10-Q

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 September 30, 2010

or

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	(I.R.S. Employer
incorporation or organization)	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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 (Do not check if a smaller reporting company) Smaller reporting filer o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On October 31, 2010, the Registrant had 458,291,705 outstanding shares of Common Stock.

ATMEL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2010

	Page
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009		3
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2010 AND DECEMBER 31, 2009		4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009		5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		45
ITEM 4. CONTROLS AND PROCEDURES		46
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		46
ITEM 1A. RISK FACTORS		47
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		62
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		62
ITEM 4. (REMOVED AND RESERVED)		62
ITEM 5. OTHER INFORMATION		62
ITEM 6. EXHIBITS		63
SIGNATURES		64
EXHIBITS		65
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Atmel Corporation

Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,		September 30,			September 30,		September 30,
	2010		2009			2010		2009
	(in thousands, except per share data)
Net revenues	$	444,344	$	317,730		$	1,186,254	$	873,765
Operating expenses
Cost of revenues		236,225		218,991			684,715		587,797
Research and development		56,277		51,460			176,664		156,203
Selling, general and administrative		65,940		56,974			194,608		162,774
Acquisition-related charges		1,167		3,604			433		12,745
Charges for grant repayments		236		264			747		1,278
Restructuring charges		1,080		1,180			3,663		6,002
Asset impairment charges		—		—			11,922		—
Loss (gain) on sale of assets		5,715		—			99,767		(164	)
Total operating expenses		366,640		332,473			1,172,519		926,635
Income (loss) from operations		77,704		(14,743	)		13,735		(52,870	)
Interest and other income (expense), net		5,530		(2,312	)		12,656		(10,396	)
Income (loss) before income taxes		83,234		(17,055	)		26,391		(63,266	)
Benefit from (provision for) income taxes		136,578		(395	)		173,593		37,035
Net income (loss)	$	219,812	$	(17,450	)	$	199,984	$	(26,231	)
Basic net income (loss) per share:
Net income (loss)	$	0.48	$	(0.04	)	$	0.44	$	(0.06	)
Weighted-average shares used in basic net income (loss) per share calculations		459,588		452,322			458,872		450,970
Diluted net income (loss) per share:
Net income (loss)	$	0.47	$	(0.04	)	$	0.43	$	(0.06	)
Weighted-average shares used in diluted net income (loss) per share calculations		468,173		452,322			465,945		450,970

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

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Atmel Corporation

Condensed Consolidated Balance Sheets
(Unaudited)

	September 30,			December 31,
	2010			2009
	(in thousands, except par value)
ASSETS
Current assets
Cash and cash equivalents	$	575,728		$	437,509
Short-term investments		21,658			38,631
Accounts receivable, net of allowances for doubtful accounts of $11,800 and $11,930, respectively		239,263			194,099
Inventories		227,106			226,296
Current assets held for sale		—			16,139
Prepaids and other current assets		143,730			83,434
Total current assets		1,207,485			996,108
Fixed assets, net		226,298			203,219
Goodwill		54,865			56,408
Intangible assets, net		18,612			29,841
Non-current assets held for sale		—			83,260
Other assets		48,769			24,006
Total assets	$	1,556,029		$	1,392,842
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt and capital lease obligations	$	80,272		$	85,462
Trade accounts payable		156,886			105,692
Accrued and other liabilities		264,648			152,572
Current liabilites held for sale		—			11,284
Deferred income on shipments to distributors		54,108			44,691
Total current liabilities		555,914			399,701
Long-term debt and capital lease obligations, less current portion		3,863			9,464
Long-term liabilites held for sale		—			4,014
Other long-term liabilities		157,525			215,256
Total liabilities		717,302			628,435
Commitments and contingencies (Note 8)
Stockholders’ equity
Preferred stock; par value $0.001; Authorized: 5,000 shares; no shares issued and outstanding		—			—
Common stock; par value $0.001; Authorized: 1,600,000 shares; Shares issued and outstanding: 456,494 at September 30, 2010 and 454,586 at December 31, 2009		456			455
Additional paid-in capital		1,293,613			1,284,140
Accumulated other comprehensive income		5,332			140,470
Accumulated deficit		(460,674	)		(660,658	)
Total stockholders’ equity		838,727			764,407
Total liabilities and stockholders’ equity	$	1,556,029		$	1,392,842

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

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Atmel Corporation

Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended
	September 30,			September 30,
	2010			2009
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	199,984		$	(26,231	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		48,456			51,511
Non-cash portion of loss on sale of Rousset manufacturing operations		(33,043	)		—
Non-cash portion of loss on sale of SMS business		2,168			—
Asset impairment charges		11,922			—
Other non-cash (gains) losses, net		(14,763	)		6,722
Recovery of doubtful accounts receivable		(123	)		(2,585	)
Accretion of interest on long-term debt		473			408
Stock-based compensation expense		41,806			25,049
Changes in operating assets and liabilities
Accounts receivable		(45,068	)		5,007
Inventories		(10,922	)		72,729
Current and other assets		(87,241	)		(20,482	)
Trade accounts payable		32,522			(7,576	)
Accrued and other liabilities		59,282			(29,345	)
Deferred income on shipments to distributors		9,417			(8,642	)
Net cash provided by operating activities		214,870			66,565
Cash flows from investing activities
Acquisitions of fixed assets		(55,659	)		(14,771	)
Proceeds from the sale of fixed assets		652			—
Proceeds from the sale of SMS business, net of cash transferred		19,023			—
Acquisition of Quantum Research Group		—			(3,362	)
Acquisitions of intangible assets		(3,000	)		(4,700	)
Purchases of marketable securities		(15,768	)		(24,460	)
Sales or maturities of marketable securities		32,588			29,307
Investment in private company		(3,936	)		—
Increase in long-term restricted cash		(5,000	)		(2,050	)
Net cash used in investing activities		(31,100	)		(20,036	)
Cash flows from financing activities
Principal payments on debt		(10,915	)		(49,718	)
Proceeds from issuance of common stock		13,278			8,917
Repurchase of common stock		(40,913	)		—
Repurchase of shares related to employee tax withholding		(5,715	)		(2,699	)
Net cash used in financing activities		(44,265	)		(43,500	)
Effect of exchange rate changes on cash and cash equivalents		(1,286	)		(3,840	)
Net increase (decrease) in cash and cash equivalents		138,219			(811	)
Cash and cash equivalents at beginning of the period		437,509			408,926
Cash and cash equivalents at end of the period	$	575,728		$	408,115

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

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Atmel Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, 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 September 30, 2010 and the results of operations for the three and nine months ended September 30, 2010 and 2009 and cash flows for the nine months ended September 30, 2010 and 2009. All intercompany balances have been eliminated. Because all of the disclosures required by U.S. generally accepted accounting principles are not included, as permitted by the rules of the Securities and Exchange Commission (the “SEC”), 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, 2009. The December 31, 2009 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 provisions for excess and obsolete inventory, sales return reserves, stock-based compensation expense, allowances for doubtful accounts receivable, warranty reserves, estimates for useful lives associated with long-lived assets, charges for grant repayments, recoverability of goodwill and intangible assets, restructuring charges, certain accrued liabilities, fair value of net assets held for sale and income taxes and income tax valuation allowances. Actual results could differ materially 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 provisions for lower of cost or market and excess and obsolescence write-downs. 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 and these inventory reserves are not released until the related inventory has been sold or scrapped. As of December 31, 2009, inventories totaling $16,139 were classified as current assets held for sale in connection with the sale of the manufacturing operations in Rousset, France which was completed in June 2010 (see Note 12).

     Inventories are comprised of the following:

	September 30,		December 31,
	2010		2009
	(in thousands)
Raw materials and purchased parts	$	10,272	$	11,525
Work-in-progress		147,503		135,415
Finished goods		69,331		79,356
	$	227,106	$	226,296

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Recent Accounting Pronouncements

     In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance that revises analysis for identifying the primary beneficiary of a variable interest entity (“VIE”), by replacing the previous quantitative-based analysis with a framework that is based more on qualitative judgments. The new guidance requires the primary beneficiary of a VIE to be identified as the party that both (i) has the power to direct the activities of a VIE that most significantly impact its economic performance and (ii) has an obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE. This guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated results of operations and financial position.

     In January 2010, the FASB issued guidance that expands the interim and annual disclosure requirements of fair value measurements, including the information about movement of assets between Level 1 and 2 of the three-tier fair value hierarchy established under its fair value measurement guidance. This guidance also requires separate disclosure for purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs using Level 3 methodologies. Except for the detailed disclosure in the Level 3 reconciliation, which is effective for the fiscal years beginning after December 15, 2010, all the other disclosures under this guidance became effective for interim and annual periods beginning after December 15, 2009. The adoption of the disclosure portion of the guidance did not have a material impact on the Company’s condensed consolidated results of operations and financial position. The Company does not expect the adoption of the portion of the guidance related to the Level 3 reconciliation to have a material impact on the Company’s consolidated results of operations and financial position.

     In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of VIEs. The elimination of the concept of a QSPE removes the exception from applying the consolidation guidance within this amendment. This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. The adoption of this amendment did not have a material impact on the Company’s condensed consolidated results of operations and financial condition. See Note 12 for further discussion.

Note 2 INVESTMENTS

     Investments at September 30, 2010 and December 31, 2009 are primarily comprised of 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, with the exception of certain auction-rate securities as described below. 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 as a component of accumulated other comprehensive income. Gross realized gains or losses are recorded based on the specific identification method. In the three months ended September 30, 2010, the Company’s gross realized gains or losses on short-term investments were not material. In the nine months ended September 30, 2010, the Company recorded gross realized gains of $2,141 from the sale of short-term investments in interest and other income (expense), net on the

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condensed consolidated statements of operations. In the three months ended September 30, 2010 and 2009 and in the nine months ended September 30, 2010, the Company’s gross realized gains or losses on short-term investments were not material. The Company’s investments are further detailed in the table below:

	September 30, 2010					December 31, 2009
	Adjusted Cost			Fair Value		Adjusted Cost			Fair Value
	(in thousands)
Corporate equity securities	$	87		$	130	$	87		$	132
Auction-rate securities		2,220			2,236		5,370			5,392	*
Corporate debt securities and other obligations		21,723			21,528		33,506			35,373
	$	24,030		$	23,894	$	38,963		$	40,897
Unrealized gains		90					1,987
Unrealized losses		(226	)				(53	)
Net unrealized (losses) gains		(136	)				1,934
Fair value	$	23,894				$	40,897
Amount included in short-term investments				$	21,658				$	38,631
Amount included in other assets					2,236					2,266
				$	23,894				$	40,897

* Includes the fair value of the Put Option of $98 at December 31, 2009 related to an offer from UBS Financial Services Inc, (“UBS”) to purchase auction-rate securities of $3,126 at December 31, 2009. The securities were subsequently redeemed at par by UBS in the three months ended September 30, 2010.

     In the three and nine months ended September 30, 2010, auctions for auction-rate securities held by the Company have continued to fail and as a result these securities have continued to be illiquid. The Company concluded that $2,220 (adjusted cost) of these securities are unlikely to be liquidated within the next twelve months and classified these securities as long-term investments, which are included in other assets on the condensed consolidated balance sheets.

     Contractual maturities (at adjusted cost) of available-for-sale debt securities as of September 30, 2010, were as follows:

	(in thousands)
Due within one year	$	16,550
Due in 1-5 years		5,173
Due in 5-10 years		—
Due after 10 years		2,220
Total	$	23,943

     Atmel has classified all investments with maturity dates of 90 days or more as short-term as it has the ability and intent to redeem them within the year, with the exception of the Company’s remaining auction-rate securities which are included in other assets on the condensed consolidated balance sheets.

Note 3 FAIR VALUE OF ASSETS AND LIABILITIES

     The Company applies the accounting standard that 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. The accounting standard, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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The table below presents the balances of investments measured at fair value on a recurring basis at September 30, 2010:

	September 30, 2010
	Total		Level 1		Level 2		Level 3
			(in thousands)
Assets
Cash
Money market funds	$	9,109	$	9,109	$	—	$	—
Short-term investments
Corporate equity securities		130		130		—		—
Corporate debt securities, including government backed securities		21,528		—		21,528		—
Other assets								—
Auction-rate securities		2,236		—		—		2,236
Deferred compensation plan assets		3,542		3,542		—		—
Total	$	36,545	$	12,781	$	21,528	$	2,236

     The table below presents the balances of investments measured at fair value on a recurring basis at December 31, 2009:

	December 31, 2009
	Total		Level 1		Level 2		Level 3
	(in thousands)
Assets
Cash
Money market funds	$	76,917	$	76,917	$	—	$	—
Short-term investments
Corporate equity securities		132		132		—		—
Auction-rate securities		3,126		—		—		3,126
Corporate debt securities, including government backed securities		35,373		—		35,373		—
Other assets								—
Auction-rate securities		2,266		—		—		2,266
Deferred compensation plan assets		3,109		3,109		—		—
Total	$	120,923	$	80,158	$	35,373	$	5,392

     The Company’s investments, 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 1 of the fair value hierarchy. 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.

     Auction-rate securities are classified within Level 3 as significant assumptions are not observable in the market. The total amount of assets measured using Level 3 valuation methodologies represented less than 1% of total assets as of September 30, 2010.

     A summary of the changes in Level 3 assets measured at fair value on a recurring basis is as follows:

			Total		Sales and			Balance at		Sales and								Total							Total			Balance at
	Balance at		Unrealized		Other			December 31,		Other			Balance at		Sales and Other			Unrealized		Balance at		Sales and Other			Unrealized			September 30,
	January 1, 2009		Gains		Settlements			2009		Settlements			March 31, 2010		Settlements			Gains		June 30, 2010		Settlements			Loss			2010
													(in thousands)
Auction-rate securities	$	8,795	$	22	$	(3,425	)	$	5,392	$	(300	)	$	5,092	$	(200	)	$	14	$	4,906	$	(2,650	)	$	(20	)	$	2,236

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Note 4 INTANGIBLE ASSETS, NET

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

	September 30,			December 31,
	2010			2009
	(in thousands)
Core/licensed technology	$	85,718		$	90,718
Accumulated amortization		(77,189	)		(74,291	)
Total technology licenses		8,529			16,427
Acquisition-related intangible assets		22,413			22,413
Accumulated amortization		(12,330	)		(8,999	)
Total acquisition-related intangible assets		10,083			13,414
Total intangible assets, net	$	18,612		$	29,841

     Amortization expense for technology licenses totaled $1,388 and $1,331 in the three months ended September 30, 2010 and 2009, respectively, and $4,218 and $3,655 in the nine months ended September 30, 2010 and 2009, respectively. Amortization expense for acquisition-related intangible assets totaled $1,136 and $1,195 in the three months ended September 30, 2010 and 2009, respectively, and $3,331 and $3,723 in the nine months ended September 30, 2010 and 2009, respectively.

     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)
2010 (October 1 through December 31)	$	915	$	1,136	$	2,051
2011		3,587		4,192		7,779
2012		3,221		4,075		7,296
2013		806		680		1,486
Total future amortization	$	8,529	$	10,083	$	18,612

Note 5 BORROWING ARRANGEMENTS

     Information with respect to the Company’s debt and capital lease obligations as of September 30, 2010 and December 31, 2009 is shown in the following table:

	September 30,			December 31,
	2010			2009
	(in thousands)
Various interest-bearing notes and term loans	$	3,854		$	3,484
Bank lines of credit		80,000			80,000
Capital lease obligations		281			11,442
Total	$	84,135		$	94,926
Less: current portion of long-term debt and capital lease obligations		(80,272	)		(85,462	)
Long-term debt and capital lease obligations due after one year	$	3,863		$	9,464

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

Years Ending December 31:	(in thousands)
2010 (October 1 through December 31)	$	80,349
2011		86
2012		—
2013		—
2014		—
Thereafter		3,854
		84,289
Less: amount representing interest		(154	)
Total	$	84,135

     On March 15, 2006, the Company entered into a five-year asset-backed credit facility for up to $165,000 (reduced to $125,000 on November 6, 2009) with certain European lenders. This facility is secured by the Company’s non-U.S. trade receivables. The eligible non-US trade receivables were $91,734 at September 30, 2010, of which the amount outstanding under this facility was $80,000 at September 30, 2010. Borrowings under the facility bear interest at LIBOR plus 2% per annum (approximately 2.26% based on the one month LIBOR at September 30, 2010), 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 in compliance with its financial covenants as of September 30, 2010. Commitment fees and amortization of up-front fees paid related to the facility in the three months ended September 30, 2010 and 2009 totaled $233 and $266, respectively, and $729 and $805 in the nine months ended September 30, 2010 and 2009, respectively, and are included in interest and other income (expense), net, in the condensed consolidated statements of operations. The outstanding balance under this facility is classified within bank lines of credit in the summary debt table above.

     The fair value of the Company’s debt approximated its book value as of September 30, 2010 and December 31, 2009 due to its relatively short-term nature as well as the variable interest rates on these debt obligations.

Note 6 STOCKHOLDERS’ EQUITY

Share Based Compensation Plans

     The 2005 Stock Plan was approved by stockholders on May 11, 2005. As of September 30, 2010, 114,000 shares were authorized for issuance under the 2005 Stock Plan, and 18,130 shares of common stock remained 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.

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     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, 2009		28,478			18,828		$	1.68-$24.44	$	4.38
Restricted stock units issued		(462	)		—			—		—
Adjustment for restricted stock units issued		(360	)		—			—		—
Restricted stock units cancelled		636			—			—		—
Adjustment for restricted stock units cancelled		496			—			—		—
Options granted		(157	)		157		$	4.77		4.77
Options cancelled/expired/forfeited		341			(341	)	$	2.11-$24.44		6.60
Options exercised		—			(321	)	$	1.68-$4.74		3.00
Balances, March 31, 2010		28,972			18,323		$	1.68-$21.47	$	4.37
Restricted stock units issued		(386	)		—			—		—
Adjustment for restricted stock units issued		(301	)		—			—		—
Performance based restricted stock units issued		(282	)		—			—		—
Adjustment for performance based restricted stock units issued		(220	)		—			—		—
Restricted stock units cancelled		745			—			—		—
Adjustment for restricted stock units cancelled		581			—			—		—
Options granted		(82	)		82		$	5.20		5.20
Options cancelled/expired/forfeited		134			(134	)	$	2.11-$21.47		6.13
Options exercised		—			(391	)	$	1.80-$5.62		3.57
Balances, June 30, 2010		29,161			17,880		$	1.68-$20.19	$	4.38
Restricted stock units issued		(6,828	)		—			—		—
Adjustment for restricted stock units issued		(5,326	)		—			—		—
Performance based restricted stock units issued		(170	)		—			—		—
Adjustment for performance based restricted stock units issued		(133	)		—			—		—
Restricted stock units cancelled		529			—			—		—
Adjustment for restricted stock units cancelled		413			—			—		—
Options granted		(60	)		60		$	6.11		6.11
Options cancelled/expired/forfeited		544			(544	)	$	2.11-$20.19		4.65
Options exercised		—			(986	)	$	1.68-$8.02		3.69
Balances, September 30, 2010		18,130			16,410		$	1.68-$14.84	$	4.42

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     Restricted stock units are granted from the pool of options available for grant. On May 14, 2008, the Company’s stockholders approved an amendment to its 2005 Stock Plan whereby every share underlying restricted stock, restricted stock units (including performance-based restricted stock units), and stock purchase rights issued on or after May 14, 2008 will be counted against the numerical limit for options available for grant as 1.78 shares in the table above. If shares issued pursuant to any restricted stock, restricted stock unit, and stock purchase right agreements are cancelled, forfeited or repurchased by the Company and would otherwise return to the 2005 Stock Plan, 1.78 times the number of shares will return to the plan and will again become available for issuance. The Company issued 32,243 restricted stock units from May 14, 2008 to September 30, 2010 (net of cancellations), resulting in a reduction of 57,393 shares available for grant under the 2005 Stock Plan.

Restricted Stock Units

     Activity related to restricted stock units is set forth below:

				Weighted-Average
	Number of			Fair Value
	Units			Per Share
	(in thousands, except per share data)
Balances, December 31, 2009		24,044		$	4.38
Restricted stock units issued		462			4.73
Restricted stock units vested		(583	)		4.80
Restricted stock units cancelled		(636	)		3.55
Balances, March 31, 2010		23,287		$	4.40
Restricted stock units issued		386			5.28
Performance based restricted stock units issued		282			5.00
Restricted stock units vested		(539	)		5.45
Restricted stock units cancelled		(745	)		4.15
Balances, June 30, 2010		22,671		$	4.40
Restricted stock units issued		6,828			5.99
Performance based restricted stock units issued		170			5.73
Restricted stock units vested		(1,536	)		5.77
Restricted stock units cancelled		(529	)		4.03
Balances, September 30, 2010		27,604		$	4.74

     In the three and nine months ended September 30, 2010, 1,536 and 2,658 restricted stock units vested, respectively, including 688 and 1,064 units withheld for taxes, respectively. These vested restricted stock units had a weighted-average fair value of $5.77 and $5.49 per share on the vesting dates in the three and nine months ended September 30, 2010, respectively. As of September 30, 2010, total unearned stock-based compensation related to nonvested restricted stock units previously granted (including performance-based restricted stock units) was approximately $93,665, excluding forfeitures, and is expected to be recognized over a weighted-average period of 2.86 years.

     In the three and nine months ended September 30, 2009, 1,167 and 1,982 restricted stock units vested, respectively, including 455 and 746 units withheld for taxes, respectively. These vested restricted stock units had a weighted-average fair value of $3.91 and $3.63 on the vesting dates in the three and nine months ended September 30, 2009, respectively.

     Until restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding.

Performance-Based Restricted Stock Units

     In the year ended December 31, 2008, the Company issued performance-based restricted stock units to eligible employees for a maximum of 9,914 shares of the Company’s common stock under the 2005 Stock Plan. These restricted stock units vest on a graded scale, only if the Company achieves certain quarterly operating margin performance criteria over the performance period of July 1, 2008 to December 31, 2012. In September 2009, the performance period was extended by one additional year to December 31, 2012 which was considered a modification to the performance-based restricted stock units. In the nine months ended September 30, 2009, the Company issued additional performance-based restricted stock units to eligible employees for a maximum of 83 shares of the Company’s common stock. In the nine months ended September 30, 2010, the Company issued additional performance-based restricted stock units to eligible employees for a maximum of 452 shares of the Company’s common stock.

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     Prior to the vesting of the performance-based restricted stock units, the Company recognizes the stock-based compensation expense for the portion of its performance-based restricted stock units when management believes it is probable that the Company will achieve the performance criteria. The awards vest once the performance criteria are met. If the performance goals are unlikely to be met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the performance period and is reduced for estimated forfeitures. The Company recorded total stock-based compensation expense related to performance-based restricted stock units of $4,429 and $20,624 in the three and nine months ended September 30, 2010, respectively.

Stock Option Awards

     On August 3, 2009, the Company commenced an exchange offer whereby eligible employees were given the opportunity to exchange some or all of their outstanding stock options with an exercise price greater than $4.69 per share (which was equal to the 52-week high of the Company’s per share stock price as of the start of the offer) that were granted on or before August 3, 2008, whether vested or unvested, for restricted stock units or, for certain employees, a combination of restricted stock units and stock options and the exchange ratio was based on the per share exercise price of the eligible stock options. The Company completed the exchange offer on August 28, 2009, under which 9,484 stock options were exchanged for 1,354 stock options and 2,297 restricted stock units. The modification of these stock options did not result in a material charge to the Company’s financial results in the year ended December 31, 2009.

     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						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
Risk-free interest rate		1.43	%		2.39	%		2.08	%		2.39	%
Expected life (years)		5.40			5.58			5.54			5.59
Expected volatility		53	%		55	%		54	%		55	%
Expected dividend yield		—			—			—			—

     The Company’s weighted-average assumptions for the three and nine months ended September 30, 2010 and 2009 were determined in accordance with the accounting standard on stock-based compensation 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 value of options granted in the three and nine months ended September 30, 2010 was $2.94 and $2.58, respectively, and in the three and nine months ended September 30, 2009 was $2.23 and $2.13, respectively.

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Employee Stock Purchase Plan

     Under the 1991 Employee Stock Purchase Plan (“1991 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 980 and 1,105 shares purchased under the 1991 ESPP in the three months ended September 30, 2010 and 2009 at an average price per share of $4.05 and $3.02, respectively. There were 2,028 and 2,139 shares purchased under the 1991 ESPP in the nine months ended September 30, 2010 and 2009 at an average price per share of $3.65 and $3.08, respectively. During the 2010 Annual Stockholders’ Meeting, the Company’s stockholders approved a new 2010 Employee Stock Purchase Plan (“2010 ESPP”) and authorized an additional 25,000 shares for issuance under the 2010 ESPP. Of the 42,000 shares authorized for issuance under the 1991 ESPP, 2,723 shares were available for issuance at September 30, 2010. No shares have been issued under the 2010 ESPP.

     The fair value of each purchase under the 1991 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 1991 ESPP shares:

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
Risk-free interest rate		0.19	%		0.24	%		0.18	%		0.35	%
Expected life (years)		0.50			0.50			0.50			0.50
Expected volatility		48	%		60	%		45	%		73	%
Expected dividend yield		—			—			—			—

     The weighted-average fair value of the rights to purchase shares under the 1991 ESPP for offering periods started in the three months ended September 30, 2010 and 2009 was $1.02 and $0.86, respectively, and in the nine months ended September 30, 2010 and 2009 was $0.89 and $0.99, respectively. Cash proceeds from the issuance of shares under the 1991 ESPP were $3,974 and $3,336 in the three months ended September 30, 2010 and 2009, respectively. Cash proceeds from the issuance of shares under the 1991 ESPP were $7,411 and $6,586 in the nine months ended September 30, 2010 and 2009, respectively.

     The following table summarizes the distribution of stock-based compensation expense related to employee stock options, restricted stock units, performance-based restricted stock units and employee stock purchases in the three and nine months ended September 30, 2010 and 2009:

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2010		2009		2010		2009
	(in thousands)
Cost of revenues	$	2,093	$	1,136	$	5,957	$	3,233
Research and development		4,260		2,979		13,845		8,434
Selling, general and administrative		6,896		3,469		25,069		7,711
Total stock-based compensation expense, before income taxes		13,249		7,584		44,871		19,378
Tax benefit		—		—		—		—
Total stock-based compensation expense, net of income taxes	$	13,249	$	7,584	$	44,871	$	19,378

     The table above excludes stock-based compensation (credit) expense of $0 and $(3,065) in the three and nine months ended September 30, 2010, respectively, and $1,889 and $5,671 in the three and nine months ended September 30, 2009, respectively, related to the Quantum acquisition, which is classified within acquisition-related charges in the condensed consolidated statements of operations.

     There was no significant non-employee stock-based compensation expense in the three and nine months ended September 30, 2010 and 2009.

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     As of September 30, 2010, total unearned compensation expense related to nonvested stock options was approximately $12,501, excluding forfeitures, and is expected to be recognized over a weighted-average period of 1.17 years.

Common Stock Repurchase Program

     During the three months ended September 30, 2010, Atmel’s Board of Directors announced a $200,000 stock repurchase program. The repurchase program does not have an expiration date, and the number of shares repurchased and the timing of repurchases are based on the level of the Company’s cash balances, general business and market conditions, regulatory requirements, and other factors, including alternative investment opportunities.

     During the three and nine months ended September 30, 2010, Atmel repurchased 7,042 shares of its common stock on the open market at an average repurchase price of $5.79 per share, excluding commission, and subsequently retired those shares. Common stock and additional paid-in capital were reduced by $40,777, excluding commission, during the three months ended September 30, 2010, as a result of the stock repurchases. As of September 30, 2010, $159,223 remained available for repurchase under this program.

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 (loss) and comprehensive income (loss) for the Company arises from foreign currency translation adjustments, actuarial (loss) gain related to defined benefit pension plans and net unrealized (loss) gain on investments. The components of accumulated other comprehensive income at September 30, 2010 and December 31, 2009, net of tax, are as follows:

	September 30,			December 31,
	2010			2009
	(in thousands)
Foreign currency translation adjustments	$	6,239		$	135,839
Actuarial (loss) gain related to defined benefit pension plans		(771	)		2,697
Net unrealized (loss) gain on investments		(136	)		1,934
Total accumulated other comprehensive income	$	5,332		$	140,470

     The components of comprehensive income (loss) in the three and nine months ended September 30, 2010 and 2009 are as follows:

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
	(in thousands)
Net income (loss)	$	219,812		$	(17,450	)	$	199,984		$	(26,231	)
Other comprehensive income (loss):
Foreign currency translation adjustments		6,925			11,014			(29,821	)		23,664
Release of currency translation adjustment related to sale of assets*		(2,412	)		—			(99,779	)		—
Actuarial (losses) gains related to defined benefit pension plans		(2,173	)		1,566			(3,468	)		2,565
Unrealized (losses) gains on investments		(16	)		122			(2,070	)		451
Other comprehensive income (loss)		2,324			12,702			(135,138	)		26,680
Total comprehensive income (loss)	$	222,136		$	(4,748	)	$	64,846		$	449

* The release of foreign currency translation adjustments in the three and nine months ended September 30, 2010 was primarily related to the sales of the Company’s Rousset, France manufacturing operations, and Secure Microcontroller Solutions business (See Note 12)

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Note 8 COMMITMENTS AND CONTINGENCIES

Commitments

Indemnification

     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 certain employees, and the Company’s bylaws permit the indemnification of the Company’s agents. In the Company’s experience, the estimated fair value of the liability is not material.

     Subject to certain limitations, the Company is obligated to indemnify certain current and former directors, officers and employees in connection with litigation related to the timing of stock option grants awarded by Atmel. 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 in connection with this litigation generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses incurred in defense of these matters. The Company has been paying or reimbursing legal expenses being incurred in connection with these matters by its current and former directors, officers and employees. Given the final resolution of these matters, the Company does not anticipate that such payments or reimbursements will be significant in future quarters.

Purchase Commitments

     At September 30, 2010, the Company had certain commitments which were not included on the condensed consolidated balance sheet at that date. These include outstanding capital purchase commitments of $37,851 and a purchase commitment for product wafer purchases of approximately $41,715 from Tejas Silicon Holding Limited. Wafer purchase commitments from the Company’s supply agreement with LFoundry approximated $405,000.

Contingencies

Legal Proceedings

     The Company 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 effect on the results of operations, cash flows and financial position of Atmel. The estimate of the potential effect 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 losses related to litigation described below that the Company considers probable and for which the loss can be reasonably estimated in accordance with FASB requirements. In the event that a loss cannot be reasonably estimated, the Company has not accrued for such losses. With respect to each of the matters below, except where noted otherwise, management has determined a potential loss is not probable and accordingly, no amount has been accrued. Management makes a determination as to when a potential loss is reasonably probable based on relevant accounting literature. However, due to the inherent uncertainty of these matters, except as otherwise noted, management does not believe that the amount of loss or a range of possible losses is reasonably estimable.

     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. Additional derivative actions were filed in the United States District Court for the Northern District of California (later consolidated with the previously-filed federal derivative actions) and the Delaware Chancery Court. All the suits contained various causes of action relating to the timing of stock option grants awarded by Atmel. In June 2008, the federal district court denied the Company’s motion to dismiss for failure to make a demand on the board, and granted in part and denied in part motions to dismiss filed by the individual defendants. On March 31, 2010, that court entered an order approving a partial global settlement of these actions, and several other actions seeking to compel inspection of Company books and records. Among other things, the settlement resolved all claims against all defendants, except Atmel’s former general counsel James Michael Ross, related to the allegations and/or matters set forth in all the derivative actions. The terms of the settlement provided for: (1) a direct financial benefit to Atmel of $9,650; (2) the adoption and/or implementation of a variety of corporate governance enhancements, particularly in the way Atmel grants and documents grants of employee stock option awards; (3) the payment by Atmel of plaintiffs’ counsels’ attorneys’ fees, costs, and expenses in the amount of $4,940 (which Atmel paid on April 8, 2010); and (4) the dismissal with prejudice of all claims by and between the settling parties and releases of all claims against the settling defendants. On August 13, 2010, the Court approved a settlement of the remaining claims between Atmel, plaintiffs and Mr. Ross related to the Company’s historical stock option granting

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practices. The settlement provided for: (a) payments to the Company by Atmel’s insurers totaling $2,900; (b) the dismissal with prejudice and release of the remaining claims against Mr. Ross; and (c) the dismissal without prejudice of Mr. Ross’s related lawsuit against the Company in Delaware Chancery Court (described below).

     On September 28, 2007, Matheson Tri-Gas (“MTG”) filed suit in Texas state court in Dallas County against the Company. Plaintiff alleges claims for: (1) breach of contract for the Company’s alleged failure to pay minimum payments under a purchase requirements contract; (2) breach of contract under a product supply agreement; and (3) breach of contract for failure to execute a process gas agreement. MTG seeks unspecified damages, pre- and post-judgment interest, attorneys’ fees and costs. In late November 2007, the Company filed its answer denying liability. In July 2008, the Company filed an amended answer, counterclaim and cross claim seeking among other things a declaratory judgment that a termination agreement cut off any claim by MTG for additional payments. In an Order entered on June 26, 2009, the Court granted the Company’s motion for partial summary judgment dismissing MTG’s breach of contract claims relating to the requirements contract and the product supply agreement. The parties dismissed the remaining claims and, on August 26, 2009, the Court entered a Summary Judgment Order and Final Judgment. MTG filed a Motion to Modify Judgment and Notice of Appeal on September 24, 2009. The Company has accrued for estimated potential losses, which amount is not material. The Company intends to vigorously defend the appeal.

     On June 3, 2009, the Company filed an action in Santa Clara County Superior Court against three of its now-terminated Asia-based distributors, NEL Group Ltd. (“NEL”), Nucleus Electronics (Hong Kong) Ltd. (“NEHK”) and TLG Electronics Ltd. (“TLG”). The Company seeks, among other things, to recover $8,500 owed it, plus applicable interest and attorneys fees. On June 9, 2009, NEHK separately sued Atmel in Santa Clara County Superior Court, alleging that Atmel’s suspension of shipments to NEHK on September 23, 2008 - one day after TLG appeared on the Department of Commerce, Bureau of Industry and Security’s Entity List - breached the parties’ International Distributor Agreement. NEHK also alleges that Atmel libeled it, intentionally interfered with contractual relations and/or prospective business advantage, and violated California Business and Professions Code Sections 17200 et seq. and 17500 et seq. NEHK alleges damages exceeding $10,000. Both matters now have been consolidated. On July 29, 2009, NEL filed a cross-complaint against Atmel that alleges claims virtually identical to those NEHK has alleged, and seeks unspecified damages. Discovery in the case is ongoing and no trial date has yet been set. The Company intends to prosecute its claims and defend the NEHK/NEL claims vigorously. TLG did not answer, and the Court entered a default judgment of $2,697 on November 23, 2009.

     On July 16, 2009, James M. Ross, the Company’s former General Counsel, filed a lawsuit in Santa Clara County Superior Court challenging his termination, and certain actions the Company took thereafter. The operative complaint now contains ten causes of action, which all concern the Company’s treatment of Mr. Ross’s post-termination attempt to exercise stock options and its alleged breach of a purported oral contract to pay a bonus upon the sale of the Company’s Grenoble division. Discovery is ongoing and a trial is scheduled to commence on January 18, 2011. The Company intends to vigorously defend the lawsuit.

     On December 18, 2009, Mr. Ross filed another lawsuit in Delaware Chancery Court seeking (pursuant to Section 145 of the Delaware General Corporation Law) to enforce certain rights granted him under his indemnification agreement with the Company, and to recover damages for any breach of that agreement. In particular, Mr. Ross alleged that the Company breached the agreement in the way it negotiated and structured the partial global settlement in December 2009 in the backdating cases, described above. He also sought advancement of fees and indemnification in connection with the Delaware lawsuit. Pursuant to the Settlement Agreement the Company reached with him in the federal backdating cases, Mr. Ross filed a dismissal without prejudice on August 25, 2010.

     On July 24, 2009, 56 former employees of Atmel’s Nantes facility filed claims in the First Instance labour court, Nantes, France against the Company and MHS Electronics claiming that (1) the Company’s sale of the Nantes facility to MHS (XbyBus SAS) in 2005 did not result in the transfer of their labor agreements to MHS, and (2) these employees should still be considered Atmel employees, with the right to claim related benefits from Atmel. Alternatively, each employee seeks damages of at least 45 Euro and court costs. A ruling is expected on June 1, 2011. These claims are similar to those filed in the First Instance labour court in October 2006 by 47 other former employees of Atmel’s Nantes facility (MHS was not named a defendant in the earlier claims). On July 24, 2008, the judge hearing the earlier claims issued an oral ruling in favor of the Company, finding that there was no jurisdiction for those claims by certain “protected employees,” and denying the claims as to all other employees. Forty of those earlier plaintiffs appealed, and on February 11, 2010, the Court of Appeal of Rennes, France affirmed the lower court’s ruling. Thirty-eight of the 40 plaintiffs have elected not to pursue any further appeal, and it is not yet clear if the remaining two plaintiffs intend to appeal to the Supreme Court of France. The Company intends to continue defending all these claims vigorously.

     From time to time, the Company is notified of claims that it may be infringing patents issued to other parties and may subsequently engage in license negotiations regarding these claims. As well, from time to time, the Company receives from customers demands for indemnification, or claims relating to the quality of our products, including claims for additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting their defective products, costs for product recalls or

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other damages. The Company accrues for losses relating to such claims that the Company considers probable and for which the loss can be reasonably estimated.

Other Contingencies

     In October 2008, officials of the European Union Commission (the “Commission”) conducted an inspection at the offices of one of the Company’s French subsidiaries. The Company was informed that the Commission was seeking evidence of potential violations by Atmel or its subsidiaries of the European Union’s competition laws in connection with the Commission’s investigation of suppliers of integrated circuits for smart cards. On September 21, 2009 and October 27, 2009, the Commission requested additional information from the Company, and the Company responded to the Commission’s requests. The Company continues to cooperate with the Commission’s investigation and has not received any specific findings, monetary demand or judgment through the date of filing this Form 10-Q. As a result, the Company has not recorded any provision in its financial statements related to this matter.

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 Company’s 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 in the three and nine months ended September 30, 2010 and 2009.

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
	(in thousands)
Balance at beginning of period	$	4,109		$	4,736		$	4,225		$	5,579
Accrual for warranties during the period, net of change in estimates		764			1,018			2,930			2,437
Actual costs incurred		(824	)		(1,168	)		(3,106	)		(3,430	)
Balance at end of period	$	4,049		$	4,586		$	4,049		$	4,586

     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 September 30, 2010, the maximum potential amount of future payments that the Company could be required to make under these guarantee agreements was $1,850. 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

     In the three months ended September 30, 2010, the Company recorded an income tax benefit of $136,578, compared to an income tax provision of $395 in the three months ended September 30, 2009, primarily due to a discrete income tax benefit of $150,405 recorded during the quarter from the settlement of its IRS audit for the years 2000 through 2003. In the nine months ended September 30, 2010, the Company recorded an income tax benefit of $173,592, compared to an income tax benefit of $37,035 in the nine months ended September 30, 2009, primarily due to the IRS settlement and a tax benefit related to tax deductible costs incurred related to the sale of our wafer manufacturing facilities in Rousset, France in the quarter ended June 30, 2010. Excluding the impact of these discrete tax events, the provision for (benefit from) income taxes was at a higher consolidated effective rate than would have resulted if all group entities were profitable or if losses produced tax benefits.

     The IRS had previously assessed significant additional income taxes, primarily related to transfer pricing, which were resolved through the tax appeals process. As a result of the settlement, the Company recognized previously unrecognized tax benefits of approximately $151,430 in the three months ended September 30, 2010, which resulted in a benefit to tax expense of $54,404, related

19

to the release of previously accrued tax reserves, and an increase in gross deferred tax assets, primarily foreign tax credits and net operating losses (with a full valuation allowance) of $97,026. The Company also recorded an additional benefit to income tax expense of approximately $96,798, of which $48,425 related to the release of previously accrued penalties and interest on the tax exposures, and $48,373 related to a refund from the carryback of tax attributes to tax years prior to the audit.

     At September 30, 2010 and December 31, 2009, the Company had $54,048 and $182,553 of unrecognized tax benefits, respectively. The Company does not expect further significant increases or decreases to unrecognized tax benefits within the next twelve months. The decrease in income taxes payable is primarily due to the resolution of the IRS tax audit described above.

     Included within long-term liabilities at September 30, 2010 and December 31, 2009 were income taxes payable totaling $19,765 and $116,404, respectively.

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 employee’s post-retirement life, and covers the Company’s German employees.

     The aggregate net pension expense relating to the two plan types are as follows:

	Three Months Ended					Nine Months Ended
	September 30,		September 30,			September 30,		September 30,
	2010		2009			2010		2009
	(in thousands)
Service costs	$	463	$	198		$	1,036	$	1,184
Interest costs on projected benefit obligation		375		250			970		1,134
Amortization of actuarial loss (gain)		19		(42	)		15		(37	)
Settlement and other related losses		242		—			1,149		—
Net pension expense	$	1,099	$	406		$	3,170	$	2,281

     Interest costs on projected benefit obligation increased to $375 in the three months ended September 30, 2010 from $250 in the three months ended September 30, 2009, and decreased to $970 in the nine months ended September 30, 2010 from $1,134 in the nine months ended September 30, 2009.

     Settlement and other related losses of $242 in the three months ended September 30, 2010 was primarily related to the Company’s sale of its Secure Microcontroller Solutions business and was recorded as a charge to research and development expenses in the condensed consolidated statements of operations. The Company recorded $907 in settlements and other related costs in the three months ended June 30, 2010 related to the sale of its manufacturing operations in Rousset, France and was recorded as a charge to cost of revenues in the condensed consolidated statements of operations.

     Cash funding for benefits paid was $78 and $42 in the nine months ended September 30, 2010 and 2009, respectively. Cash funding for benefits to be paid for 2010 is not expected to exceed $686.

     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, in the nine months ended September 30, 2010, a change in the interest rate assumptions used to

20

calculate the present value of the pension obligation coupled with higher exchange rates resulted in a net increase in the pension liability. This resulted in a decrease of $3,468, net of tax, which was recorded in accumulated other comprehensive income in stockholders’ equity on the condensed consolidated balance sheet at September 30, 2010.

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:

• Microcontrollers segment includes a variety of proprietary and standard microcontrollers, the majority of which contain embedded nonvolatile memory and integrated analog peripherals. In March 2008, the Company acquired Quantum, a supplier of capacitive sensing IP solutions. 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 electrically erasable programmable read-only memory (“EEPROM”) and erasable programmable ready-only memory (“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 telecommunication market.

• 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 specific applications. This segment also encompasses a range of products which provide security for digital data transaction, including smart cards for mobile phones, set top boxes, banking and national identity cards. This segment also includes products with military and aerospace applications. The Company also develops application specific standard products (“ASSP”) for high reliability space applications, power management and secure crypto memory products.

     The Company evaluates segment performance based on revenues and income or loss from operations excluding acquisition-related charges, charges for grant repayments, restructuring charges, asset impairment charges and loss (gain) on sale of business and assets. Interest and other income (expenses), net, nonrecurring gains and losses, foreign exchange gains and losses and income taxes are not measured by operating segment. Because the Company’s segments reflect the manner in which management reviews its business, they necessarily involve judgments that management believes are reasonable in light of the circumstances under which they are made. These judgments may change over time or may be modified to reflect new facts or circumstances. Segments may also be changed or modified to reflect product, technologies or applications that are newly created, or that change over time, or other business conditions that evolve, each of which may result in reassessing specific segments and the elements included within each of those segments. Recent events may affect the manner in which we present segments in the future.

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     Segments are defined by the products they design and sell. They do not make sales to each other. The Company’s net revenues and segment income (loss) from operations for each reportable segment in the three and nine months ended September 30, 2010 and 2009 are as follows:

  Information about Reportable Segments

	Micro-			Nonvolatile		RF and
	Controllers			Memories		Automotive			ASIC			Total
	(in thousands)
Three months ended September 30, 2010
Net revenues from external customers	$	255,546		$	66,473	$	45,179		$	77,146		$	444,344
Segment income from operations		57,920			15,052		4,932			7,998			85,902
Three months ended September 30, 2009
Net revenues from external customers	$	120,042		$	78,796	$	38,525		$	80,367		$	317,730
Segment (loss) income from operations		(5,612	)		685		(3,000	)		(1,768	)		(9,695	)
Nine months ended September 30, 2010
Net revenues from external customers	$	604,054		$	217,527	$	136,934		$	227,739		$	1,186,254
Segment income from operations		93,614			27,475		7,356			1,822			130,267
Nine months ended September 30, 2009
Net revenues from external customers	$	318,702		$	211,961	$	106,497		$	236,605		$	873,765
Segment (loss) income from operations		(9,431	)		3,466		(7,904	)		(19,140	)		(33,009	)

     The Company does not allocate assets by segment, as management does not use asset information to measure or evaluate a segment’s performance.

Reconciliation of Segment Information to Condensed Consolidated Statements of Operations

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
	(in thousands)
Total segment income (loss) from operations	$	85,902		$	(9,695	)	$	130,267		$	(33,009	)
Unallocated amounts:
Acquisition-related charges		(1,167	)		(3,604	)		(433	)		(12,745	)
Charges for grant repayments		(236	)		(264	)		(747	)		(1,278	)
Restructuring charges		(1,080	)		(1,180	)		(3,663	)		(6,002	)
Asset impairment charges		—			—			(11,922	)		—
(Loss) gain on sale of assets		(5,715	)		—			(99,767	)		164
Consolidated income (loss) from operations	$	77,704		$	(14,743	)	$	13,735		$	(52,870	)

     Geographic sources of revenues were as follows:

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2010		2009		2010		2009
	(in thousands)
United States	$	68,964	$	57,438	$	194,348	$	155,856
Germany		51,929		42,026		150,744		113,214
France		13,318		15,654		46,835		56,906
United Kingdom		3,296		2,415		10,161		7,541
Japan		11,810		9,166		31,347		26,673
China, including Hong Kong		137,181		91,228		362,440		240,385
Singapore		11,186		12,500		31,944		43,584
Taiwan		35,286		22,234		79,030		51,804
South Korea		43,079		12,503		85,970		33,596
Rest of Asia-Pacific		18,810		14,591		49,540		39,115
Rest of Europe		38,464		32,981		120,207		91,857
Rest of the World		11,021		4,994		23,688		13,234
Total net revenues	$	444,344	$	317,730	$	1,186,254	$	873,765

     Net revenues are attributed to countries based on delivery locations.

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     No single customer accounted for more than 10% of net revenues in each of the three and nine months ended September 30, 2010 and 2009, respectively.

     Locations of long-lived assets as of September 30, 2010 and December 31, 2009 were as follows:

	September 30,		December 31,
	2010		2009
	(in thousands)
United States	$	106,358	$	105,017
Asia-Pacific		52,631		37,726
Germany		17,982		21,408
France		29,750		35,505
United Kingdom		1,395		4,949
Rest of Europe		39,814		17,366
Total	$	247,930	$	221,971

     Excluded from the table above are auction-rate securities of $2,236 and $2,266 as of September 30, 2010 and December 31, 2009, respectively, which are included in other assets on the condensed consolidated balance sheets. Also excluded from the table above as of September 30, 2010 and December 31, 2009 are goodwill of $54,865 and $56,408, respectively, intangible assets, net of $18,612 and $29,841, respectively, deferred income tax assets of $24,901 and $2,988, respectively, and assets held for sale of $0 and $83,260, respectively.

Note 12 LOSS ON SALE OF ASSETS

Loss on Sale of Assets

     In the three and nine months ended September 30, 2010, the Company recorded a loss on sale of assets related to the sale of its Secure Microcontroller Solutions (“SMS”) business and its manufacturing facility in Rousset, France.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2010		2010
	(in thousands)
Secure Microcontroller Solutions	$	5,715	$	5,715
Rousset, France		—		94,052
Loss on Sale of Assets	$	5,715	$	99,767

Secure Microcontroller Solutions

     On September 30, 2010, the Company completed the sale of its SMS business to INSIDE Contactless S.A. (“INSIDE”), based in Aix-en-Provence, France. Under the terms of the agreement, the Company transferred certain assets and employee liabilities to INSIDE in return for cash consideration of $37,000, subject to a working capital adjustment. The cash proceeds of $5,000 was deposited in escrow at closing, for a period of twenty months, subject to post closing claims. The Company may receive additional cash consideration of up to $21,000 if certain financial targets are met in 2010 and 2011.

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In connection with the sale, the Company entered into other ancillary agreements, including technology licensing and transition services for certain supply arrangements, testing, and engineering services. Upon closing of this transaction, the Company recorded a loss on sale of business of $5,715, which is summarized below:

	Three Months Ended
	September 30,
(in thousands)	2010
Sales Price	$	37,000
Net assets transferred, including working capital		32,420
Release of currency translation adjustment		2,412
Selling costs		3,882
Other related costs		4,001
Loss on Sale of Assets	$	5,715

     In connection with the sale, the Company transferred net assets totaling $32,420 to INSIDE.

     Our East Kilbride, UK facility was included in the assets transferred to INSIDE, resulting in the complete liquidation of the Company’s investment in this foreign entity and, as a result, the Company recorded a loss of $2,412 related to the currency translation adjustment balance (“CTA balance”) that was previously recorded within stockholders’ equity.

     As part of the SMS sale, the Company incurred direct and incremental selling costs of $3,882, which represented broker commissions and legal fees. The Company also incurred a transfer fee of $1,300 related to transferring a royalty agreement to INSIDE. These costs provided no benefit to the Company, and would not have been incurred if it was not selling the SMS business unit. Therefore, the direct and incremental costs associated with these services were recorded as part of the loss on sale. Atmel incurred other costs related to the sale of $2,701, which included performance-based bonuses of $533 for certain employees (no executive officers were included), related to the completion of the sale.

     In connection with the SMS sale, Atmel and INSIDE entered into an escrow agreement. According to the terms of the escrow agreement, $5,000 of the sales price will be held in escrow for a period of twenty months from the date of sale, for specific potential losses outlined in the escrow agreement. Upon termination of the escrow period, the escrow, less any validated claims, will be sent to Atmel. The escrow amount is not considered contingent considerations and, therefore, is included in the loss on sale recognized in the three months ended September 30, 2010.

     INSIDE has entered into a three year supply agreement to source wafers from the fabrication facility in Rousset, France that the Company sold to LFoundry in the second quarter of 2010. Wafers purchased by INSIDE from LFoundry will reduce our future commitment under the Company’s Wafer Supply Agreement with LFoundry.

     The SMS sale also provides INSIDE a royalty-based, non-exclusive license to certain business-related intellectual property in order to support the current SMS business and future product development.

     In connection with the SMS sale, the Company participated in INSIDE’s preferred stock offering and invested $3,936 in INSIDE. This represents an approximate 3% level of ownership in INSIDE. This equity investment provides no decision-making rights that are significant to the economic performance of INSIDE. Atmel is an equity holder that is shielded from economic losses and does not participate fully in INSIDE’s residual economics. Accordingly, Atmel has concluded that its interest in INSIDE is a variable interest entity (“VIE”). A VIE must be consolidated if Atmel is its primary beneficiary, which has the power to direct the activities that most significantly impact the VIE’s economic performance or the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In determining whether the Company is the primary beneficiary, the Company identified the significant activities and the parties that have the power to direct them, determined the equity, profit and loss participation, and reviewed the funding and operating agreements. Based on the above factors, Atmel determined that it is not the primary beneficiary and hence will not consolidate the VIE. As part of the sale, Atmel entered into the above agreements with INSIDE. The Company’s maximum exposure related to these agreements is not expected to be significantly in excess of the amounts recorded and the Company does not intend to provide any other support to the VIE, financial or otherwise.

     The sale of the SMS business unit does not qualify as discontinued operations as it does not meet the requirement to be considered a component of an entity.

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Rousset, France

     On June 23, 2010, the Company completed the sale of its manufacturing operations in Rousset, France to LFoundry GmbH (“LFoundry”). Under the terms of the agreement, the Company transferred manufacturing assets and employee liabilities to the buyer in return for nominal cash consideration. In connection with the sale, the Company entered into certain other ancillary agreements, including a Manufacturing Services Agreement (“MSA”) in which the Company will purchase wafers from LFoundry for four years following the closing on a “take-or-pay” basis. Upon closing of this transaction, the Company recorded a loss on sale of $94,052, which is summarized in the following table:

	Three Months Ended
	June 30,
(in thousands)	2010
Net assets transferred	$	61,646
Fair value of Manufacturing Services Agreement		92,417
Currency translation adjustment		(97,367	)
Severance cost liability		27,840
Transition services		4,746
Selling costs		3,173
Other related costs		1,597
Loss on Sale of Assets	$	94,052

     In connection with the sale of the manufacturing operations, the Company transferred assets and liabilities specific to the manufacturing operations totaling $61,646 to LFoundry, resulting in a working capital adjustment to be received from LFoundry of $1,597.

     As future wafer purchases under the MSA were negotiated at pricing above their fair value when compared to current pricing available from third-party foundries, the Company recorded a liability in conjunction with the sale, representing the present value of the unfavorable purchase commitment. The Company determined that the difference between the contract prices and market prices over the term of the agreement totaled $103,660. The present value of this liability, using a discount rate of 7%, which was based on a rate for unsecured subordinated debt similar to the Company’s, was determined to be $92,417, and has been included in the loss on sale. The gross value of the MSA will be recognized as a credit to cost of revenues over the term of the MSA as the wafers are purchased and the present value discount of $11,243 will be recognized as interest expense over the same term.

     The sale of the Rousset, France manufacturing operations resulted in the substantial liquidation of the Company’s investment in its European manufacturing facilities, and accordingly, the Company recorded a gain of $97,367 related to CTA balance that was previously recorded within stockholders’ equity, as the Company concluded, based on guidance related to foreign currency, that it should similarly release all remaining related currency translation adjustments.

     Also, as part of the sale, the Company agreed to reimburse LFoundry for severance costs expected to be incurred subsequent to the sale. The Company entered into an escrow agreement in which the Company agreed to remit funds to LFoundry for the required benefits and payments to those employees who are determined to be part of the approved departure plan. The Company recorded a liability of $27,840 as a component of the loss on sale, which represents management’s best estimate of the severance amount payable under this arrangement, and which is expected to be paid by December 31, 2010.

     As part of the sale of the manufacturing operations, the Company incurred $4,746 in software/hardware and consulting costs to set up a separate, independent IT infrastructure for LFoundry. These costs were incurred based on negotiation with LFoundry, provided no benefit to the Company, and would not have been incurred if the Company was not selling the manufacturing operations. Therefore, the direct and incremental costs associated with these services were recorded as part of the loss on sale. The Company also incurred other costs related to the sale of $1,597, which included performance-based bonuses of $497 for certain employees (no executive officers were included), related to the completion of the sale of the Rousset manufacturing operations to LFoundry.

     The Company also incurred direct and incremental selling costs of $3,173, which represented broker commissions and legal fees associated with the sale to LFoundry.

     The Company has retained an equity interest in the manufacturing operations (the “entity”) sold to LFoundry which provides limited protective rights and no decision-making rights that are significant to the economic performance of the entity. The Company is an equity holder that is shielded from economic losses and does not participate fully in the entity’s residual economics, accordingly, the Company has concluded that its interest in the entity is a VIE. A VIE must be consolidated if the Company is its primary

25

beneficiary, which has the power to direct the activities that most significantly impact the VIE’s economic performance or the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In determining whether the Company is the primary beneficiary, it identified the significant activities and the parties that have the power to direct them, determined the equity, profit and loss participation, and reviewed the funding and operating agreements. Based on the above factors, the Company determined that it is not the primary beneficiary and hence will not consolidate the VIE. As part of the sale, the Company entered into a wafer supply agreement, an arrangement to reimburse employee severance costs that LFoundry may incur, and has leased land and a building to LFoundry. The Company’s maximum exposure related to these arrangements is not expected to be significantly in excess of the amounts recorded and it does not intend to provide any other support to the VIE, financial or otherwise.

Note 13 RESTRUCTURING CHARGES

     The following table summarizes the activity related to the accrual for restructuring charges detailed by event in the three and nine months ended September 30, 2010 and 2009.

	January 1,							Currency			March 31,							Currency			June 30,							Currency		September 30,
	2010							Translation			2010							Translation			2010							Translation		2010
	Accrual		Charges		Payments			Adjustment			Accrual		Charges		Payments			Adjustment			Accrual		Charges		Payments			Adjustment		Accrual
	(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	1,592	$	—	$	—		$	—		$	1,592	$	—	$	—		$	—		$	1,592	$	—		—			—	$	1,592	(2)
Second quarter of 2008
Employee termination costs		4		—		—			(1	)		3		—		—			—			3		—		—			—		3	(1)
Third quarter of 2008
Employee termination costs		557		—		—			(37	)		520		—		—			(30	)		490		—		—			20		510	(1)
First quarter of 2009
Employee termination costs		—		969		(398	)		—			571		11		(184	)		(39	)		359		6		(201	)		7		171	(1)
Other restructuring charges		318		—		(46	)		—			272		—		(45	)		—			227		—		(45	)		—		182	(1)
Second quarter of 2010
Employee termination costs		—		—		—			—			—		1,603		—			(76	)		1,527		1,074		(1,888	)		77		790	(1)
Total 2010 activity	$	2,471	$	969	$	(444	)	$	(38	)	$	2,958	$	1,614	$	(229	)	$	(145	)	$	4,198	$	1,080	$	(2,134	)	$	104	$	3,248

(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 September 30, 2011.
(2)	Relates to a contractual obligation, which is currently subject to litigation.

	January 1,							Currency			March 31,								Currency		June 30,							Currency			September 30,
	2009							Translation			2009		Charges/						Translation		2009							Translation			2009
	Accrual		Charges		Payments			Adjustment			Accrual		(Credits)			Payments			Adjustment		Accrual		Charges		Payments			Adjustment			Accrual
	(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	1,592	$	—	$	—		$	—		$	1,592	$	—		$	—		$	—	$	1,592	$	—	$	—		$	—		$	1,592
Fourth quarter of 2007
Other restructuring charges		218		32		(81	)		(2	)		167		104			(125	)		12		158		334		(492	)		—			—
Second quarter of 2008
Employee termination costs		235		42		(220	)		(10	)		47		4			(34	)		3		20		12		(19	)		1			14
Third quarter of 2008
Employee termination costs		17,575		226		(10,579	)		(1,028	)		6,194		(441	)		(3,971	)		125		1,907		137		(1,402	)		32			674
Fouth quarter of 2008
Employee termination costs		3,438		567		(2,854	)		(10	)		1,141		59			(1,145	)		6		61		—		(61	)		—			—
First quarter of 2009
Employee termination costs		—		1,485		(37	)		(11	)		1,437		(83	)		(520	)		205		1,039		108		(1,047	)		(16	)		84
Second quarter of 2009
Employee termination costs		—		—		—			—			—		2,827			(2,777	)		—		50		—		(50	)		—			—
Third quarter of 2009
Employee termination costs		—		—		—			—			—		—			—			—		—		200		(200	)		—			—
Other restructuring charges		—		—		—			—			—		—			—							389		(26	)		—			363
Total 2009 activity	$	23,058	$	2,352	$	(13,771	)	$	(1,061	)	$	10,578	$	2,470		$	(8,572	)	$	351	$	4,827	$	1,180	$	(3,297	)	$	17		$	2,727

2010 Restructuring Charges

     In the three and nine months ended September 30, 2010, the Company incurred restructuring charges of $1,080 and $3,663 consisting of the following:

• Charges of $1,080 and $3,663 in the three and nine months ended September 30, 2010, respectively, related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities.

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2009 Restructuring Charges

     In the three and nine months ended September 30, 2009, the Company continued to implement the restructuring initiatives announced in 2008 and 2009 that are discussed below and incurred restructuring charges of $1,180 and $6,002, respectively. The charges relating to this initiative consist of the following:

• Net charges of $457 and $5,143 in the three and nine months ended September 30, 2009, respectively, related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities.

• Charges of $723 and $859 in the three and nine months ended September 30, 2009, respectively, related to facility closure costs.

Note 14 NET INCOME (LOSS) PER SHARE

     Basic net income (loss) per share is calculated by using the weighted-average number of common shares outstanding during that period. Diluted net income (loss) 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, contingent issuable shares for all periods and accrued issuance of shares under employee stock purchase plan. 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. Income or loss from operations is 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 (loss) per share is provided as follows:

	Three Months Ended					Nine Months Ended
	September 30,		September 30,			September 30,		September 30,
	2010		2009			2010		2009
	(in thousands, except per share data)
Net income (loss)	$	219,812	$	(17,450	)	$	199,984	$	(26,231	)
Weighted-average shares — basic		459,588		452,322			458,872		450,970
Incremental shares and share equivalents		8,585		—			7,073		—
Weighted-average shares — diluted		468,173		452,322			465,945		450,970
Net income (loss) per share:
Basic
Net income (loss) per share — basic	$	0.48	$	(0.04	)	$	0.44	$	(0.06	)
Diluted
Net income (loss) per share — diluted	$	0.47	$	(0.04	)	$	0.43	$	(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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2010		2009		2010		2009
	(in thousands)
Employee stock options and restricted stock units outstanding		41,829		49,229		41,252		52,663

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Note 15 INTEREST AND OTHER INCOME (EXPENSE), NET

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

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2009			2010			2009
	(in thousands)
Interest and other income	$	535		$	658		$	3,120		$	1,439
Interest expense		(2,577	)		(1,530	)		(4,934	)		(5,075	)
Foreign exchange transaction gains (losses)		7,572			(1,440	)		14,470			(6,760	)
Total	$	5,530		$	(2,312	)	$	12,656		$	(10,396	)

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Quarterly 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 Quarterly Report and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2009.

FORWARD LOOKING STATEMENTS

     You should read the following discussion 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 2010, our gross margins and product mix anticipated revenues by segment and by product, operating expenses and capital expenditures, cash flow and liquidity measures, factory utilization, charges related to and the effect of our strategic transactions, restructuring, performance restricted stock units, and other strategic efforts, and our expectations regarding tax matters and 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. Generally, the words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-Q.

OVERVIEW

     We are a worldwide leader in the design and manufacture of microcontrollers, capacitive touch solutions, advanced logic, mixed-signal, nonvolatile memory and radio frequency (RF) components. Leveraging one of the industry’s broadest intellectual property (IP) technology portfolios, Atmel is able to provide the electronics industry with complete system solutions focused on industrial, consumer, communications, computing and automotive markets, and our solutions are used in products such as mobile handsets, automotive electronics, lighting, utility metering, global positioning systems (GPS) and battery power management. We design, develop, manufacture and sell our products.

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

     Our net revenues increased to $444 million in the three months ended September 30, 2010, an increase of 40% or $126 million from $318 million in net revenues for the three months ended September 30, 2009. Our net revenues increased to $1,186 million in the nine months ended September 30, 2010, an increase of 36% or $312 million, from $874 million in the nine months ended September 30, 2009. Demand in the third quarter exceeded our forecast primarily due to stronger than expected orders for 8-bit AVR microcontrollers, 32-bit ARM-based microcontrollers, and our new maXTouch microcontrollers. We continued to see significant adoption of our industry leading maXTouch microcontrollers with high volume Android mobile phone customers. Our Microcontroller segment revenues increased 113% over revenues in the third quarter of 2009.

     Gross margin rose to 46.8% and 42.3% in the three and nine months ended September 30, 2010, respectively, compared to 31.1% and 32.7% in the three and nine months ended September 30, 2009, respectively. Gross margins in the three and nine months ended September 30, 2010 were positively impacted by higher shipment levels, improved factory loading, and a more favorable mix of higher margin microcontroller products included in our net revenues. During the quarter, we increased purchases of wafers from external foundries at lower costs compared to historical costs, which also contributed to improved gross margins.

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     We continue to take significant actions to improve operational efficiencies, reduce costs and shift our focus towards microcontroller markets. During the third quarter of 2010, we completed the sale of our Secure Microcontroller Solutions (SMS) business to INSIDE Contactless (INSIDE). Under the terms of the agreement, we transferred manufacturing assets and employment obligations to the buyer in return for $32 million cash consideration, net of working capital adjustment, of which $5 million was placed in escrow. Net of all closing and other costs, we recorded a loss on the sale of $6 million. Our third quarter results include approximately $27 million of revenue from the SMS business. Our year-to-date results included approximately $79 million of revenue from the SMS business.

     In addition, we incurred restructuring charges in the three and nine months ended September 30, 2010, of $1 million and $4 million, respectively, compared to charges of $1 million and $6 million, in the three and nine months ended September 30, 2009, respectively. The restructuring charges resulted from headcount reductions and facility closure costs, primarily related to operational re-alignment and cost reduction efforts in our French operations following the sale of our wafer fabrication facility in June 2010. We may incur further restructuring charges in future periods as we rationalize our remaining operations.

     During the third quarter, we completed negotiations and concluded our IRS audit for the years 2000 — 2003. The IRS had previously assessed significant additional income taxes, primarily related to transfer pricing, which were resolved through the tax appeals process. As a result of the settlement, we recorded a tax benefit of $150 million. The tax benefit related primarily to release of previously accrued tax reserves, accrued penalties and interest, and a refund receivable from the carryback of tax attributes to tax years prior to the audit. Benefit from income taxes totaled $137 million and $174 million in the three and nine months ended September 30, 2010, respectively, compared to a provision for income taxes of $0.4 million in the three months ended September 30, 2009 and a benefit of $37 million in the nine months ended September 30, 2009.

     Cash provided by operating activities was $215 million and $67 million in the nine months ended September 30, 2010 and 2009, respectively. Our cash, cash equivalents and short-term investments increased to $597 million at September 30, 2010, compared to $476 million at December 31, 2009. Payments for capital expenditures totaled $56 million in the nine months ended September 30, 2010, compared to $15 million in the nine months ended September 30, 2009. We repurchased 7 million shares during the third quarter, utilizing $41 million in cash following the authorization by our Board of Directors in August 2010 to repurchase up to $200 million in Atmel common stock in the open market depending upon market conditions and other factors.

RESULTS OF CONTINUING OPERATIONS

	Three Months Ended									Nine Months Ended
	September 30, 2010				September 30, 2009					September 30, 2010				September 30, 2009
	(in thousands, except percentage of net revenues)
Net revenues	$	444,344	100.0	%	$	317,730		100.0	%	$	1,186,254	100.0	%	$	873,765		100.0	%
Gross profit		208,119	46.8	%		98,739		31.1	%		501,539	42.3	%		285,968		32.7	%
Research and development		56,277	12.7	%		51,460		16.2	%		176,664	14.9	%		156,203		17.9	%
Selling, general and administrative		65,940	14.8	%		56,974		17.9	%		194,608	16.4	%		162,774		18.6	%
Acquisition-related charges		1,167	0.3	%		3,604		1.1	%		433	0.0	%		12,745		1.5	%
Charges for grant repayments		236	0.1	%		264		0.1	%		747	0.1	%		1,278		0.1	%
Restructuring charges		1,080	0.2	%		1,180		0.4	%		3,663	0.3	%		6,002		0.7	%
Asset impairment charges		—	0.0	%		—		0.0	%		11,922	1.0	%		—		0.0	%
Loss (gain) on sale of assets		5,715	1.3	%		—		0.0	%		99,767	8.4	%		(164	)	0.0	%
Income (loss) from operations	$	77,704	17.5	%	$	(14,743	)	-4.6	%	$	13,735	1.2	%	$	(52,870	)	-6.1	%

Net Revenues

     Our net revenues increased to $444 million in the three months ended September 30, 2010, an increase of 40% or $126 million from $318 million in net revenues for the three months ended September 30, 2009. Our net revenues increased to $1,186 million in the nine months ended September 30, 2010, an increase of 36% or $312 million, from $874 million in the nine months ended September 30, 2009. Demand in the third quarter exceeded our forecast primarily due to stronger than expected orders for 8-bit AVR microcontrollers, 32-bit ARM-based microcontrollers, and our new maXTouch microcontrollers. We continued to see significant adoption of our industry leading maXTouch microcontrollers with high volume Android mobile phone customers. Our combined Microcontroller segment revenues increased 113% (58% of total revenues), compared to revenues in the third quarter of 2009 (38% of total revenues).

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     Revenues for our RFA segment increased 17% in the third quarter of 2010, compared to the same quarter of 2009, but decreased in our ASIC and Non-volatile Memory segments, declining 4% and 16%, respectively, compared to the same quarter of 2009. Shipments of ASIC and Memory products were unfavorably impacted by limited production capacity, as we allocated wafers to microcontroller customers in an effort to meet significantly increased demand during the quarter. In order to support ASIC and Memory customers we have increased orders for wafers from outside foundries. Based on current market conditions, our foundry partners do not expect to be able to deliver to us significant additional wafer output until the first half of 2011.

     During the third quarter of 2010, we completed the sale of our SMS business to INSIDE. Third quarter revenues for our ASIC segment include approximately $27 million of revenue from the SMS business. Year to date revenues for our ASIC segment included approximately $79 million of revenue from the SMS business. The sale closed on September 30, 2010, and as a result, no revenues from the SMS business will be included in our operating results after this date.

     Average exchange rates utilized to translate foreign currency revenues and expenses in Euro were approximately 1.27 and 1.41 Euro to the dollar in the three months ended September 30, 2010 and 2009, respectively, and 1.32 and 1.36 Euro to the dollar in the nine months ended September 30, 2010 and 2009, respectively. Our net revenues for the three months ended September 30, 2010 would have been approximately $10 million higher had the average exchange rate in the current quarter remained the same as the rate in effect in the three months ended September 30, 2009. Our net revenues for the nine months ended September 30, 2010 would have been approximately $7 million higher had the average exchange rate in the current nine months remained the same as the rate in effect in the nine months ended September 30, 2009.

Net Revenues — By Operating Segment

     Our net revenues by operating segment are summarized as follows:

	Three Months Ended
	September 30,		September 30,
	2010		2009		Change			% Change
	(in thousands, except for percentages)
Microcontroller	$	255,546	$	120,042	$	135,504			113	%
Nonvolatile Memory		66,473		78,796		(12,323	)		-16	%
RF and Automotive		45,179		38,525		6,654			17	%
ASIC		77,146		80,367		(3,221	)		-4	%
Total net revenues	$	444,344	$	317,730	$	126,614			40	%

	Nine Months Ended
	September 30,		September 30,
	2010		2009		Change			% Change
	(in thousands, except for percentages)
Microcontroller	$	604,054	$	318,702	$	285,352			90	%
Nonvolatile Memory		217,527		211,961		5,566			3	%
RF and Automotive		136,934		106,497		30,437			29	%
ASIC		227,739		236,605		(8,866	)		-4	%
Total net revenues	$	1,186,254	$	873,765	$	312,489			36	%

Microcontroller

     Microcontroller segment net revenues increased 113% to $256 million in the three months ended September 30, 2010 from $120 million in the three months ended September 30, 2009. Microcontroller segment net revenues increased 90% to $604 million in the nine months ended September 30, 2010 from $319 million in the nine months ended September 30, 2009. The increase in net revenues was primarily related to increased demand from customers for 8-bit and 32-bit microcontrollers which increased 69% and 75%, respectively, for the three months ended September 30, 2010, compared to the three months ended September 30, 2009 and increased 63% and 85%, respectively, in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009.

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     Demand in the third quarter exceeded our forecast primarily due to stronger than expected orders for 8-bit AVR microcontrollers, 32-bit ARM-based microcontrollers, and our new maXTouch microcontrollers. Microcontroller demand was especially strong in the industrial, smart energy and consumer sectors during both the three and nine months ended September 30, 2010. Revenue also increased for our touch products, as we continued shipments of our new maXTouch product line of touch screen-related microcontrollers primarily to mobile phone customers, which is included within the 8-bit Microcontroller family. We continue to see significant adoption of our industry leading maXTouch microcontrollers by our high volume Android mobile phone customers.

Nonvolatile Memory

     Nonvolatile memory segment net revenues decreased 16% to $66 million in the three months ended September 30, 2010 from $79 million in the three months ended September 30, 2009. Nonvolatile memory segment net revenues increased 3% to $218 million in the nine months ended September 30, 2010 from $212 million in the nine months ended September 30, 2009. The decrease in net revenues in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 was primarily related to lower shipments of Serial EE memory products. While demand for memory products remained strong during the period, shipments of memory products were unfavorably impacted by limited production capacity resulting from wafer allocation to microcontroller customers to satisfy significant demand. Although we have increased orders for additional memory wafers from outside foundries, based on current market conditions, our foundry partners do not expect to be able to deliver to us significant additional wafer output until the first half of 2011.

RF and Automotive

     RF and Automotive segment net revenues increased 17% to $45 million in the three months ended September 30, 2010 from $39 million in the three months ended September 30, 2009. RF and Automotive segment net revenues increased 29% to $137 million in the nine months ended September 30, 2010 from $106 million in the nine months ended September 30, 2009. The increase in net revenues was primarily related to improved demand in automotive markets. Our high voltage products increased 30% and 53% in the three and nine months ended September 30, 2010 over the prior year, respectively, driven by higher shipments for vehicle networking products (LIN/IVN applications). In addition, demand increased for RF, Foundry, and GPS products compared to the same quarter of the prior year as automotive and consumer markets continue to recover in 2010.

ASIC

     ASIC segment net revenues decreased 4% to $77 million in the three months ended September 30, 2010 from $80 million in the three months ended September 30, 2009. ASIC segment net revenues decreased 4% to $228 million in the nine months ended September 30, 2010 from $237 million in the nine months ended September 30, 2009. ASIC segment net revenues were unfavorably impacted by limited production capacity, resulting from wafer allocation to microcontroller customers in an effort to satisfy significant demand.

     SmartCard shipments decreased 5% and 9%, for the three and nine months ended September 30, 2010, compared to the three and nine months ended September 30, 2009, respectively. Net revenues for our CASP business also decreased 19% and 24% for the three and nine months ended September 30, 2010, compared to the three and nine months ended September 30, 2009. Net revenues for these product families were unfavorably impacted by limited production capacity, as we allocated wafers to microcontroller customers in an effort to meet significantly increased demand during the quarter. The Aerospace business also declined 13% in the three months ended September 30, 2010, compared to the three months ended September 30, 2009, but remained flat in the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. While demand for Aerospace products remains strong, we remain supply-chain constrained due to the very specialized requirements of these products.

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Net Revenues by Geographic Area

     Our net revenues by geographic areas in the three and nine months ended September 30, 2010, compared to the three and nine months ended September 30, 2009 are summarized as follows (revenues are attributed to countries based on delivery locations; see Note 11 of Notes to Condensed Consolidated Financial Statements for further discussion):

	Three Months Ended
	September 30,		September 30,
	2010		2009		Change		% Change
	(in thousands, except for percentages)
Asia	$	257,352	$	162,874	$	94,478		58	%
Europe		107,007		93,076		13,931		15	%
United States		68,964		57,438		11,526		20	%
Other*		11,021		4,342		6,679		154	%
Total net revenues	$	444,344	$	317,730	$	126,614		40	%

	Nine Months Ended
	September 30,		September 30,
	2010		2009		Change		% Change
	(in thousands, except for percentages)
Asia	$	640,271	$	435,809	$	204,462		47	%
Europe		327,947		269,518		58,429		22	%
United States		194,348		155,856		38,492		25	%
Other*		23,688		12,582		11,106		88	%
Total net revenues	$	1,186,254	$	873,765	$	312,489		36	%

* Primarily includes South Africa, and Central and South America

     Net revenues outside the United States accounted for 84% and 83% of our net revenues in the three and nine months ended September 30, 2010, compared to 82% in each of the three and nine months ended September 30, 2009.

     Our net revenues in Asia increased $94 million, or 58%, in the three and nine months ended September 30, 2010, compared to the three and nine months ended September 30, 2009, and increased by $204 million, or 47%, in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The increase in the three and nine months ended September 30, 2010, compared to the three and nine months ended September 30, 2009 for the region was primarily due to higher shipments of memory and microcontroller products as a result of improved demand in customer end markets for mobile phone and consumer-based products.

     During the third quarter of 2010, we negotiated new sales terms with our independent distributors in Asia, excluding Japan. Under the new terms, these distributors are provided with certain limited stock rotation and price protection rights. These new terms also allow us to invoice these distributors at full list price upon shipment, and issue a rebate, or “credit” once the product has been sold to the end customer and the distributor has met certain reporting requirements. Our previous sales terms with Asia distributors did not offer these rights to distributors, and our practice was to invoice at a price net of any rebates. As a result, we have historically recognized revenue for Asia distributors at the point of shipment (related to transfer of title). After review of pricing, rebate, and quotation related information under the new sales agreements, we concluded that we could reliably estimate future estimated claims, and as a result, we did not change our revenue recognition model. We continue to recognize revenue at point of shipment, utilizing amounts invoiced less estimated future claims. The objective of this conversion is achieve improved gross margins on shipments to Asian distribution customers through closer monitoring of end-customer pricing, design registration for microcontroller products, and global alignment of pricing across all regions.

     Our net revenues in Europe increased $14 million, or 15%, in the three months ended September 30, 2010, compared to the three months ended September 30, 2009, and increased by $58 million, or 22%, in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The increase in the three and nine months ended September 30, 2010, compared to the three and nine months ended September 30, 2009 for the region was primarily a result of the improved automotive and industrial markets, offset in part by declining demand in Smart Card, CBIC, and Aerospace products when compared to the three and nine months ended September 30, 2009.

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     Our net revenues in the United States increased by $12 million, or 20%, in the three months ended September 30, 2010, compared to the three months ended September 30, 2009, and increased by $38 million, or 25%, in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The increase in the three and nine months ended September 30, 2010 from the three and nine months ended September 30, 2009 for the region was primarily a result of higher demand for smart metering and consumer-based products.

Revenues and Costs — Impact from Changes to Foreign Exchange Rates

     Changes in foreign exchange rates have historically had a significant impact on our net revenues and operating costs. Net revenues denominated in foreign currencies were 20% and 24% of our total net revenues in the three months ended September 30, 2010 and 2009, respectively, and 20% and 24% of our total net revenues in the nine months ended September 30, 2010 and 2009, respectively. Costs denominated in foreign currencies were 23% and 36% of our total costs in the three months ended September 30, 2010 and 2009, respectively, and 31% and 39% of our total costs in the nine months ended September 30, 2010 and 2009, respectively.

     Net revenues denominated in Euro were 20% and 23% in the three months ended September 30, 2010 and 2009, respectively, and 20% and 23% in the nine months ended September 30, 2010 and 2009, respectively. Costs denominated in Euro were 20% and 32% of our total costs in the three months ended September 30, 2010 and 2009, respectively, and 27% and 35% in the nine months ended September 30, 2010 and 2009, respectively.

     Net revenues included 71 million Euro and 53 million Euro in the three months ended September 30, 2010 and 2009, respectively and 179 million in Euro and 151 million Euro in the nine months ended September 30, 2010 and 2009, respectively. Operating expenses included 56 million Euro and 74 million Euro in the three months ended September 30, 2010 and 2009, respectively, and 216 million Euro and 235 million Euro in the nine months ended September 30, 2010 and 2009, respectively.

     Average exchange rates utilized to translate foreign currency revenues and expenses in Euro were approximately 1.27 and 1.41 Euro to the dollar in the three months ended September 30, 2010 and 2009, respectively, and 1.32 and 1.36 Euro to the dollar in the nine months ended September 30, 2010 and 2009, respectively.

     In the three months ended September 30, 2010, changes in foreign exchange rates had minimal impact to our operating results. Our net revenues for the three months ended September 30, 2010 would have been approximately $10 million higher had the average exchange rate in the current quarter remained the same as the rate in effect in the three months ended September 30, 2009. In addition, in the three months ended September 30, 2010, our operating expenses would have been approximately $9 million higher (relating to an increase in cost of revenues of $4 million; an increase in research and development expenses of $3 million; and an increase in sales, general and administrative expenses of $2 million). Therefore, our income from operations in the three months ended September 30, 2010 would have been approximately $1 million higher had exchange rates in the three months ended September 30, 2010 remained unchanged from the three months ended September 30, 2009.

     In the nine months ended September 30, 2010, changes in foreign exchange rates had an unfavorable impact on our operating results. Our net revenues for the nine months ended September 30, 2010 would have been approximately $7 million higher had the average exchange rate in the current nine-month period remained the same as the rate in effect in the nine months ended September 30, 2009. However, in the nine months ended September 30, 2010, our operating expenses would have been approximately $0.2 million higher (relating to an increase in cost of revenues of $0.6 million; a decrease in research and development expense of $0.5 million; and an increase of $0.1 million to sales, general and administrative expense). Therefore, our income from operations in the nine months ended September 30, 2010 would have been approximately $7 million higher had exchange rates in the nine months ended September 30, 2010 remained unchanged from the nine months ended September 30, 2009.

     Following the sale of our wafer fabrication facility in Rousset, France in the second quarter of 2010, we began purchasing wafers from the buyer (LFoundry) in US dollars, significantly reducing our spending in foreign currency, specifically the Euro. The combination of lower Euro spending and higher Euro revenues from improved European customer markets resulted in our foreign currency revenues nearly matching our foreign currency spending during the third quarter of 2010, and we expect a similar result through the end of this year. However, there can be no assurance that we will not experience an unfavorable impact to revenues, gross margins, or operating results due to changes in foreign exchanges rates in future periods.

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Cost of Revenues and Gross Margin

     Gross margin rose to 46.8% and 42.3% in the three and nine months ended September 30, 2010, respectively, compared to 31.1% and 32.7% in the three and nine months ended September 30, 2009, respectively. Gross margins in the three and nine months ended September 30, 2010 were positively impacted by higher overall shipment levels, lower manufacturing costs as a result of higher factory loading at our wafer fabrication facilities, and a more favorable mix of higher margin microcontroller products included in our net revenues.

     In the nine months ended September 30, 2010, we manufactured approximately 73% of our products in our own wafer fabrication facilities compared to 89% in the nine months ended September 30, 2009. As a result of the sale of our Rousset, France wafer fabrication facility in June 2010, we have significantly reduced the level of wafer deliveries obtained from internal manufacturing operations, consistent with our strategy to leverage outside foundries in the future to reduce costs and lower investment risk. During the third quarter of 2010, we manufactured approximately 53% of our wafers from our own wafer fabrication facilities. We expect to further reduce this level of supply from internal sources in future quarters.

     Our cost of revenues includes the costs of wafer fabrication, assembly and test operations, changes in inventory reserves, royalty expense, freight costs and stock compensation expense. 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.

Research and Development

     Research and development (“R&D”) expenses increased 9%, or $5 million, to $56 million in the three months ended September 30, 2010 from $51 million in the three months ended September 30, 2009. R&D expenses increased 13%, or $20 million, to $177 million in the nine months ended September 30, 2010 from $156 million in the nine months ended September 30, 2009.

     R&D expenses in the three months ended September 30, 2010, compared to the three months ended September 30, 2009, increased primarily due to increased salaries of $3 million related to additional product development headcount, increased stock-based compensation of $1 million related to stock-based incentive programs, and higher depreciation expenses of $1 million. R&D expenses in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009, increased primarily due to increased salaries of $13 million related to additional product development headcount, increased stock-based compensation of $5 million related to stock-based incentive programs, and higher depreciation expenses of $3 million.

     R&D expenses, including items described above, in the three months ended September 30, 2010, were favorably impacted by approximately $3 million and in the nine months ended September 30, 2010, were unfavorably impacted by approximately $0.5 million, due to foreign exchange rate fluctuations, compared to rates in effect and the related expenses for each of the three and nine months ended September 30, 2009. As a percentage of net revenues, R&D expenses totaled 13% and 16% in the three months ended September 30, 2010 and 2009, respectively, and 15% and 18% in the nine months ended September 30, 2010 and 2009, respectively.

     We receive R&D grants from various European research organizations, the benefit of which is recognized as an offset to related research and development costs. We recognized benefits of $1 million and $2 million in the three months ended September 30, 2010 and 2009, respectively and $3 million and $8 million in the nine months ended September 30, 2010 and 2009, respectively.

     Our internally developed process technologies are an important part of new product development. We continue to invest in developing process technologies emphasizing wireless, high voltage, analog, digital, and embedded memory manufacturing processes. Our technology development groups, in partnership with certain external foundries, are developing new and enhanced fabrication processes, including architectures utilizing advanced processes at the 65 nanometer line width node. This investment allows us to bring new products to market faster, add innovative features and achieve performance improvements. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve.

Selling, General and Administrative

     Selling, general and administrative (“SG&A”) expenses increased 16%, or $9 million, to $66 million in the three months ended September 30, 2010 from $57 million in the three months ended September 30, 2009. SG&A expenses increased 20%, or $32 million, to $195 million in the nine months ended September 30, 2010 from $163 million in the nine months ended September 30, 2009.

     SG&A expenses in the three months ended September 30, 2010, compared to the three months ended September 30, 2009, increased primarily due to increased employee-related costs of $8 million, increases in stock-based compensation of $3 million and

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outside services of $3 million, offset by a decrease in legal fees of $6 million. SG&A expenses in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009, increased primarily due to increased employee-related costs of $14 million and increases in stock-based compensation of $17 million related to stock-based incentive programs. Employee-related costs increased in 2010 due to higher revenue related selling costs, increased headcount supporting sales, marketing, and administrative functions, and reduction of temporary cost savings measures imposed in 2009 while business levels remained below prior year levels.

     SG&A expenses, including items described above, in each of the three and nine months ended September 30, 2010, were not significantly impacted due to foreign exchange rate fluctuations, compared to rates in effect and the related expenses incurred in the three and nine months ended September 30, 2009.

     As a percentage of net revenues, SG&A expenses totaled 15% and 18% of net revenues in the three months ended September 30, 2010 and 2009, respectively, and 16% and 19% in the nine months ended September 30, 2010 and 2009, respectively.

Stock-Based Compensation

     Stock-based compensation cost is measured at the measurement date (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. The fair value of a restricted stock unit is equivalent to the market price of our common stock on the measurement date.

     The following table summarizes the distribution of stock-based compensation expense related to employee stock options, restricted stock units and employee stock purchases in the three and nine months ended September 30, 2010 and 2009:

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2010		2009		2010		2009
			(in thousands)
Cost of revenues	$	2,093	$	1,136	$	5,957	$	3,233
Research and development		4,260		2,979		13,845		8,434
Selling, general and administrative		6,896		3,469		25,069		7,711
Total stock-based compensation expense, before income taxes		13,249		7,584		44,871		19,378
Tax benefit		—		—		—		—
Total stock-based compensation expense, net of income taxes	$	13,249	$	7,584	$	44,871	$	19,378

     The table above excludes stock-based compensation expense (credit) of $0 and $2 million in the three months ended September 30, 2010 and 2009, respectively, and $(3) million and $6 million in the nine months ended September 30, 2010 and 2009, respectively, for former Quantum executives related to the acquisition, which are classified within acquisition-related charges in the condensed consolidated statements of operations.

     We have issued performance-based restricted stock units to eligible employees for a maximum of 9 million shares of our common stock under the 2005 Stock Plan. These restricted stock units vest only if we achieve all, or a portion of, certain quarterly operating margin performance criteria over the performance period of July 1, 2008 to December 31, 2012. We issued awards for up to 9.9 million units during 2008. In June 2009, the performance period was extended by one additional year to December 31, 2012 which was considered a modification to the performance-based restricted stock units. During the three and nine months ended September 30, 2010, we issued additional performance-based restricted stock units to eligible employees for up to 0.2 million and 0.5 million shares, respectively, of our common stock.

     Until restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding. We recognize the stock-based compensation expense for our performance-based restricted stock units when we believe it is probable that we will achieve the performance criteria. The awards vest once the performance criteria are met. If the performance goals are unlikely to be met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the performance period and is reduced for estimated forfeitures. In the three months ended September 30, 2010, as a result of significant improvements in our current and forecast operating results and customer order status, we revised our estimates of our ability to meet the performance plan criteria, such that they will be achieved earlier than previously estimated and at a higher vesting level. We recorded total stock-based compensation

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expense related to performance-based restricted stock units of $4 million and $21 million in the three and nine months ended September 30, 2010, respectively.

Operating Income (Loss) by Segment

	Three Months Ended					Nine Months Ended
	September 30,		September 30,			September 30,		September 30,
	2010		2009			2010		2009
	(in thousands)
Microcontroller	$	57,920	$	(5,612	)	$	93,614	$	(9,431	)
Nonvolatile Memory		15,052		685			27,475		3,466
RF and Automotive		4,932		(3,000	)		7,356		(7,904	)
ASIC		7,998		(1,768	)		1,822		(19,140	)
Total operating income (loss)	$	85,902	$	(9,695	)	$	130,267	$	(33,009	)

Microcontroller

     In the three and nine months ended September 30, 2010, Microcontroller segment operating profit increased to $58 million and $94 million, respectively, compared to an operating loss of $(6) million and $(9) million in the three and nine months ended September 30, 2009, respectively, driven by higher shipment levels, improved factory loading, and a more favorable mix of higher margin products included in net revenues.

Nonvolatile Memory

     In the three and nine months ended September 30, 2010, our Nonvolatile Memories operating profit was $15 million and $27 million, respectively, compared to operating profit of $1 million and $3 million in the three and nine months ended September 30, 2009, respectively. Despite reduced revenues, operating results improved significantly compared to the prior year as a result of stronger market conditions related to pricing as well as lower production costs from improved factory loading.

RF and Automotive

     In the three and nine months ended September 30, 2010, our RF and Automotive operating profit was $5 million and $7 million, respectively, compared to operating loss of $(3) million and $(8) million in the three and nine months ended September 30, 2009, respectively, primarily driven by increased shipments.

ASIC

     In the three and nine months ended September 30, 2010, our ASIC operating income was $8 million and $2 million, respectively, compared to operating losses of $2 million and $19 million in the three and nine months ended September 30, 2009, respectively. Despite reduced revenues, operating results improved significantly compared to the prior year as a result of stronger market conditions related to pricing as well as lower production costs from improved factory loading.

Charges for Grant Repayments

     In the three months ended September 30, 2010 and 2009, we recorded accrued interest of $0.2 million and $0.3 million, respectively. In the nine months ended September 30, 2010 and 2009, we recorded accrued interest of $0.7 million and $1 million, respectively. These charges are primarily related to interest on estimated grant repayment requirements for our former Greece facility and are recorded as charges for grant repayments on the condensed consolidated statements of operations.

     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. In addition, we may need to record charges to reverse grant benefits recorded in prior periods as a result of changes to previously committed plans for headcount, project

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spending, or capital investment at any of these specific locations. Certain grant repayments also require interest from the date funds were awarded. 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.

Acquisition-Related Charges

     We recorded total acquisition-related charges of $1 million and $4 million in the three months ended September 30, 2010 and 2009, respectively, and $0.4 million and $13 million in the nine months ended September 30, 2010 and 2009, respectively, related to the acquisition of Quantum Research Group Ltd. (“Quantum”), which is comprised of the following components:

     We recorded amortization of intangible assets of $1 million in each of the three months ended September 30, 2010 and 2009, respectively, and $3 million and $4 million in the nine months ended September 30, 2010 and 2009, respectively, associated with customer relationships, developed technology, trade name, non-compete agreements and backlog.

     We recorded no stock-based compensation expense for the three months ended September 30, 2010. We recorded stock-based compensation expense of $2 million in the three months ended September 30, 2009. We recorded a stock-based compensation credit of $3 million and an expense of $6 million in the nine months ended September 30, 2010 and 2009, respectively. These assets are amortized over three to five years.

     We estimate charges related to amortization of intangible assets will be approximately $1 million for the remaining quarter in 2010.

     In the three months ended March 31, 2010, we recorded a credit of $5 million related to the reversal of the expenses previously recorded for shares that were expected to be issued in March 2011 to a former executive of Quantum related to contingent employment through March 2011. The credit was recorded due to forfeiture as a result of a change in employment status.

     We made cash payments of $4 million and $11 million to the former Quantum employees in the three months ended March 31, 2010 and 2009.

Loss on Sale of Assets

     In the three and nine months ended September 30, 2010, we recorded a loss on sale of assets related to the sale of our Secure Microcontroller Solutions (“SMS”) business and our manufacturing facility in Rousset, France.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2010		2010
	(in thousands)
Secure Microcontroller Solutions	$	5,715	$	5,715
Rousset, France		—		94,052
Loss on Sale of Assets	$	5,715	$	99,767

Secure Microcontroller Solutions

     On September 30, 2010, we completed the sale of our SMS business to INSIDE, based in Aix-en-Provence, France. Under the terms of the agreement, we transferred certain assets and employee liabilities to INSIDE in return for cash consideration of $37 million, subject to a working capital adjustment. The cash proceeds of $5 million was deposited in escrow at closing, for a period of twenty months, subject to post closing claims. We may receive additional

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cash consideration of up to $21 million if certain financial targets are met in 2010 and 2011. In connection with the sale, we entered into other ancillary agreements. Upon closing of this transaction, we recorded a loss on sale of $6 million, which is summarized in the following table:

	Three Months Ended
	September 30,
(in thousands)	2010
Sales Price	$	37,000
Net assets transferred, including working capital		32,420
Release of currency translation adjustment		2,412
Selling costs		3,882
Other related costs		4,001
Loss on Sale of Assets	$	5,715

     In connection with the sale, we transferred net assets totaling $32 million to INSIDE.

     Our East Kilbride, UK facility was included in the assets transferred to INSIDE, resulting in the complete liquidation of our investment in this foreign entity and, as a result, we recorded a loss of $2 million related to the currency translation adjustment balance (“CTA balance”) that was previously recorded within stockholders’ equity.

     As part of the SMS sale, we incurred direct and incremental selling costs of $4 million, which represented broker commissions and legal fees. We also incurred a transfer fee of $1 million related to transferring a royalty agreement to INSIDE. These costs provided no benefit to us, and would not have been incurred if we were not selling the SMS business unit. Therefore, the direct and incremental costs associated with these services were recorded as part of the loss on sale. We also incurred other costs related to the sale of $3 million, which included performance-based bonuses of $1 million for certain employees (no executive officers were included), related to the completion of the sale.

     In connection with the SMS sale, we entered into an escrow agreement with INSIDE. According to the terms of the escrow agreement, $5 million of the sales price will be held in escrow a period of twenty months, from the date of sale for specific potential losses outlined in the escrow agreement. Upon termination of the escrow period, the escrow funds, less any validated claims, will be sent to us.

     INSIDE has entered into a three year supply agreement to source wafers from the fabrication facility in Rousset, France that we recently sold to LFoundry in the second quarter of 2010. Wafers purchased by INSIDE from LFoundry will reduce our future commitment our Wafer Supply Agreement with LFoundry.

     The SMS sale also provides INSIDE a royalty-based, non-exclusive license to certain business-related intellectual property in order to support the current SMS business and future product development.

Rousset, France

     On June 23, 2010, we completed the sale of our manufacturing operations in Rousset, France to LFoundry GmbH (“LFoundry”). Under the terms of the agreement, we transferred manufacturing assets and employee liabilities to the buyer in return for nominal cash consideration. In connection with the sale, we entered into certain other ancillary agreements, including a Manufacturing Services Agreement (“MSA”) in which

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we will purchase wafers from LFoundry for four years following the closing on a “take-or-pay” basis. Upon closing of this transaction, we recorded a loss on sale of $94 million which is summarized in the following table:

	Three Months Ended
	June 30,
(in thousands)	2010
Net assets transferred	$	61,646
Fair value of Manufacturing Services Agreement		92,417
Currency translation adjustment		(97,367	)
Severance cost liability		27,840
Transition services		4,746
Selling costs		3,173
Other related costs		1,597
Loss on Sale of Assets	$	94,052

     In connection with the sale of the manufacturing operations, we transferred assets and liabilities specific to the manufacturing operations totaling $62 million to LFoundry, resulting in a working capital adjustment to be received from LFoundry of $2 million.

     As future wafer purchases under the MSA were negotiated at pricing above their fair value when compared to current pricing available from third-party foundries, we recorded a liability in conjunction with the sale, representing the present value of the unfavorable purchase commitment. We determined that the difference between the contract prices and market prices over the term of the agreement totaled $104 million. The present value of this liability, using a discount rate of 7%, which was based on a rate for unsecured subordinated debt similar to ours, was determined to be $92 million, and has been included in the loss on sale. The gross value of the MSA will be recognized as a credit to cost of revenues over the term of the MSA as the wafers are purchased and the present value discount of $11 million will be recognized as interest expense over the same term.

     The sale of the Rousset, France manufacturing operations resulted in the substantial liquidation of our investment in our European manufacturing facilities, and accordingly, we recorded a gain of $97 million related to CTA balance that was previously recorded within stockholders’ equity, as we concluded, based on guidance related to foreign currency, that we should similarly release all remaining related currency translation adjustments.

     Also, as part of the sale, we agreed to reimburse LFoundry for severance costs expected to be incurred subsequent to the sale. We entered into an escrow agreement in which we agreed to remit funds to LFoundry for the required benefits and payments to those employees who are determined to be part of the approved departure plan. We recorded a liability of $28 million as a component of the loss on sale, which represents our best estimate of the severance amount payable under this arrangement, and which is expected to be paid by December 31, 2010.

     As part of the sale of the manufacturing operations, we incurred $5 million in software/hardware and consulting costs to set up a separate, independent IT infrastructure for LFoundry. These costs were incurred based on negotiation with LFoundry, provided no benefit to us, and would not have been incurred if we were not selling the manufacturing operations. Therefore, the direct and incremental costs associated with these services were recorded as part of the loss on sale. We also incurred other costs related to the sale of $2 million, which included performance-based bonuses of $0.5 million for certain employees (no executive officers were included), related to the completion of the sale of the Rousset manufacturing operations to LFoundry.

     We also incurred direct and incremental selling costs of $3 million, which represented broker commissions and legal fees associated with the sale to LFoundry.

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Restructuring Charges

     The following table summarizes the activity related to the accrual for restructuring charges detailed by event for the three and nine months ended September 30, 2010 and 2009:

	January 1,							Currency			March 31,							Currency			June 30,							Currency		September 30,
	2010							Translation			2010							Translation			2010							Translation		2010
	Accrual		Charges		Payments			Adjustment			Accrual		Charges		Payments			Adjustment			Accrual		Charges		Payments			Adjustment		Accrual
											(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	1,592	$	—	$	—		$	—		$	1,592	$	—	$	—		$	—		$	1,592	$	—		—			—	$	1,592
Second quarter of 2008
Employee termination costs		4		—		—			(1	)		3		—		—			—			3		—		—			—		3
Third quarter of 2008
Employee termination costs		557		—		—			(37	)		520		—		—			(30	)		490		—		—			20		510
First quarter of 2009
Employee termination costs		—		969		(398	)		—			571		11		(184	)		(39	)		359		6		(201	)		7		171
Other restructuring charges		318		—		(46	)		—			272		—		(45	)		—			227		—		(45	)		—		182
Second quarter of 2010
Employee termination costs		—		—		—			—			—		1,603		—			(76	)		1,527		1,074		(1,888	)		77		790
Total 2010 activity	$	2,471	$	969	$	(444	)	$	(38	)	$	2,958	$	1,614	$	(229	)	$	(145	)	$	4,198	$	1,080	$	(2,134	)	$	104	$	3,248

	January 1,							Currency			March 31,								Currency		June 30,							Currency			September 30,
	2009							Translation			2009		Charges/						Translation		2009							Translation			2009
	Accrual		Charges		Payments			Adjustment			Accrual		(Credits)			Payments			Adjustment		Accrual		Charges		Payments			Adjustment			Accrual
											(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	1,592	$	—	$	—		$	—		$	1,592	$	—		$	—		$	—	$	1,592	$	—	$	—		$	—		$	1,592
Fourth quarter of 2007
Other restructuring charges		218		32		(81	)		(2	)		167		104			(125	)		12		158		334		(492	)		—			—
Second quarter of 2008
Employee termination costs		235		42		(220	)		(10	)		47		4			(34	)		3		20		12		(19	)		1			14
Third quarter of 2008
Employee termination costs		17,575		226		(10,579	)		(1,028	)		6,194		(441	)		(3,971	)		125		1,907		137		(1,402	)		32			674
Fouth quarter of 2008
Employee termination costs		3,438		567		(2,854	)		(10	)		1,141		59			(1,145	)		6		61		—		(61	)		—			—
First quarter of 2009
Employee termination costs		—		1,485		(37	)		(11	)		1,437		(83	)		(520	)		205		1,039		108		(1,047	)		(16	)		84
Second quarter of 2009
Employee termination costs		—		—		—			—			—		2,827			(2,777	)		—		50		—		(50	)		—			—
Third quarter of 2009
Employee termination costs		—		—		—			—			—		—			—			—		—		200		(200	)		—			—
Other restructuring charges		—		—		—			—			—		—			—							389		(26	)		—			363
Total 2009 activity	$	23,058	$	2,352	$	(13,771	)	$	(1,061	)	$	10,578	$	2,470		$	(8,572	)	$	351	$	4,827	$	1,180	$	(3,297	)	$	17		$	2,727

2010 Restructuring Charges

     In the three and nine months ended September 30, 2010, we incurred restructuring charges of $1 million and $4 million consisting of the following:

• Charges of $1 million and $4 million in the three and nine months ended September 30, 2010 related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities.

2009 Restructuring Charges

     In the three and nine months ended September 30, 2009, we continued to implement the restructuring initiatives announced in 2008 and incurred restructuring charges of $1 million and $6 million, respectively. The charges relating to this initiative consist of the following:

• Net charges of $0.5 million and $5 million in the three and nine months ended September 30, 2009, respectively, related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with the accounting standard related to costs associated with exit or disposal activities.

• Charges of $1 million in both the three and nine months ended September 30, 2009 related to facility closure costs.

Interest and Other Income (Expense), Net

     Interest and other income (expense), net, was income of $6 million in the three months ended September 30, 2010, compared to expense of $2 million in the three months ended September 30, 2009, and income of $13 million in the nine months ended September 30, 2010, compared to expense of $10 million in the nine months ended September 30, 2009. The change to income

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in the three months ended September 30, 2010 was primarily due to the favorable impact of $5 million and $12 million, respectively, primarily from foreign exchange exposures from intercompany balances between our subsidiaries compared to the three and nine months ended September 30, 2010 and 2009. Included in interest expense for the three months ended September 30, 2010 is approximately $1 million related to the wafer supply agreement signed with LFoundry. We continue to have balances in foreign currencies subject to exchange rate fluctuations and may incur further gains or losses in the future.

     During the third quarter, we settled a significant portion of intercompany debts between our subsidiaries, resulting in $2 million of foreign exchange gains recorded for the quarter. We continue to have balances in foreign currencies subject to exchange rate fluctuations and may incur further gains or losses in the future.

Benefit from (Provision for) Income Taxes

     In the three months ended September 30, 2010, we recorded an income tax benefit of $137 million, compared to an income tax provision of $0.4 million in the three months ended September 30, 2009, primarily due to a discrete income tax benefit of $150 million recorded during the quarter from the settlement of its IRS audit for the years 2000 through 2003. In the nine months ended September 30, 2010, we recorded an income tax benefit of $174 million, compared to an income tax benefit of $37 million in the nine months ended September 30, 2009, primarily due to the IRS settlement and a tax benefit related to tax deductible costs incurred related to the sale of our wafer manufacturing facilities in Rousset, France in the quarter ended June 30, 2010. Excluding the impact of these discrete tax events, the provision for (benefit from) income taxes was at a higher consolidated effective rate than would have resulted if all group entities were profitable or if losses produced tax benefits.

     The IRS had previously assessed significant additional income taxes, primarily related to transfer pricing, which were resolved through the tax appeals process. As a result of the settlement, we recognized previously unrecognized tax benefits of approximately $151 million in the three months ended September 30, 2010, which resulted in a benefit to tax expense of $54 million, related to the release of previously accrued tax reserves, and an increase in gross deferred tax assets, primarily foreign tax credits and net operating losses (with a full valuation allowance) of $97,026. We also recorded an additional benefit to income tax expense of approximately $97 million, of which $48 million related to the release of previously accrued penalties and interest on the tax exposures, and $48 million related to a refund from the carryback of tax attributes to tax years prior to the audit.

     At September 30, 2010 and December 31, 2009, we had $54 million and $183 million of unrecognized tax benefits, respectively. We do not expect further significant increases or decreases to unrecognized tax benefits within the next twelve months. The decrease in income taxes payable is primarily due to the resolution of the IRS tax audit described above.

     Included within long-term liabilities at September 30, 2010 and December 31, 2009 were income taxes payable totaling $20 million and $116 million, respectively.

Liquidity and Capital Resources

     At September 30, 2010, we had $597 million of cash, cash equivalents and short-term investments, compared to $476 million at December 31, 2009. Our current ratio, calculated as total current assets divided by total current liabilities, was 2.17 at September 30, 2010, compared to 2.49 at December 31, 2009. We reduced our short-term and long-term debt obligations to $84 million at September 30, 2010 from $95 million at December 31, 2009. Working capital, calculated as total current assets less total current liabilities, increased to $652 million at September 30, 2010, compared to $596 million at December 31, 2009. Cash provided by operating activities was $215 million and $67 million in the nine months ended September 30, 2010 and 2009, respectively, and capital expenditures totaled $56 million and $15 million in the nine months ended September 30, 2010 and 2009, respectively.

     Approximately $2 million and $5 million of our investment portfolio at September 30, 2010 and December 31, 2009, respectively, were invested in auction-rate securities. In the three months ended September 30, 2010, we sold auction-rate securities to UBS at par value of $3 million.

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Operating Activities

     Net cash provided by operating activities was $215 million in the nine months ended September 30, 2010, compared to $67 million in the nine months ended September 30, 2009. Net cash provided by operating activities in the nine months ended September 30, 2010 was primarily due to improved operating results, adjusting net income of $200 million for the nine month period to exclude non-cash asset impairment charges of $12 million, certain non-cash depreciation and amortization charges of $48 million, stock-based compensation charges of $42 million, and $31 million related to the non-cash portion of loss on sale related to the sale of Rousset, France manufacturing operations and our SMS business.

     Accounts receivable increased by 23% or $45 million to $239 million at September 30, 2010, from $194 million at December 31, 2009. The average days of accounts receivable outstanding (“DSO”) decreased to 49 days at September 30, 2010 from 51 days at December 31, 2009. Our accounts receivable and DSO were primarily impacted by higher revenue levels and uneven shipment linearity during the quarter.

     Inventories increased during this period, utilizing $11 million of operating cash flows in the nine months ended September 30, 2010, compared to a decrease in inventories providing $73 million of operating cash flows in the nine months ended September 30, 2009. Our days of inventory (including inventory classified as current assets held for sale) decreased to 88 days at September 30, 2010 from 102 days at December 31, 2009. Inventory levels have remained relatively flat during the first nine months of 2010 while shipments have increased significantly, resulting in a significant drop in days of inventory. 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.

     In the nine months ended September 30, 2010 and 2009, we made cash payments of $4 million and $11 million, respectively, to former Quantum employees in connection with contingent employment arrangements resulting from the acquisition in 2008. We also received cash payments of $6 million related to litigation-related insurance settlements that were recorded as a reduction of operating expenses in the nine months ended September 30, 2010.

Investing Activities

     Net cash used in investing activities was $31 million in the nine months ended September 30, 2010, compared to $20 million in the nine months ended September 30, 2009. In the nine months ended September 30, 2010, we paid $56 million for acquisitions of fixed assets and $3 million for intangible assets, offset in part by net proceeds of $19 million from the sale of our SMS business and net proceeds of $17 million of sale of short-term investments. In the nine months ended September 30, 2009, we paid approximately $3 million related to contingent consideration earned by a former Quantum employee, $15 million for acquisitions of fixed assets and $5 million for intangible assets, offset in part by net proceeds of $5 million from the sale of short-term investments.

Financing Activities

     Net cash used in financing activities was $44 million in each of the nine months ended September 30, 2010 and 2009. We continued to reduce debt, with repayments of principal balances on our capital leases totaling $11 million in the nine months ended September 30, 2010 (primarily related to our real property in Rousset, France), compared to $50 million in the nine months ended September 30, 2009. Proceeds from the issuance of common stock totaled $13 million and $9 million for the nine months ended September 30, 2010 and 2009, respectively. We repurchased 7 million shares in the three months ended September 30, 2010, utilizing $41 million in cash, excluding commissions, following the authorization by our Board of Directors in August 2010 to repurchase up to $200 million in our common stock in the open market depending upon market conditions and other factors. The repurchases reduced our shares outstanding and were recorded as a reduction of additional paid-in capital in our consolidated balance sheet.

     We believe our existing balances of cash, cash equivalents and short-term investments, together with anticipated cash flow from operations, available 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.

     During the next twelve months, we expect our operations to generate positive cash flow. However, a portion of cash may be used to further repay debt, make capital investments or satisfy restructuring commitments or repurchase of our common stock. We expect that we will have sufficient cash from operations and financing sources to satisfy all debt obligations. We made $56 million in cash payments for capital equipment in the nine months ended September 30, 2010, and we expect total cash payments for capital expenditures of $100 million to $115 million in 2010. Debt obligations outstanding at September 30, 2010, which are classified as short-term, totaled $80 million. We paid $11 million to reduce debt in the nine months ended September 30, 2010. We paid $4 million in

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restructuring payments, primarily for employee severance in the nine months ended September 30, 2010. We expect to pay out approximately $33 million in further restructuring and fab-sale related payments over the next twelve months. During 2010 and future years, our capacity to make necessary capital investments or strategic acquisitions will depend on our ability to continue to generate sufficient cash flow from operations and on our ability to obtain adequate financing if necessary. In the event that we cannot obtain adequate financing due to credit market conditions or must pay down our $80 million in a line of credit, we believe we have sufficient working capital funds due to the $597 million in cash, cash equivalents and short-term investments we held as of September 30, 2010 together with expected future cash flows from operations, which amounted to $215 million for the nine months ended September 30, 2010.

     On March 15, 2006, we entered into a five-year asset-backed credit facility for up to $165 million (reduced to $125 million on November 6, 2009) with certain European lenders. This facility is secured by our non-U.S. trade receivables. The eligible non-US trade receivables were $92 million at September 30, 2010, of which the amount outstanding under this facility was $80 million at September 30, 2010. Borrowings under the facility bear interest at LIBOR plus 2% per annum (approximately 2.26% based on the one month LIBOR at September 30, 2010), 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 us to certain financial and other covenants and cross-default provisions. We were in compliance with our financial covenants as of September 30, 2010. Commitment fees and amortization of up-front fees paid related to the facility in the three months ended September 30, 2010 and 2009 totaled $0.2 million and $0.3 million, respectively, and $0.7 million and $0.8 million in the nine months ended September 30, 2010 and 2009, respectively, and are included in interest and other income (expense), net, in the condensed consolidated statements of operations.

Contractual Obligations

     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 nine months ended September 30, 2010 to those 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 March 1, 2010, except as described below.

     The following table describes new material commitments to settle contractual obligations in cash as of September 30, 2010 (see Note 12 of Notes to Condensed Consolidated Financial Statements for further discussion):

	Payments Due by Period
	Less than		1-3		3-5
Contractual Obligations:	1 Year		Years		Years		Total
	(in thousands)
Manufacturing supply agreement with LFoundry	$	113,714	$	233,060	$	57,765	$	404,539

Off-Balance Sheet Arrangements (Including Guarantees)

     See the paragraph under the heading “Guarantees” in Note 8 of Notes to Condensed Consolidated Financial Statements for a discussion of off-balance sheet arrangements.

Recent Accounting Pronouncements

     See Note 1 of Notes to Condensed Consolidated Financial Statements for information regarding recent accounting pronouncements.

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

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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 inventories, 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 March 1, 2010.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

     When we take an order denominated in a foreign currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we ship our product, which will reduce revenue. Conversely, revenues will be positively impacted if the local currency strengthens against the dollar. In Europe, where our significant operations have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, costs will increase if the local currency strengthens against the dollar. The net effect of average exchange rates in the three and nine months ended September 30, 2010, compared to the average exchange rates in the three and nine months ended September 30, 2009, resulted in a decrease in income from operations of $1 million and $7 million, respectively. This impact is determined assuming that all foreign currency denominated transactions that occurred in the three and nine months ended September 30, 2010 were recorded using the average foreign currency exchange rates in the same period in 2009.

     Approximately 20% and 24% of our net revenues in the three months ended September 30, 2010 and 2009, respectively, were denominated in foreign currencies. Approximately 20% and 24% of our net revenues in the nine months ended September 30, 2010 and 2009, respectively, were denominated in foreign currencies. Operating costs denominated in foreign currencies were approximately 23% and 36% of total operating costs in the three months ended September 30, 2010 and 2009, respectively. Operating costs denominated in foreign currencies were approximately 31% and 39% of total operating costs in the nine months ended September 30, 2010 and 2009, respectively.

     Average exchange rates utilized to translate foreign currency revenues and expenses in Euro were approximately 1.27 and 1.41 Euro to the dollar in the three months ended September 30, 2010 and 2009, respectively, and 1.32 and 1.36 Euro to the dollar in the nine months ended September 30, 2010 and 2009, respectively.

     In the three months ended September 30, 2010, changes in foreign exchange rates had minimal impact to our operating results. Our net revenues for the three months ended September 30, 2010 would have been approximately $10 million higher had the average exchange rate in the current quarter remained the same as the rate in effect in the three months ended September 30, 2009. In addition, in the three months ended September 30, 2010 our operating expenses would have been approximately $9 million higher (relating to an increase in cost of revenues of $4 million; an increase in research and development expenses of $3 million; and an increase in sales, general and administrative expenses of $2 million). Therefore, our income from operations in the three months ended September 30, 2010 would have been approximately $1 million higher had exchange rates in the three months ended September 30, 2010 remained unchanged from the three months ended September 30, 2009.

     In the nine months ended September 30, 2010, changes in foreign exchange rates had an unfavorable impact on our operating results. Our net revenues for the nine months ended September 30, 2010 would have been approximately $7 million higher had the average exchange rate in the current nine-month period remained the same as the rate in effect in the nine months ended September 30, 2009. However, in the nine months ended September 30, 2010 our operating expenses would have been approximately $0.2 million higher (relating to an increase in cost of revenues of $0.6 million; an decrease in research and development expenses of $0.5 million; and an increase of $0.1 million to sales, general and administrative expenses). Therefore, our income from operations in the nine months ended September 30, 2010 would have been approximately $7 million higher had exchange rates in the nine months ended September 30, 2010 remained unchanged from the nine months ended September 30, 2009.

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     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 29% of our accounts receivables were denominated in foreign currencies as of September 30, 2010 and December 31, 2009.

     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 14% and 27% of our accounts payable were denominated in foreign currencies as of September 30, 2010 and December 31, 2009, respectively. Approximately 5% and 15% of our debt obligations were denominated in foreign currencies as of September 30, 2010 and December 31, 2009, respectively.

Liquidity and Valuation Risk

     Approximately $2 million and $5 million of our investment portfolio at September 30, 2010 and December 31, 2009, respectively, were invested in auction-rate securities.

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 SEC 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

     There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2010 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

     We are party to various legal proceedings. While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our 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. For more information regarding certain of these proceedings, see Note 8 of Notes to Condensed Consolidated Financial Statements, which is incorporated by reference into this Item. The estimate of the potential impact on our financial position or overall results of operations or cash flows for the legal proceedings described in Note 8 of Notes to Condensed Consolidated Financial Statements could change in the future. We have accrued for losses related to litigation that we consider probable and for which the loss can be reasonably estimated.

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     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 operations. 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 also 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. In addition to the other factors discussed in this “Risk Factors” section, factors that could affect our operating results include:

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

• our transition to a fab-lite strategy;

• our dependence on selling through distributors;

• 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;

• global economic and political conditions;

• compliance with U.S. and international antitrust, trade and export laws and regulations by us and our distributors;

• 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;

• fluctuations in manufacturing yields;

• the average margin of the mix of products we sell;

• third party intellectual property infringement claims;

• the highly competitive nature of our markets;

• the pace of technological change;

• natural disasters or terrorist acts;

• assessment of internal controls over financial reporting;

• ability to meet our debt obligations;

• our ability to maintain good relationships with our customers and suppliers;

• contracts with our customers and suppliers;

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

• personnel changes;

• performance-based restricted stock units;

• business interruptions;

• system integration disruptions;

• anti-takeover effects in our certificate of incorporation and bylaws;

• the unfunded nature of our foreign pension plans and that any requirement to fund these plans could negatively impact our cash position;

• the effects of our acquisition strategy, such as unanticipated accounting charges, which may adversely affect our results of operations;

• utilization of our manufacturing capacity;

• disruptions to the availability of raw materials which could impact our ability to supply products to our customers;

• costs associated with, and the outcome of, any litigation to which we are, or may become, a party;

• product liability claims that may arise, which could result in significant costs and damage to our reputation;

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

• complexity of our legal entity organizational structure; and

• compliance with economic incentive terms in certain government grants.

     Any unfavorable changes in any of these factors could harm our operating results and may result in volatility or a decline in our stock price.

     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 that incorporate advanced features or integrated technologies to address new or emerging markets. Our operating results could be harmed if such cost reductions and new product introductions do not occur in a timely manner. From time to time, our quarterly revenues and operating results can become more dependent upon orders booked and shipped within a given quarter and, accordingly, our quarterly results can become less predictable and subject to greater variability.

     In addition, our future success will depend in large part on the recovery of global economic growth generally and on growth in various electronics industries that use semiconductors specifically, 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.

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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. Global semiconductor sales increased 9% to $248 billion in 2006, and 3% to $256 billion in 2007. Global semiconductor sales decreased by 3% to $249 billion in 2008, and 9% to $226 billion in 2009.

     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.

     THE EFFECTS OF THE RECENT GLOBAL RECESSIONARY MACROECONOMIC ENVIRONMENT HAVE ADVERSELY AFFECTED OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.

     The recent global recessionary macroeconomic environment has impacted levels of consumer spending, caused disruptions and extreme volatility in global financial markets and increased rates of default and bankruptcy. These macroeconomic developments could continue to negatively affect our business, operating results, or financial condition in a number of ways. For example, current or potential customers or distributors may not pay us or may delay paying us for previously purchased products. In addition, if consumer spending continues to decrease, we could experience diminished demand for our products.

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 the number of manufacturing facilities we own. In May 2008, we completed the sale of our North Tyneside, United Kingdom wafer fabrication facility. In December 2008, we sold our wafer fabrication operation in Heilbronn, Germany, and in June 2010, we sold our Rousset, France manufacturing operations. In the future, we will be increasingly relying on the utilization of third-party foundry manufacturing partners. As part of this transition we have expanded and will continue to 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 could harm our business. In the nine months ended September 30, 2010, we manufactured approximately 73% of our products in our own wafer fabrication facilities compared to 89% in the nine months ended September 30, 2009. 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;

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• 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 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 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.

     OUR REVENUES ARE DEPENDENT ON SELLING THROUGH DISTRIBUTORS.

     Sales through distributors accounted for 53% and 52% of our net revenues for the three months ended September 30, 2010 and 2009, respectively, and 54% and 50% in the nine months ended September 30, 2010 and 2009, 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.

     Our revenue reporting is highly dependent on receiving pertinent, accurate and timely data from our distributors. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. Because the data set is large and complex and because there may be errors in the reported data, we must use estimates and apply judgments to reconcile distributors’ reported inventories to their activities. Actual results could vary from those estimates.

     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, decided to market our competitors’ products over our products, were unable to sell our products or were unable to pay us for products sold for any reason, 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 a material adverse impact to our revenues and operating results. For example, in the three months ended December 31, 2008, we recorded a one time bad debt charge of $12 million related to an Asian distributor whose business was extraordinarily impacted following their addition to the U.S. Department of Commerce Entity List, which prohibits us from shipping products to the distributor.

     Additionally, distributors typically maintain an inventory of our products. For certain distributors, we have signed agreements that 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

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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.

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 that 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 margins and results of 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 margins 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, AND A VIOLATION OF, OR CHANGE IN, THESE LAWS COULD ADVERSELY AFFECT OUR OPERATIONS.

     For hardware, software or 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 U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”). Hardware, software and technology exported from other countries may also be subject to local laws and regulations governing international trade. Under these laws and regulations, we are responsible for obtaining all necessary licenses or other approvals, if required, for exports of hardware, software and technology, as well as the provision of technical assistance. We are also required to obtain export licenses, if required, prior to transferring technical data or software to foreign persons. In addition, we are required to obtain necessary export licenses prior to the export or re-export of hardware, software and technology (i) to any person, entity, organization or other party identified on the U.S. Department of Commerce Denied Persons or Entity List, the U.S. Department of Treasury’s Specially Designated Nationals or Blocked Persons List or the Department of State’s Debarred List; or (ii) for use in nuclear, chemical/biological weapons, rocket systems or unmanned air vehicle applications. We are enhancing our export compliance program, including 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 additional operational procedures. A determination by the U.S. or local government that we have failed to comply with one or more of these export control laws or trade sanctions, including failure to properly restrict an export to the persons, entities or countries set forth on the government restricted party lists, 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 participation in U.S. government contracts. Further, a change in these laws and regulations could restrict our ability to export to previously permitted countries, customers, distributors or other third parties. Any one or more of these sanctions or a change in law or regulations could have a material adverse effect on our business, financial condition and results of operations.

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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.

     When we take an order denominated in a foreign currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we ship our product, which will reduce revenue. Conversely, revenues will be positively impacted if the local currency strengthens against the dollar. In Europe, where our significant operations have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, costs will increase if the local currency strengthens against the dollar. The net effect of average exchange rates in the three and nine months ended September 30, 2010, compared to the average exchange rates in the three and nine months ended September 30, 2009, resulted in a decrease in income from operations of $1 million and $7 million, respectively. This impact is determined assuming that all foreign currency denominated transactions that occurred in the three and nine months ended September 30, 2010 were recorded using the average foreign currency exchange rates in the same period in 2009.

     Approximately 20% and 24% of our net revenues in the three months ended September 30, 2010 and 2009, respectively, were denominated in foreign currencies. Approximately 20% and 24% of our net revenues in the nine months ended September 30, 2010 and 2009, respectively, were denominated in foreign currencies. Operating costs denominated in foreign currencies were approximately 23% and 36% of total operating costs in the three months ended September 30, 2010 and 2009, respectively. Operating costs denominated in foreign currencies were approximately 31% and 39% of total operating costs in the nine months ended September 30, 2010 and 2009, respectively.

     Average exchange rates utilized to translate foreign currency revenues and expenses in Euro were approximately 1.27 and 1.41 Euro to the dollar in the three months ended September 30, 2010 and 2009, respectively, and 1.32 and 1.36 Euro to the dollar in the nine months ended September 30, 2010 and 2009, respectively.

     In the three months ended September 30, 2010, changes in foreign exchange rates had minimal impact to our operating results. Our net revenues for the three months ended September 30, 2010 would have been approximately $10 million higher had the average exchange rate in the current quarter remained the same as the rate in effect in the three months ended September 30, 2009. In addition, in the three months ended September 30, 2010 our operating expenses would have been approximately $9 million higher (relating to an increase in cost of revenues of $4 million; an increase in research and development expenses of $3 million; and an increase in sales, general and administrative expenses of $2 million). Therefore, our income from operations in the three months ended September 30, 2010 would have been approximately $1 million higher had exchange rates in the three months ended September 30, 2010 remained unchanged from the three months ended September 30, 2009.

     In the nine months ended September 30, 2010, changes in foreign exchange rates had an unfavorable impact on our operating results. Our net revenues for the nine months ended September 30, 2010 would have been approximately $7 million higher had the average exchange rate in the current nine-month period remained the same as the rate in effect in the nine months ended September 30, 2009. However, in the nine months ended September 30, 2010 our operating expenses would have been approximately $0.2 million higher (relating to an increase in cost of revenues of $0.6 million; an decrease in research and development expenses of $0.5 million; and an increase of $0.1 million to sales, general and administrative expenses). Therefore, our income from operations in the nine months ended September 30, 2010 would have been approximately $7 million higher had exchange rates in the nine months ended September 30, 2010 remained unchanged from the nine months ended September 30, 2009.

     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 29% of our accounts receivables were denominated in foreign currency as of September 30, 2010 and December 31, 2009.

     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 14% and 27% of our accounts payable were denominated in foreign currency as of September 30, 2010 and December 31, 2009, respectively. Approximately 5% and 15% of our debt obligations were denominated in foreign currency as of September 30, 2010 and December 31, 2009, respectively.

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

     We currently manufacture a majority of the wafers for our products at our fabrication facilities. 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 BUSINESS DISRUPTION RISKS AS WELL AS THE RISK OF SIGNIFICANT UNANTICIPATED COSTS ASSOCIATED WITH DISPOSAL OR RESTRUCTURING ACTIVITIES.

     In the first quarter of 2009, we announced our intention to pursue strategic alternatives for our ASIC business and related manufacturing assets as part of our transformation plan, which is aimed at focusing on our high-growth and high-margin businesses. In June 2010, we sold our Rousset, France manufacturing operations. In January 2010, we announced that following a comprehensive review of alternatives for our ASIC business, we would continue to explore the potential sale of our Smart Card (SMS) business located in Rousset, France and East Kilbride, UK and that we intended to discontinue potential sale discussions for our Customer Specific Products (CSP) and Aerospace businesses. On September 30, 2010, we announced that we closed a transaction with INSIDE Contactless S.A. (“INSIDE”) by which INSIDE purchased, for cash consideration, our Secure Microcontroller Solutions (“SMS”) business based in Rousset, France and East Kilbride, U.K. We are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations, including those located in Europe in order to enhance our overall competitiveness and viability. 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 employers when the market requires downsizing. We may incur additional costs including compensation to employees and the potential requirement to repay governmental subsidies. We have in the past and may in the future experience labor union or workers council objections, or labor unrest actions (including possible strikes), which could result in reduced production output. Significant reductions to output or increases in cost could harm our business and operating results.

     We continue to evaluate the existing restructuring accruals 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.

OUR PERIODIC DISPOSAL ACTIVITIES HAVE IN THE PAST AND MAY IN THE FUTURE TRIGGER IMPAIRMENT CHARGES AND/OR RESULT IN A LOSS ON SALE OF ASSETS.

     We are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations, including those located in Europe, in order to enhance our overall competitiveness and viability. Our disposal activities have in the past and may in the future trigger restructuring, impairment and other accounting charges and/or result in a loss on sale of assets. Any of these charges or losses could cause the price of our common stock to decline.

     For example, in the fourth quarter of 2009, we announced that we entered into an exclusivity agreement with LFoundry GmbH for the purchase of our manufacturing operations in Rousset, France. As a result of this agreement, we determined that certain assets and liabilities were no longer included in the disposal group as they were not being acquired or assumed by the buyer, and as result, we reclassified these assets and liabilities back to held and used as of December 31, 2009 and recorded an asset impairment charge of $80 million. In determining any potential write down of these assets and liabilities, we considered both the net book value of the disposal group, which was $78 million, and the related credit balance of $120 million for foreign currency translation adjustments (“CTA balance”) that is recorded within stockholders’ equity. As a result, no impairment charge was recorded for the disposal group as its carrying value, net of the CTA balance, could not be reduced to below zero. In the three months ended June 30, 2010, the CTA balance remaining in stockholders’ equity of $97 million was released. In the three months ended June 30, 2010, we recorded an additional $12 million asset impairment charge.

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     In addition, in connection with the closing of the sale of the manufacturing operations in Rousset, France in the three months ended June 30, 2010, we entered into a Manufacturing Services Agreement pursuant to which we will purchase wafers from LFoundry for four years following the closing on a “take-or-pay” basis. The purchase price of the wafers under the agreement is higher than the fair value of the wafers, which is determined based on the pricing we could have obtained from third-party foundries. As a result, we recorded a charge of $92 million in the three months ended June 30, 2010.

     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 IP rights or positions, which have on occasion resulted in significant and often protracted and expensive litigation. We from time to time receive communications from third parties asserting patent or other IP rights covering our products or processes. 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. It is possible that we will be involved in other intellectual property infringement lawsuits in the future. The cost of defending against such lawsuits, in terms of management time and attention, legal fees and product delays, can be substantial. Moreover, if such infringement lawsuits are successful, we may be prohibited from using the technologies at issue in the lawsuits, and if we are unable to (1) obtain a license on acceptable terms, (2) license a substitute technology or (3) 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, Synaptics, 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

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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, new entrants, new technology and cyclical demand, 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 as 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 may cause us to be unable 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’ decisions 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.

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

     Net revenues outside the United States accounted for 84% and 83% of our net revenues in the three and nine months ended September 30, 2010, respectively, compared to 82% in each of the three and nine months ended September 30, 2009. We expect that revenues derived from international sales will continue to represent a significant portion of net revenues. International sales and operations are subject to a variety of risks, including:

• greater difficulty in protecting intellectual property;

• reduced flexibility and increased cost of staffing adjustments;

• longer collection cycles;

• legal and regulatory requirements, including antitrust laws, export license requirements, trade barriers, tariffs and tax laws, and environmental and privacy regulations and changes to those laws and regulations; and

• general economic and political conditions in these foreign markets.

     Some of our distributors, third-party foundries, independent assembly operators and other business partners also have international operations and are subject to the risks described above. Even if we are able to manage the risks of international operations successfully, our business may be materially adversely affected if our distributors, third-party foundries and other business partners are not able to manage these risks successfully.

     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. 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 20% and 24% of our net revenues in the three months ended September 30, 2010 and 2009, respectively, were denominated in foreign currencies. Approximately 20% and 24% of our net revenues in the nine months ended September 30, 2010 and 2009, respectively, were denominated in foreign currencies. Operating costs denominated in foreign currencies were approximately 23% of total operating costs in the three months ended September 30, 2010, compared to 36% in the three months ended September 30, 2009. Operating costs denominated in foreign currencies were approximately 31% and 39% of total operating costs in the nine months ended September 30, 2010 and 2009, respectively.

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

     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.

     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, 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

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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 to our business, could result in a material misstatement of our condensed consolidated financial statements or 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 September 30, 2010, our total debt was $84 million, compared to $95 million at December 31, 2009. Our debt-to-equity ratio was 0.86 at September 30, 2010 and 0.82 at December 31, 2009. 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.

     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 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.

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, including lack of access to credit, or otherwise reduce or discontinue sales of our products. Our distributors could commence or increase sales of our competitors’ products. Distributors typically are not highly capitalized and may experience difficulties during times of economic contraction. If our distributors were to become insolvent, their inability to maintain their business and sales could negatively impact our business and revenue. Also, one or more of our distributors or their affiliates may be identified in the future on the U.S. Department of Commerce Denied Persons or Entity List, the U.S. Department of Treasury’s Specially Designated Nationals or Blocked Persons Lists, or the Department of State’s Debarred Parties List, in which case we would not be permitted to sell our products through such distributors. In any of these cases, our business or results from operations could be materially harmed. For example, in the three months ended December 31, 2008, we took a one-time charge for a bad debt provision of $12 million related to an Asian distributor whose business was impacted following their addition to the U.S. Department of Commerce Entity List, which prohibits us from shipping products to the distributor.

     Our sales terms for Asian distributors generally include 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

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may impact our future revenues in this region. It may take time for us to convert systems and processes to support modified sales terms. It may also 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.

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 European Union (“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.

ACCOUNTING FOR OUR PERFORMANCE-BASED RESTRICTED STOCK UNITS IS SUBJECT TO JUDGMENT AND MAY LEAD TO UNPREDICTABLE EXPENSE RECOGNITION.

     We have issued performance-based restricted stock units to eligible employees for a maximum of 9 million shares of our common stock under the 2005 Stock Plan. These restricted stock units vest only if we achieve all, or a portion of, certain quarterly operating margin performance criteria over the performance period of July 1, 2008 to December 31, 2012. We issued awards for up to 9.9 million units during 2008. In September 2009, the performance period was extended by one additional year to December 31, 2012 which was considered a modification to the performance-based restricted stock units. During the three and nine months ended September 30, 2010, we issued additional performance-based restricted stock units to eligible employees for up to 0.2 million and 0.5 million shares of our common stock.

     Until restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding. We recognize the stock-based compensation expense for performance-based restricted stock

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units when we believe it is probable that we will achieve certain future quarterly operating margin performance criteria. If achieved, the award vests. If the performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the performance period and is reduced for estimated forfeitures. We are required to reassess this probability at each reporting date, and any change in our forecasts may result in an increase or decrease to the expense recognized.

     In the fourth quarter of 2009, after significant improvement to operating results and customer order rates, we recorded stock-based compensation expense of $3 million, as we re-assessed the probability of achieving the performance criteria and estimated that it is probable that a portion of the performance criteria will be achieved by December 31, 2012. In the three months ended June 30, 2010, we further revised our estimates of our ability to meet the performance plan criteria, as a result of significant improvements in our current and forecasted operating results and customer order levels. We believe that we will achieve the performance targets earlier than previously estimated and at a higher vesting level, and recorded a charge during the quarter of $9 million.

     In the three and nine months ended September 30, 2010, we recorded stock-based compensation expense of $4 million and $21 million, as we believe that it is probable that the performance criteria will be achieved and that the performance shares granted will vest during the performance period, due to significantly improved operating results from higher shipments and reduced costs.

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 AND BYLAWS 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.

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 of 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 $30 million at September 30, 2010 and $29 million at December 31, 2009. 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. We expect to pay approximately $1 million in 2010 for benefits earned. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively impact our cash position and operating capital.

FUTURE ACQUISITIONS 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 acquisition 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 September 30, 2010, we acquired four 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

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intellectual property. For example, on March 6, 2008, we completed the purchase of 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 experienced 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. Effective January 1, 2009, we adopted an amendment to the accounting standard on business combinations. The accounting standard will have an impact on our condensed consolidated financial statements, depending upon the nature, terms and size of the acquisitions we consummate in the future.

     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 are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and at any other time that circumstances arise indicating the carrying value may not be recoverable. At September 30, 2010, we had $55 million of goodwill. We completed our annual test of goodwill impairment in the fourth quarter of 2009 and concluded that we did not have any impairment at that time. However, if we continue to see deterioration in the global economy and the current market conditions in the semiconductor industry worsen, the carrying amount of our goodwill may no longer be recoverable, and we may be required to record a material impairment charge, which would have a negative impact on our results of operations.

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 or 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 manufacturing facility in the first quarter of 2008. In addition, our other manufacturing facilities could experience conditions requiring production levels to be reduced below optimal capacity levels. If we are unable to

60

operate our manufacturing facilities at optimal production levels, our operating costs will increase and gross margin and results from operations will be negatively impacted. Gross margins were positively impacted in the three and nine months ended September 30, 2010 primarily due to higher overall shipment levels, increased production levels and factory loading at our wafer fabrication facilities, and a more favorable mix of higher margin microcontroller products included in our net revenues.

     Our manufacturing facilities could experience conditions in the future 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 IMPACT 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 OUR 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 contain defects or bugs, or have 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.

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 foreign/domestic 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, the outcome is subject to significant 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.

61

OUR LEGAL ENTITY ORGANIZATIONAL STRUCTURE IS COMPLEX, WHICH COULD RESULT IN UNANTICIPATED UNFAVORABLE TAX OR OTHER CONSEQUENCES, WHICH COULD HAVE AN ADVERSE AFFECT ON OUR NET INCOME(LOSS) AND FINANCIAL CONDITION. WE CURRENTLY HAVE OVER 40 ENTITIES GLOBALLY AND SIGNIFICANT INTERCOMPANY LOANS BETWEEN ENTITIES.

     We currently operate legal entities in countries where we conduct manufacturing, design, and sales operations around the world. In some countries, we maintain multiple entities for tax or other purposes. Certain entities have significant unsettled intercompany balances that could result in adverse tax or other consequences related to capital structure, loan interest rates and legal entity structure changes. We expect to reduce the level of complexity of our legal entity structure over time, as well as reduce intercompany loan balances. However, we may incur additional income tax or other expense related to loan settlement or loan restructuring actions, or incur additional costs related to legal entity restructuring or dissolution efforts.

     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, in the three months ended March 31, 2008, we repaid $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 relative to target levels agreed with government agencies 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.

CURRENT AND FUTURE LITIGATION AGAINST US COULD BE COSTLY AND TIME CONSUMING TO DEFEND.

     We are subject to legal proceedings and claims that arise in the ordinary course of business. See Part II, Item 1 of this Form 10-Q. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     The following table provides information about the repurchase of our common stock in open-market transactions during the three months ended September 30, 2010. See Note 6 for further discussion.

					Total Number of Shares		Appropriate Dollar Value of
					Purchased as Part of Publicly		Shares that May Yet be
	Total Number of Shares		Average Price Paid per		Announced Plans or		Purchased Under the Plans
Period	Purchased		Share ($) (1)		Programs (2)		or Programs (3)
July 1 – July 31		—		—		—		—
August 1 – August 31		7,041,969	$	5.79		7,041,969	$	159,223,406
September 1 – September 30		—		—		—		—

(1)	Represents the average price paid per share ($) exclusive of commissions.
(2)	Represents shares purchased in open-market transactions under the stock repurchase plan approved by the Board of Directors.
(3)	These amounts correspond to a plan announced in August 2010 whereby the Board of Directors authorized the repurchase of up to $200 million of our common stock. The repurchase program does not have an expiration date. Shares repurchased under the program have been and will be retired. Amount remaining to be purchased is exclusive of commissions.

     We did not sell unregistered securities during the three months ended September 30, 2010.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

     None.

62

ITEM 6. EXHIBITS

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

10.1	Facility Agreement Waiver, dated June 24, 2010, by and among Atmel SARL, Atmel Corporation, Atmel Switzerland Sarl and Bank of America, N.A.
10.2	Facility Agreement Waiver, dated August 3, 2010, by and among Atmel SARL, Atmel Corporation, Atmel Switzerland Sarl and Bank of America, N.A.
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.
101.INS †	XBRL Instance Document
101.SCH †	XBRL Taxonomy Extension Schema
101.CAL †	XBRL Taxonomy Extension Calculation Linkbase
101.DEF †	XBRL Taxonomy Definition Linkbase
101.LAB †	XBRL Taxonomy Extension Label Linkbase
101.PRE †	XBRL Taxonomy Extension Presentation Linkbase

† The financial information contained in these XBRL documents is unaudited and is furnished, not filed with the Commission.

63

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ATMEL CORPORATION (Registrant)
November 9, 2010	/s/ STEVEN LAUB
	Steven Laub
	President & Chief Executive Officer
	(Principal Executive Officer)
November 9, 2010	/s/ STEPHEN CUMMING
	Stephen Cumming
	Vice President Finance & Chief Financial Officer
	(Principal Financial Officer)
November 9, 2010	/s/ DAVID MCCAMAN
	David McCaman
	Vice President Finance & Chief Accounting Officer
	(Principal Accounting Officer)

64

EXHIBIT INDEX

10.1	Facility Agreement Waiver, dated June 24, 2010, by and among Atmel SARL, Atmel Corporation, Atmel Switzerland Sarl and Bank of America, N.A.
10.2	Facility Agreement Waiver, dated August 3, 2010, by and among Atmel SARL, Atmel Corporation, Atmel Switzerland Sarl and Bank of America, N.A.
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.
101.INS †	XBRL Instance Document
101.SCH †	XBRL Taxonomy Extension Schema
101.CAL †	XBRL Taxonomy Extension Calculation Linkbase
101.DEF †	XBRL Taxonomy Definition Linkbase
101.LAB †	XBRL Taxonomy Extension Label Linkbase
101.PRE †	XBRL Taxonomy Extension Presentation Linkbase

† The financial information contained in these XBRL documents is unaudited and is furnished, not filed with the Commission.

65

EX-10.1

Exhibit 10.1

To:	Atmel SARL as the borrower under
	the Facility Agreement defined below
	(the “Borrower”)
	Atmel Corporation as a guarantor and
	as the US parent of the Borrower
	(the “US Parent”)
	Atmel Switzerland SARL as the Swiss Parent of the Borrower and a guarantor
	(the “Swiss Parent” and, together with the US Parent, the “Guarantors”)
From:	Bank of America, N.A.
	as facility agent under the Facility Agreement
	and as security agent under the Receivables Pledge Agreement
	(the “Facility Agent”)

June 24, 2010

Dear Sirs

FACILITY AGREEMENT WAIVER (THE “WAIVER LETTER”)

1.	DEFINITIONS
(a)	We refer to (1) a US$165,000,000 facility agreement dated 15 March 2006 between, among others, (i) the Borrower, (ii) the Guarantors, (iii) the Lenders party thereto, (iv) the Facility Agent and (v) Bank of America, N.A. as Security Agent (as amended, supplemented, varied, novated and/or restated from time to time, the “Facility Agreement”) and (2) the receivables pledge agreement dated 15 March 2006 between the Borrower and Bank of America, N.A., as Security Agent (the “Receivables Pledge Agreement”).
(b)	The Borrower has asked us to waive the applicability of Clause 20.3 (Disposals) of the Facility Agreement to permit the contemplated disposal of certain assets by the Borrower and the Swiss Parent in connection with the US Parent’s proposed sale of its secure microcontroller solutions business, with further background as set out in the letter dated June 23, 2010 from the US Parent to the Facility Agent (the “Waiver Request”).
(c)	The Borrower has asked us to release our rights as Security Agent under the Receivables Pledge Agreement to those contracts that are the subject of the Contract Transfers (as such term is defined in the Waiver Request) (the “Release Request”).
(d)	Unless otherwise defined, terms defined in the Facility Agreement have the same meaning in this Waiver Letter. Clause references herein are to clauses of the Facility Agreement.

2.	WAIVER
	Subject to the terms of this Waiver Letter and acting on the instructions of the Majority Lenders, we hereby consent to the Waiver Request and, accordingly, waive the applicability of Clause 20.3 (Disposals) of the Facility Agreement for the sole purpose of permitting the Asset Disposals (as such term is defined in the Waiver Request) (the “Waiver”).
3.	RELEASE
	Subject to the terms of this Waiver Letter, we hereby grant the Release Request and, accordingly, release our rights as Security Agent under the Receivables Pledge Agreement to those contracts that are the subject of the Contract Transfers (as such term is defined in the Waiver Request) (the “Release”).
4.	CONDITIONS
	The Waiver and the Release shall be effective on and from the date on which we, in our capacity as Facility Agent and Security Agent confirm receipt of:
(a)	a copy of the Purchase Agreement (as such term is defined in the Waiver Request) substantially in the form provided to us immediately prior to execution of the Waiver Request, together with schedules identifying (A) all contracts and purchase orders which will be sold as part of the Contract Transfers (as such term is defined in the Waiver Request) and (B) all inventory which will be sold as part of the Inventory Disposal (as such term is defined in the Waiver Request); and
(b)	a copy of this Waiver Letter duly countersigned on behalf of the Borrower and the Guarantors.
5.	RESERVATION OF RIGHTS
	The Waiver and Release are given strictly on the basis of the terms of this Waiver Letter and without prejudice to the rights of the Finance Parties. Nothing in this Waiver Letter shall be deemed to constitute a waiver of any Default, Event of Default or any further amendment or consent under any Finance Document whatsoever. The terms of the Finance Documents remain in full force and effect save as expressly amended by this Waiver Letter.
6.	REPRESENTATIONS
	The Borrower and each Guarantor by countersigning this Waiver Letter hereby confirms that on the date of this Waiver Letter:
(a)	each of the representations and warranties listed in paragraph (e) of Clause 17.1 (Representations and Warranties) of the Facility Agreement or stated to repeat in accordance with Clause 17.2 (Repetition) of the Facility Agreement with respect to the facts and circumstances then existing are true and correct; and
(b)	no Default has occurred and is continuing or, after giving effect to the Waiver and the Release, would result from the making of or entering into an agreement to sell and transfer any of the Asset Disposals (as such term is defined in the Waiver Request).

-2-

7.	STATUS OF DOCUMENTS
	By countersigning this Waiver Letter, the Borrower and the Guarantors each hereby confirms its agreement to the terms of this Waiver Letter and further confirms that its obligations under the Finance Documents (including, without limitation, the guarantees and security (including the priority of ranking of such security) provided thereby) shall continue in full force and effect.
8.	MISCELLANEOUS
(a)	This Waiver Letter is designated as a Finance Document.
(b)	This Waiver Letter may be executed in any number of counterparts (whether by fax, electronic copies such as PDF, or otherwise, but if by fax or electronic copies, with the original signed letter being promptly sent to the other party hereto by an internationally recognized overnight courier) and each such counterpart shall be deemed an original, and when taken together, constitute one and the same instrument.
(c)	If any provision of this Waiver Letter is or becomes invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions shall not be effected or impaired in any way.
(d)	The Contracts (Rights of Third Parties) Act 1999 shall not apply to this Waiver Letter and no person other than the parties to this Waiver Letter shall have any rights under it.
(e)	This Waiver Letter and any matter, claim or dispute arising out or in connection with it, whether contractual or non-contractual, is governed by, and is to be construed in accordance with, English law without any reference to conflicts of law principles thereof. The provisions of Clause 40 (Jurisdiction) of the Facility Agreement will apply to this Waiver Letter mutatis mutandis.

Yours faithfully,

/s/ Lee Masters for and on behalf of

BANK OF AMERICA, N.A.

(as Facility Agent, acting for and on behalf of, and on the instructions of, the Majority Lenders, and as Security Agent)

-3-

We hereby acknowledge and agree to the terms of the above:

/s/ Gregor Mathers

for and on behalf of

ATMEL SARL

as Borrower

/s/ Stephen Cumming

for and on behalf of

ATMEL CORPORATION

as US Parent and Guarantor

/s/ Gregor Mathers

for and on behalf of

ATMEL SWITZERLAND SARL

as Swiss Parent and Guarantor

-4-

EX-10.2

Exhibit 10.2

To:	Atmel SARL as the borrower under
	the Facility Agreement defined below
	(the “Borrower”)
	Atmel Corporation as a guarantor and
	as the US parent of the Borrower
	(the “US Parent”)
	Atmel Switzerland SARL as a guarantor
	(the “Swiss Parent” and, together with the US Parent,
	the “Guarantors”)
From:	Bank of America, N.A.
	as facility agent under the Facility Agreement
	(the “Facility Agent”)

August 3, 2010

Dear Sirs

FACILITY AGREEMENT WAIVER (THE “WAIVER LETTER”)

1.	DEFINITIONS
(a)	We refer to a US$165,000,000 facility agreement dated 15 March 2006 between, among others, (1) the Borrower, (2) the Guarantors, (3) the Lenders party thereto, (4) the Facility Agent and (5) Bank of America, N.A. as Security Agent (as amended, supplemented, varied, novated and/or restated from time to time, the “Facility Agreement”).
(b)	The Borrower has asked us to waive the obligation of the US Parent under Clause 21.1 (Fixed Charge Coverage Ratio) of the Facility Agreement not to permit the Fixed Charge Coverage Ratio for the Relevant Period ending on 30 June 2010 (only) to fall below 1.10:1 with further background as set out in the letter dated 23 July 2010 from the US Parent to the Facility Agent (the “Waiver Request”).
(c)	Unless otherwise defined, terms defined in the Facility Agreement have the same meaning in this letter. Clause references herein are to clauses of the Facility Agreement.
2.	WAIVER
	Subject to the terms of this Waiver Letter and acting on the instructions of the Majority Lenders, we hereby consent to the Waiver Request and, accordingly, waive (a) the application of Clause 21.1 (Fixed Charge Coverage Ratio) solely for the Relevant Period ending on 30 June 2010 (the “Waiver”) and (b) any Event of Default that arose (if any) as a result of failure to comply with Clause 21.1 for such Relevant Period.

3.	CONDITIONS
	The Waiver shall be effective on and from the date on which we, in our capacity as Facility Agent confirm receipt of a copy of this Waiver Letter duly counter-signed on behalf of the Borrower and the Guarantors (in form and substance satisfactory to us).
4.	RESERVATION OF RIGHTS
	The Waiver contained in this Waiver Letter is given strictly on the basis of the terms of this Waiver Letter and without prejudice to the rights of the Finance Parties. Save as expressly stated in this Waiver Letter, nothing in this Waiver Letter shall be deemed to constitute a waiver of any Default or any further amendment or consent under any Finance Document whatsoever and the terms of the Finance Documents remain in full force and effect.
5.	REPRESENTATIONS
	The Borrower and each Guarantor by countersigning this Waiver Letter hereby confirms that on the date of this Waiver Letter each of the representations and warranties listed in paragraph (e) of Clause 17.1 (Representations and Warranties) or stated to repeat in accordance with Clause 17.2 (Repetition) with respect to the facts and circumstances then existing is true and correct.
6.	STATUS OF DOCUMENTS
	By countersigning this Waiver Letter, the Borrower and the Guarantors each hereby confirms its agreement to the terms of this Waiver Letter and further confirms that its obligations under the Finance Documents (including, without limitation, the guarantees and security (including the priority of ranking of such security) provided thereby) shall continue in full force and effect.
7.	MISCELLANEOUS
(a)	This Waiver Letter is designated as a Finance Document.
(b)	This Waiver Letter may be executed in counterparts (whether by fax or electronic copies such as PDF, or otherwise, but if by fax or electronic copies, with the original signed letter being promptly sent to the other party hereto) and all such counterparts taken together shall constitute one and the same instrument.
(c)	If any provision of this Waiver Letter is or becomes invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired in any way.
(d)	The Contracts (Rights of Third Parties) Act 1999 shall not apply to this Waiver Letter and no person other than the parties to this Waiver Letter shall have any rights under it.
(e)	This Waiver Letter shall be, governed by English law. The provisions of Clause 40 (Jurisdiction) of the Facility Agreement will apply to this Waiver Letter mutatis mutandis.

Yours faithfully

-2-

/s/ Lee Masters for and on behalf of

BANK OF AMERICA, N.A.

(as Facility Agent, acting for and on behalf of, and on the instructions of, the Majority Lenders)

-3-

We hereby acknowledge and agree to the terms of the above.

/s/ Stephen Cumming for and on behalf of

ATMEL SARL

as Borrower

/s/ Stephen Cumming for and on behalf of

ATMEL CORPORATION

as US Parent and Guarantor

/s/ Stephen Cumming for and on behalf of

ATMEL SWITZERLAND SARL

as Swiss Parent and Guarantor

-4-

EX-31.1

Exhibit 31.1

CERTIFICATIONS

     I, Steven Laub, certify that:

     1. I have reviewed this Quarterly Report on Form 10-Q of Atmel Corporation;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2010

/s/ STEVEN LAUB

Steven Laub

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

     I, Stephen Cumming, certify that:

     1. I have reviewed this Quarterly Report on Form 10-Q of Atmel Corporation;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2010

/s/ STEPHEN CUMMING

Stephen Cumming

Vice President Finance and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Steven Laub, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Atmel Corporation on Form 10-Q for the fiscal quarter ended September 30, 2010 (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Atmel Corporation.

November 9, 2010

By:	/s/ STEVEN LAUB
	Steven Laub
	Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Stephen Cumming, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Atmel Corporation on Form 10-Q for the fiscal quarter ended September 30, 2010 (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Atmel Corporation.

November 9, 2010

By:	/s/ STEPHEN CUMMING
	Stephen Cumming
	Vice President Finance and Chief Financial Officer