be successful, resulting in an adverse impact on our net income. In addition, our net income may be subject to greater foreign currency gains and losses on certain foreign currency assets and liabilities during times in which we have not entered into foreign exchange forward contracts.

REVENUES AND COSTS DENOMINATED IN FOREIGN CURRENCIES COULD ADVERSELY IMPACT OUR OPERATING RESULTS WITH CHANGES IN THESE FOREIGN CURRENCIES AGAINST THE DOLLAR.

When we take an order denominated in a foreign currency we may receive fewer dollars than initially anticipated if that local currency weakens against the dollar before we collect our funds. Conversely, when we incur a cost denominated in a foreign currency we may pay more dollars than initially anticipated if that local currency strengthens against the dollar before we pay the costs. In addition to reducing revenues or increasing our costs, this risk can negatively affect our operating results. In Europe, where our significant operations have costs denominated in European currencies, a negative impact on expenses can be partially offset by a positive impact on revenues. Sales denominated in European currencies, and yen as a percentage of net revenues were 23% and 18% for the three months ended March 31, 2007 and 2006, respectively. Operating expenses denominated in foreign currencies as a percentage of total operating expenses, primarily the euro, were 55% and 61% for the three months ended March 31, 2007 and 2006, respectively. We also face the risk that our accounts receivable denominated in foreign currencies could be devalued if such foreign currencies weaken quickly and significantly against the dollar. Conversely, we face the risk that our accounts payable denominated in foreign currencies could increase in value if such foreign currencies strengthen against the dollar.

We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Approximately 26% of our accounts receivable are denominated in foreign currency as of March 31, 2007 and December 31, 2006, respectively.

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WE DEPEND ON INDEPENDENT ASSEMBLY CONTRACTORS WHICH MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS AND WHICH MAY NOT MEET OUR QUALITY AND DELIVERY OBJECTIVES.

We currently manufacture a majority of the wafers for our products at our fabrication facilities, and the wafers are then sorted and tested at our facilities. After wafer testing, we ship the wafers to one of our independent assembly contractors located in China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, South Korea, Taiwan or Thailand where the wafers are separated into die, packaged and, in some cases, tested. Our reliance on independent contractors to assemble, package and test our products involves significant risks, including reduced control over quality and delivery schedules, the potential lack of adequate capacity and discontinuance or phase-out of the contractors’ assembly processes. These independent contractors may not continue to assemble, package and test our products for a variety of reasons. Moreover, because our assembly contractors are located in foreign countries, we are subject to certain risks generally associated with contracting with foreign suppliers, including currency exchange fluctuations, political and economic instability, trade restrictions, including export controls, and changes in tariff and freight rates. Accordingly, we may experience problems in timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.

WE FACE RISKS ASSOCIATED WITH DISPOSAL OR RESTRUCTURING ACTIVITIES.

As part of our fab-lite strategy, in December 2006, we announced plans to sell our Heilbronn, Germany, and North Tyneside, United Kingdom, manufacturing facilities. However, reducing our wafer fabrication capacity involves significant potential costs and delays, particularly in Europe, where the extensive statutory protection of employees imposes substantial costs and delays on their employers when the market requires downsizing. Such costs and delays include compensation to employees and local government agencies, requirements and approvals of governmental and judicial bodies, and losses of or requirement to repay governmental subsidies. We may experience labor union objections or other difficulties while implementing a downsizing. Any such difficulties that we experience would harm our business and operating results, either by deterring needed downsizing or by the additional costs of accomplishing it in Europe relative to America or Asia.

We continue to evaluate the existing restructuring and asset impairment reserves related to previously implemented restructuring plans. As a result, there may be additional restructuring charges or reversals of previously established reserves. However, we may incur additional restructuring and asset impairment charges in connection with any restructuring plans adopted in the future. Any such restructuring or asset impairment charges recorded in the future could significantly harm our business and operating results. See Notes 7 and 9 to Notes to Condensed Consolidated Financial Statements for further discussion.

IF WE ARE UNABLE TO IMPLEMENT NEW MANUFACTURING TECHNOLOGIES OR FAIL TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, OUR BUSINESS WOULD BE HARMED.

Whether demand for semiconductors is rising or falling, we are constantly required by competitive pressures in the industry to successfully implement new manufacturing technologies in order to reduce the geometries of our semiconductors and produce more integrated circuits per wafer. We are developing processes that support effective feature sizes as small as 0.13-microns, and we are studying how to implement advanced manufacturing processes with even smaller feature sizes such as 0.065-microns.

Fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Whether through the use of our foundries or third party manufacturers, we may experience problems in achieving acceptable yields in the manufacture of wafers, particularly during a transition in the manufacturing process technology for our products.

We have previously experienced production delays and yield difficulties in connection with earlier expansions of our wafer fabrication capacity or transitions in manufacturing process technology. Production delays or difficulties in achieving acceptable yields at any of our fabrication facilities or at the fabrication facilities of our third party manufacturers could materially and adversely affect our operating results. We may not be able to obtain the

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WE HAVE NOT BEEN IN COMPLIANCE WITH SEC REPORTING REQUIREMENTS AND NASDAQ LISTING REQUIREMENTS. IF WE ARE UNABLE TO ATTAIN COMPLIANCE WITH, OR THEREAFTER REMAIN IN COMPLIANCE WITH SEC REPORTING REQUIREMENTS AND NASDAQ LISTING REQUIREMENTS, THERE MAY BE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OUR STOCKHOLDERS.

As a consequence of the Audit Committee investigation into our historical stock option practices and resulting restatements of our financial statements, we were not able to file our periodic reports with the SEC on a timely basis and continue to face the possibility of delisting of our stock from the NASDAQ Global Select Market. On June 8, 2007, we filed our Annual Report on Form 10-K for the year ended December 31, 2006, and our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006. See the “Explanatory Note” immediately preceding Part I and Note 2, “Restatements of Consolidated Financial Statements,” to Condensed Consolidated Financial Statements of this Form 10-Q for further discussion. With the filing of this Quarterly Report on Form 10-Q we believe that we have returned to full compliance with SEC reporting requirements and NASDAQ listing requirements. However, SEC comments on our Form 10-K and Form 10-Q or other factors could render us unable to maintain our effective listing on the NASDAQ Global Select Market or any other national securities exchange. If this happens, the price of our stock and the ability of our stockholders to trade in our stock would be adversely affected. In addition, we would be subject to a number of restrictions regarding the registration of our stock under federal securities laws, and we would not be able to allow our employees to exercise their outstanding options, which could adversely affect our business and results of operations.

As a result of the delayed filing of our Quarterly Report on Form 10-Q for the quarters ended June 30, 2006, September 30, 2006, and March 31, 2007, as well as our Form 10-K, we will be ineligible to register our securities on Form S-3 for sale by us or resale by others until one year from the date the last delinquent filing is made. We may use Form S-1 to raise capital or complete acquisitions, but doing so could increase transaction costs and adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.

WE MAY FACE THIRD PARTY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO DEFEND AND RESULT IN LOSS OF SIGNIFICANT RIGHTS.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which on occasion have resulted in significant and often protracted and expensive litigation. We have from time to time received, and may in the future receive, communications from third parties asserting patent or other intellectual property rights covering our products or processes. In the past, we have received specific allegations from major companies alleging that certain of our products infringe patents owned by such companies. In order to avoid the significant costs associated with our defense in litigation involving such claims, we may license the use of the technologies that are the subject of these claims from such companies and be required to make corresponding royalty payments, which may harm our operating results.

We have in the past been involved in intellectual property infringement lawsuits, which harmed our operating results and are currently involved in intellectual property infringement lawsuits, which may harm our future operating results. We are currently involved in several intellectual property infringement lawsuits. Although we intend to vigorously defend against any such lawsuits, we may not prevail given the complex technical issues and inherent uncertainties in patent and intellectual property litigation. Moreover, the cost of defending against such litigation, in terms of management time and attention, legal fees and product delays, could be substantial, whatever the outcome. If any patent or other intellectual property claims against us are successful, we may be prohibited from using the technologies subject to these claims, and if we are unable to obtain a license on acceptable terms, license a substitute technology, or design new technology to avoid infringement, our business and operating results may be significantly harmed.

We have several cross-license agreements with other companies. In the future, it may be necessary or advantageous for us to obtain additional patent licenses from existing or other parties, but these license agreements may not be available to us on acceptable terms, if at all.

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OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY SUFFER PRICE REDUCTIONS, REDUCED REVENUES, REDUCED GROSS MARGINS, AND LOSS OF MARKET SHARE.

We compete in markets that are intensely competitive and characterized by rapid technological change, product obsolescence and price decline. Throughout our product line, we compete with a number of large semiconductor manufacturers, such as AMD, Cypress, Freescale, Fujitsu, Hitachi, IBM, Infineon, Intel, LSI Logic, Microchip, Philips, Renesas, Samsung, Sharp, Spansion, STMicroelectronics, Texas Instruments and Toshiba. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. As we have introduced new products we are increasingly competing directly with these companies, and we may not be able to compete effectively. We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last several years, we have experienced significant price competition in several business segments, especially in our nonvolatile memory segment for EPROM, Serial EEPROM, and Flash memory products, as well as in our commodity microcontrollers and smart cards. We expect continuing competitive pressures in our markets from existing competitors and new entrants, new technology and cyclical demand, which, among other factors, will likely maintain the recent trend of declining average selling prices for our products.

In addition to the factors described above, our ability to compete successfully depends on a number of factors, including the following:

	•		our success in designing and manufacturing new products that implement new technologies and processes;

	•		our ability to offer integrated solutions using our advanced nonvolatile memory process with other technologies;

	•		the rate at which customers incorporate our products into their systems;

	•		product introductions by our competitors;

	•		the number and nature of our competitors in a given market;

	•		the incumbency of our competitors at potential new customers;

	•		our ability to minimize production costs by outsourcing our manufacturing, assembly and testing functions; and

	•		general market and economic conditions.

Many of these factors are outside of our control, and we may not be able to compete successfully in the future.

WE MAY BE SUBJECT TO ADVERSE FINDINGS FROM ADDITIONAL AUDIT COMMITTEE INVESTIGATIONS INTO IMPROPER BUSINESS PRACTICES.

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time, we cannot predict the outcome of such reviews, if any. An adverse finding in any of these matters could lead to future delays in filing our subsequent SEC reports and delisting of our common stock from the NASDAQ Global Select Market, and result in additional management time being diverted and additional legal and other costs that could have a material adverse effect on our business, financial condition and results of operations.

WE FACE VARIOUS RISKS ASSOCIATED WITH A POTENTIAL CHANGE OF CONTROL OF OUR BOARD OF DIRECTORS.

Pursuant to the order of the Delaware Chancery Court, on May 18, 2007, Atmel held a Special Meeting of Stockholders to consider and vote on a proposal by George Perlegos, our former Chairman, President and CEO, to remove five members of our Board of Directors and to replace them with five persons nominated by Mr. Perlegos. On June 1, 2007, following final tabulation of votes and certification by IVS Associates, Inc., the independent inspector of elections for the Special Meeting, we announced that stockholders had rejected the proposal considered at the Special Meeting.

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On June 5, 2007, Atmel received notice that Mr. Perlegos will not solicit proxies from Atmel’s shareholders as to any issue, including the makeup of Atmel’s Board of Directors, in connection with Atmel’s annual meeting to be held in July 2007. There can be no assurance that Atmel will not face another proxy contest in the future, which would be time-consuming, expensive and disruptive to normal business operations.

WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.

The average selling prices of our products historically have decreased over the products’ lives and are expected to continue to do so. As a result, our future success depends on our ability to develop and introduce new products which compete effectively on the basis of price and performance and which address customer requirements. We are continually designing and commercializing new and improved products to maintain our competitive position. These new products typically are more technologically complex than their predecessors, and thus have increased potential for delays in their introduction.

The success of new product introductions is dependent upon several factors, including timely completion and introduction of new product designs, achievement of acceptable fabrication yields and market acceptance. Our development of new products and our customers’ decision to design them into their systems can take as long as three years, depending upon the complexity of the device and the application. Accordingly, new product development requires a long-term forecast of market trends and customer needs, and the successful introduction of our products may be adversely affected by competing products or by technologies serving the markets addressed by our products. Our qualification process involves multiple cycles of testing and improving a product’s functionality to ensure that our products operate in accordance with design specifications. If we experience delays in the introduction of new products, our future operating results could be harmed.

In addition, new product introductions frequently depend on our development and implementation of new process technologies, and our future growth will depend in part upon the successful development and market acceptance of these process technologies. Our integrated solution products require more technically sophisticated sales and marketing personnel to market these products successfully to customers. We are developing new products with smaller feature sizes, the fabrication of which will be substantially more complex than fabrication of our current products. If we are unable to design, develop, manufacture, market and sell new products successfully, our operating results will be harmed. Our new product development, process development, or marketing and sales efforts may not be successful, our new products may not achieve market acceptance, and price expectations for our new products may not be achieved, any of which could harm our business.

OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO VARIOUS POLITICAL AND ECONOMIC RISKS.

Sales to customers outside the U.S. accounted for 87% and 84% of net revenues in the three months ended March 31, 2007 and 2006, respectively. We expect that revenues derived from international sales will continue to represent a significant portion of net revenues. International sales and operations are subject to a variety of risks, including:

	•		greater difficulty in protecting intellectual property;

	•		reduced flexibility and increased cost of staffing adjustments, particularly in France and Germany;

	•		longer collection cycles;

	•		potential unexpected changes in regulatory practices, including export license requirements, trade barriers, tariffs and tax laws, environmental and privacy regulations; and

	•		general economic and political conditions in these foreign markets.

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Approximately 87% and 83% of our net revenues in the three months ended March 31, 2007 and 2006, respectively, were denominated in U.S. dollars. Approximately 50% and 52% of net revenues were generated in Asia in the three months ended March 31, 2007 and 2006, respectively.

OUR OPERATIONS AND FINANCIAL RESULTS COULD BE HARMED BY NATURAL DISASTERS OR TERRORIST ACTS.

Since the terrorist attacks on the World Trade Center and the Pentagon in 2001, certain insurance coverage has either been reduced or made subject to additional conditions by our insurance carriers, and we have not been able to maintain all necessary insurance coverage at reasonable cost. Instead, we have relied to a greater degree on self-insurance. For example, we now self-insure property losses up to $10 million per event. Our headquarters, some of our manufacturing facilities, the manufacturing facilities of third party foundries and some of our major vendors’ and customers’ facilities are located near major earthquake faults and in potential terrorist target areas. If a major earthquake or other disaster or a terrorist act impacts us and insurance coverage is unavailable for any reason, we may need to spend significant amounts to repair or replace our facilities and equipment, we may suffer a temporary halt in our ability to manufacture and transport product and we could suffer damages of an amount sufficient to harm our business, financial condition and results of operations.

A LACK OF EFFECTIVE INTERNAL CONTROL OVER FINANCIAL REPORTING COULD RESULT IN AN INABILITY TO ACCURATELY REPORT OUR FINANCIAL RESULTS, WHICH COULD LEAD TO A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, deficiencies in our internal controls. Evaluations of the effectiveness of our internal controls in the future may lead our management to determine that internal control over financial reporting is no longer effective. Such conclusions may result from our failure to implement controls for changes in our business, or deterioration in the degree of compliance with our policies or procedures.

A failure to maintain effective internal control over financial reporting, including a failure to implement effective new controls to address changes in our business could result in a material misstatement of our consolidated financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

OUR DEBT LEVELS COULD HARM OUR ABILITY TO OBTAIN ADDITIONAL FINANCING, AND OUR ABILITY TO MEET OUR DEBT OBLIGATIONS WILL BE DEPENDENT UPON OUR FUTURE PERFORMANCE.

As of March 31, 2007, our total debt was $146 million compared to $169 million at December 31, 2006. The decrease is primarily a result of the redemption of the zero coupon convertible notes, due 2021. Our long-term debt less current portion to equity ratio was 0.05 and 0.06 at March 31, 2007 and December 31, 2006, respectively. Increases in our debt-to-equity ratio could adversely affect our ability to obtain additional financing for working capital, acquisitions or other purposes and make us more vulnerable to industry downturns and competitive pressures.

Certain of our debt facilities contain terms that subject us to financial and other covenants. We were not in compliance with covenants requiring timely filing of U.S. GAAP financial statements as of March 31, 2007, and, as a result, requested waivers from our lenders to avoid default under these facilities. Waivers were not received from all lenders, and as a result, we reclassified $15 million of non-current liabilities related to assets held for sale to current liabilities related to assets held for sale on our condensed consolidated balance sheet as of March 31, 2007.

From time to time our ability to meet our debt obligations will depend upon our ability to raise additional financing and on our future performance and ability to generate substantial cash flow from operations, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. If we

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are unable to meet debt obligations or otherwise are obliged to repay any debt prior to its due date, our available cash would be depleted, perhaps seriously, and our ability to fund operations harmed. In addition, our ability to service long-term debt in the U.S. or to obtain cash for other needs from our foreign subsidiaries may be structurally impeded, as a substantial portion of our operations are conducted through our foreign subsidiaries. Our cash flow and ability to service debt are partially dependent upon the liquidity and earnings of our subsidiaries as well as the distribution of those earnings, or repayment of loans or other payments of funds by those subsidiaries, to the U.S. parent corporation. These foreign subsidiaries are separate and distinct legal entities and may have limited or no obligation, contingent or otherwise, to pay any amounts to us, whether by dividends, distributions, loans or any other form.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.

Although in July 2006 we sold our Grenoble, France, subsidiary and in December 2006 we announced our plan to sell the Heilbronn and North Tyneside fabrication facilities, we intend to continue to make capital investments to support new products and manufacturing processes that achieve manufacturing cost reductions and improved yields. Currently, we expect our total capital expenditures for the next twelve months to be $60 to $80 million. We may seek additional equity or debt financing to fund operations or to fund other projects. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for products, product mix, changes in semiconductor industry conditions and competitive factors. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms.

PROBLEMS THAT WE EXPERIENCE WITH KEY CUSTOMERS OR DISTRIBUTORS MAY HARM OUR BUSINESS.

Our ability to maintain close, satisfactory relationships with large customers is important to our business. A reduction, delay, or cancellation of orders from our large customers would harm our business. The loss of one or more of our key customers, or reduced orders by any of our key customers, could harm our business and results of operations. Moreover, our customers may vary order levels significantly from period to period, and customers may not continue to place orders with us in the future at the same levels as in prior periods.

We sell many of our products through distributors. Our distributors could experience financial difficulties or otherwise reduce or discontinue sales of our products. Our distributors could commence or increase sales of our competitors’ products. In any of these cases, our business could be harmed. In addition, in the short-term our revenues in Asia may decrease as we optimize our distributor base in Asia. It may take time for us to identify financially viable distributors and help them develop quality support services. This process may result in short-term revenue loss, particularly in the third and fourth quarters of fiscal 2007. There can be no assurances that we will be able to manage this optimization process in an efficient and timely manner.

WE ARE NOT PROTECTED BY LONG-TERM CONTRACTS WITH OUR CUSTOMERS.

We do not typically enter into long-term contracts with our customers, and we cannot be certain as to future order levels from our customers. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. In the event of an early termination by one of our major customers, it is unlikely that we will be able to rapidly replace that revenue source, which would harm our financial results.

OUR FAILURE TO SUCCESSFULLY INTEGRATE BUSINESSES OR PRODUCTS WE HAVE ACQUIRED COULD DISRUPT OR HARM OUR ONGOING BUSINESS.

We have from time to time acquired, and may in the future acquire additional, complementary businesses, facilities, products and technologies. Achieving the anticipated benefits of an acquisition depends, in part, upon whether the integration of the acquired business, products or technology is accomplished in an efficient and effective manner. Moreover, successful acquisitions in the semiconductor industry may be more difficult to accomplish than in other industries because such acquisitions require, among other things, integration of product offerings, manufacturing operations and coordination of sales and marketing and research and development efforts. The difficulties of such integration may be increased by the need to coordinate geographically separated organizations,

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WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS, WHICH COULD IMPOSE UNANTICIPATED REQUIREMENTS ON OUR BUSINESS IN THE FUTURE. ANY FAILURE TO COMPLY WITH CURRENT OR FUTURE ENVIRONMENTAL REGULATIONS MAY SUBJECT US TO LIABILITY OR SUSPENSION OF OUR MANUFACTURING OPERATIONS.

We are subject to a variety of international, federal, state and local governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes. Increasing public attention has been focused on the environmental impact of semiconductor operations. Although we have not experienced any material adverse effect on our operations from environmental regulations, any changes in such regulations or in their enforcement may impose the need for additional capital equipment or other requirements. If for any reason we fail to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations, we could be subject to substantial liability or our manufacturing operations could be suspended.

We also could face significant costs and liabilities in connection with product take-back legislation. We record a liability for environmental remediation and other environmental costs when we consider the costs to be probable and the amount of the costs can be reasonably estimated. The EU has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for the individual member states of the EU to enact the directive in their respective countries was August 13, 2004 (such legislation, together with the directive, the “WEEE Legislation”). Producers participating in the market became financially responsible for implementing these responsibilities beginning in August 2005. Our potential liability resulting from the WEEE Legislation may be substantial. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan, the cumulative impact of which could be significant.

WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY SERIOUSLY HARM OUR BUSINESS.

Our future success depends in large part on the continued service of our key technical and management personnel, and on our ability to continue to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and in the development of new products and processes. The competition for such personnel is intense, and the loss of key employees, none of whom is subject to an employment agreement for a specified term or a post-employment non-competition agreement, could harm our business.

BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan. In addition, business interruption insurance may not be enough to compensate us for losses that may occur and any losses or damages incurred by us as a result of business interruptions could significantly harm our business.

SYSTEM INTEGRATION DISRUPTIONS COULD HARM OUR BUSINESS.

We periodically make enhancements to our integrated financial and supply chain management systems. This process is complex, time-consuming and expensive. Operational disruptions during the course of this process or delays in the implementation of these enhancements could impact our operations. Our ability to forecast sales demand, ship products, manage our product inventory and record and report financial and management information on a timely and accurate basis could be impaired due to these enhancements.

PROVISIONS IN OUR RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND PREFERRED SHARES RIGHTS AGREEMENT MAY HAVE ANTI-TAKEOVER EFFECTS.

Certain provisions of our Restated Certificate of Incorporation, Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. Our board of directors has

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the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, voting rights, preferences and privileges and restrictions of those shares without the approval of our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, by making it more difficult for a third party to acquire a majority of our stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders. We have no present plans to issue shares of preferred stock.

We also have a preferred shares rights agreement with Equiserve Trust Company, N.A., as rights agent, dated as of September 4, 1996, amended and restated on October 18, 1999 and amended as of November 7, 2001, which gives our stockholders certain rights that would likely delay, defer or prevent a change of control of Atmel in a transaction not approved by our board of directors.

OUR STOCK PRICE HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE.

The market price of our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price of our common stock may be significantly affected by factors such as the announcement of new products or product enhancements by us or our competitors, technological innovations by us or our competitors, quarterly variations in our results of operations, changes in earnings estimates by market analysts and general market conditions or market conditions specific to particular industries. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the market in which we do business or relating to us specifically could result in an immediate and adverse effect on the market price of our stock. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many high technology companies, often unrelated to the operating performance of the specific companies.

ACCOUNTING FOR EMPLOYEE STOCK OPTIONS USING THE FAIR VALUE METHOD COULD SIGNIFICANTLY REDUCE OUR NET INCOME OR INCREASE OUR NET LOSS.

In December 2004, the FASB issued SFAS No. 123R, which is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and supersedes our previous accounting under APB No. 25.

We adopted SFAS No. 123R effective January 1, 2006, using the modified prospective transition method and our condensed consolidated financial statements as of March 31, 2007 and December 31, 2006 are based on this method. In accordance with the modified prospective transition method, our condensed consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS No. 123R.

We have elected to adopt FSP No. FAS 123(R)-3 to calculate our pool of windfall tax benefits.

SFAS No. 123R requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest will be recognized as expense over the requisite service periods in our consolidated statements of operations. Prior to January 1, 2006, we accounted for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25 as allowed under SFAS No. 123 (and further amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123”). Under the intrinsic value method, stock-based compensation expense was recognized in our condensed consolidated statements of operations for stock based awards granted to employees when the exercise price of these awards was less than the fair market value of the underlying stock at the date of grant.

Income from continuing operations in the three months ended March 31, 2007 and 2006 was reduced by stock-based compensation expense of $3 million and $2 million, respectively, calculated in accordance with SFAS No. 123R.

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OUR FOREIGN PENSION PLANS ARE UNFUNDED, AND ANY REQUIREMENT TO FUND THESE PLANS IN THE FUTURE COULD NEGATIVELY IMPACT OUR CASH POSITION AND OPERATING CAPITAL.

We sponsor defined benefit pension plans that cover substantially all our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Long-term pension benefits payable totaled $51 million and $53 million at March 31, 2007 and December 31, 2006, respectively. The plans are non-funded, in compliance with local statutory regulations, and we have no immediate intention of funding these plans. Benefits are paid when amounts become due, commencing when participants retire. Cash funding for benefits to be paid for 2007 is expected to be approximately $1.1 million. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively impact our cash position and operating capital.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following Exhibits have been filed with, or incorporated by reference into, this Report:

	3.1		Amended and Restated Bylaws of Atmel Corporation as of March 23, 2007 (which is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on March 28, 2007).

	10.1		Stock Option Fixed Exercise Date Election Form (which is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on January 8, 2007).

	10.2		Amendment to the Employment Agreement, dated as of March 13, 2007, between the Company and Steven (which is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on March 19, 2007).

	10.3		Description of Amendment of Certain Option Agreements (which is incorporated herein by reference to Item 5.02 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on April 12, 2007).

	31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).

	31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).

	32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EXHIBIT INDEX

3.1		Amended and Restated Bylaws of Atmel Corporation as of March 23, 2007 (which is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on March 28, 2007).

10.1		Stock Option Fixed Exercise Date Election Form (which is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on January 8, 2007).

10.2		Amendment to the Employment Agreement, dated as of March 13, 2007, between the Company and Steven Laub (which is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on March 19, 2007).

10.3		Description of Amendment of Certain Option Agreements (which is incorporated herein by reference to Item 5.02 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on April 12, 2007).

31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).

31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

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		Page
Explanatory Note Regarding Restatements		3

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2007 and December 31, 2006		6

Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and March 31, 2006		7

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and March 31, 2006		8

Notes to Condensed Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		47

Item 3. Quantitative and Qualitative Disclosures About Market Risk		71

Item 4. Controls and Procedures		72

PART II: OTHER INFORMATION

Item 1. Legal Proceedings		73

Item 1A. Risk Factors		76

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		96

Item 3. Defaults Upon Senior Securities		96

Item 4. Submission of Matters to a Vote of Security Holders		96

Item 5. Other Information		96

Item 6. Exhibits		96

Signatures		98

Exhibits		99
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

	•		inability of our manufacturing subcontractors to develop manufacturing methods appropriate for our products and their unwillingness to devote adequate capacity to produce our products;

	•		possible abandonment of fabrication processes by our manufacturing subcontractors for products that are strategically important to us;

	•		decline in product quality and reliability;

	•		inability to maintain continuing relationships with our suppliers;

	•		restricted ability to meet customer demand when faced with product shortages; and

	•		increased opportunities for potential misappropriation of our intellectual property.


	ATMEL CORPORATION
	(Registrant)
June 27, 2007	/s/ STEVEN LAUB
	Steven Laub
	President & Chief Executive Officer (Principal Executive Officer)


June 27, 2007	/s/ ROBERT AVERY
	Robert Avery
	Vice President Finance & Chief Financial Officer (Principal Financial and Accounting Officer)



Date: June 27, 2007	/s/ Steven Laub
	Steven Laub
	President & Chief Executive Officer



Date: June 27, 2007	/s/ Robert Avery
	Robert Avery
	Vice President Finance & Chief Financial Officer