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, 2008


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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

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 April 30, 2008, the Registrant had 445,542,593 outstanding shares of Common Stock.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Atmel Corporation

Condensed Consolidated Balance Sheets

(Unaudited)


	March 31,			December 31,
	2008			2007
	(in thousands, except par value)
ASSETS
Current assets
Cash and cash equivalents	$	308,365		$	374,130
Short-term investments		28,455			55,817
Accounts receivable, net of allowance for doubtful accounts of $3,799 and $3,111, respectively		223,615			209,189
Inventories		348,603			357,301
Assets held for sale		47,414			—
Prepaids and other current assets		99,665			88,781

Total current assets		1,056,117			1,085,218
Fixed assets, net		499,717			579,566
Goodwill		62,865			—
Intangible assets, net		49,758			19,552
Other assets		45,150			18,417

Total assets	$	1,713,607		$	1,702,753


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Current portion of long-term debt	$	135,558		$	142,471
Trade accounts payable		113,335			191,856
Accrued and other liabilities		291,885			266,987
Deferred income on shipments to distributors		21,334			19,708

Total current liabilities		562,112			621,022
Long-term debt less current portion		20,251			20,408
Other long-term liabilities		253,809			237,844

Total liabilities		836,172			879,274


Commitments and contingencies (Note 8)

Stockholders’ equity
Common stock; par value $0.001; Authorized: 1,600,000 shares;
Shares issued and outstanding: 445,516 at March 31, 2008 and 443,837 at December 31, 2007		446			444
Additional paid-in capital		1,204,921			1,193,846
Accumulated other comprehensive income		189,231			153,140
Accumulated deficit		(517,163	)		(523,951	)

Total stockholders’ equity		877,435			823,479

Total liabilities and stockholders’ equity	$	1,713,607		$	1,702,753

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

Atmel Corporation

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended
	March 31,			March 31,
	2008			2007
	(in thousands, except per share data)
Net revenues	$	411,237		$	391,313

Operating expenses
Cost of revenues		265,183			251,376
Research and development		66,377			67,299
Selling, general and administrative		63,562			58,059
Acquisition-related charges		3,711			—
Credit from grant repayments		(119	)		—
Restructuring charges		27,908			1,782
Gain on sale of assets		(30,758	)		—

Total operating expenses		395,864			378,516

Income from operations		15,373			12,797
Interest and other income (expense), net		(5,387	)		979

Income from continuing operations before income taxes		9,986			13,776
Benefit from (provision for) income taxes		(3,198	)		15,164

Net income	$	6,788		$	28,940


Basic net income per share:
Net income	$	0.02		$	0.06

Weighted-average shares used in basic net income per share calculations		444,670			488,842

Diluted net income per share:
Net income	$	0.02		$	0.06

Weighted-average shares used in diluted net income per share calculations		447,643			494,198

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

Atmel Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended
	March 31,			March 31,
	2008			2007
	(in thousands)
Cash flows from operating activities
Net income	$	6,788		$	28,940
Adjustments to reconcile net income to net cash (used in) provided by operating activities
Depreciation and amortization		33,680			31,940
Loss (gain) on sale or disposal of fixed assets		(30,758	)		17
In-process research and development charges		1,047			—
Other non-cash losses		3,877			428
Provision for doubtful accounts receivable		731			132
Accretion of interest on long-term debt		844			278
Stock-based compensation expense		6,307			3,310
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable		(11,878	)		10,993
Inventories		18,302			(23,267	)
Current and other assets		1,425			12,732
Trade accounts payable		(89,445	)		(8,027	)
Accrued and other liabilities		17,297			3,736
Deferred income on shipments to distributors		1,626			(1,992	)

Net cash (used in) provided by operating activities		(40,157	)		59,220


Cash flows from investing activities
Acquisitions of fixed assets		(16,672	)		(26,206	)
Proceeds from sale of North Tyneside assets and other assets		81,865			11
Acquisitions of intangible assets		(1,080	)		—
Purchases of short-term investments		(3,783	)		(4,114	)
Sales or maturities of short-term investments		4,425			2,000
Acquisition of Quantum Research Group, net of cash acquired		(89,416	)		—

Net cash used in investing activities		(24,661	)		(28,309	)


Cash flows from financing activities
Principal payments on capital leases and other debt		(9,800	)		(22,806	)
Proceeds from issuance of common stock		4,285			—

Net cash used in financing activities		(5,515	)		(22,806	)

Effect of exchange rate changes on cash and cash equivalents		4,568			1,397

Net increase (decrease) in cash and cash equivalents		(65,765	)		9,502


Cash and cash equivalents at beginning of the period		374,130			410,480

Cash and cash equivalents at end of the period	$	308,365		$	419,982


Supplemental cash flow disclosures:
Interest paid	$	2,622		$	2,314
Income taxes paid, net		5,995			16,893

Supplemental non-cash investing and financing activities disclosures:
Decreases in accounts payable related to fixed asset purchases		(3,523	)		(6,441	)
Increase in accounts payable related to Quantum Research Group acquisition costs		3,661			—

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

Atmel Corporation

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data, employee data, and where otherwise indicated)

(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, 2008 and the results of operations and cash flows for the three months ended March 31, 2008 and 2007. All intercompany balances have been eliminated. Because all of the disclosures required by U.S. 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, 2007. The December 31, 2007 year-end condensed balance sheet data was derived from the audited consolidated financial statements and does not include all of the disclosures required by U.S. 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.

The preparation of financial statements in conformity with U.S. 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, warranty reserves, estimates for useful lives associated with long-lived assets (including intangible assets), asset impairments charges, restructuring charges and 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 and excess and obsolescence reserves. The determination of obsolete or excess inventory requires an estimation of the future demand for the Company’s products and these reserves are recorded when the inventory on hand exceeds management’s estimate of future demand for each product. Once the inventory is written down, a new cost basis is established; however, for tracking purposes, the write-down is recorded as a reserve on the balance sheets. These inventory reserves are not relieved until the related inventory has been sold or scrapped. Inventories are comprised of the following:


	March 31,		December 31,
	2008		2007
	(in thousands)
Raw materials and purchased parts	$	16,991	$	22,996
Work-in-progress		240,116		249,863
Finished goods		91,496		84,442

	$	348,603	$	357,301

Grant Recognition

Subsidy grants from government organizations are amortized as a reduction of expenses over the period the related obligations are fulfilled. 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:


	Three Months Ended
	March 31,		March 31,
	2008		2007
	(in thousands)
Cost of revenues	$	409	$	297
Research and development expenses		4,959		5,467

Total	$	5,368	$	5,764

In the three months ended March 31, 2008, the Company made $39,519 in government grant repayments to the UK government in connection with the closure of the North Tyneside, UK manufacturing facility, which was previously accrued as of December 31, 2007. The Company recorded a credit of $119 in grant repayments in the three months ended March 31, 2008 due to changes in certain assumptions in estimating the initial grant liability.

Stock-Based Compensation

Upon adoption of Statement of Financial Accounting Standards 123R (“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, 2008 and 2007 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, 2008 and 2007 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. 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 are measured based on SFAS No. 123R requirements. See Note 6 for further discussion.

Valuation of Goodwill and Intangible Assets

The Company reviews goodwill and intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment under SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets). Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and forecasted operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. The Company bases its fair value estimates on assumptions it believes to be reasonable. Actual future results may differ from those estimates.

Recent Accounting Pronouncements

by requiring transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No 133; and how derivative instruments and related hedged items affect its financial position, financial performance and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of
SFAS No. 161 on its consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on its consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective as of the beginning of an entity’s fiscal year that begins after December 31, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 160 on its consolidated results of operations and financial condition.

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.” Under SFAS No. 159, a company may elect to use fair value to measure eligible items at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Currently, we have not expanded our financial assets and liabilities that we account for under the fair value option of SFAS No. 159.

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 assets and liabilities on financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FASB Staff Position No. 157-2 (FSP No. 157-2) delays the effective date for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually. 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 has adopted SFAS No. 157 and FSP No. 157-2) beginning January 1, 2008, and there is no material impact on its condensed consolidated financial statements. See Note 16 for further discussion.

Note 2 BUSINESS COMBINATION

On March 6, 2008, the Company completed its acquisition of Quantum Research Group Ltd. (“Quantum”), a supplier of capacitive sensing IP and solutions. The Company acquired all outstanding shares as of the acquisition date and Quantum became a wholly-owned subsidiary of Atmel.

The total purchase price of the acquisition is as follows:


	(in thousands)
Cash	$	88,106
Fair value of common stock issued		405
Direct transaction costs		7,159

Total estimated purchase price	$	95,670

Of the $88,106 cash paid on the closing date of the acquisition, $13,000 was placed in an escrow account and will be released 18 months from the closing date upon satisfaction of any outstanding obligations related to certain representations and warranties included in the acquisition agreement. As part of the purchase price, the Company also issued 126 shares of its common stock to a Quantum shareholder, which was valued at $405. The share value used was based on fair value determined by calculating the average closing stock prices from March 4, 2008 to March 8, 2008.

The allocation of the purchase price to Quantum’s tangible and identifiable intangible assets acquired and liabilities assumed is based on their estimated fair values. Further adjustments may be included in the final allocation of the purchase price of Quantum, if the adjustments are determined within the purchase price allocation period (up to twelve months from the closing date). The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. Goodwill is not deductible for tax purposes. Goodwill and intangible assets were recorded on the books of an Atmel subsidiary that utilizes the euro as the functional currency.

The purchase price is allocated as follows as of the closing date of the acquisition:


	March 6,
	2008
	(in thousands)
Goodwill	$	60,599
Other intangible assets		31,002
Tangible assets acquired and liabilities assumed:
Cash and cash equivalents		2,188
Accounts receivable		3,070
Inventory		966
Prepaids and other current assets		149
Fixed assets		455
Trade accounts payable		(1,013	)
Accrued liabilities		(2,793	)
In-process research and development		1,047

	$	95,670


			Cumulative
	March 6,		Translation		March 31,
	2008		Adjustments		2008
	(in thousands)
Goodwill	$	60,599	$	2,266	$	62,865

		60,599		2,266		62,865


Other intangible assets:
Customer relationships		21,482		773		22,255
Developed technology		6,880		258		7,138
Tradename		1,180		44		1,224
Non-compete agreement		990		37		1,027
Backlog		470		18		488

	$	31,002	$	1,130	$	32,132

The goodwill amount is not subject to amortization. The goodwill is related to the Company’s Microcontroller segment. It is tested for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company has estimated the fair value of other intangible assets using the income approach to value these identifiable intangible assets which are subject to amortization. The

following table sets forth the components of the identifiable intangible assets subject to amortization as of March 31, 2008, which are being amortized on a straight-line basis:


			Accumulated					Estimated
	Gross Value		Amortization			Net		Useful Life
	(in thousands, except for years)
Customer relationships	$	22,255	$	(371	)	$	21,884	5 years
Developed technology		7,138		(119	)		7,019	5 years
Tradename		1,224		(34	)		1,190	3 years
Non-compete agreement		1,027		(16	)		1,011	5 years
Backlog		488		(488	)		—	< 1 year

	$	32,132	$	(1,028	)	$	31,104

Customer relationships represent future projected net revenues that will be derived from sales of current and future versions of existing products that will be sold to existing customers. Core developed technology represents a combination of processes, patents and trade secrets developed through years of experience in design and development of the products. Trade name represents the Quantum brand that the Company will continue to use to market the current and future capacitive sensing products. Non-compete agreement represents the fair value to the Company from agreements with certain former Quantum executives to refrain from competition for a number of years. Backlog represents committed orders from customers as of the closing date of the acquisition.

The Company recorded the following acquisition-related charges in the condensed consolidated statements of operations in the three months ended March 31, 2008:


	Three Months Ended
	March 31, 2008
	(in thousands)
Amortization of intangible assets	$	962
In-process research and development		1,047
Compensation-related expense		1,702

	$	3,711

The Company recorded amortization of intangible assets of $962 associated with customer relationships, developed technology, trade name, non-compete agreements and backlog.

The Company recorded a charge of $1,047 associated with acquired in-process research and development (“IPR&D”), in connection with the acquisition of Quantum. The Company’s methodology for allocating the purchase price to IPR&D involves established valuation techniques utilized in the high-technology industry. Each project in process was analyzed by discounted forecasted cash flows directly related to the products expected to result from the subject research and development, net of returns in contributory assets including working capital, fixed assets, customer relationships, trade name, and assembled workforce. IPR&D was expensed upon acquisition because technological feasibility has not been established and no future alternative uses existed. The fair value of technology under development is determined using the income approach, which discounts expected future cash flows to present value. A discount rate of 33% is used for the projects to account for the risks associated with the inherent uncertainties surrounding the successful development of the IPR&D, market acceptance of the technology, the useful life of the technology, the profitability level of such technology and the uncertainty of technological advances, which could impact the estimates recorded. The discount rates used in the present value calculations are typically derived from a weighted-average cost of capital analysis. These estimates did not account for any potential synergies realizable as a result of the acquisition and were in line with industry averages and growth estimates.

The Company agreed to pay additional amounts to former key executives of Quantum contingent upon continuing employment over a three year period. The Company has agreed to pay up to $32,334, including the value of 5,319 shares of the Company’s common stock. These payments are accrued over the employment period and recorded as compensation expense, calculated on an accelerated

basis. In the three months ended March 31, 2008, the Company recorded $1,702 of compensation expense as acquisition-related charges in the condensed consolidated statements of operations.

The Company agreed to make additional payments of $9,560 that is contingent on achieving specified financial objectives in 2008. Of this amount, the Company paid $1,570 in April 2008 for the achievement of the financial objectives in the three months ended March 31, 2008 and was included in goodwill as of March 31, 2008. The remaining amount will be recorded as additional goodwill if and when the financial objectives are achieved in the remainder of 2008.

Pro Forma Results

Pro forma consolidated statements of operations information has not been presented because Quantum’s financial results are not material to the Company’s condensed consolidated statements of operations for the three months ended March 31, 2008.

Note 3 INVESTMENTS

Investments at March 31, 2008 and December 31, 2007 primarily comprise corporate equity securities, U.S. and foreign corporate debt securities, guaranteed variable annuities and auction rate securities.

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. Gross realized gains or losses are recorded based on the specific identification method. During the three months ended March 31, 2008, the Company’s gross realized gains or losses on short-term investments were not material. The carrying amount of the Company’s investments is shown in the table below:


	March 31, 2008					December 31, 2007
	Book Value			Fair Value		Book Value			Fair Value
	(in thousands)
Corporate equity securities	$	87		$	1,477	$	87		$	1,542
Auction-rate securities		29,057			27,944		29,075			29,075
Corporate debt securities and other obligations		23,419			24,974		23,817			25,200

	$	52,563		$	54,395	$	52,979		$	55,817

Unrealized gains		3,207					2,900
Unrealized losses		(1,375	)				(62	)

Net unrealized gains		1,832					2,838

Fair value	$	54,395				$	55,817


Amount included in short-term investments				$	28,455				$	55,817
Amount included in other assets					25,940					—

				$	54,395				$	55,817

In the three months ended March 31, 2008 the Company recorded an impairment of $1,113 related to a decline in the value of auction-rate securities which is recorded as other comprehensive loss. The Company does not believe that the impairment is “other than temporary” due to its intent and ability to hold the securities until they can be liquidated at par value. In the three months ended March 31, 2008 the auctions for the Company’s auction-rate securities have failed and as a result, the securities have become illiquid. The Company concluded that $25,940 of these securities are unlikely to be liquidated within the next twelve months and reclassified these securities to long-term investments, which is included in other assets on the condensed consolidated balance sheets.

Contractual maturities (at book value) of available-for-sale debt securities as of March 31, 2008, were as follows:


	(in thousands)
Due within one year	$	4,335
Due in 1-5 years		10,562
Due in 5-10 years		—
Due after 10 years		37,579

Total	$	52,476

Atmel has classified all investments (excluding auction rate securities) with maturity dates of 90 days or more as short-term as it has the ability to redeem them within the year.

Note 4 INTANGIBLE ASSETS, NET

Intangible assets, net, consisted of technology licenses and acquisition-related intangible assets as follows:


	March 31,			December 31,
	2008			2007
	(in thousands)
Core/licensed technology	$	104,599		$	102,906
Accumulated amortization		(85,945	)		(83,354	)

Total technology licenses		18,654			19,552


Acquisition-related intangible assets (See Note 2)		32,132			—
Accumulated amortization		(1,028	)		—

Total acquisition-related intangible assets		31,104			—

Total intangible assets, net	$	49,758		$	19,552

Amortization expense for technology licenses for the three months ended March 31, 2008 and 2007 totaled $1,093 and $1,193, respectively. See Note 2 for discussion of amortization of acquisition-related intangible assets in the three months ended March 31, 2008.

The following table presents the estimated future amortization of the technology licenses and acquisition-related intangible assets:


	Technology		Acquisition-Related
Years Ending December 31:	Licenses		Intangible Assets		Total
	(in thousands)
2008 (April 1 through December 31)	$	3,254	$	4,869	$	8,123
2009		4,237		6,492		10,729
2010		3,912		6,492		10,404
2011		3,225		6,152		9,377
2012		3,221		6,084		9,305
Thereafter		805		1,015		1,820

Total future amortization	$	18,654	$	31,104	$	49,758

Note 5 BORROWING ARRANGEMENTS

Information with respect to Atmel’s debt and capital lease obligations as of March 31, 2008 and December 31, 2007 is shown in the following table:


	March 31,			December 31,
	2008			2007
	(in thousands)
Various interest-bearing notes and term loans	$	5,298		$	6,221
Bank lines of credit		125,000			125,000
Capital lease obligations		25,511			31,658

Total	$	155,809		$	162,879
Less: current portion of long-term debt and capital lease obligation		(135,558	)		(142,471	)

Long-term debt and capital lease obligations due after one year	$	20,251		$	20,408

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


Years Ending December 31:	(in thousands)
2008 (April 1 through December 31)	$	136,657
2009		7,635
2010		6,418
2011		5,400
2012		1,298
Thereafter		2,798

		160,206
Less: amount representing interest		(4,397	)

Total	$	155,809

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, 2008, the amount available under this facility was $119,836 based on eligible non-U.S. trade receivables, of which $100,000 was outstanding. Borrowings under the facility bear interest at LIBOR plus 2% per annum (approximately 6.5% at March 31, 2008), while the undrawn portion is subject to a commitment fee of 0.375% per annum. The outstanding balance is subject to repayment in full on the last day of its interest period (every two months). The terms of the facility subject the Company to certain financial and other covenants and cross-default provisions. The Company was not in compliance with certain financial covenants (i.e. fixed charge ratio) as of March 31, 2008. The Company obtained a waiver on May 7, 2008. Commitment fees and amortization of up-front fees paid related to the facility for the three months ended March 31, 2008 and 2007 totaled $326 and $402, respectively, and are included in interest and other income (expenses), net, in the condensed consolidated statements of operations. The outstanding balance under this facility is classified as a bank line of credit in the summary debt table.

In December 2004, the Company established a $25,000 revolving line of credit with a domestic bank, which has been extended until September 2008. The interest rate on the revolving line of credit is either the domestic bank’s prime rate or LIBOR plus 2%. In September 2005, the Company obtained a $15,000 term loan from the same bank. This term loan matures in September 2008. The interest rate on this term loan is LIBOR plus 2.25% (approximately 7.0% at March 31, 2008). The revolving line of credit is secured by the Company’s U.S. trade receivables. Both 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, 2008, the full $25,000 of the revolving line of credit and $2,499 of the term loan was outstanding and are classified as a bank line of credit and interest bearing note in the summary debt table, respectively.

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 was collateralized by the financed assets. As of March 31, 2008, the balance outstanding under the arrangement had been repaid. The outstanding balance as of December 31, 2007 of $5,250 was classified as a capital lease in the summary debt table.

Of the Company’s remaining $28,310 in outstanding debt obligations as of March 31, 2008, $25,511 are classified as capital lease and $2,799 as interest bearing notes in the summary debt table.

Included within the Company’s outstanding debt obligations are $147,880 of variable-rate debt obligations where the interest rates are based on either the LIBOR index plus a spread ranging from 2.0% to 2.25% or the short-term EURIBOR index plus a spread ranging from 0.9% to 2.25%. Approximately $127,499 of the Company’s total debt obligations have cross default provisions.

Note 6 STOCK-BASED COMPENSATION

Option and Employee Stock Purchase Plans

Atmel has one stock option plan — the 2005 Stock Plan (an amendment and restatement of the 1996 Stock Plan). The 2005 Stock Plan was approved by stockholders on May 11, 2005. As of March 31, 2008, of the 56,000 shares authorized for issuance under the 2005 Stock Plan, 4,969 shares of common stock remain available for grant. Under Atmel’s 2005 Stock Plan, Atmel may issue common stock directly, grant options to purchase common stock or grant restricted stock units payable in 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 2005 Stock Plan is set forth below:


							Outstanding Options
									Weighted-
							Exercise		Average
	Available			Number of			Price		Exercise Price
	for Grant			Options			per Share		per Share
	(in thousands, except per share data)
Balances, December 31, 2007		6,104			30,782		$	1.68-$24.44	$	5.81
Restricted stock units granted		(635	)		—			—		—
Options granted		(1,463	)		1,463			3.27-3.41		3.31
Options cancelled/expired/forfeited		963			(963	)		1.98-21.47		5.35
Options exercised		—			(303	)		3.00-4.32		2.09

Balances, March 31, 2008		4,969			30,979		$	1.68-24.44	$	5.73

Stock options exercised in the three months ended March 31, 2008 had an aggregate exercise price of $634. No stock options were exercised in the three months ended March 31, 2007.

Restricted Stock Units


	Number of
	Shares
	(in thousands)
Balances, December 31, 2007		3,968
Units granted		635
Units vested		(88	)

Balances, March 31, 2008		4,515


			Weighted-Average
	Number of		Fair Value
	Shares		Per Share
	(in thousands, except per share data)
Restricted stock units issued		635	$	3.32

During the three months ended March 31, 2008, 88 units of restricted stock vested. These vested units had a weighted-average fair value of $3.35 on the vesting dates. The Company has also committed to issue 2,403 of restricted stock units to certain employees in the remainder of 2008 (see Note 8 for further discussion). As of March 31, 2008, total unearned stock-based compensation related to nonvested restricted stock units was approximately $31,686, excluding forfeitures, and is expected to be recognized over a weighted-average period of 3.7 years.

The following table summarizes the stock options outstanding at March 31, 2008:


Options Outstanding									Options Exercisable
(in thousands, except for price and term data)
			Weighted-								Weighted-
			Average		Weighted-						Average		Weighted-
Range of			Remaining		Average		Aggregate				Remaining		Average		Aggregate
Exercise	Number		Contractual		Exercise		Intrinsic		Number		Contractual		Exercise		Intrinsic
Price	Outstanding		Term (years)		Price		Value		Exercisable		Term (years)		Price		Value
$1.68 - $2.50		3,101		4.58	$	2.09	$	4,298		2,932		4.42	$	2.09	$	4,075
2.62 - 3.32		4,120		7.88		3.20		1,165		1,639		7.08		3.11		602
3.33 - 4.70		1,144		5.10		4.09		2		715		3.68		3.93		2
4.74 - 4.74		3,283		9.35		4.74		—		430		9.38		4.74		—
4.77 - 4.92		3,238		8.84		4.90		—		763		8.46		4.89		—
4.95 - 5.73		4,288		8.37		5.48		—		1,208		7.74		5.45		—
5.75 - 6.27		3,150		5.61		5.83		—		2,206		5.39		5.81		—
6.28 - 6.28		3,451		8.67		6.28		—		917		8.71		6.28		—
6.47 - 12.13		3,544		3.42		8.59		—		3,522		3.41		8.60		—
12.47 - 24.44		1,660		2.17		16.71		—		1,660		2.17		16.71		—

		30,979		6.81	$	5.73	$	5,465		15,992		5.16	$	6.44	$	4,679

During the three months ended March 31, 2008, the number of stock options that were exercised was 303, which had an intrinsic value of $401. No stock options were exercised in 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,
	2008			2007
Risk-free interest rate		2.50	%		4.54	%
Expected life (years)		5.39			5.98
Expected volatility		55	%		64	%
Expected dividend yield		—			—

The Company’s weighted-average assumptions for the three months ended March 31, 2008 and 2007 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, 2008 and 2007 were $1.69 and $3.74, 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 percent of an employee’s eligible compensation. There were 1,161 purchases under the ESPP in the three months ended March 31, 2008 at an average price of $3.14 per share. Of the 42,000 shares authorized for issuance under this plan, 8,159 shares were available for issuance at March 31, 2008. There were no purchases under the ESPP in the three months ended March 31, 2007.

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 the date of the beginning of the offering period using the Black-Scholes option pricing model. The following assumptions were utilized to determine the fair value of the Company’s ESPP shares:


	Three Months Ended
	March 31,
	2008
Risk-free interest rate		2.07	%
Expected life (years)		0.50
Expected volatility		40	%
Expected dividend yield		—

The weighted-average fair value of the rights to purchase shares under the ESPP for offering periods started in the three months ended March 31, 2008 was $0.67. Cash proceeds for the issuance of shares under the ESPP was $3,643 in the three months ended March 31, 2008.

The components of the Company’s stock-based compensation expense, net of amounts capitalized in inventory, for the three months ended March 31, 2008 and 2007, are summarized below:


	Three Months Ended
	March 31,			March 31,
	2008			2007
	(in thousands)
Employee stock options	$	3,743		$	3,275
Employee stock purchase plan		447			—
Restricted stock units		2,195			—
Amounts (capitalized in) liquidated from inventory		(78	)		35

	$	6,307		$	3,310

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 in the three months ended March 31, 2008 or 2007, 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, restricted stock units and employee stock purchases under SFAS No. 123R in the three months ended March 31, 2008 and 2007, which was recorded as follows:


	Three Months Ended
	March 31,		March 31,
	2008		2007
	(in thousands)
Cost of revenues	$	836	$	526
Research and development		2,745		780
Selling, general and administrative		2,726		2,004

Total stock-based compensation expense, before income taxes		6,307		3,310
Tax benefit		—		—

Total stock-based compensation expense, net of income taxes	$	6,307	$	3,310

There was no non-employee stock-based compensation expense in the three months ended March 31, 2008 and 2007.

As of March 31, 2008, total unearned compensation expense related to nonvested stock options was approximately $35,977, excluding forfeitures, and is expected to be recognized over a weighted-average period of 1.7 years.

Note 7 ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income 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 and comprehensive income for Atmel arises from foreign currency translation adjustments, unrealized pension gains and losses and unrealized gains on investments.

The components of accumulated other comprehensive income at March 31, 2008 and December 31, 2007, net of tax, are as follows:


	March 31,		December 31,
	2008		2007
	(in thousands)
Foreign currency translation	$	186,461	$	149,127
Actuarial gains related to defined benefit pension plans		938		1,175
Net unrealized gains on investments		1,832		2,838

Total accumulated other comprehensive income	$	189,231	$	153,140

The components of comprehensive income for the three months ended March 31, 2008 and 2007 are as follows:


	Three Months Ended
	March 31,			March 31,
	2008			2007
	(in thousands)
Net income	$	6,788		$	28,940

Other comprehensive income:
Foreign currency translation adjustments		37,334			4,067
Actuarial gain (loss) related to defined benefit pension plans		(237	)		1,589
Unrealized gain (loss) on investments		(1,006	)		7

Other comprehensive income		36,091			5,663

Total comprehensive income	$	42,879		$	34,603

Foreign currency translation adjustments increased by $37,334 in the three months ended March 31, 2008, compared to $4,067 in the three months ended March 31, 2007 primarily due to a translation adjustment resulting from the significant change in the euro/dollar exchange rate.

Note 8 COMMITMENTS AND CONTINGENCIES

Commitments

Employment Agreements

The Company entered into an employment agreement with an executive, effective August 7, 2006. The agreement provides for certain payments and benefits to be provided in the event that the executive 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 or restricted stock units to the executive 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 was unable to issue these shares on January 2, 2007. On March 13, 2007, the executive’s agreement was amended to provide for issuing these shares after the Company became current with its reporting obligations under the Exchange Act, or for an amount in cash if the executive’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. On July 11, 2007, the Company granted 1,000 restricted stock units (“RSUs”) to the executive pursuant to the employment agreement of August 7, 2006.

The Company has agreements with certain employees providing for both cash bonuses and issuance of restricted stock units. As of March 31, 2008, the Company has a commitment for future payments of $6,011 in bonus and related payroll taxes and to issue 2,403 RSUs under these agreements.

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.

Purchase Commitments

At March 31, 2008, the Company had outstanding capital purchase commitments of $1,309. The Company also has a supply agreement obligation with a subsidiary of XbyBus SAS, a French corporation of $14,422 for wafer purchases through the remainder of 2008.

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.

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 Information Document Requests from the Internal Revenue Service (“IRS”) regarding the Company’s investigation into misuse of corporate travel funds and investigation into backdating of stock options. The DOJ and IRS inquiries may require the Company to expend significant management time and incur significant legal and other expenses, 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.

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. On defendants’ motions, this consolidated amended complaint was dismissed with leave to amend, and a second consolidated amended complaint was filed in August 2007. Atmel and the individual defendants have each moved to dismiss the second consolidated amended complaint on various grounds. The motions have been argued and taken under submission by the Court. On February 20, 2008, a seventh stockholder derivative lawsuit was filed in the U.S. District Court for the Northern District of California, which alleges the same causes of action as alleged in the second consolidated amended complaint. This seventh suit was consolidated with the already-pending consolidated federal action and was served on the Company on May 5, 2008. The state derivative cases have also 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 these derivative actions was unwarranted and will continue to vigorously contest them.

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. A hearing took place in October 2007 and in February 2008, to the Court announced that it will appoint an additional, professional judge to decide the matter. Atmel will be required to replead this matter in June 2008. Atmel believes that the filing of this action is without merit and intends to vigorously defend this action.

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 by 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 (the “‘804 Patent”). 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 April 2007, AuthenTec filed 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 declaratory relief that the ‘804 Patent is unenforceable, alleged interference with business relationships, and abuse of process. AuthenTec sought 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, and has been related to the action Atmel filed. On July 3, 2007, Atmel filed an answer to the claims for declaratory relief that the patents were neither valid nor infringed, and also added counterclaims of infringement. Also on July 3, 2007, Atmel moved to dismiss the remaining claims for declaratory relief that the ‘804 Patent is unenforceable, alleged interference with business relationships, and alleged abuse of process. On August 2, 2007, the parties agreed to the dismissal with prejudice of AuthenTec’s claims for alleged interference with business relationships and alleged abuse of process. The parties also agreed to grant AuthenTec leave to amend its counterclaim to add the claim for alleged unenforceability of the ‘804 Patent. In early 2008, the parties each filed motions seeking summary judgment, and by Order dated May 5, 2008, the Court granted AuthenTec’s motion for summary judgment of noninfringement. Atmel is evaluating this Order and its options to appeal the same.

On September 28, 2007, Matheson Tri-Gas filed suit in Texas state court in Dallas County against the Company. Plaintiff alleges a claim for breach of contract for alleged failure to pay minimum payments under a purchase requirements contract. Matheson seeks unspecified damages, pre- and post-judgment interest, attorneys’ fees and costs. In late November 2007, Atmel filed its answer denying liability. The Company believes that Matheson’s claims are without merit and intends to vigorously defend this action.

On January 23, 2008, Isamtek MG (1999) Ltd filed suit in the District Court in Petach Tikva, Israel against Atmel SARL and two other defendants. Isamtek has alleged that Atmel breached its distributor agreement with Isamtek and has alleged breach of duty of care in tort and interference with contractual by the other defendants. Isamtek seeks monetary and declaratory relief as well as presentation of accounts.

On December 21, 2005, the Company’s recently-acquired subsidiary Quantum Research Group, Ltd (“QRG”) filed suit against Apple Computer Company, Inc. (“Apple”) and Fingerworks, Ltd (“Fingerworks”) in the United States District Court for the District of Maryland, alleging infringement of U.S. Patent No. 5,730,165 (“the ‘165 Patent”) and, on May 11, 2006, QRG filed an Amended Complaint adding Cypress Semiconductor/MicroSystems, Inc. (“Cypress”) as a defendant and asserting additional claims for Defamation, False Light, and Unfair Competition against Cypress. On or about July 31, 2006, Apple and Fingerworks each filed its Answer denying infringement and asserting counterclaims seeking a declaratory judgment of non-infringement and invalidity, as well as an award of costs and attorneys’ fees under 35 U.S.C. Section 285. On or about December 14, 2006, Cypress filed its Answer denying infringement, denying the counts alleging Defamation, False Light, and Unfair Competition, and asserting counterclaims seeking a declaratory judgment of non-infringement and invalidity, as well as an award of costs and attorneys’ fees under 35 U.S.C. Section 285. On June 7, 2007, the Court issued its claim construction ruling and an Order invalidating certain asserted claims of the

‘165 Patent. In November 2007, Defendants filed a motion for summary judgment of non-infringement and invalidity of the remaining asserted claims of the ‘165 Patent. At that time, QRG filed a motion for summary judgment of infringement of claim 50 of the ‘165 patent. These motions, along with various procedural and evidentiary motions, are pending. Based upon a Stipulation by the parties, the trial date for this action was extended to October 27, 2008, and the suit was stayed by the Court until at least May 19, 2008, to facilitate settlement discussions. Atmel intends to aggressively defend its intellectual property assets.

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

Other Contingencies

The Company recently began investigating a transaction from 2001 involving its Greek subsidiary (which was substantially shut down in 2007). The transaction appears to have been with an entity that was not a legitimate third party vendor, and may have been entered into for an inappropriate purpose. The Company’s investigation of the circumstances surrounding the transaction is ongoing, and it has voluntarily disclosed the existence of its investigation to the Department of Justice and the Securities and Exchange Commission.

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 is working with several agencies to remediate deficiencies 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 carry back 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 has protested all of these proposed various adjustments and is currently working through the matter with the IRS Appeals Division.

The income tax returns for the Company’s subsidiary in Rousset, France for the 2003, 2004 and 2005 tax years are currently under examination by the French tax authorities. The examination has resulted in an 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.

In addition, the Company has a tax audit in progress in a U.S. state and various foreign jurisdictions.

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. The Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different that the amounts originally accrued, the increases of decreases are recorded as income tax expense or benefit in the condensed consolidated statements of operations. Income taxes and related interest and penalties due for potential adjustments may result from the resolution of these examinations, and examinations of open U.S. federal, state and foreign tax years.

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, 2008 and 2007:


	Three Months Ended
	March 31,			March 31,
	2008			2007
	(in thousands)
Balance at beginning of period	$	6,789		$	4,773
Accrual for warranties during the period, net of change in estimates		1,481			2,284
Actual costs incurred		(1,749	)		(1,730	)

Balance at end of period	$	6,521		$	5,327

Product warranty liability is included in accrued and other liabilities on the condensed consolidated balance sheets.

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 the Company or its subsidiaries. As of March 31, 2008, the maximum potential amount of future payments that the Company could be required to make under these guarantee agreements is approximately $13,799. 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 9 INCOME TAXES

For the three months ended March 31, 2008 and 2007, the Company recorded an income tax provision of $3,198 and a tax benefit of $15,164, respectively.

The provision for income taxes for these periods was first 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.

Other than the items noted as follows, there were no significant changes in estimates or provision for income taxes in the three months ended March 31, 2008:

The sale of assets and restructuring charges of a foreign subsidiary as well as in-process research and development costs of Quantum Research Group were treated as discrete events for the three months ended March 31, 2008. Due to a full valuation allowance position in this jurisdiction, there is no tax expense impact associated with these discrete events in the quarter.

At December 31, 2007, there was no provision for U.S. income tax for undistributed earnings, as it was the Company’s intention to reinvest these earnings indefinitely in operations outside the U.S. For 2008, the Company determined that it would require a portion of undistributed earnings repatriated to the U.S. in the form of a cash dividend. The Company anticipates the cash dividends will be distributed from select foreign subsidiaries, resulting in an estimated withholding tax expense of $6,035. As such, for 2008 the Company changed its position to no longer assert permanent reinvestment of undistributed earnings for select foreign entities.

During the quarter ended March 31, 2008 and 2007, the Company recognized a tax benefit of $3,223 and $19,549, respectively, resulting from the refund of unutilized French research tax credits for 2003 and 1999 through 2002, respectively, which were received during the respective periods.

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 filed a protest to these proposed adjustments and is pursuing administrative review with the IRS Appeals Division.

In addition, the Company has various tax audits in progress in a certain U.S. state 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 FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“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 federal, 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.

The Company files income tax returns in the U.S. federal jurisdiction, and various state 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, 2002, 2004 and 2002 respectively; subsequent tax years for these jurisdictions remain subject to tax authority review. Hong Kong tax years are closed for years through 2003 and subsequent tax years remain subject to tax authority review.

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. At December 31, 2007, the Company had $166,180 of unrecognized tax benefits. Unrecognized tax benefits decreased by $3,010 in the three months ended March 31, 2008, primarily related to net benefits of $3,223 recognized relating to the receipt of a tax refund for French research tax credits as noted above.

Note 10 PENSION 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, 2008 and 2007 are as follows:


	Three Months Ended
	March 31,		March 31,
	2008		2007
	(in thousands)
Service costs-benefits earned during the period	$	548	$	1,097
Interest cost on projected benefit obligation		736		380
Amortization of actuarial loss		58		43

Net pension cost	$	1,342	$	1,520

Service costs-benefits earned decreased to $548 in the three months ended March 31, 2008 from $1,097 in the three months ended March 31, 2007 primarily due to an increase in the retirement age to 63 years old from 62 years old in Germany during 2007. Interest cost on projected benefit obligation increased to $736 in the three months ended March 31, 2008 from $380 in the three months ended March 31, 2007 primarily due to an increase in interest rates to 6.1% in the three months ended March 31, 2008, compared to 4.7% in the three months ended March 31, 2007 in Germany.

The Company made $225 and $976 in benefit payments during the three months ended March 31, 2008 and 2007, respectively. The Company expects to make $1,664 in benefit payments in 2008.

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 2008, an increase in inflation rate assumptions used to calculate the present value of the pension obligation resulted in an increase in the pension liability of $587. This increase in liability was offset in part by an increase in discount rate. This resulted in a decrease of $237, net of tax, to accumulated other comprehensive income in stockholders’ equity in the condensed consolidated balance sheets during the three months ended March 31, 2008, in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

Note 11 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 consists of 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. This segment also includes products with military and aerospace applications. In the three months ended, March 31, 2008, the Company acquired Quantum. Results from the acquired operations are considered complementary to sales of microcontroller products and are included in this segment.

	•		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 acquisition-related charges, charges for grant repayments, impairment and restructuring charges and gains on sale of assets. 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
	(in thousands)
Three months ended March 31, 2008
Net revenues from external customers	$	115,039		$	130,660	$	94,993	$	70,545	$	411,237
Segment income (loss) from operations		(6,208	)		9,400		10,165		2,758		16,115
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

Reconciliation of Segment Information to Condensed Consolidated Statements of Operations


	Three Months Ended
	March 31,			March 31,
	2008			2007
	(in thousands)
Total segment income from operations	$	16,115		$	14,579
Unallocated amounts:
Acquisition-related charges		(3,711	)		—
Credit from grant repayments		119			—
Restructuring charges		(27,908	)		(1,782	)
Gain on sale of assets		30,758			—

Consolidated income from operations	$	15,373		$	12,797

Geographic sources of revenues were as follows:


	Three Months Ended
	March 31,		March 31,
	2008		2007
	(in thousands)
United States	$	61,397	$	49,786
Germany		64,004		56,873
France		37,824		37,923
United Kingdom		5,150		6,992
Japan		24,552		21,999
China, including Hong Kong		86,590		82,882
Singapore		31,317		45,218
Rest of Asia-Pacific		55,374		43,840
Rest of Europe		38,773		41,322
Rest of the World		6,256		4,478

Total net revenues	$	411,237	$	391,313

No single customer accounted for more than 10% of net revenues in the three months ended March 31, 2008 and 2007.

Net revenues are attributed to countries based on delivery locations.

Locations of long-lived assets as of March 31, 2008 and December 31, 2007 were as follows:


	March 31,		December 31,
	2008		2007
	(in thousands)
United States	$	138,061	$	137,334
Germany		36,894		34,337
France		274,092		268,358
United Kingdom		15,116		106,651
Asia-Pacific		31,437		28,541
Rest of Europe		17,597		17,756

Total	$	513,197	$	592,977

Excluded from the table above for March 31, 2008 is $25,940 of auction-rate securities, which are included in other assets on the condensed consolidated balance sheets. Also, excluded from the table above are goodwill, intangible assets and deferred tax assets.

Note 12 ASSETS HELD FOR SALE

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, including assets not available for immediate sale in their present condition. The Company reports assets 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. Assets classified as held for sale are not depreciated.

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

On October 8, 2007, the Company entered into definitive agreements to sell certain wafer fabrication equipment and land and buildings at North Tyneside to TSMC and Highbridge for a total of approximately $124,000. The disposal group previously classified as held for sale included all assets (excluding cash and inventory) and liabilities of the North Tyneside legal entity. Upon entering into the agreements noted above, the Company determined that certain equipment and all of the related liabilities were no longer included in the disposal group as they were not being acquired or assumed by the buyer. As a result, the Company reassessed whether the assets to be sold in this transaction continued to meet the criteria for classification as held for sale as of September 30, 2007. The Company concluded that the assets to be sold under the above agreements were no longer available for immediate sale in their present condition as the terms of the these agreements require the Company to perform significant additional steps, including the dismantling, decommissioning and testing of the wafer fabrication equipment before TSMC will accept transfer of title of the purchased equipment, as well as the delivery of a vacated building to Highbridge. The Company had previously expected to sell the assets in the form of the transfer of the legal entity and then enter into a further supply agreement for product wafers with the buyer. However, the agreements noted above require termination of production efforts in order to deliver assets in the condition specified by the buyers. The Company determined that it needed to continue to operate the facility in order to build sufficient inventory as a result of the closure of the North Tyneside facility, and therefore could not deliver the assets to be sold in the conditions specified in the sales agreements until production activity was concluded, which occurred in February 2008. In accordance with SFAS No. 144, the Company determined in the third quarter of 2007 that the assets to be sold to TSMC and Highbridge did not meet the criteria for assets held for sale and were reclassified as held and used, and measured at the lower of their adjusted carrying amounts or fair values less cost to sell as of December 31, 2007. The Company has classified the real property as assets held for sale on the condensed consolidated balance sheets as of March 31, 2008 as manufacturing activity ceased in February 2008. The Company recognized a gain of $30,758 for the sale of the equipment in the three months ended March 31, 2008. The Company received proceeds of $42,951 ($47,414 as or March 31, 2008 due to cumulative translation adjustments) from Highbridge for the closing of the real property portion of the transaction in November 2007. The Company will vacate the facility in the second quarter of 2008.

The Company announced its intention to sell the fabrication facility in Heilbronn, Germany in December 2006. However, the facility did not meet the criteria for classification as held for sale as of March 31, 2008 and December 31, 2007, 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, 2008 and December 31, 2007 were classified as held and used.

Note 13 RESTRUCTURING CHARGES

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, 2008 and 2007, respectively.


	January 1,							Currency		March 31,
	2008							Translation		2008
	Accrual		Charges		Payments			Adjustment		Accrual

	(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	1,592	$	—	$	—		$	—	$	1,592
Fourth quarter of 2006
Employee termination costs		1,324		17		(767	)		78		652
Fouth quarter of 2007
Employee termination costs		12,759		1,106		(7,527	)		559		6,897
Termination of contract with supplier		—		11,636		(493	)		780		11,923
Other exit related costs		—		15,149		(5,766	)		892		10,275

Total 2008 activity	$	15,675	$	27,908	$	(14,553	)	$	2,309	$	31,339	(1)


	January 1,							Currency		March 31,
	2007							Translation		2007
	Accrual		Charges		Payments			Adjustment		Accrual

	(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	8,896	$	—	$	(249	)	$	—	$	8,647
Fourth quarter of 2005
Nantes fabrication facility sale		115		—		—			—		115
Fouth quarter of 2006
Employee termination costs		7,490		1,782		(1,743	)		41		7,570

Total 2007 activity	$	16,501	$	1,782	$	(1,992	)	$	41	$	16,332


(1)		Accrued restructuring charges are classified within accrued and other liabilities on the condensed consolidated balance sheets and are expected to be paid prior to December 31, 2008.

2008 Restructuring Charges

In the three months ended March 31, 2008, the Company continued to implement the restructuring initiatives announced in 2006 and 2007 and incurred restructuring charges of $27,908.

The Company incurred restructuring charges related to the signing of definitive agreements in October 2007 to sell certain wafer fabrication equipment and real property at North Tyneside to TSMC and Highbridge. As a result of this action, this facility will be closed and all of the employees of the facility will be terminated. During the first quarter of 2008, the Company recorded the following restructuring charges:

	•		Charge of $1,106 related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities” (SFAS No. 146”).

	•		Charges of $15,149 related to equipment removal and facility closure costs. After production activity ceased, the Company utilized employees as well as outside services to disconnect fabrication equipment, fulfill equipment performance testing requirements of the buyer, and perform facility decontamination and other facility closure-related activity. Included in these costs are labor costs, facility related costs, outside service provider costs, and legal and other fees. Equipment removal activities were substantially complete as of March 31, 2008. Building decontamination and closure related costs are expected to be completed by the second quarter of 2008.

	•		Charges of $11,636 related to contract termination charges, primarily associated with a long term gas supply contract for nitrogen gas utilized in semiconductor manufacturing. The Company is required to pay an early termination penalty including de-installation and removal costs. Other contract termination costs relate to semiconductor equipment support services with minimum payment clauses extending beyond the current period.

2007 Restructuring Activities

In the three months ended March, 31 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.” 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.

Note 14 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, upon vesting of restricted stock units and contingent issuable shares 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 is provided as follows:


	Three Months Ended
	March 31,		March 31,
	2008		2007
	(in thousands)
Net income	$	6,788	$	28,940


Weighted-average shares — basic		444,670		488,842
Incremental shares and share equivalents		2,973		5,356

Weighted-average shares — diluted		447,643		494,198


Net income share:
Basic
Net income per share — basic	$	0.02	$	0.06

Diluted
Net income per share — diluted	$	0.02	$	0.06

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 anti-dilutive:


	Three Months Ended
	March 31,			March 31,
	2008			2007
	(in thousands)
Employee stock options and restricted stock units outstanding		37,668			31,747
Incremental shares and share equivalents		(2,973	)		(5,356	)

Total weighted-average potential shares excluded from per share calculation		34,695			26,391

Note 15 INTEREST AND OTHER INCOME (EXPENSE), NET

Interest and other income (expense), net, are summarized in the following table:


	Three Months Ended
	March 31,			March 31,
	2008			2007
	(in thousands)
Interest and other income	$	2,407		$	4,896
Interest expense		(4,025	)		(3,489	)
Foreign exchange transaction losses		(3,769	)		(428	)

Total	$	(5,387	)	$	979

The increase in foreign transaction losses in the three months ended March 31, 2008 was primarily due to the significant change in the euro/dollar exchange rate.

Note 16 FAIR VALUES OF ASSETS AND LIABILITIES

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards 157, “Fair Value Measurements,” (SFAS No. 157). The standard defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).” The standard establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Fair Value Hierarchy

SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

	•		Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets

	•		Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

	•		Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows models and similar techniques.

Determination of Fair Value

The Company’s cash and investment instruments, with the exception of auction-rate securities, are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, and money market securities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Auction-rate securities are classified within Level 3 as significant assumptions are not observable in the market. During the three months ended March 31, 2008, the Company recorded an impairment of $1,113 relating to decline in the value of auction-rate securities which is recorded as comprehensive loss. There were no realized gain or losses recorded for these auction-rate securities in the three months ended March 31, 2008. The Company does not believe that the impairment is “other than temporary” due to its intent and ability to hold the securities until they can be liquidated at par value.

The types of instruments valued based on other observable inputs include corporate debt securities and other obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The table below presents the balances of assets measured at fair value on a recurring basis:


	Three Months Ended March 31, 2008
	Total		Level 1		Level 2		Level 3
	(in thousands)
*Assets*
Cash and cash equivalents	$	308,365	$	308,365	$	—	$	—
Corporate equity securities		1,477		1,477		—		—
Auction-rate securities		27,944		—		—		27,944
Corporate debt securities and other obligations		24,974		—		24,974		—

Total	$	362,760	$	309,842	$	24,974	$	27,944

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, 2007.

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 our outlook for fiscal 2008, our anticipated revenues by geographic area, operating expenses and liquidity, factory utilization, the effect of our strategic transactions, restructuring and other strategic efforts and our expectations regarding the effects of exchange rates and efforts to manage exposure to exchange rate fluctuation. 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 SEC, 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 SEC 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.

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 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, 2008, we manufactured approximately 93% of our products in our own wafer fabrication facilities.

Our operating segments consist of: (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).

On March 6, 2008, we acquired Quantum Research Group Ltd. (“Quantum”) for $96 million. The results of operations of Quantum acquired are included in our Microcontroller segment.

Net revenues increased by 5% to $411 million in the three months ended March 31, 2008, compared to $391 million in the three months ended March 31, 2007. This increase was a result of increased shipments achieved in our Microcontroller and Nonvolatile Memory segments. The increase in net revenues in our Microcontroller segment was primarily driven by growth of our AVR and ARM microcontroller products. The improvement in Nonvolatile Memory was primarily due to increased shipments of Data Flash memory products. 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 code-division multiple access (“CDMA”) phones.

Gross margin remained relatively flat at 35.5% in the three months ended March 31, 2008, compared to 35.8% in the three months ended March 31, 2007.

We generated income from operations of $15 million in the three months ended March 31, 2008, compared to $13 million for the three months ended March 31, 2007.

Cash used in operating activities totaled $40 million in the three months ended March 31, 2008, compared to cash provided by operating activities of $59 million in the three months ended March 31, 2007. The cash used in operations in the three months ended March 31, 2008 resulted from grant repayments and other restructuring payments of approximately $54 million related to our North Tyneside, UK facility. At March 31, 2008, our cash, cash equivalents and short-term investments totaled $337 million, down from approximately $430 million at December 31, 2007, due to $89 million of cash payments for the Quantum acquisition, $54 million of North Tyneside restructuring payments described above, and a reclassification of $26 million of auction-rate securities to other assets on the condensed consolidated balance sheets as of March 31, 2008. Our total indebtedness decreased to approximately $156 million at March 31, 2008 from $163 million at
December 31, 2007.

RESULTS OF OPERATIONS


	Three Months Ended
	March 31, 2008					March 31, 2007
	(in thousands, except percentage of net revenues)
Net revenues	$	411,237		100.0	%	$	391,313	100.0	%
Gross profit		146,054		35.5	%		139,937	35.8	%
Research and development expenses		66,377		16.1	%		67,299	17.2	%
Selling, general and administrative expenses		63,562		15.5	%		58,059	14.8	%
Acquisition-related charges		3,711		0.9	%		—	—
Credit from grant repayments		(119	)	0.0	%		—	—
Restructuring charges		27,908		6.8	%		1,782	0.5	%
Gain on sale of assets		(30,758	)	-7.5	%		—	—

Income from operations	$	15,373		3.7	%	$	12,797	3.3	%

Net Revenues

Net Revenues — By Operating Segment

Our net revenues by segment for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 are summarized as follows:


	Three Months Ended
	March 31, 2008		March 31, 2007		Change			% Change
	(in thousands, except for percentages)
ASIC	$	115,039	$	110,977	$	4,062			4	%
Microcontroller		130,660		108,022		22,638			21	%
Nonvolatile Memory		94,993		86,028		8,965			10	%
RF and Automotive		70,545		86,286		(15,741	)		-18	%

Total net revenues	$	411,237	$	391,313	$	19,924			5	%

ASIC

ASIC segment net revenues increased by 4% or $4 million to $115 million in the three months ended March 31, 2008, compared to $111 million in the three months ended March 31, 2007. ASIC segment net revenues increased in the three months ended March 31, 2008 as smart card product net revenues grew $7 million, or 17%, compared to the three months ended March 31, 2007 due primarily to higher unit volume shipments.

Microcontroller

Microcontroller segment net revenues increased by 21% or $23 million to $131 million in the three months ended March 31, 2008, compared to $108 million in the three months ended March 31, 2007. The significant growth in net revenues in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 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 30% in the three months ended March 31, 2008, while ARM based products grew 26%. Revenue for products acquired from Quantum is included as part of our Microcontroller operating segment.

Nonvolatile Memory

Nonvolatile Memory segment revenues increased by 10% or $9 million to $95 million in the three months ended March 31, 2008, compared to $86 million in the three months ended March 31, 2007. This increase was primarily due to increased shipments of Data Flash memory products. In addition, revenue related to Serial EEPROM increased by $2 million, offset in part by decreases in the remaining nonvolatile memory families. 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 2008. This product family benefits from significant market share resulting from competitive pricing and a broad range of offerings.

RF and Automotive

RF and Automotive segment revenues decreased by 18% or $15 million to $71 million in the three months ended March 31, 2008, compared to $86 million in the three months ended March 31, 2007. The decrease in net revenues in the RF and Automotive segment was 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, 2008, net revenues decreased approximately $17 million for BiCMOS foundry products, offset by a $2 million increase in revenue from other automotive products, when compared to the three months ended March 31, 2007.

Net Revenues — By Geographic Area

Our net revenues by geographic areas in the three months ended March 31, 2008 compared to the three months ended March 31, 2007 are summarized as follows (revenues are attributed to countries based on delivery locations):


	Three Months Ended
	March 31, 2008		March 31, 2007		Change		% Change
	(in thousands, except for percentages)
United States	$	61,397	$	49,786	$	11,611		23	%
Europe		145,751		143,109		2,642		2	%
Asia		197,833		193,942		3,891		2	%
Other*		6,256		4,476		1,780		40	%

Total net revenues	$	411,237	$	391,313	$	19,924		5	%


*		Primarily includes South Africa and Central and South America

Sales outside the United States accounted for 85% of our net revenues in the three months ended March 31, 2008, compared to 87% in the three months ended March 31, 2007.

Our sales in the United States increased by $12 million, or 23%, in the three months ended March 31, 2008, compared to the three months ended March 31, 2007 due to United States based customers increasing deliveries to domestic operations and increased shipments to United States based distributors.

Our sales in Europe increased by $3 million, or 2%, in the three months ended March 31, 2008, compared to the three months ended March 31, 2007, due to both higher volume shipments of ARM-based microcontrollers 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 increased by $4 million, or 2%, in the three months ended March 31, 2008, compared to the three months ended March 31, 2007, primarily due to higher shipments of Microcontroller and Nonvolatile memory products, but offset by reduced shipments for communication chipsets for CDMA phones.

The trend over the last several years has been an increase in revenues in Asia (excluding Singapore), while revenues in the United States has 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. Revenues in Asia increased in 2008 compared to 2007, and we expect that Asia revenues will continue to grow more rapidly than other regions in the future. Revenues in Asia may be impacted in the future as we refine our distribution strategy and 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. There can be no assurances that we will be able to manage this optimization process in an efficient and timely manner.

Impact to Revenues and Costs from Changes to Foreign Exchange Rates

Changes in foreign exchange rates, primarily the euro, have had a significant impact on our net revenues and operating costs. Net revenues denominated in euro were approximately 21% and 22% in the three months ended March 31, 2008 and 2007, respectively. Costs denominated in euro were 45% and 51% in the three months ended March 31, 2008 and 2007, respectively. Net revenues included 62 million euro in the three months ended March 31, 2008, compared to 67 million in the three months ended March 31, 2007. Operating expenses in euro decreased to approximately 121 million euro in the three months ended March 31, 2008, compared to 147 million euro in operating expenses in the three months ended March 31, 2007. Operating expenses in euro declined by approximately 26 million euro in the three months ended March 31, 2008, compared to the three months ended March 31, 2007 due to lower production activities at the closure of our North Tyneside, UK facility. However, our operating expenses in euros continue to exceed our net revenues in euro. We expect to take additional actions in the future to further reduce this exposure.

Average exchange rates utilized to translate foreign currency revenues and expenses were 1.47 euro to the dollar in the three months ended March 31, 2008, compared to 1.32 euro to the dollar for the three months ended March 31, 2007.

During the three months ended March 31, 2008, changes in foreign exchange rates had an unfavorable impact on operating costs and income from operations. Had average exchange rates remained the same in the three months ended March 31, 2008 as the average exchange rates in effect in the three months ended March 31, 2007 our reported revenues in the three months ended March 31, 2008, would have been $8 million lower. However, as discussed above, our foreign currency expenses exceed foreign currency revenues. For the three months ended March 31, 2008, 49% of our operating expenses were denominated in foreign currencies, primarily the euro. Had average exchange rates in the three months ended March 31, 2008 remained the same as the average exchange rates in the three months ended March 31, 2007, 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, 2008, compared to the three months ended March 31, 2007.

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.

Gross margin remained relatively flat at 35.5% in the three months ended March 31, 2008, compared to 35.8% in the three months ended March 31, 2007.

In the three months ended March 31, 2008, we incurred under-utilization costs as production activity ended at our North Tyneside, UK facility. We expect to achieve improved utilization at the remaining fabrication facilities in future periods. However, these improvements may be offset by the unfavorable impact of changes to foreign exchange rates, primarily the dollar-to-euro exchange rate.

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 $0.4 million and $0.3 million in the three months ended March 31, 2008 and 2007, respectively.

Research and Development

Research and development (“R&D”) expenses decreased by 1% or $1 million to $66 million in the three months ended March 31, 2008 from $67 million in the three months ended March 31, 2007. R&D expenses decreased by $5 million, primarily due to a decrease in the number of development wafers used in technology development, offset in part by an increase in stock-based compensation of $3 million and non-recurring engineering project costs of $1 million. R&D expenses in the three months ended March 31, 2008 benefited from elimination of certain development programs that were determined to be non-strategic over the last year. However, these savings were unfavorably impacted by approximately $5 million due to adverse foreign exchange rate fluctuations. As a percentage of net revenues, research and development expenses totaled 16% and 17% in the three months ended March 31, 2008 and 2007, respectively.

We have continued to invest in developing a variety of product areas and process technologies, including embedded 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. We are continuing to re-focus our R&D resources on fewer, but 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 both the three months ended March 31, 2008 and 2007, we recognized $5 million in research grant benefits.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses increased by 9% or $6 million to $64 million in the three months ended March 31, 2008, from $58 million in the three months ended March 31, 2007. The increase in SG&A expenses in the three months ended March 31, 2008, compared to the three months ended March 31, 2007, was due to increased employee salaries and benefits of $4 million, and stock option compensation charges of $3 million. SG&A expenses in the three months ended March 31, 2008 were unfavorably impacted by approximately $2 million due to foreign exchange rate fluctuations. As a percentage of net revenues, SG&A expenses remained at 15% in the three months ended March 31, 2008, compared to the three months ended March 31, 2007.

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.

Stock-based compensation expense under SFAS 123R was $6 million and $3 million in the three months ended March 31, 2008 and 2007, respectively. Stock-based compensation expense increased in the three months ended March 31, 2008 due to stock option replenishment grants awarded to primarily management-level employees, retention awards for certain key executives, as well as stock options awarded to recently hired executives.

Acquisition-Related Charges

We recorded total acquisition-related charges of $4 million in the three months ended March 31, 2008 related to the acquisition of Quantum as below:

We recorded amortization of intangible assets of $1 million associated with customer relationships, developed technology, trade name, non-compete agreements and backlog. These assets are amortized over three to five years. We estimate charges related to amortization of intangible assets of approximately $2 million per quarter for the remaining quarters of 2008.

We recorded a charge of $1 million associated with acquired in-process research and development (“IPR&D”), in connection with the acquisition of Quantum. Our methodology for allocating the purchase price to IPR&D involves established valuation techniques utilized in the high-technology industry. Each project in process was analyzed by discounted forecasted cash flows directly related to the products expected to result from the subject research and development, net of returns in contributory assets including working capital, fixed assets, customer relationships, trade name, and assembled workforce. IPR&D was expensed upon acquisition because technological feasibility has not been established and no future alternative uses existed. The fair value of technology under development is determined using the income approach, which discounts expected future cash flows to present value. A discount rate of 33% is used for the projects to account for the risks associated with the inherent uncertainties surrounding the successful development of the IPR&D, market acceptance of the technology, the useful life of the technology, the profitability level of such technology and the uncertainty of technological advances, which could impact the estimates recorded. The discount rates used in the present value calculations are typically derived from a weighted-average cost of capital analysis. These estimates did not account for any potential synergies realizable as a result of the acquisition and were in line with industry averages and growth estimates.

We agreed to pay additional amounts to former key executives of Quantum contingent upon continuing employment over a three year period. We have agreed to pay up to $32 million, including the value of 5.3 million shares of our common stock. These payments are accrued over the employment period and recorded as compensation expense, calculated on an accelerated basis. During the three months ended March 31, 2008, we recorded $2 million of compensation expense as acquisition-related charges. We estimate charges related to these compensation agreements to total approximately $4 million per quarter for the remaining quarters of 2008.

Assets Held for Sale

Under Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) 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 classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report assets and liabilities to be disposed of by sale as held for sale and

recognize these 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.

North Tyneside, United Kingdom, and Heilbronn, Germany Facilities

On October 8, 2007, we entered into definitive agreements to sell certain wafer fabrication equipment and land and buildings at North Tyneside to TSMC and Highbridge for a total of approximately $124 million. We recognized a gain of $31 million for the sale of the fabrication equipment in the three months ended March 31, 2008. We received proceeds of $43 million ($47 million as of March 31, 2008 due to cumulative translation adjustments) from Highbridge for the closing of the real property portion of the transaction in November 2007. We will vacate the facility in the second quarter of 2008.

The Heilbronn, Germany facility did not meet the criteria for classification as held for sale as of March 31, 2008 and December 31, 2007, due to uncertainties relating to the likelihood of completing a sale within the next twelve months. Long-lived assets of this facility at March 31, 2008 and December 31, 2007 were classified as held and used.

Restructuring Charges

The following table summarizes the activity related to the accrual for restructuring charges detailed by event for the three months ended March 31, 2008 and 2007.


	January 1,							Currency		March 31,
	2008							Translation		2008
	Accrual		Charges		Payments			Adjustment		Accrual
	(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	1,592	$	—	$	—		$	—	$	1,592
Fourth quarter of 2006
Employee termination costs		1,324		17		(767	)		78		652
Fouth quarter of 2007
Employee termination costs		12,759		1,106		(7,527	)		559		6,897
Termination of contract with supplier		—		11,636		(493	)		780		11,923
Other exit related costs		—		15,149		(5,766	)		892		10,275

Total 2008 activity	$	15,675	$	27,908	$	(14,553	)	$	2,309	$	31,339


	January 1,							Currency		March 31,
	2007							Translation		2007
	Accrual		Charges		Payments			Adjustment		Accrual
	(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	8,896	$	—	$	(249	)	$	—	$	8,647
Fourth quarter of 2005
Nantes fabrication facility sale		115		—		—			—		115
Fouth quarter of 2006
Employee termination costs		7,490		1,782		(1,743	)		41		7,570

Total 2007 activity	$	16,501	$	1,782	$	(1,992	)	$	41	$	16,332

2008 Restructuring Charges

In the first quarter of 2008, we continued to implement the restructuring initiative announced in 2006 and 2007 and incurred restructuring charges of $28 million.

We incurred restructuring charges related to the signing of definitive agreements in October 2007 to sell certain wafer fabrication equipment and real property at North Tyneside to Taiwan Semiconductor Manufacturing Company Limited (“TSMC”) and Highbridge Business Park Limited (“Highbridge”). As a result of this action, this facility will be closed and all of the employees of the facility will be terminated. During the first quarter of 2008, the Company recorded the following restructuring charges:

	•		Charges of $1 million in severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities” (SFAS No. 146”).

	•		Charges of $15 million related to equipment removal and facility closure costs. After production activity ceased, the Company utilized employees as well as outside services to disconnect fabrication equipment, fulfill equipment performance testing requirements of the buyer, and perform facility decontamination and other facility closure-related activity. Included in these costs are labor costs, facility related costs, outside service provider costs, and legal and other fees. Equipment removal activities were substantially complete as of March 31, 2008. Building decontamination and closure related costs are expected to be completed by the second quarter of 2008.

	•		Charges of $12 millions related to contract termination charges, primarily associated with a long term gas supply contract for nitrogen gas utilized in semiconductor manufacturing. We are required to pay an early termination penalty including de-installation and removal costs. Other contract termination costs relate to semiconductor equipment support services with minimum payment clauses extending beyond the current period.

2007 Restructuring Activities

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

	•		$1 million in termination benefits recorded in accordance with SFAS No. 112 “Employers’ Accounting for Post Employment Benefits.” 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.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, was a net expense of $5 million in the three months ended March 31, 2008, compared to a net income of $1 million in the three months ended March 31, 2007. The change to net expense in the three months ended March 31, 2008 was primarily due to $4 million from foreign currency exchange translation losses as a result of the increase in the euro compared to the US dollar. In addition, interest expense increased $1 million as a result of interest charges resulting from proceeds of $100 million received from our revolving line of credit in December 2007. Interest income also declined from the prior year ago quarter due to lower cash balances following stock repurchase activity in the third quarter of 2007.

Interest rates on our outstanding borrowings did not change significantly in the three months ended March 31, 2008, as compared to the three months ended March 31, 2007.

Income Taxes

For the three months ended March 31, 2008 and 2007, we recorded an income tax provision of $3 million and tax benefit of $15 million, respectively.

Other than the items noted as follows, there were no significant changes in estimates or provision for income taxes in the three months ended March 31, 2008:

The sale of assets and restructuring charges of a foreign subsidiary as well as in-process research and development costs of Quantum were treated as discrete events for the three months ended March 31, 2008. Due to a full valuation allowance position in this jurisdiction, there is no tax expense impact associated with these discrete events in the quarter.

At December 31, 2007, there was no provision for U.S. income tax for undistributed earnings, as it was our intention to reinvest these earnings indefinitely in operations outside the U.S. For 2008, we determined that we would require a portion of undistributed earnings repatriated to the U.S. in the form of a cash dividend. We anticipate the cash dividends will be distributed from select foreign subsidiaries, resulting in an estimated withholding tax expense of $6 million. As such, we changed our position to no longer assert permanent reinvestment of undistributed earnings for select foreign entities for the year 2008.

During the three months ended March 31, 2008 and 2007, we recognized a tax benefit of $3 million and $20 million, respectively, resulting from the refund of unutilized French research tax credits for 2003 and 1999 through 2002, respectively, which were received during the respective periods.

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 filed a protest to these proposed adjustments and are pursuing administrative review with the IRS Appeals Division.

In addition, we have various tax audits in progress in certain state 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 FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).

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.

We file income tax returns in the U.S. federal, and various state 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, 2002, 2004 and 2002 respectively; subsequent tax years for these jurisdictions remain subject to tax authority review. Hong Kong tax years are closed for years through 2003 and subsequent tax years remain subject to tax authority review.

On January 1, 2007, we adopted 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. At December 31, 2007, we had $166 million of unrecognized tax benefits. Unrecognized tax benefits decreased by $3 million in the three months ended March 31, 2008, primarily related to net benefits of $3 million recognized relating to the receipt of a tax refund for French research tax credits as noted above.

Liquidity and Capital Resources

At March 31, 2008, we had $337 million of cash and cash equivalents and short-term investments compared to $430 million at December 31, 2007. Our current ratio, calculated as total current assets divided by total current liabilities, was 1.88 at March 31, 2008, an increase of 0.13 from 1.75 at December 31, 2007. We have reduced our debt obligations to $156 million at March 31, 2008, from $163 million at December 31, 2007. Working capital (total current assets less total current liabilities) increased by $30 million to $494 million at March 31, 2008, compared to $464 million at December 31, 2007 primarily due to classification of North Tyneside real

property as current assets held for sale on the condensed consolidated balance sheets along with the receipt of $82 million in cash proceeds from the sale of fabrication equipment at our North Tyneside, UK facility.

Approximately $28 million of our investment portfolio at March 31, 2008 was invested in auction-rate securities. Of the $28 million auction-rate securities, approximately $26 million were reclassified to long-term investments under other assets on the condensed consolidated balance sheets, as they are not expected to be liquidated within the next twelve months, while the remaining $2 million were sold in April 2008.

Operating Activities: Net cash used in operating activities was $40 million in the three months ended March 31, 2008 compared to $59 million provided by operating activities in the three months ended March 31, 2007. Net cash used in operating activities in the three months ended March 31, 2008 was primarily due to the payment of a government grant liability of approximately $40 million and restructuring costs of $14 million related to the closure of our North Tyneside, UK manufacturing facility, as well as an increase in accounts receivable of $15 million.

Accounts receivable increased by 7% or $15 million to $224 million at March 31, 2008 from $209 million at December 31, 2007. The average days of outstanding accounts receivable (“DSO”) was 49 days at March 31, 2008, compared to 44 days at December 31, 2007 due to reduced shipment linearity in the three months ended March 31, 2008 and the change in foreign exchange rates compared to the dollar at March 2008, compared to December 2007. 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 from operating activities would be negatively affected.

Inventories decreased and provided $18 million of operating cash flows in the three months ended March 31, 2008 compared to $23 million of cash utilized in the three months ended March 31, 2007 as a result of lower manufacturing activity at our North Tyneside, UK fabrication facility. Days of inventory increased slightly to 118 days at March 31, 2008, compared to 117 days at December 31, 2007 due to lower shipment levels in the three months ended March 31, 2008, compared to the three months ended December 31, 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.

Reduction of accounts payable balances utilized $89 million of operating cash flows in the three months ended March 31, 2008, primarily related to grant repayments of approximately $40 million related to the closure of our North Tyneside, UK manufacturing facility.

Increases in accrued and other liabilities generated $17 million of operating cash flows in the three months ended March 31, 2008, primarily related to higher legal fees increased restructuring accruals.

Investing Activities: Net cash used in investing activities was $25 million in the three months ended March 31, 2008, compared to $28 million in the three months ended March 31, 2007. During the three months ended March 31, 2008, we paid approximately $89 million for the acquisition of Quantum, net of cash acquired, and $17 million for capital expenditures, offset in part by $82 million we received from the sale of fabrication equipment from our North Tyneside, UK facility. This compares to approximately $26 million paid for capital expenditures in the three months ended March 31, 2007. We anticipate that expenditures for capital purchases will be between $80 million and $90 million for 2008, which will be used to maintain existing equipment, provide additional testing capacity and, to a limited extent, for equipment to develop advanced process technologies.

Financing Activities: Net cash used in financing activities was $6 million in the three months ended March 31, 2008, compared to $23 million in the three months ended March 31, 2007. We continued to pay down debt, with repayments of principal balances on capital leases and other debt totaling $10 million in the three months ended March 31, 2008, compared to $23 million in the three months ended March 31, 2007. Issuance of common stock totaled $4 million in the three months ended March 31, 2008. No stock issuance proceeds were received in the three months ended March 31, 2007.

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 in the three months ended March 31, 2008 and 2007 due to the effect of exchange rate changes on cash balances was $5 million and $1 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 $17 million in cash payments for capital equipment in the three months ended March 31, 2008, and we expect our cash payments for capital expenditures to be between $80 million to $90 million in 2008. Debt obligations outstanding at March 31, 2008, which are classified as short-term, totaled $136 million. During the remainder of 2008 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 in the three months ended March 31, 2008, other than the unrecognized tax benefits associated with the adoption of FIN No. 48. Unrecognized tax benefits at March 31, 2008 were approximately $163 million, the timing of the resolution of which is uncertain.

Off-Balance Sheet Arrangements (Including Guarantees)

In the ordinary course of business, we have investments in privately held companies, which we review to determine if they should be considered variable interest entities. We have evaluated our investments in these other privately held companies and have determined that there was no material impact on our operating results or financial condition upon our adoption of FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51” (“FIN 46R”). Under FIN 46R certain events can require a reassessment of our investments in privately held companies to determine if they are variable interest entities and which of the stakeholders will be the primary beneficiary. As a result of such events, we may be required to make additional disclosures or consolidate these entities. We may be unable to influence these events.

During the ordinary course of business, we provide 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, 2008, the maximum potential amount of future payments that we could be required to make under these guarantee agreements is approximately $14 million. We have not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, we believe we will not be required to make any payments under these guarantee arrangements.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are 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.

We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts and sales returns, accounting for income taxes, valuation of inventory, fixed assets, stock-based compensation, restructuring charges and litigation have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results. The critical accounting estimates associated with these policies are described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of our Annual Report on Form 10-K filed with the SEC on February 29, 2008, except for Goodwill and Intangible Assets which is discussed below.

Valuation of Goodwill and Intangible Assets

We review goodwill and intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment under SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets). Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and forecasted operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable. Actual future results may differ from those estimates.

Recent Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This standard is intended to improve financial reporting by requiring transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No 133; and how derivative instruments and related hedged items affect its financial position, financial performance and cash flows. We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 161 on our consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on our consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective as of the beginning of an entity’s fiscal year that begins after December 31, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 160 on our consolidated results of operations and financial condition.

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 assets and liabilities on financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FASB Staff Position No. 157-2 (“FSP 157-2) delays the effective date for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually. 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 have adopted SFAS No. 157 and FSP No. 157-2 beginning January 1, 2008, and there is no material impact on our condensed consolidated financial statements. See Note 16 of the Notes of the Condensed Consolidated Financial Statements.

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 $156 million at March 31, 2008. Approximately $8 million of these borrowings have fixed interest rates. We have $148 million of floating interest rate debt, of which approximately $20 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, 2008. All fair market values are shown net of applicable premium or discount, if any (dollars in thousands):


													Total
													Variable-rate
													Debt
													Outstanding at
	Payments by Due Year												March 31,
	2008*		2009		2010		2011		2012		Thereafter		2008
	(in thousands)
60 day USD LIBOR weighted-average interest rate basis (1) — Revolving line of credit	$	100,000	$	—	$	—	$	—	$	—	$	—	$	100,000

Total of 60 day USD LIBOR rate debt	$	100,000	$	—	$	—	$	—	$	—	$	—	$	100,000

90 day USD LIBOR weighted-average interest rate basis (1) — Revolving line of credit due 2008	$	25,000	$	—	$	—	$	—	$	—	$	—	$	25,000

Total of 90 day USD LIBOR rate debt	$	25,000	$	—	$	—	$	—	$	—	$	—	$	25,000

90 day EURIBOR weighted-average interest rate basis (1) — Capital leases	$	3,820	$	5,093	$	5,093	$	5,093	$	1,282	$	—	$	20,381

Total of 90 day USD LIBOR rate debt	$	3,820	$	5,093	$	5,093	$	5,093	$	1,282	$	—	$	20,381

360 day USD LIBOR weighted-average interest rate basis (1) — Senior secured term loan due 2008	$	2,499	$	—	$	—	$	—	$	—	$	—	$	2,499

Total of 360 day USD LIBOR rate debt	$	2,499	$	—	$	—	$	—	$	—	$	—	$	2,499


Total variable-rate debt	$	131,319	$	5,093	$	5,093	$	5,093	$	1,282	$	—	$	147,880


*		Represents payments due over the nine months remaining for 2008.

(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, 2008 related to our outstanding borrowings that are sensitive to changes in interest rates as of March 31, 2008. 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).

For the three months ended March 31, 2008:


							Interest Expense
	Interest Expense Given an Interest						with No Change in		Interest Expense Given an Interest
	Rate Decrease by X Basis Points						Interest Rate		Rate Increase by X Basis Points
	150 BPS		100 BPS		50 BPS		(in thousands)		50 BPS		100 BPS		150 BPS
Interest expense	$	2,511	$	3,016	$	3,520	$	4,025	$	4,530	$	5,035	$	5,539

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 we have 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 in the three months ended March 31, 2008, compared to the average exchange rates in the three months ended March 31, 2007, resulted in a decrease in income from operations of $11 million (as discussed in this report in Part I, 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, 2008 were recorded using the average foreign currency exchange rates for the same period in 2007. Sales denominated in foreign currencies were 22% and 23% in the three months ended March 31, 2008 and 2007, respectively. Sales denominated in euros were 21% and 22% in the three months ended March 31, 2008 and 2007, respectively. Sales denominated in yen were 1% in the three months ended March 31, 2008 and 2007. Costs denominated in foreign currencies, primarily the euro, were 49% and 55% in the three months ended March 31, 2008 and 2007, 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 23% and 23% of our accounts receivable were denominated in foreign currencies as of both March 31, 2008 and December 31, 2007, 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 42% and 54% of our accounts payable were denominated in foreign currencies as of March 31, 2008 and December 31, 2007, respectively. Approximately 16% and 18% of our debt obligations were denominated in foreign currencies as of March 31, 2008 and December 31, 2007, respectively.

Liquidity and Valuation Risk

Approximately $28 million of our investment portfolio at March 31, 2008 was invested in highly-rated auction rate securities. Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each reset period, investors can sell or continue to hold the securities at par. These securities are subject to fluctuations in fair value depending on the supply and demand at each auction. If the auctions for the securities we own fail, the investments may not be readily convertible to cash until a future auction of these investments is successful. If the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates, we may be required to adjust the carrying value of the investment through an impairment charge. During the three months ended March 31, 2008, we recorded an impairment of $1,113 relating to decline in the value of auction-rate securities which is recorded as comprehensive loss. We do not believe that the impairment is “other than temporary” due to our intent and ability to hold the securities until they can be liquidated at par value.

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.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our 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 Atmel 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

motions have been argued and taken under submission by the Court. On February, 20, 2008, a seventh stockholder derivative lawsuit was filed in the U.S. District Court for the Northern District of California, which alleges the same causes of action as alleged in the second consolidated amended complaint. This seventh suit was consolidated with the already-pending consolidated federal action and was served on the Company on May 5, 2008. The state derivative cases have also 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 these derivative actions was unwarranted and will continue to vigorously contest them.

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 (the “’804 Patent”). 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 April 2007, AuthenTec filed 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 declaratory relief that the ‘804 Patent is unenforceable, alleged interference with business relationships, and abuse of process. AuthenTec sought 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, and has been related to the action Atmel filed. On July 3, 2007, Atmel filed an answer to the claims for declaratory relief that the patents were neither valid nor infringed, and also added counterclaims of infringement. Also on July 3, 2007, Atmel moved to dismiss the remaining claims for declaratory relief that the ‘804 Patent is unenforceable, alleged interference with business relationships, and alleged abuse of process. On August 2, 2007, the parties agreed to the dismissal with prejudice of AuthenTec’s claims for alleged interference with business relationships and alleged abuse of process. The parties also agreed to grant AuthenTec leave to amend its counterclaim to add the claim for alleged unenforceability of the ‘804 Patent. In early 2008, the parties each filed motions seeking summary judgment, and by Order dated May 5, 2008, the Court granted AuthenTec’s motion for summary judgment of noninfringement. Atmel is evaluating this Order and its options to appeal the same.

denying infringement, denying the counts alleging Defamation, False Light, and Unfair Competition, and asserting counterclaims seeking a declaratory judgment of non-infringement and invalidity, as well as an award of costs and attorneys’ fees under 35 U.S.C. Section 285. On June 7, 2007, the Court issued its claim construction ruling and an Order invalidating certain asserted claims of the ‘165 Patent. In November 2007, Defendants filed a motion for summary judgment of non-infringement and invalidity of the remaining asserted claims of the ‘165 Patent. At that time, QRG filed a motion for summary judgment of infringement of claim 50 of the ‘165 patent. These motions, along with various procedural and evidentiary motions, are pending. Based upon a Stipulation by the parties, the trial date for this action was extended to October 27, 2008, and the suit was stayed by the Court until at least May 19, 2008, to facilitate settlement discussions. Atmel intends to aggressively defend its intellectual property assets.

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

Other Contingencies

Item 1A. Risk Factors

In addition to the other information contained in this Form 10-Q, we have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operation. Investors should carefully consider the risks described below before making an investment decision. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment. In addition, these risks and uncertainties 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.

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

	•		our transition to a fab-lite strategy;

	•		our increased dependence on outside foundries and their ability to meet our volume, quality, and delivery objectives, particularly during times of increasing demand along with 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 and revenues and costs denominated in foreign currencies;

	•		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;

	•		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;

	•		potential impairment and liquidity of auction rate securities;

	•		our ability to maintain good relationships with our customers;

	•		long-term contracts 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;

	•		anti-takeover effects in our certificate of incorporation, bylaws, and preferred shares rights agreement;

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

	•		foreign pension plans are unfunded and any requirement to fund these plans could negatively impact or cash position;

	•		acquisition strategy may result in unanticipated accounting charges or otherwise adversely affect or results of operations

	•		we may not be able to effectively utilize all of our manufacturing capacity;

	•		disruptions to the availability of raw materials can disrupt our ability to supply products to our customers;

	•		product liability claims may arise resulting in significant costs and damage to reputation;

	•		revenues are dependent on selling through distributors;

	•		audits of our income tax returns, both in the U.S. and in foreign jurisdictions; and

	•		compliance with economic incentive terms in certain government 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 can 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 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 continued economic growth generally and on 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 be profitable 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 3% to $256 billion in 2007, and are estimated by the Semiconductor Industry Association to increase 8% to $277 billion in 2008.

Our 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.

The semiconductor industry is increasingly characterized by annual seasonality and wide fluctuations of supply and demand. A significant portion of our revenue comes from sales to customers supplying consumer markets and international sales. As a result, our business may be subject to seasonally lower revenues in particular quarters of our fiscal year. The industry has also been impacted by significant shifts in consumer demand due to economic downturns or other factors, which may result in diminished product demand and production over-capacity. We have experienced substantial quarter-to-quarter fluctuations in revenues and operating results and

expect, in the future, to continue to experience short term period-to-period fluctuations in operating results due to general industry or economic conditions.

WE COULD EXPERIENCE DISRUPTION OF OUR BUSINESS AS WE TRANSITION TO A FAB-LITE STRATEGY AND INCREASE DEPENDENCE ON OUTSIDE FOUNDRIES, WHERE 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.

As part of our fab-lite strategy, we have reduced and plan to further reduce the number of manufacturing facilities we own. 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 our intention to sell our North Tyneside, United Kingdom and Heilbronn, Germany wafer fabrication facilities. In October 2007, we announced that we had entered into agreements for the sale of certain wafer equipment and real property in North Tyneside, United Kingdom. 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 this transition we must expand our foundry relationships by entering into new agreements with third-party foundries. If these agreements are not completed on a timely basis, or the transfer of production is delayed for other reasons, the supply 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;

	•		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.

If any of the above risks are realized, we could experience an interruption in our supply chain or an increase in costs, which could delay or decrease our revenue or harm our business.

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.

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 future 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.

WE BUILD SEMICONDUCTORS BASED ON FORECASTED DEMAND, AND AS A RESULT, CHANGES TO FORECASTS FROM ACTUAL DEMAND MAY RESULT IN EXCESS INVENTORY OR OUR INABILITY TO FILL CUSTOMER ORDERS ON A TIMELY BASIS WHICH MAY HARM OUR BUSINESS

We schedule production and build semiconductor devices based primarily on our internal forecasts, as well as non-binding forecasts from customers for orders which may be cancelled or rescheduled with short notice. Our customers frequently place orders requesting product delivery in a much shorter period than our lead time to fully fabricate and test devices. Because the markets we serve are volatile and subject to rapid technological, price, and end user demand changes, our forecasts of unit quantities to build may be significantly incorrect. Changes to forecasted demand from actual demand may result in us producing unit quantities in excess of orders from customers, which could result in the need to record additional expense for the write-down of inventory, negatively affecting gross margin and results from operations.

As we transition to increased dependence on outside foundries, we will have less control over modifying production schedules to match changes in forecasted demand. If we commit to obtaining foundry wafers and cannot cancel or reschedule commitments without material costs or cancellation penalties, we may be forced to purchase inventory in excess of demand, which could result in a write-down of inventories negatively affecting gross margin and results of operations.

Conversely, failure to produce or obtain sufficient wafers for increased demand could cause us to miss revenue opportunities and, if significant, could impact our customers’ ability to sell products, which could adversely affect our customer relationships, and thereby materially adversely affect our business, financial condition and results of operations.

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

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.

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, 2008, compared to the average exchange rates for the three months ended March 31, 2007, resulted in a decrease in income from operations of $11 million (as discussed in Part I, Item 2 of this report). This impact is determined assuming that all foreign currency denominated transactions that occurred in the three months ended March 31, 2008 were recorded using the average foreign currency exchange rates for the same period in 2007. Sales denominated in foreign currencies were 22% and 23% for the three months ended March 31, 2008 and 2007, respectively. Sales denominated in euros were 21% and 22% for the three months ended March 31, 2008 and 2007, respectively. Sales denominated in yen were 1% for the three months ended March 31, 2008 and 2007. Costs denominated in foreign currencies, primarily the euro, were 49% and 55% for the three months ended March 31, 2008 and 2007, 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 23% and 23% of our accounts receivable are denominated in foreign currency as of both March 31, 2008 and December 31, 2007, 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 42% and 54% of our accounts payable were denominated in foreign currency as of March 31, 2008 and December 31, 2007, respectively. Approximately 16% and 18% of our debt obligations were denominated in foreign currency as of March 31, 2008 and December 31, 2007, respectively.

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, 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. In October 2007, we announced that we had entered into agreements for the sale of certain wafer fabrication equipment and real property in North Tyneside, United Kingdom. However, reducing our wafer fabrication capacity involves significant potential costs and delays, particularly in Europe, where the extensive statutory protection of employees imposes substantial restrictions 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 the potential requirement to repay governmental subsidies. We may experience labor union or workers council objections, or other difficulties, while implementing a reduction of the number of employees. Significant difficulties that we experience could harm our business and operating results, either by deterring needed headcount reduction or by the additional employee severance costs resulting from employee reduction actions 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 or recoveries of previous charges. However, we may incur additional restructuring and asset impairment charges in connection with additional 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.

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 additional cash from operations or external financing necessary to fund the implementation of new manufacturing technologies.

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.

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 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 85% and 87% of net revenues in the three months ended March 31, 2008 and 2007, 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:

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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.

Further, we purchase a significant portion of our raw materials and equipment from foreign suppliers, and we incur labor and other operating costs in foreign currencies, particularly at our French and German manufacturing facilities. As a result, our costs will fluctuate along with the currencies and general economic conditions in the countries in which we do business, which could harm our operating results.

Approximately 22% and 23% of our net revenues in the three months ended March 31, 2008 and 2007 were denominated in foreign currencies. Operating costs denominated in foreign currencies, primarily the euro, were approximately 49% and 55% of total operating costs in the three months ended March 31, 2008 and 2007, 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 a 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 products 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, 2008, our total debt was $156 million, compared to $163 million at December 31, 2007. Our debt-to-equity ratio was 0.95 and 1.07 at March 31, 2008 and December 31, 2007, 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 certain financial covenants as of March 31, 2008. We obtained a waiver in May 2008. We were in compliance with all of these covenants as of December 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 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 amount to us, whether by dividends, distributions, loans or any other form.

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

We intend to continue to make capital investments to support new products and manufacturing processes that achieve manufacturing cost reductions and improved yields. We may seek additional equity or debt financing to fund operations, strategic transactions, or 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.

A SUBSTANTIAL PORTION OF OUR SHORT-TERM INVESTMENT PORTFOLIO IS INVESTED IN AUCTION-RATE SECURITIES. FAILURES IN THESE AUCTIONS MAY AFFECT OUR LIQUIDITY, WHILE RATING DOWNGRADES OF THE SECURITY ISSUER AND/OR THE THIRD-PARTIES INSURING SUCH INVESTMENTS MAY REQUIRE US TO ADJUST THE CARRYING VALUE OF THESE INVESTMENTS THROUGH AN IMPAIRMENT CHARGE.

Approximately $28 million of our investment portfolio at March 31, 2008 is invested in auction rate securities, of which $2 million was sold in April 2008. Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each reset period, investors can sell or continue to hold the securities at par. These securities are subject to fluctuations in fair value depending on the supply and demand at each auction. If the auctions for the securities we own fail, the investments may not be readily convertible to cash until a future auction of these investments is successful. If the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates, we may be required to adjust the carrying value of the investment through an impairment charge.

During the three months ended March 31, 2008, we recorded an impairment of $1,113 relating to decline in the value of auction-rate securities which is recorded as comprehensive loss. We do not believe that the impairment is “other than temporary” due to our intent and ability to hold the securities until they can be liquidated at par value.

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. Our sales terms for European distributors generally include very limited rights of return and stock rotation privileges. However, as we evaluate how to refine our distribution strategy, we may need to modify our sales terms or

make changes to our distributor base, which may impact our future revenues in this region. It may take time for us to convert systems and processes to support modified sales terms. In addition, revenues in Asia may be impacted in the future as we refine our distribution strategy and optimize our distributor base in this region. It may take time for us to identify financially viable distributors and help them develop high quality support services. There can be no assurances that we will be able to manage these changes in an efficient and timely manner, or that our net revenues, result of operations and financial position will not be negatively impacted as a result.

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. For example, we acquired Quantum Research Group on March 6, 2008 for $96 million. 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, the complexity of the technologies being integrated, and the necessity of integrating personnel with disparate business backgrounds and combining two different corporate cultures.

The integration of operations following an acquisition requires the dedication of management resources that may distract attention from the day-to-day business, and may disrupt key research and development, marketing or sales efforts. The inability of management to successfully integrate any future acquisition could harm our business. Furthermore, products acquired in connection with acquisitions may not gain acceptance in our markets, and we may not achieve the anticipated or desired benefits of such transactions.

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 while we are making 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, our 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 the authority to issue up to 5 million 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.

CHANGES IN STOCK OPTION ACCOUNTING RULES MAY ADVERSELY IMPACT OUR REPORTED OPERATING RESULTS, OUR STOCK PRICE, AND OUR ABILITY TO OFFER COMPETITIVE COMPENSATION ARRANGEMENTS WITH OUR EMPLOYEES.

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 consolidated financial statements as of and for the years ended December 31, 2007 and 2006 are based on this method. In accordance with the modified prospective transition method, our 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 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 for the three months ended March 31, 2008 and 2007 was reduced by stock-based compensation expenses of $6 million and $3 million, respectively. These charges were calculated in accordance with SFAS No. 123R.

The implementation of SFAS No. 123R has resulted in lower reported operating results, net income, and earnings per share, which could negatively impact our future stock price. In addition, this could impact our ability to utilize employee stock plans to reward employees, and could result in a competitive disadvantage to us in attracting or retaining employees in the future.

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. Pension benefits payable totaled $59 and $53 million at March 31, 2008 and December 31, 2007. 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 paid in 2007 was approximately $1 million, and we expect to pay $2 million in 2008. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively impact our cash position and operating capital.

OUR ACQUISITION STRATEGY MAY RESULT IN UNANTICIPATED ACCOUNTING CHARGES OR OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, AND RESULT IN DIFFICULTIES IN ASSIMILATING AND INTEGRATING THE OPERATIONS, PERSONNEL, TECHNOLOGIES, PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES OR BUSINESSES, OR BE DILUTIVE TO EXISTING STOCKHOLDERS.

A key element of our business strategy includes expansion through the acquisitions of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our skilled engineering workforce or enhance our technological capabilities. Between January 1, 1999 and December 31, 2007, we acquired two companies and certain assets of three other businesses. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets, including tangible and intangible assets such as intellectual property. For example, on March 6, 2008, we completed the purchase of Quantum Research Group Ltd. (“Quantum”), a developer of capacitive sensing IP and solutions for user interfaces.

Acquisitions may require significant capital infusions, typically entail many risks, and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We have in the past and may in the future experience delays in the timing and successful integration of an acquired company’s technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also require us to enter into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation and increase our expenses. These challenges are magnified as the size of the acquisition increases. Furthermore, these challenges would be even greater if we acquired a business or entered into a business combination transaction with a company that was larger and more difficult to integrate than the companies we have historically acquired.

Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expense, and the recording and later amortization of amounts related to certain purchased intangible assets, any of which items could negatively impact our results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline. Beginning January 1, 2009, the accounting for future business combinations will change. We expect that the new requirements will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.

Acquisitions or asset purchases made entirely or partially for cash may reduce our cash reserves. We may seek to obtain additional cash to fund an acquisition by selling equity or debt securities. Any issuance of equity or convertible debt securities may be dilutive to our existing stockholders.

We cannot assure you that we will be able to consummate any pending or future acquisitions or that we will realize any anticipated benefits from these acquisitions. We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions.

WE MAY NOT BE ABLE TO EFFECTIVELY UTILIZE ALL OF OUR MANUFACTURING CAPACITY, WHICH MAY NEGATIVELY IMPACT OUR BUSINESS.

The manufacture and assembly of semiconductor devices requires significant fixed investment in manufacturing facilities, specialized equipment, and a skilled workforce. If we are unable to fully utilize our own fabrication facilities due to decreased demand, significant shift in product mix, obsolescence of the manufacturing equipment installed, lower than anticipated manufacturing yields, or other reasons, our operating results will suffer. Our inability to produce at anticipated output levels could include delays in the recognition of revenue, loss of revenue or future orders, customer-imposed penalties for failure to meet contractual shipment deadlines.

Our operating results are also adversely affected when we operate at production levels below optimal capacity. Lower capacity utilization results in certain costs being charged directly to expense and lower gross margins. During 2007, we lowered production levels significantly at our North Tyneside, United Kingdom manufacturing facility to avoid building more inventory than we were forecasting orders for. As a result, operating costs for these periods were higher than in prior periods negatively impacting gross margins. We closed our North Tyneside in the first quarter of 2008. In addition, other Atmel manufacturing facilities could experience similar conditions requiring production levels to be reduced below optimal capacity levels. If we are unable to operate our manufacturing facilities at optimal production levels, our operating costs will increase and gross margin and results from operations will be negatively impacted.

DISRUPTIONS TO THE AVAILABILITY OF RAW MATERIALS CAN DISRUPT OUR ABILITY TO SUPPLY PRODUCTS TO OUR CUSTOMERS, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

The manufacture of semiconductor devices requires specialized raw materials, primarily certain types of silicon wafers. We generally utilize more than one source to acquire these wafers, but there are only a limited number of qualified suppliers capable of producing these wafers in the market. The raw materials and equipment necessary for our business could become more difficult to obtain as worldwide use of semiconductors in product applications increases. We have experienced supply shortages from time to time in the past, and on occasion our suppliers have told us they need more time than expected to fill our orders. Any significant interruption of the supply of raw materials could harm our business.

WE COULD FACE PRODUCT LIABILITY CLAIMS THAT RESULT IN SIGNIFICANT COSTS AND DAMAGE TO REPUTATION WITH CUSTOMERS, WHICH WOULD NEGATIVELY IMPACT OUR OPERATING RESULTS.

All of our products are sold with a limited warranty. However, we could incur costs not covered by our warranties, including additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting their defective products, costs for product recalls, or other damages. These costs could be disproportionately higher than the revenue and profits we receive from the sales of these devices.

Our products have previously experienced, and may in the future experience, manufacturing defects, software or firmware bugs, or other similar defects. If any of our products contains defects or bugs, or has reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. In addition, these defects or bugs could interrupt or delay sales or shipment of our products to our customers.

We have implemented significant quality control measures to mitigate this risk; however, it is possible that products shipped to our customers will contain defects or bugs. In addition, these problems may divert our technical and other resources from other development efforts. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional costs or delay shipments for revenue which would negatively affect our business, financial condition and results of operations.

OUR REVENUES ARE DEPENDENT ON SELLING THROUGH DISTRIBUTORS.

Sales through distributors accounted for 47% and 43% of our net revenues in the three months ended March 31, 2008 and 2007, respectively. We market and sell our products through third-party distributors pursuant to agreements that can generally be terminated for convenience by either party upon relatively short notice to the other party. These agreements are non-exclusive and also permit our distributors to offer our competitors’ products. We are dependent on our distributors to supplement our direct marketing and sales efforts. If any significant distributor or a substantial number of our distributors terminated their relationship with us or decided to market our competitors’ products over our products, our ability to bring our products to market would be negatively impacted, we may have difficulty in collecting outstanding receivable balances, and we may incur other charges or adjustments resulting in material adverse impact to our revenues and operating results.

Additionally, distributors typically maintain an inventory of our products. For certain distributors, we have signed agreements which protect the value of their inventory of our products against price reductions, as well as provide for rights of return under specific conditions. In addition, certain agreements with our distributors also contain standard stock rotation provisions permitting limited levels of product returns. We defer the gross margins on our sales to these distributors, until the applicable products are re-sold by the distributors. However, in the event of an unexpected significant decline in the price of our products or significant return of unsold inventory, we may experience inventory write-downs, charges to reimburse costs incurred by distributors, or other charges or adjustments which could harm our revenues and operating results.

THE OUTCOME OF CURRENTLY ONGOING AND FUTURE AUDITS OF OUR INCOME TAX RETURNS, BOTH IN THE U.S. AND IN FOREIGN JURISDICTIONS, COULD HAVE AN ADVERSE EFFECT ON OUR NET INCOME (LOSS) AND FINANCIAL CONDITION.

We are subject to continued examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. 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 uncertainties. If we are unable to obtain agreements with the tax authority on the various proposed adjustments, there could be an adverse material impact on our results of operations, cash flows and financial position.

IF WE ARE UNABLE TO COMPLY WITH ECONOMIC INCENTIVE TERMS IN CERTAIN GOVERNMENT GRANTS, WE MAY NOT BE ABLE TO RECEIVE OR RECOGNIZE GRANT BENEFITS OR WE MAY BE REQUIRED TO REPAY GRANT BENEFITS PREVIOUSLY PAID TO US AND RECOGNIZE RELATED CHARGES, WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL POSITION.

We receive economic incentive grants and allowances from European governments targeted at increasing employment at specific locations. The subsidy grant agreements typically contain economic incentive and other covenants that must be met to receive and retain grant benefits. Noncompliance with the conditions of the grants could result in the forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts received to date. For example, we recently paid $40 million of government grants as a result of closing our North Tyneside manufacturing facility. In addition, we may need to record charges to reverse grant benefits recorded in prior periods as a result of changes to our plans for headcount, project spending, or

capital investment at any of these specific locations. If we are unable to comply with any of the covenants in the grant agreements, our results of operations and financial position could be materially adversely affected.

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

On March 6, 2008, in connection with our acquisition of Quantum, we issued 125,915 shares of our common stock to a former Quantum shareholder in exchange for such shareholder’s shares of Quantum. The issuance of such shares was exempt from registration pursuant to Regulation S promulgated under the Securities Act of 1933, as amended. See Note 2 to the condensed consolidated financial statements for more information regarding the issuance of such shares.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

Amendment of Material Agreement

On May 7, 2008, the parties to the Facility Agreement, dated as of March 15, 2006, by and among Atmel Corporation, Atmel Sarl, Atmel Switzerland Sarl, the financial institutions listed therein, and Bank of America, N.A., as facility agent and security agent (the “Agreement”), entered into a waiver letter. Pursuant to the waiver letter, the parties to the Agreement waived (i) Atmel Corporation’s obligation not to permit the “Fixed Charge Coverage Ratio,” as defined in the Agreement, to fall below 1.10:1 for the fiscal quarter ended March 31, 2008, and (ii) any “Event of Default,” as defined in the Agreement, that occurred prior to the date of the waiver letter resulting from the failure to comply with the Fixed Charge Coverage Ratio. In connection with the waiver letter, we paid the facility agent a waiver fee in the amount of $75,000, as well as certain costs and expenses required by the Agreement. Bank of America, N.A. has provided, and in the future may provide banking and related services to Atmel.

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 April 9, 2008 (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 April 15, 2008).

10.1*		Share Purchase Agreement, dated February 6, 2008, by and among Atmel Corporation, Atmel UK Holdings Limited, QRG Limited and Mr. Harald Phillip.

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.

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

*		Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Commission.


	Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets at March 31, 2008 and December 31, 2007		3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and March 31, 2007		4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and March 31, 2007		5
Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		45
PART II: OTHER INFORMATION
Item 1. Legal Proceedings		45
Item 1A. Risk Factors		47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		61
Item 3. Defaults Upon Senior Securities		61
Item 4. Submission of Matters to a Vote of Security Holders		61
Item 5. Other Information		61
Item 6. Exhibits		61
Signatures		62
Exhibits		63
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


	ATMEL CORPORATION (Registrant)
May 12, 2008	/s/ STEVEN LAUB
	Steven Laub
	President & Chief Executive Officer (Principal Executive Officer)


May 12, 2008	/s/ ROBERT AVERY
	Robert Avery
	Vice President Finance & Chief Financial Officer (Principal Financial and Accounting Officer)