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 JUNE 30, 2005

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 incorporation or organization)	(I.R.S. Employer Identification Number)

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

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

On August 1, 2005, the Registrant had 481,043,541 outstanding shares of Common Stock.

ATMEL CORPORATION

FORM 10-Q

QUARTER ENDED JUNE 30, 2005

INDEX	Page
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004		1
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and June 30, 2004		2
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and June 30, 2004		3
Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		48
Item 4. Controls and Procedures		52
Part II: Other Information
Item 1. Legal Proceedings		53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 3. Defaults Upon Senior Securities		54
Item 4. Submission of Matters to a Vote of Security Holders		54
Item 5. Other Information		55
Item 6. Exhibits		55
Signatures		56
Exhibits
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Atmel Corporation

Condensed Consolidated Balance Sheets
(Unaudited)

	June 30,			December 31,
(In thousands, except per share data)	2005			2004
ASSETS
Current assets
Cash and cash equivalents	$	303,148		$	346,350
Short-term investments		45,621			58,858
Accounts receivable, net of allowance for doubtful accounts of $7,730 in 2005 and $10,043 in 2004		231,737			228,544
Inventories		320,326			346,589
Other current assets		81,603			91,588
Total current assets		982,435			1,071,929
Fixed assets, net		1,025,342			1,204,852
Intangible and other assets		43,509			46,742
Total assets	$	2,051,286		$	2,323,523
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	133,564		$	141,383
Convertible notes		218,437			—
Trade accounts payable		164,192			245,240
Accrued and other liabilities		216,913			208,942
Deferred income on shipments to distributors		16,060			18,124
Total current liabilities		749,166			613,689
Long-term debt less current portion		159,517			110,302
Convertible notes less current portion		287			213,648
Other long-term liabilities		255,687			274,288
Total liabilities		1,164,657			1,211,927
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock: par value $0.001; Authorized: 1,600,000 shares; Shares issued and outstanding 480,984 at June 30, 2005 and 477,926 at December 31, 2004		480			478
Additional paid-in capital		1,288,611			1,281,235
Accumulated other comprehensive income		142,265			289,009
Accumulated deficit		(544,727	)		(459,126	)
Total stockholders’ equity		886,629			1,111,596
Total liabilities and stockholders’ equity	$	2,051,286		$	2,323,523

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

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Atmel Corporation

Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands, except per share data)	2005			2004			2005			2004
Net revenues	$	412,200		$	420,803		$	831,977		$	828,198
Operating expenses
Cost of revenues		319,420			301,088			652,195			587,849
Research and development		71,561			57,307			140,282			113,951
Selling, general and administrative		53,312			43,951			105,628			87,168
Total operating expenses		444,293			402,346			898,105			788,968
Income (loss) from operations		(32,093	)		18,457			(66,128	)		39,230
Interest and other expenses, net		(9,050	)		(2,712	)		(12,973	)		(8,608	)
Income (loss) before income taxes		(41,143	)		15,745			(79,101	)		30,622
Provision for income taxes		(1,437	)		(4,094	)		(6,500	)		(7,962	)
Net income (loss)	$	(42,580	)	$	11,651		$	(85,601	)	$	22,660
Basic net income (loss) per share	$	(0.09	)	$	0.02		$	(0.18	)	$	0.05
Diluted net income (loss) per share	$	(0.09	)	$	0.02		$	(0.18	)	$	0.05
Shares used in basic net income (loss) per share calculations		480,793			475,381			480,203			474,954
Shares used in diluted net income (loss) per share calculations		480,793			485,536			480,203			485,726

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

2

Atmel Corporation

Condensed Consolidated Statements of Cash Flows
(Unaudited)

	Six Months Ended June 30,
(In thousands)	2005			2004
Cash flows from operating activities
Net income (loss)	$	(85,601	)	$	22,660
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		153,303			146,230
Unrealized losses (gains) on derivative contracts		563			(355	)
Gain on sales of fixed assets		(148	)		(905	)
Provision for (recovery of) doubtful accounts receivable		(1,991	)		18
Accrued interest on convertible notes		5,075			4,835
Accrued interest on other long term debt		1,061			1,814
Changes in operating assets and liabilities:
Accounts receivable		(1,327	)		(29,661	)
Inventories		15,450			(38,214	)
Current and other assets		1,784			(13,074	)
Trade accounts payable		(34,040	)		36,557
Accrued and other liabilities		(5,364	)		(8,998	)
Deferred income on shipments to distributors		(2,064	)		2,424
Net cash provided by operating activities		46,701			123,331
Cash flows from investing activities
Acquisition of fixed assets		(140,256	)		(93,294	)
Sales of fixed assets		383			2,771
Payments for intangible and other assets		(5,146	)		—
Decrease in restricted cash		—			26,175
Purchase of investments		(6,371	)		(35,163	)
Sale or maturity of investments		18,748			16,803
Net cash used in investing activities		(132,642	)		(82,708	)
Cash flows from financing activities
Proceeds from equipment financing and other debt		131,242			—
Principal payments on capital leases and other debt		(72,760	)		(75,400	)
Issuance of common stock		7,379			5,905
Net cash provided by (used in) financing activities		65,861			(69,495	)
Effect of exchange rate changes on cash and cash equivalents		(23,122	)		(9,373	)
Net decrease in cash and cash equivalents		(43,202	)		(38,245	)
Cash and cash equivalents at beginning of period		346,350			385,887
Cash and cash equivalents at end of period	$	303,148		$	347,642
Supplemental cash flow disclosures:
Interest paid	$	7,250		$	9,674
Income taxes paid, net		11,145			23,548
Change in accounts payable due to fixed asset purchases		(79,054	)		23,042
Fixed assets acquired under capital leases	$	106,242		$	5,458

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

3

Atmel Corporation

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

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 June 30, 2005, the results of operations for the three and six month periods ended June 30, 2005 and 2004 and the cash flows for the six month periods ended June 30, 2005, and 2004. All material intercompany balances have been eliminated. Because all of the disclosures required by generally accepted accounting principles are not included, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The December 31, 2004 year-end balance sheet data was derived from the audited consolidated financial statements and does not include all of the disclosures required by generally accepted accounting principles. The condensed consolidated statements of operations for the periods presented are not necessarily indicative of results to be expected for any future period, nor for the entire year. Certain prior period amounts have been reclassified to conform to current presentations and such reclassifications did not have any effect on the prior periods’ net income.

     Inventories

     Inventories are stated at the lower of cost (determined on a first-in, first-out basis for raw materials and purchased parts; and an average-cost basis for work in progress) or market, and are comprised of the following:

	June 30, 2005		December 31, 2004
Raw materials and purchased parts	$	16,325	$	18,006
Work in progress		225,784		246,717
Finished goods		78,217		81,866
Inventories	$	320,326	$	346,589

     The Company’s policy is to write down its raw materials, work in progress and finished goods to the lower of cost or market at the close of a period. The Company’s inventory represents high technology integrated circuits that are subject to rapid technological obsolescence and are sold in a highly competitive industry. If actual product demand or selling prices are less favorable than the Company’s estimate, the Company may be required to take additional inventory write-downs. Alternatively, if the Company sells more inventory or achieves better pricing than the Company’s forecast, future margins may be higher.

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     Grant Recognition

     Grants from government organizations are amortized as a reduction of expenses over the period the related obligations are fulfilled. During the six month period ended June 30, 2005, the Company entered into new grant agreements with several French government agencies. Recognition of future benefits will depend on the Company’s achievement of certain investment and employment goals. During the three and six-month periods ended June 30, 2005, the Company recognized $9,890 and $20,070 of grant benefits, respectively. During the three and six -month periods ended June 30, 2004, the Company recognized $8,706 and $15,750 of grant benefits, respectively.

     Stock-Based Compensation

     Atmel has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS No.123”), Accounting for Stock Based Compensation amended by SFAS No. 148. Accordingly, no compensation cost has been recognized for the 1986 Incentive Stock Option Plan and the 2005 Stock Plan (an amendment and restatement of the 1996 Stock Plan) or for grants made under the 1991 Employee Stock Purchase Plan (“ESPP”). If the compensation cost for the 1986 Plan and the 2005 Stock Plan and the ESPP had been determined based on the fair value at the grant date consistent with the provisions of SFAS No.123, Atmel’s net income (loss) per share for the three and six-month periods ended June 30, 2005 and 2004 would have been adjusted to the pro forma amounts indicated below:

	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income (loss) — as reported	$	(42,580	)	$	11,651		$	(85,601	)	$	22,660
Add: employee stock-based compensation expense included in net income (loss) as reported, net of tax effects		—			—			—			—
Deduct: employee stock-based compensation expense based on fair value method, net of tax effects		(4,606	)		(4,237	)		(8,957	)		(8,292	)
Net income (loss) — pro forma	$	(47,186	)	$	7,414		$	(94,558	)	$	14,368
Basic net income (loss) per share — as reported	$	(0.09	)	$	0.02		$	(0.18	)	$	0.05
Basic net income (loss) per share — pro forma	$	(0.10	)	$	0.02		$	(0.20	)	$	0.03
Diluted net income (loss) per share — as reported	$	(0.09	)	$	0.02		$	(0.18	)	$	0.05
Diluted net income (loss) per share — pro forma	$	(0.10	)	$	0.02		$	(0.20	)	$	0.03

     The fair value of each option grant for the 1986 Plan and the 2005 Stock Plan is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

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	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Risk-free interest		3.87	%		3.72	%		3.88	%		3.20	%
Expected life (years)	5.21 - 6.94			5.02 - 5.89			5.17 - 6.94			5.02 - 5.89
Expected volatility		92	%		92	%		92	%		93	%
Expected dividend yield		0	%		0	%		0	%		0	%

     The weighted average fair values of stock options granted during three-month periods ended June 30, 2005 and 2004 were $1.99 and $3.97, respectively. The weighted average fair values of stock options granted during the six-month periods ended June 30, 2005 and 2004 were $2.34 and $4.46, respectively.

     The fair value of each purchase under the ESPP is estimated on the date at the beginning of the offering period using the Black-Scholes option-pricing model with the following assumptions:

	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
Risk-free interest		3.85	%		2.99	%		3.35	%		1.59	%
Expected life (years)		0.5			0.5			0.5			0.5
Expected volatility		92	%		93	%		74	%		81	%
Expected dividend yield		0	%		0	%		0	%		0	%

     The weighted average fair values of ESPP purchases during the three-month periods ended June 30, 2005 and 2004 were $1.31 and $3.02, respectively. The weighted average fair values of ESPP purchases during the six-month period ended June 30, 2005 and 2004 were $1.16 and $1.68, respectively.

     The effects of applying SFAS No.123 on the pro forma disclosures for the three and six month periods ended June 30, 2005 and 2004 are not likely to be representative of the effects on pro forma disclosures in future periods.

     Recent Accounting Pronouncements:

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123. This Statement supersedes APB No. 25, which is the basis for our current policy on accounting for stock-based compensation described above. SFAS No. 123R will require companies to recognize as an expense in the Statement of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees. Pro forma disclosures about the fair value method and the impact on net income (loss) and net income (loss) per share appear above. Under the methods of adoption allowed by the standard, awards that are granted, modified, or settled after the date of adoption should be measured and

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accounted for in accordance with SFAS No. 123R. The fair value of unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123 except that amounts must be recognized in the Statement of Operations. Previously reported amounts may be restated to reflect the SFAS No. 123R amounts in the Statement of Operations.

     In April 2005, the Securities and Exchange Commission (“SEC”) announced that registrants previously required to adopt SFAS No. 123R’s provisions on share-based payment at the beginning of the first interim period after June 15, 2005 may now adopt the provisions at the beginning of their first annual period beginning after June 15, 2005.

     The Company is evaluating the requirements of SFAS No. 123R and expects the adoption of SFAS No. 123R to have a material impact on our consolidated results of operations and net income (loss) per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

     In March 2005, the SEC issued Staff Accounting Bulletin No. 107, (“SAB No. 107”). The interpretations in SAB No. 107 express views of the SEC staff regarding SFAS No. 123R and provide the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company will consider the guidance in SAB No. 107 when it adopts SFAS No. 123R in the three-month period ending March 31, 2006.

     In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a Replacement of Accounting Principles Board (“APB”) Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”).

     SFAS No. 154 requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so. Retrospective application refers to the application of a different accounting principle to previously issued financial statements as if that principle had always been used. SFAS No. 154’s retrospective-application requirement replaces APB 20’s requirement to recognize most voluntary changes in accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The requirements are effective for accounting changes made in fiscal years beginning after December 15, 2005 and will only impact the consolidated financial statements in periods in which a change in accounting principle is made.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of Accounting Principles Board Opinion No. 29 (“APB No. 29”)  (“SFAS No. 153”). The guidance in APB No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that gains or losses on exchanges of nonmonetary assets may be recognized based on the differences in the fair values of the assets exchanged. The guidance in APB No. 29, however, included certain exceptions to that principle which allowed the asset received to be recognized at the book value

7

of the asset surrendered. SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for “exchanges of nonmonetary assets that do not have commercial substance”. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 should be applied prospectively, and are effective for the Company for nonmonetary asset exchanges occurring from the third quarter of 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in the first quarter of 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4” (“ARB No. 43, Chapter 4”) (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for the Company for inventory costs incurred beginning in 2006. Earlier application is permitted. The provisions of SFAS No. 151 should be applied prospectively. The adoption of SFAS No. 151 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

     At its November 2003 meeting, the Emerging Issues Task Force (“EITF”) reached a consensus on disclosure guidance previously discussed under EITF 03-01, “The Meaning of Other Than Temporary Impairment and its Application to Certain Investments” (“EITF 03-01”). The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”) and investments accounted for under the cost method. The consensus provided for disclosure of amounts of impairment of investments in securities not yet recognized in income effective for fiscal years ending after December 15, 2003. The Company adopted the disclosure requirements during its quarter ended September 30, 2004. At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115 and investments accounted for under the cost method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In September 2004, the FASB issued FASB Staff Position, 03-01-1, which delays the effective date of the recognition and measurement guidance. The Company does not believe that this consensus on the recognition and measurement guidance will have a significant impact on its Consolidated Financial Statements.

2. Short-Term Investments

     Short-term investments as of June 30, 2005 and December 31, 2004 are primarily comprised of United States of America (“U.S.”) and foreign corporate debt securities, U.S.

8

government and municipal agency debt securities, commercial paper, and guaranteed variable annuities.

     All marketable securities are deemed by management to be available for sale and are reported at fair value with net unrealized gains or losses reported within stockholders’ equity on the Company’s Condensed Consolidated Balance Sheets. Realized gains and losses are recorded based on the specific identification method. For the three and six-month periods ended June 30, 2005 and 2004, there were no net realized gains on short-term investments. The carrying amount of the Company’s investments is shown in the table below:

	June 30, 2005					December 31, 2004
	Book			Market		Book			Market
	Value			Value		Value			Value
U.S. Government obligations	$	986		$	985	$	998		$	998
State and municipal securities		690			690		798			796
Corporate securities and other obligations		43,284			43,946		56,555			57,064
Subtotal		44,960			45,621		58,351			58,858
Unrealized gains		779			—		666			—
Unrealized losses		(118	)		—		(159	)		—
Net unrealized gains		661			—		507			—
Total	$	45,621		$	45,621	$	58,858		$	58,858

     Contractual maturities of available-for-sale debt securities as of June 30, 2005, were as follows:

Due within one year	$	2,495
Due in 1-5 years		6,000
Due in 5-10 years		3,682
Due after 10 years		32,783
Total	$	44,960

     The following table shows the gross unrealized losses and fair value of the Company’s investments that have been in a continuous unrealized loss position for less than and greater than 12 months, aggregated by investment category as of June 30, 2005:

	Less than 12 months					Greater than 12 months
	Fair		Unrealized			Fair		Unrealized
	Value		losses			Value		losses
Corporate and municipal debt securities	$	12,451	$	(10	)	$	3,465	$	(108	)

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

3. Intangible Assets

     Intangible assets as of June 30, 2005 are included in Intangibles and Other Assets in the Condensed Consolidated Balance Sheets and consisted of the following:

	Gross					Net
	Intangible		Accumulated			Intangible
	Assets		Amortization			Assets
Core / Licensed Technology	$	101,964	$	(82,387	)	$	19,577
Non-Compete Agreement		306		(240	)		66
Patents		1,377		(739	)		638
Total Intangible Assets	$	103,647	$	(83,366	)	$	20,281

     Intangible assets as of December 31, 2004 consisted of the following:

	Gross					Net
	Intangible		Accumulated			Intangible
	Assets		Amortization			Assets
Core / Licensed Technology	$	100,118	$	(76,985	)	$	23,133
Non-Compete Agreement		306		(164	)		142
Patents		1,377		(509	)		868
Total Intangible Assets	$	101,801	$	(77,658	)	$	24,143

     Intangible amortization expense for the three-month periods ended June 30, 2005 and 2004 totaled $3,041 and $2,954, respectively. Intangible amortization expense for the six-month periods ended June 30, 2005 and 2004 totaled $5,708 and $6,183, respectively. The following table presents the estimated future amortization of net intangible assets:

	Amount
2005 (July 1 through December 31)	$	5,814
2006		7,734
2007		5,745
2008		878
2009 and thereafter		110
Total estimated future amortization	$	20,281

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4. Borrowing Arrangements

     Information with respect to Atmel’s debt and capital lease obligations is shown in the following table:

	June 30, 2005			December 31, 2004
Various interest-bearing notes	$	114,114		$	71,391
Line of credit		40,000			15,000
Convertible notes		218,724			213,648
Capital lease obligations		138,967			165,294
		511,805			465,333
Less amount due within one year		(352,001	)		(141,383	)
Long-term debt due after one year	$	159,804		$	323,950

Maturities of the debt and capital lease obligations are as follows:

	Convertible
	Notes			Other			Total
2005 (July 1 through December 31)	$	—		$	86,882		$	86,882
2006		228,033			97,781			325,814
2007		—			90,727			90,727
2008		335			20,254			20,589
2009		—			5,177			5,177
Thereafter		—			8,486			8,486
		228,368			309,307			537,675
Less amount representing interest		(9,644	)		(16,226	)		(25,870	)
Total	$	218,724		$	293,081		$	511,805

     In June 2005, the Company entered into a Euro 43,156 ($52,237) term loan agreement with a domestic bank. The interest rate is fixed at 4.10%. The Company has pledged certain manufacturing equipment as collateral. The full amount of the loan was outstanding at June 30, 2005. The loan is required to be repaid in equal installments of Euro 3,841 per calendar quarter commencing on September 30, 2005, with the final payment due on June 28, 2008.

     On February 28, 2005, the Company entered into an equipment financing arrangement in the amount of 40,685 Euro or $54,005 which is repayable in quarterly installments over three years. The stated interest rate is based on 90-day Euro Interbank Offered Rate (“Euribor”) plus 2.25%. This equipment financing is collateralized by the financed assets.

     In December 2004, the Company obtained a term loan with a domestic bank in the amount of $20,000. Concurrently, the Company established a $25,000 revolving line of credit with the same domestic bank. In June 2005, the full amount of the revolving line of credit was drawn. Both the term loan and the revolving line of credit mature in December 2007. The interest rate on the revolving line of credit is determined by the Company and must be either the domestic bank’s prime rate or LIBOR plus 2%. The interest rate on the term loan is EURIBOR plus 2.0%. All

11

domestic account receivable balances secure amounts borrowed. The revolving line of credit and term loan require the Company to meet certain financial ratios and to comply with other covenants on a periodic basis. The Company was in compliance with these covenants as of June 30, 2005. As of June 30, 2005, the full amount of the revolving line of credit and term loan was drawn and outstanding.

     In May 2001, the Company completed a sale of zero coupon convertible notes, due 2021 (“2021 Notes”), which raised $200,027. The 2021 Notes are convertible at any time, at the option of the holder, into the Company’s common stock at the rate of 22.983 shares per $1 (one thousand dollars) principal amount. The effective interest rate of the 2021 Notes is 4.75% per annum. The 2021 Notes will be redeemable for cash, at the Company’s option, at any time on or after May 23, 2006 in whole or in part at redemption prices equal to the issue price plus accrued original issue discount. At the option of the holders on May 23, 2006, May 23, 2011, and May 23, 2016, the Company may be required to repurchase the 2021 Notes at prices equal to the issue price plus accrued original issue discount through date of repurchase. The Company may elect to pay the repurchase price in cash, in shares of common stock or in any combination of the two. As of June 30, 2005, the outstanding balance of the 2021 Notes was $218,437 and is recorded within current liabilities on the Condensed Consolidated Balance Sheet as the 2021 Notes were redeemable to the holders within twelve months.

     In April 1998, Atmel completed a sale of zero coupon subordinated convertible notes, due 2018, (“2018 Notes”) which raised $115,004. On April 21, 2003, the Company paid $134,640 in cash to those note-holders of the 2018 Notes that submitted their 2018 Notes for redemption. 2018 Notes with an accreted value of $287 as of June 30, 2005 were not submitted for redemption and remain outstanding and are included within long-term liabilities on the Condensed Consolidated Balance Sheet. The 2018 Notes are convertible at any time, at the option of the holder, into the Company’s common stock at the rate of 55.932 shares per $1 (one thousand dollars) principal amount. The effective interest rate of the 2018 Notes is 5.5% per annum. At any time, the Company has the option to redeem the 2018 Notes for cash, in whole at any time or in part from time to time at redemption prices equal to the issue price plus accrued interest. At the option of the holders on April 21, 2008, and 2013, the Company may be required to repurchase the 2018 Notes at prices equal to the issue price plus accrued original issue discount through date of repurchase. The Company may elect to pay the repurchase price in cash, in shares of common stock or in any combination of the two.

     During the six-months ended June 30, 2005, the Company made $72,760 in principal payments on its capital leases and other debt.

5. Derivative Instruments

     The Company conducts business on a global basis in several currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. The Company uses derivative instruments to help manage exposures to foreign currency risk. The Company’s objective in holding derivatives is to minimize the volatility of earnings and cash flows associated with changes in foreign currency exchange rates.

     The Company recognizes derivative instruments, all of which are foreign currency forward contracts, as either assets or liabilities on the Condensed Consolidated Balance Sheets and measures those instruments at fair value. The accounting for changes in the fair value of a

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derivative depends on the intended use of the derivative and the designation at inception. The Company does not enter into derivatives for trading purposes.

     Gains and losses on contracts intended to offset foreign exchange gains or losses from the revaluation of current assets and liabilities, including inter-company balances, denominated in currencies other than the functional currency are included in interest and other expenses, net, in the Condensed Consolidated Statements of Operations. The Company’s balance sheet hedge contracts related to current assets and liabilities generally range from one to three months in original maturity. As of June 30, 2005, the Company had settled all of its outstanding balance sheet hedge contracts. As of December 31, 2004, the notional value of the balance sheet hedge contracts outstanding was 102,000 Euro or a fair value of $138,168. For the three and six-month periods ended June 30, 2005, the Company incurred a realized loss of $(29,533) upon settlement of all outstanding balance sheet hedge contracts. This loss was offset primarily by unrealized gains associated with the revaluation of current assets and current liabilities denominated in foreign currencies other than the Company’s functional currency resulting in net foreign exchange transaction losses of $(4,117) during the three-month period ended June 30, 2005. For the three and six-month periods ended June 30, 2004, the unrealized gain (loss) on the Company’s outstanding contracts was $281 and $(577), respectively. Both the realized and unrealized gain (loss) were included within interest and other expenses, net on the Company’s Condensed Consolidated Statements of Operations offset by the related realized and unrealized gain on the revaluation of the related current assets and liabilities.

     The Company periodically hedges forecasted transactions related to certain anticipated foreign currency operating expenses, primarily related to European manufacturing subsidiaries, with forward contracts. These contracts are designated as cash flow hedges. As of June 30, 2005 and December 31, 2004, the effective portion of the derivative’s (loss) gain, reported as a component of accumulated other comprehensive income, was $(15,088) and $3,918, respectively. These amounts are reclassified into cost of revenues when the related expenses are recognized. For the three and six-month periods ended June 30, 2005, the effective portion of the derivative’s (loss) that was reclassified into cost of revenues was $(4,299) and $(2,711), respectively. For the three and six-month periods ended June 30, 2004, the effective portion of the derivative’s (loss) that was reclassified into cost of revenues was $(3,310) and $(5,030), respectively. The ineffective portion of the gain or loss, if any, is reported in interest and other expenses, net immediately. For the three and six-month periods ended June 30, 2005, and 2004, the amounts recognized in earnings for hedge ineffectiveness and the time value excluded from effectiveness testing, were not significant. For the three and six-month periods ended June 30, 2005, the unrealized (loss) on the Company’s outstanding cash flow hedge contracts was $(563) and $(727), respectively. For the three and six-month periods ended June 30, 2004, the unrealized gain on the Company’s outstanding cash flow hedge contracts was $74 and $222, respectively. As of June 30, 2005, outstanding cash flow hedges, which had maturities of up to six months, had a notional value of 160,000 Euro or a fair value of $194,158. As of December 31, 2004, outstanding cash flow hedges, which had maturities of up to three months, had a notional value of 90,000 Euro or a fair value of $121,883.

     The fair value of derivative instruments as of June 30, 2005 was a net liability of $15,650. The fair value of derivative instruments as of December 31, 2004 was a net asset of $7,397. These amounts are included in other current assets or in accrued and other liabilities on the Company’s Condensed Consolidated Balance Sheets.

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     The Company’s foreign exchange forward contracts expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company minimizes such risk by limiting its counterparties to highly rated, large financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect any material losses as a result of default by counterparties.

6. Retirement Plans

The Company sponsors defined benefit pension plans that cover substantially all 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. The plans are non-funded. Pension liabilities and charges to expense are based upon various assumptions, updated annually, 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 primarily the Company’s French employees. The second plan type provides for defined benefit payouts for remaining employee’s post-retirement life, and covers primarily the Company’s German employees. The aggregate net pension cost relating to the two plan types for the three and six-month periods ended June 30, 2005 and 2004 included the following components:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Service cost-benefits earned during the period	$	570	$	525	$	1,189	$	880
Interest cost on projected benefit obligation		522		442		1,076		832
Amortization of net actuarial loss		24		108		55		208
Net pension cost	$	1,116	$	1,075	$	2,320	$	1,920

          As previously disclosed in the Consolidated Financial Statements in Company’s Annual Report on Form 10-K for the year ended December 31, 2004, the Company expects to make approximately $897 in benefit payments in 2005, including $335 paid in the six-month period ended June 30, 2005.

7. Restructuring and Asset Impairment Charges

          The following table summarizes the activity related to the restructuring accrual during the three-months ended June 30, 2005:

	March 31,					June 30,
	2005		Payments			2005
Restructuring accrual	$	10,747	$	(433	)	$	10,314

          The restructuring accrual balance of $10,314 at June 30, 2005 related to a long-term supplier contract and will be paid out over the next 9 years. The current balance of $934 is

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recorded in accrued and other liabilities on the Condensed Consolidated Balance Sheets. The long-term balance of $9,380 is recorded in other long-term liabilities on the Condensed Consolidated Balance Sheets.

8. Accumulated Other Comprehensive Income

          The components of accumulated other comprehensive income as of June 30, 2005, and December 31, 2004, are as follows:

	June 30,			December 31,
	2005			2004
Foreign currency translation	$	157,660		$	284,584
Pension liability		(968	)		—
Unrealized gain (loss) on derivative instruments		(15,088	)		3,918
Unrealized gains on investments		661			507
Accumulated other comprehensive income	$	142,265		$	289,009

9. Net Income (Loss) Per Share

          Basic net income (loss) per share is computed by using the weighted average number of common shares outstanding during that period. Diluted net loss per share is computed 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, warrants and convertible securities for all periods.

	Three months ended					Six months ended
	June 30,					June 30,
	2005			2004		2005			2004
Basic and diluted net income (loss)	$	(42,580	)	$	11,651	$	(85,601	)	$	22,660
Weighted-average shares — basic net income (loss) per share calculations		480,793			475,381		480,203			474,954
Dilutive effect of stock options		—			10,155		—			10,772
Weighted-average shares — diluted net income (loss) per share calculations		480,793			485,536		480,203			485,726
Basic net income (loss) per share	$	(0.09	)	$	0.02	$	(0.18	)	$	0.05
Diluted net income (loss) per share	$	(0.09	)	$	0.02	$	(0.18	)	$	0.05

          The following table summarizes antidilutive securities which were not included in the “Weighted-average shares — diluted net income (loss) per share calculations” used for calculation of diluted net income (loss) per share:

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	Three months ended				Six months ended
	June 30,				June 30,
	2005		2004		2005		2004
Employee stock options		22,310		8,862		22,275		8,343
Common stock equivalent shares associated with convertible notes		83,888		33,606		75,466		32,205
Total shares excluded from per share calculation		106,198		42,468		97,741		40,548
Average closing stock price used in computing the number of common stock equivalent shares	$	2.61	$	6.21	$	2.90	$	6.48

          As disclosed in Note 4, the convertible bond holders have the right to put the notes back to the Company at specific future dates, in which case the Company may elect to settle the notes in shares or cash. In accordance with EITF Topic D-72, “ Effects of Contracts That May Be Settled in Stock or Cash on the Computation of Diluted Earnings per Share”, the calculation of the number of common stock equivalent shares associated with the convertible notes assumes that the notes will be settled in shares at the then fair value. As a result, the number of common stock equivalent shares associated with convertible notes is computed by dividing the total outstanding balance (principal plus interest) of the convertible notes by the average closing sales price of the Company’s common stock for the applicable period.

          This calculation assumes the Company would repurchase the convertible notes using only common stock at the average stock price for the related period and no cash. In the event of redemption of the convertible notes, the actual conversion price will depend on future market conditions.

10. Interest and Other Expenses, Net

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

	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Interest and other income	$	2,330		$	2,467		$	4,031		$	5,494
Interest expense		(7,263	)		(6,327	)		(13,332	)		(13,871	)
Foreign exchange transaction gains (losses)		(4,117	)		1,148			(3,672	)		(231	)
Total	$	(9,050	)	$	(2,712	)	$	(12,973	)	$	(8,608	)

11. Income Taxes

       For the three and six month-periods ended June 30, 2005, the Company recorded income tax expense of $1,437 and $6,500, respectively, compared to income tax expense of $4,094 and $7,962 for the three and six-month periods ended June 30, 2004, respectively.

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       The provision for income taxes for these periods relates to certain profitable foreign subsidiaries, as the Company does not recognize any tax benefits for unprofitable entities where a full valuation allowance provided against their related deferred tax assets exists. In the three-month period ended June 30, 2005, the Company recognized the benefit of research and development income tax credits resulting from changes in French tax law and utilized in finalizing the tax return for 2004 for one of its French operations.

          During the three-months ended June 30, 2005, the Internal Revenue Service (“IRS”) commenced an income tax audit of the Company’s tax returns for the 2002 and 2003 fiscal tax years. Management believes it has adequately provided for taxes and related interest and penalties that may be assessed due to potential adjustments that result from the resolution of the audit of these and other tax years.

12. Segment Reporting

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

          Application specific integrated circuit (“ASIC”) segment includes custom application specific integrated circuits designed to meet specialized single-customer requirements for their high performance devices in a broad variety of applications. In addition, this segment includes smart card applications, imaging sensors and processors, audio processors, field programmable gate arrays (“FPGAs”) and programmable logic devices (“PLDs”), multimedia, and network storage products.

          Microcontroller segment includes a variety of proprietary and standard microcontrollers, the majority of which contain embedded nonvolatile memory, and military and aerospace application specific products.

          Nonvolatile Memory segment includes serial and parallel interface electrically erasable programmable read only memories (“EEPROMs”), serial and parallel interface Flash memories, and erasable programmable read only memories (“EPROMs”) for use in a broad variety of customer applications.

          Radio Frequency (“RF”) and Automotive segment includes radio frequency and analog circuits for the telecommunications, automotive and industrial markets as well as application specific products for the automotive industry.

          The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on revenues and income or loss from operations. Interest and other expenses, net, nonrecurring gains

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and losses, foreign exchange gains and losses and income taxes are not measured by operating segment.

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

Information about segments:

				Micro-
	ASIC			controller		NVM			RF and Automotive			Total
Three Months ended June 30, 2005
Net revenues	$	151,288		$	77,292	$	95,425		$	88,195		$	412,200
Segment operating income (loss)		(31,317	)		9,870		(6,661	)		(3,985	)		(32,093	)
Three Months ended June 30, 2004
Net revenues	$	142,472		$	97,488	$	118,959		$	61,884		$	420,803
Segment operating income (loss)		(23,882	)		27,890		8,383			6,066			18,457

				Micro-
	ASIC			controller		NVM			RF and Automotive			Total
Six Months ended June 30, 2005
Net revenues	$	301,439		$	154,917	$	195,111		$	180,510		$	831,977
Segment operating income (loss)		(66,645	)		21,447		(14,414	)		(6,516	)		(66,128	)
Six Months ended June 30, 2004
Net revenues	$	288,547		$	187,015	$	224,733		$	127,903		$	828,198
Segment operating income (loss)		(36,421	)		57,755		3,567			14,329			39,230

          Geographic sources of revenues for each of the three and six-month periods ended June 30, 2005 and 2004 were as follows, (revenues are attributed to countries based on delivery locations):

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	Three months ended				Six months ended
	June 30,				June 30,
	2005		2004		2005		2004
United States	$	59,082	$	63,768	$	113,043	$	134,526
Germany		41,727		45,049		86,627		90,197
France		40,164		40,220		81,005		74,065
UK		11,025		7,907		20,775		16,385
Japan		12,150		15,165		24,445		30,184
China including Hong Kong		88,197		103,323		174,669		188,230
Singapore		67,809		28,920		135,833		66,855
Rest of Asia-Pacific		44,735		61,353		97,233		119,274
Rest of Europe		41,435		43,954		86,186		88,091
Rest of World		5,876		11,144		12,161		20,391
Total Revenues	$	412,200	$	420,803	$	831,977	$	828,198

          Locations of long-lived assets as of June 30, 2005 and December 31, 2004:

	June 30, 2005		December 31, 2004
United States	$	288,082	$	323,831
Germany		18,355		26,380
France		377,023		459,312
UK		330,124		382,068
Japan		53		63
China including Hong Kong		609		410
Rest of Asia-Pacific		10,451		8,815
Rest of Europe		11,309		14,024
Total Long Lived Assets	$	1,036,006	$	1,214,903

13. Commitments and Contingencies

     Legal Proceedings:

     From time to time, the Company may be notified of claims that it may be infringing patents issued to other parties and may subsequently engage in license negotiations regarding these claims. Should the Company elect to enter into license agreements with other parties or should the other parties resort to litigation, the Company may be obligated in the future to make payments or to otherwise compensate these third parties which could have an adverse effect on the Company’s financial condition or results of operations or cash flows.

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

     Agere Systems, Inc. (“Agere”) filed suit in the United States District Court, Eastern District of Pennsylvania in February 2002, alleging patent infringement regarding certain semiconductor and related devices manufactured by Atmel. The complaint sought unspecified damages, costs and attorneys’ fees. Atmel disputed Agere’s claims. A jury trial for this action commenced on March 1, 2005 and on March 22, 2005, the jury returned a decision in favor of Atmel. This decision is subject to appeal.

     Seagate Technology (“Seagate”) filed suit against Atmel in the Superior Court for the State of California for the County of Santa Clara on July 31, 2002. Seagate contended that certain semiconductor chips sold by Atmel to Seagate between April 1999 and mid-2001 were defective. Atmel cross-complained against Amkor Technology, Inc. and ChipPAC Inc., Atmel’s leadframe assemblers. Amkor and ChipPAC brought suits against Sumitomo Bakelite Co. Ltd., Amkor and ChipPAC’s molding compound supplier. The parties settled their dispute and in June 2005, the parties dismissed their respective complaints, with prejudice. The settlement amount did not have a significant impact on the Company’s financial position.

     Warranty Liability:

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

     The following table summarizes the activity related to the product warranty liability during the six-month periods ended June 30, 2005 and 2004:

	2005			2004
Balance at beginning of period	$	10,495		$	9,998
Accrual for warranties during the period (including exchange rate impact)		3,018			3,422
Change in accrual relating to preexisting warranties (including change in estimates)		(530	)		(152	)
Settlements made (in cash or in kind) during the period		(3,769	)		(3,473	)
Balance at end of period	$	9,214		$	9,795

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Indemnifications:

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

     Purchase Commitments:

     At June 30, 2005, the Company had outstanding commitments for purchases of capital equipment of $46,572 which are expected to be delivered over the next several quarters.

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

          You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2004.

Forward Looking Statements

          You should read the following discussion of our financial condition and results of operations in conjunction with our Condensed Consolidated Financial Statements and the related “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2005 (including intended cost reduction efforts) and our expectations regarding the effects of exchange rates. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, especially under the caption “Trends, Uncertainties and Risks,” and elsewhere in this Form 10-Q and similar discussions in our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K. Generally, the words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-Q.

OVERVIEW

          We are a leading provider of semiconductor integrated circuits (“ICs”) products. We leverage our expertise in nonvolatile memories by combining them with microcontrollers, digital signal processors, Radio Frequency (“RF”) devices, and other logic to enable our customers to rapidly introduce leading edge electronic products that are differentiated by higher performance, advanced features, lower cost, smaller size, longer battery life and more memory. Our products are used primarily in the following markets: communications, computing, consumer electronics, storage, security, automotive, military and aerospace.

          We design, develop, manufacture and sell our products. We develop process technologies ourselves to ensure they provide the maximum possible performance. We manufacture more than 97% of our products in our own wafer fabrication facilities (“fabs”).

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          Net revenues during the three-month period ended June 30, 2005 decreased 2% or $9 million to $412 million, compared to $421 million from the same period in 2004, primarily due to declines in our Microcontroller and Nonvolatile Memory operating segments, partially offset by growth in our ASIC and RF and Automotive operating segments. Gross margin decreased to 23% for the three-month period ended June 30, 2005, compared to 28% for the same period in 2004, primarily due to pricing pressures on certain products, lower-than-expected manufacturing yields, and unfavorable impact from costs denominated in foreign currencies.

          During the three-month period ended June 30, 2005, changes in foreign exchange rates had a significant impact on net revenues and operating costs. Had average exchange rates during the three-month period ended June 30, 2005 remained the same as the average exchange rates in effect for the same period in 2004, our reported net revenues in the three-month period ended June 30, 2005, would have been approximately $2 million lower, while our operating costs would have been approximately $9 million lower (cost of revenues, $6 million; research and development, $2 million; sales, general and administrative, $1 million). The net effect of less favorable exchange rates for the three-month period ended June 30, 2005 compared to the average exchange rates for the same period in 2004 resulted in a increase in our loss from operations of $7 million.

          During the three-month period ended June 30, 2005, we had a loss from operations of $32 million, compared to income from operations of $19 million for the same period in 2004. The change from the prior period resulted primarily from lower gross margins, higher operating expenses and unfavorable foreign exchange rates.

          Net revenues during the six-month period ended June 30, 2005, increased slightly to $832 million as compared to $828 million for the same period in 2004, primarily due to growth in our ASIC and RF and Automotive operating segments, partially offset by declines in our Microcontroller and Nonvolatile Memory operating segments. The increase in the RF and Automotive operating segment is primarily related to growth in communication chipsets for CDMA phones while the increase in our ASIC operating segment was due to higher unit shipments offset by lower average selling price. The decline in our Microcontroller business is primarily due to end-of-life sales of military products in 2004, while the decrease in our Nonvolatile Memory operating segment is due to price declines driven by competitive pricing pressures. Gross margin decreased to 22% for the six-month period ended June 30, 2005, compared to 29% for the same period in 2004, primarily due to pricing pressures on certain products, lower-than-expected manufacturing yields, and unfavorable impact from costs denominated in foreign currencies.

          During the six-month period ended June 30, 2005, changes in foreign exchange rates had a significant impact on net revenues and operating costs. Had average exchange rates during this period remained the same as the average exchange rates in effect for the same period in 2004, our reported net revenues for the six-month period ended June 30, 2005, would have been approximately $7 million lower, while our operating costs would have been approximately $26 million lower (cost of revenues, $19 million; research and development, $5 million; sales, general and administrative, $2 million). The net effect of less favorable exchange rates for the six-month period ended June 30, 2005 compared to the average exchange rates for the same period in 2004 resulted in an increase in our loss from operations of $19 million.

          During the six-month period ended June 30, 2005, we had a loss from operations of $66 million, compared to income from operations of $39 million for the same period in 2004. The

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change from the prior period resulted primarily from lower gross margins, higher operating expenses and unfavorable foreign exchange rates.

          Although we incurred a net loss for the six-month period ended June 30, 2005, we still generated cash from operating activities, as we had in prior quarters. In the years 2002 through 2004, we have used this cash flow to significantly reduce our outstanding debt. During this period, we also made significant investments in advanced manufacturing processes and related equipment to maintain our competitive position technologically as well as to increase capacity. During the six-month period ended June 30, 2005 and comparative period in 2004, we paid $140 million and $93 million, respectively for new equipment.

          As of June 30, 2005, our cash and cash equivalents, and short-term investment balances totaled $349 million, down from $405 million as of December 31, 2004, while total indebtedness increased from $465 million to $512 million during the same period.

          We are currently formulating plans to improve our long term operating results by reducing our work force, selling or closing some of our older overseas manufacturing facilities, and reducing research and development projects. We are also contemplating improvements in our long term operating results by lowering capital expenditures and outsourcing the manufacture of certain products. Finally, we expect to achieve a reduction in our research and development costs by eliminating projects that have lower potential returns.

RESULTS OF OPERATIONS

          The following table sets forth for the periods indicated certain operating data as a percentage of net revenues:

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	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net revenues		100	%		100	%		100	%		100	%
Operating expenses
Cost of revenues		77			72			78			71
Research and development		17			14			17			14
Selling, general and administrative		14			10			13			11
Total operating expenses		108			96			108			96
Income (loss) from operations		(8	)		4			(8	)		4
Interest and other expenses, net		(2	)		(1	)		(1	)		(1	)
Income (loss) before income taxes		(10	)		3			(9	)		3
Provision for income taxes		—			(1	)		(1	)		(1	)
Net income (loss)		(10	)%		2	%		(10	)%		2	%

Net Revenues — By Operating Segment

  Our operating segments comprise: (1) ASIC; (2) Microcontroller; (3) Nonvolatile Memory; and (4) RF and Automotive.

     Our net revenues by segment for the three and six-month periods ended June 30, 2005 compared to the same periods in 2004 are summarized as follows (in thousands):

	Three Months Ended										Six Months Ended
	June 30,							Percent			June 30,							Percent
Segment	2005		2004		Change			Change			2005		2004		Change			Change
ASIC	$	151,288	$	142,472	$	8,816			6	%	$	301,439	$	288,547	$	12,892			4	%
Microcontroller		77,292		97,488		(20,196	)		(21	%)		154,917		187,015		(32,098	)		(17	%)
Nonvolatile Memory		95,425		118,959		(23,534	)		(20	%)		195,111		224,733		(29,622	)		(13	%)
RF and Automotive		88,195		61,884		26,311			43	%		180,510		127,903		52,607			41	%
Net revenues	$	412,200	$	420,803	$	(8,603	)		(2	%)	$	831,977	$	828,198	$	3,779			—

ASIC

          ASIC segment revenues increased by 6% or $9 million to $151 million for the three-month period ended June 30, 2005, compared to $142 million for the same period in 2004 and increased by 4% or $13 million to $301 million for the six-month period ended June 30, 2005, compared to $288 million for the same period in 2004.

          The increase in ASIC segment revenue growth was predominantly driven by higher unit shipments, partially offset by lower average selling prices. The majority of this growth came from increased revenues in Smart Card IC and ARM-based digital products. Smart Card IC products experienced growing demand for applications requiring small memory with high security, such as GSM cell phone applications, bank cards, national ID cards and conditional

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access for set-top boxes. ARM-based digital products benefited from introduction of new design wins for consumer-type electronics.

          Although many of the products within the ASICs business segment are profitable, currently Smart Card ICs are not, which makes the entire business segment unprofitable. We are currently improving profitability for our Smart Card ICs through planned die-size reductions and improved process yields. Due to competitive pricing pressures, conditions may remain challenging for Smart Card IC products for the foreseeable future.

Microcontroller

          Microcontroller segment revenues decreased by 21% or $20 million to $77 million for the three-month period ended June 30, 2005, compared to $97 million for the same period in 2004 and decreased 17% or $32 million to $155 million for the six-month period ended June 30, 2005, compared to $187 million for the same period in 2004. The decrease in segment revenues related primarily to the large sale of end-of-life Military and Aerospace application specific standard products in 2004 that was not repeated in 2005. The decrease was also due to lower overall average selling prices associated with sales of commodity Microcontrollers to customers in Asia.

Nonvolatile Memory

          Nonvolatile Memory segment revenues decreased by 20% or $24 million to $95 million for the three-month period ended June 30, 2005, compared to $119 million for the same period in 2004 and decreased 13% or $30 million to $195 million for six-month period ended June 30, 2005, compared to $225 million for the same period in 2004.

          Because Nonvolatile Memory products are commodity oriented, they are subject to greater declines in average selling prices than products in our other segments. Our nonvolatile memory segment continues to be unprofitable. Competitive pressures and the need to continually migrate to new technology are among several factors causing continued pricing declines. Conditions in this segment are expected to remain challenging for the foreseeable future. In an attempt to mitigate the pricing pressure in this market, we have shifted our focus away from parallel flash products, which tend to experience greater average sales price fluctuations.

RF and Automotive

          RF and Automotive segment revenues increased 43% or $26 million to $88 million for the three-month period ended June 30, 2005, compared to $62 million for the same period in 2004 and increased 41% or $53 million to $181 million for the six-month period ended June 30, 2005, compared to $128 million for same period in 2004.

          In 2005, RF and Automotive revenue increased primarily due to significant increases in sales of SiGe BiCMOS products that are sold for implementation into CDMA handsets. In addition, we have a significant presence in the European automotive sector, which has given us a steady customer base utilizing our products for function controllers, as well as ASSP’s for power train, convenience, and safety systems. RF communication applications include GPS and car radio products.

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Net Revenues — By Geographic Area

Our net revenues by geographic areas are summarized as follows (revenues are attributed to countries based on delivery locations):

	Three Months Ended										Six Months Ended
(in thousands)	June 30,							Percent			June 30,							Percent
Region	2005		2004		Change			Change			2005		2004		Change			Change
North America	$	59,082	$	63,768	$	(4,686	)		(7	%)	$	113,043	$	134,526	$	(21,483	)		(16	%)
Europe		134,351		137,130		(2,779	)		(2	%)		274,593		268,738		5,855			2	%
Asia		212,891		208,761		4,130			2	%		432,180		404,543		27,637			7	%
Other *		5,876		11,144		(5,268	)		(47	%)		12,161		20,391		(8,230	)		(40	%)
Total Net Revenues	$	412,200	$	420,803	$	(8,603	)		(2	%)	$	831,977	$	828,198	$	3,779			—

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

          Sales outside North America accounted for 86% of our net revenues for the three-month period ended June 30, 2005, as compared to 85% for the same period in 2004 and accounted for 86% of our net revenues for the six-month period ended June 30, 2005, compared to 84% of our net revenues for the same period in 2004.

          Our sales to North America decreased by $5 million, or 7% for the three-month period ended June 30, 2005, compared to the same period in 2004 and decreased $21 million, or 16% for the six-month period ended June 30, 2005, compared to the same period in 2004, due to lower average selling prices partially offset by slightly higher volume shipments.

          Our sales to Europe decreased $3 million, or 2%, for the three-month period ended June 30, 2005 as compared to the same period in 2004 and increased $6 million, or 2%, for the six-month period ended June 30, 2005, compared to the same period in 2004. The sales decrease for the three -month period was due to lower overall average selling prices. The sales increase for the six-month period was due to higher volume shipments and an increase in the value of the Euro relative to the U.S. dollar partially offset by lower average selling prices.

     Our sales to Asia increased $4 million, or 2%, for the three-month period ended June 30, 2005, compared to the same period in 2004 and increased $28 million, or 7%, for the six-month period ended June 30, 2005, compared to the same period in 2004 primarily due to higher volume shipments of our SiGe BiCMOS products partially offset by lower average selling prices.

Revenues and Costs — Impact from Changes to Foreign Exchange Rates

     During the three-month period ended June 30, 2005 approximately 22% of net revenues were denominated in foreign currencies, primarily the Euro, compared to 26% for the same period in 2004. During the six-month period ended June 30, 2005, approximately 23% of net revenues were denominated in foreign currencies, primarily the Euro compared to 27% for the same period in 2004. Sales in Euros amounted to 21% and 25% of net revenues for the three-month periods ended June 30, 2005 and 2004, respectively compared to 21% and 26% of net revenues for the six-month periods ended June 30, 2005 and 2004, respectively. Sales in

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Japanese Yen accounted for approximately 1% of net revenues for each of the three and the six-month periods ended June 30, 2005 and 2004.

     During the three and six-month periods ended June 30, 2005 changes in foreign exchange rates had a significant impact on net revenues and operating costs. Had average exchange rates for these periods remained the same as the average exchange rates in effect for the same respective periods in 2004, our reported net revenues would have been approximately $2 million and $7 million lower, respectively. However, our foreign currency costs exceed foreign currency revenues. During the three and six-month periods ended June 30, 2005 approximately 57% and 59% of our costs, respectively, were denominated in foreign currencies, primarily the Euro. Had average exchange rates during the three and six-month periods ended June 30, 2005, remained the same as the average exchange rates in effect for the same respective periods in 2004, our reported operating costs for the three-month period ended June 30, 2005 would have been approximately $9 million lower (cost of revenues $6 million; research and development, $2 million; sales, general and administrative $1 million) and our reported operating costs for the six-month period ended June 30, 2005 would have been approximately $26 million lower (cost of revenues $19 million; research and development, $5 million; sales, general and administrative, $2 million). The net effect of less favorable exchange rates for the three and six-month periods ended June 30, 2005 compared to the average exchange rates for the same periods in 2004 resulted in an increase in our loss from operations of $7 million and $19 million, respectively.

     Starting in the first quarter of 2004, we began a program to hedge a portion of forecasted transactions related to certain foreign currency operating expenses anticipated to occur within twelve months, primarily for European manufacturing subsidiaries, with forward exchange contracts. These contracts are designated as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and are designed to reduce the short-term impact of exchange rate changes on operating results. Our practice is to hedge exposures for the next 90 days. Average USD-Euro foreign exchange rates for cash flow hedge contracts were $1.32 and $1.26 during the three-month periods ended June 30, 2005 and 2004, respectively, compared to the average USD-Euro foreign exchange transaction rate of $1.26 and $1.22, respectively during the same periods, which resulted in an increase to cost of revenues of $4 million and $3 million, respectively. Average USD-Euro foreign exchange rates for cash flow hedge contracts were $1.32 and $1.26 during the six-month periods ended June 30, 2005 and 2004, respectively, compared to the average USD-Euro foreign exchange transaction rate of $1.30 and $1.23, respectively during the same periods, which resulted in an increase to cost of revenues of $3 million and $5 million, respectively.

     For the remaining half of 2005, we expect exchange rates to remain at or below the historical rates for the six-month period ended June 30, 2005. Due to hedging activities for the first half of 2005, we do not expect to realize the benefits of a lower USD-Euro foreign exchange rate until the fourth quarter of 2005.

Cost of Revenues and Gross Margin

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

     Gross margin was 23% and 28% for the three-month periods ended June 30, 2005 and 2004, respectively, and 22% and 29% for the six-month periods ended June 30, 2005 and 2004, respectively. The 5% decrease in gross margin during the three-month period

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ended June 30, 2005 compared to the same period in 2004, is due to the impact from price erosion on certain products and lower-than-expected manufacturing yields. Had exchange rates for the three-month period ended June 30, 2005 remained the same as the average exchange rates in effect for 2004, our reported gross margin would have increased by 1%. The 7% decrease in gross margin during the six-month period ended June 30, 2005 compared to the same period in 2004, is due to the impact from price erosion on certain products and lower-than-expected manufacturing yields. Had exchange rates for the six-month period ended June 30, 2005, remained the same as the average exchange rates in effect for 2004, our reported gross margin would have been increased by 2%.

     In recent periods, average selling prices for some of our semiconductor products have been below manufacturing costs, and accordingly, our results of operations, cash flows and financial condition have been adversely affected. As these charges are recorded in advance of when written-down inventory is sold, subsequent gross margins in the period of sale may be higher than they would be absent the effect of the previous write-downs. Our excess and obsolete inventory write-offs taken in prior years relate to all of our product categories, while lower-of-cost or market reserves relate primarily to our non-volatile memory products and Smart Card IC products.

     We receive economic assistance grants in some locations as an incentive to achieve certain hiring and investment goals related to manufacturing operations, the benefit for which is recognized as an offset to related costs. We recognized a $4 million reduction to cost of revenues for such grants for each of the three-month periods ended June 20, 2005 and 2004 and an $8 million reduction to cost of revenues for these grants for each of the six-month periods ended June 30, 2005 and 2004.

Research and Development

     Research and Development (“R&D”) expenses during the three-month period ended June 30, 2005 increased 26% or $15 million to $72 million from $57 million during the three-month period ended June 30, 2004. R&D expenses during the six-month period ended June 30, 2005 increased 23% or $26 million to $140 million from $114 million in the six-month period ended June 30, 2004. Increased spending on 0.09 micron-technology and unfavorable impact of exchange rates were the primary cause for the increase in R&D expenses. Had exchange rates during the three-month period ended June 30, 2005 remained the same as the average exchange rates incurred during the same period in 2004, R&D expenses would have been $2 million lower than the amount reported. Had exchange rates for the six-month period ended June 30, 2005 remained the same as the average exchange rates incurred during the same period in 2004, R&D expenses would have been $5 million lower than the amount reported.

     We have continued to invest in R&D efforts in a wide variety of product areas and process technologies, including embedded EEPROM CMOS technology, Logic and Flash to be manufactured at 0.13 and 0.09 micron line widths, as well as investments in SiGe BiCMOS technology to be manufactured at 0.18 micron line widths. We have also continued to purchase or license technology in order to bring a broad range of products to market in a timely fashion. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve.

     We receive R&D grants from various European research organizations, the benefit for which is recognized as an offset to related costs. For the three-month period ended June 30,

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2005, we recognized $6 million in research grant benefits, compared to $5 million recognized for the three-month period ended June 30, 2004. For the six-month period ended June 30, 2005, we recognized $12 million in research grant benefits, compared to $7 million recognized for the six-month period ended June 30, 2004.

Selling, General and Administrative

     Selling, General and Administrative (“SG&A”), expenses increased 20% or $9 million to $53 million during the three-month period ended June 30, 2004 from $44 million during the same period in 2004. SG&A expense increased 22% or $19 million to $106 million in the six-month period ended June 30, 2005 from $87 million for the same period in 2004. As a percentage of net revenues, SG&A expenses for the three-month period ended June 30, 2005 increased to 14% as compared to 10% of net revenues for the same period in 2004 and increased to 13% in the six-month period ended June 30, 2005 compared to 11% in the six-month period ended June 30, 2004. The increase in SG&A expenses for the periods presented was due to a $7 million increase in legal expenses during the three-month period ended June 30, 2005 compared to the same period in 2004, and a $9 million increase in legal expenses during the six-month period ended June 30, 2005 compared to the same period in 2004, primarily due to increased activity associated with our litigation activity. During the six-month period ended June 30, 2005 we incurred $2 million of increased consulting fees primarily associated with Sarbanes Oxley Section 404 compliance, compared to the same period in 2004. During the three and six-month periods ended June 30, 2005 we incurred a $1 million and $4 million increase, respectively, in labor, benefits and other expenses compared to the same periods in 2004. In addition, had exchange rates in the three-month period ended June 30, 2005 remained the same as the average exchange rates incurred during the same period in 2004, SG&A expenses would have been $1 million lower than the amount reported. Had exchange rates during the six-month period ended June 30, 2005 remained the same as the average exchange rates incurred during the same period in 2004, SG&A expenses would have been $2 million lower than the amount reported.

Interest and Other Expenses, Net

     Interest and other expenses, net, increased by $6 million to $9 million during the three-month period ended June 30, 2005 compared to $3 million during the same period in 2004 and increased by $4 million to $13 million during the six-month period ended June 30, 2005, compared to $9 million during the same period in 2004. As a percentage of net revenues, interest and other expenses, net was 2% and 1% for the three-month periods ended June 30, 2005 and 2004, respectively and 1% for each of the six-month periods ended June 30, 2005 and 2004. The increase in interest and other expenses, net, is primarily due to foreign exchange losses of $4 million recognized in both the three and six-month periods ended June 30, 2005, compared to foreign exchange gains of $1 million for the three-month period ended June 30, 2004 and foreign exchange losses of $0.2 million for the six-month period ended June 30, 2004. The loss incurred during the three and six-month periods ended June 30, 2005 was primarily the result of anticipated and hedged balance sheet exposures that were larger than those that materialized during the quarter. Also, the significant movement in the USD-EURO foreign exchange rate in May, when applied to the difference between our balance sheet exposures and outstanding hedge

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contracts contract contributed to the unfavorable impact of $4 million on interest and other expenses, net, on our Condensed Consolidated Statements of Operations.

     Interest rates on our outstanding borrowings did not change significantly in the three and six-month periods ended June 30, 2005 as compared to the same periods in 2004.

Income Taxes

     For the three-month period ended June 30, 2005, we recorded income tax expense of $1 million compared to $4 million during the three-month period ended June 30, 2004. The income tax expense for the current quarter relates to the operations of our foreign subsidiaries. In subsidiaries where we have available tax net operating losses, we have utilized these losses to offset current year income. For subsidiaries which have full valuation allowances against their related deferred tax assets, the future benefit of current year net operating losses is not provided. We have also recognized, in the second quarter, the benefit of research and development income tax credits generated from our French operations in finalizing their tax return for 2004 resulting from a favorable change in French tax law.

     During the second quarter of 2005, the IRS commenced an audit of our federal income tax returns for the fiscal years ended 2002 and 2003. We believe we have adequately provided for taxes and related interest and penalties that may be assessed due to potential adjustments that result from the resolution of the audit of these and other tax years.

     For the six-month period ended June 30, 2005, we recorded an income tax expense of $7 million compared to $8 million for the six-month period ended June 30, 2004. The income tax expense for the six-month period ended June 30, 2005 relates to the operations of our foreign subsidiaries. The future tax benefit of net operating losses was not provided, as realization of the related benefit was not assured.

Liquidity and Capital Resources

     At June 30, 2005, we had a total of $349 million of cash and cash equivalents and short-term investments compared to $405 million at December 31, 2004. Current ratio, calculated as total current assets divided by total current liabilities, was 1.3 at June 30, 2005 and 1.7 at December 31, 2004. Despite reporting losses during the six and three-month period ended June 30, 2005, we have generated positive cash flow from operating activities, as net losses include deductions for depreciation and other non-cash charges. Working capital decreased by $225 million to $233 million at June 30, 2005 compared to $458 million at December 31, 2004, primarily as a result of the reclassification of $218 million of our Zero Coupon Convertible Notes due 2021 (“2021 Notes”) from long-term liabilities to current liabilities.

     Operating Activities: Net cash provided by operating activities was $47 million in the six-month period ended June 30, 2005, compared to $123 million in the six-month period ended June 30, 2004. We generated operating cash flow in spite of incurring losses due primarily to depreciation and other non-cash charges. The $76 million decrease in operating cash flows is primarily due to our net loss incurred as a result of pricing pressures related to certain products and unfavorable foreign exchange rates. Accounts receivable increased 1% or $3 million to $232 million at June 30, 2005 from $229 million at December 31, 2004. The average days of accounts

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receivable outstanding (“DSO”) was 51 days at both the end of the second quarter of 2005 and the end of the fourth quarter of 2004. Our accounts receivable and DSO are primarily impacted by shipment linearity, payment terms offered, and collection performance. Should we need to offer longer payment terms in the future due to competitive pressures, this could negatively affect our DSO.

     Inventories decreased 8% or $27 million, to $320 million at June 30, 2005 from $347 million at December 31, 2004. Average days of sales in inventory decreased to 89 days at June 30, 2005 as compared to 107 days at December 31, 2004. The decrease is primarily related to higher shipment volumes and increased reserves for excess and obsolete 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, increased shipment levels, higher levels of process complexity, and the strategic need to offer competitive lead times may result in an increase in inventory levels in the future.

     Other current assets decreased 11% or $10 million, to $82 million at June 30, 2005 from $92 million at December 31, 2004. This decrease is primarily due to a reduction in derivative assets related to the change in foreign currency exchange rates offset by higher receivable balances for VAT incurred related to increased European purchase activity during the six-month period ended June 30, 2005.

     Investing Activities: Net cash used for investing activities was $133 million for the six-month period ended June 30, 2005 compared to $83 million used for the six-month period ended June 30, 2004. During the first six months of 2005, we made significant investments in advanced manufacturing processes, and related equipment.

     Financing Activities: Net cash provided by financing activities was $66 million for the six-month period ended June 30, 2005 compared to net cash used of $(69) million for the six-month period ended June 30, 2004. The change is primarily due to the $131 million of financing activity completed during the six-month period ended June 30, 2005. We continued to pay down debt, with repayments of principal balances on capital leases and other debt totaling $73 million for the six-month period ended June 30, 2005, compared to $75 million for the same period in 2004.

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

     Net decrease in cash and cash equivalents for the six-month periods ended June 30, 2005 and 2004 included a decrease of $23 million and $9 million, respectively, due to the effect of exchange rate changes on cash balances denominated in foreign currencies. These cash balances were primarily held in certain subsidiaries in Euro denominated accounts and decreased in value due to the weakening of the Euro compared to the U.S. dollar during these periods.

     During 2005, we expect our operations to generate positive cash flow; however, a significant portion of this cash will be used to repay debt and make capital investments. The amount of cash we use during the remainder of 2005 will depend largely on the amount of cash generated from our operations. Currently, we expect our total 2005 cash payments for capital

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expenditures to be approximately $170 million. In 2005 and future years, our capacity to make significant capital investments will depend on our ability to generate substantial cash flow from operations and on our ability to obtain adequate financing.

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123. This Statement supersedes APB No. 25, which is the basis for our current policy on accounting for stock-based compensation described in Note 1 of Notes to Condensed Consolidated Financial Statements. SFAS No. 123R will require companies to recognize as an expense in the Statement of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees. Pro-forma disclosures about the fair value method and the impact on net income (loss) and net income (loss) per share appear in Note 1 of Notes to Condensed Consolidated Financial Statements. Under the methods of adoption allowed by the standard, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123R. The fair value of unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123 except that amounts must be recognized in the Statement of Operations. Previously reported amounts may be restated to reflect the SFAS No. 123R amounts in the Statement of Operations.

     In April 2005, the Securities and Exchange Commission (“SEC”) announced that registrants previously required to adopt SFAS No. 123R’s provisions on share-based payment at the beginning of the first interim period after June 15, 2005 may now adopt the provisions at the beginning of their first annual period beginning after June 15, 2005.

     We are evaluating the requirements of SFAS No. 123R and we expect that the adoption of SFAS No. 123R will have a material impact on our consolidated results of operations and net income (loss) per share. We have not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

     In March 2005, the SEC issued Staff Accounting Bulletin No. 107, (“SAB No. 107”). The interpretations in SAB No. 107 express views of the SEC staff regarding SFAS No. 123R and provide the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company will consider the guidance in SAB No. 107 when it adopts SFAS No. 123R in the three-month period ending March 31, 2006.

     In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a Replacement of Accounting Principles Board (“APB”) Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”).

     SFAS No. 154 requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so. Retrospective application refers to the application of a different accounting principle to previously issued financial statements as if that principle had always been used. SFAS No. 154’s retrospective-application requirement replaces APB 20’s requirement to recognize most voluntary changes in accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting

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principle. This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The requirements are effective for accounting changes made in fiscal years beginning after December 15, 2005 and will only impact the consolidated financial statements in periods in which a change in accounting principle is made.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of Accounting Principles Board Opinion No. 29 (“APB No. 29”) (“SFAS No. 153”). The guidance in APB No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that gains or losses on exchanges of nonmonetary assets may be recognized based on the differences in the fair values of the assets exchanged. The guidance in APB No. 29, however, included certain exceptions to that principle which allowed the asset received to be recognized at the book value of the asset surrendered. SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for “exchanges of nonmonetary assets that do not have commercial substance”. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 should be applied prospectively, and are effective for us for nonmonetary asset exchanges occurring from the third quarter of 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in the first quarter of 2005. The adoption of SFAS No. 153 is not expected to have a material impact on our Consolidated Financial Statements.

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4” (“ARB No. 43, Chapter 4”) (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “ . . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for us for inventory costs incurred beginning in 2006. Earlier application is permitted. The provisions of SFAS No. 151 should be applied prospectively. The adoption of SFAS No. 151 is not expected to have a material impact on our Consolidated Financial Statements.

     At its November 2003 meeting, the Emerging Issues Task Force (“EITF”) reached a consensus on disclosure guidance previously discussed under EITF 03-01, “The Meaning of Other Than Temporary Impairment and its Application to Certain Investments” (“EITF 03-01”). The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”) and investments accounted for under the cost method. The consensus provided for disclosure of amounts of impairment of investments in securities not yet recognized in income effective for fiscal years ending after December 15, 2003. We adopted the disclosure requirements during our quarter ended September 30, 2004. At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-

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sale or held-to-maturity under SFAS No. 115 and investments accounted for under the cost method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In September 2004, the FASB issued FASB Staff Position, 03-01-1, which delays the effective date of the recognition and measurement guidance. We do not believe that this consensus on the recognition and measurement guidance will have a significant impact on our Consolidated Financial Statements.

Trends, Uncertainties and Risks

     Keep these trends, uncertainties and risks in mind when you read “forward-looking” statements elsewhere in this Form 10-Q and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.

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

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

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

• ability to meet our debt obligations

• fluctuations in currency exchange rates

• availability of additional financing

• the extent of utilization of manufacturing capacity

• fluctuations in manufacturing yields

• the highly competitive nature of our markets

• the pace of technological change

• natural disasters or terrorist acts

• political and economic risks

• our ability to maintain good relations with our customers

• integration of new business or products

• third party intellectual property infringement claims

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

• assessment of internal controls over financial reporting

• environmental regulations

• personnel changes

• business interruptions

• system integration disruptions, and

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

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

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     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 the design stage. However, design wins may precede volume sales by a year or more. We may not be successful in achieving design wins or design wins may not result in future revenues, which depend in large part on the success of the customer’s end product or system. The average selling price of each of our products usually declines as individual products mature and competitors enter the market. To offset average selling price decreases, we rely primarily on reducing costs to manufacture those products, increasing unit sales to absorb fixed costs and introducing new, higher priced products which incorporate advanced features or integrated technologies to address new or emerging markets. Our operating results could be harmed if such cost reductions and new product introductions do not occur in a timely manner. From time to time, our quarterly revenues and operating results can become more dependent upon orders booked and shipped within a given quarter and, accordingly, our quarterly results can become less predictable and subject to greater variability.

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

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

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

     Atmel’s operating results have been harmed by industry-wide fluctuations in the demand for semiconductors, which resulted in under-utilization of our manufacturing capacity and declining gross margins. In the past we have recorded significant charges to recognize impairment in value of our manufacturing equipment, reducing our workforce, and 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 customer products.

     OUR LONG-TERM DEBT 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 June 30, 2005, our long-term convertible notes and long-term debt less current portion was $160 million compared to $324 million at December 31, 2004. As of June 30, 2005,

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the current portion of our convertible notes and current portion of long-term debt was $352 million compared to $141 million at December 31, 2004. Our long-term debt (less current portion) to equity ratio was 0.2 at June 30, 2005 and 0.3 at December 31, 2004. Our current debt levels, as well as any increase 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.

     Our ability to meet our debt obligations will depend upon 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.

     Our ability to service long-term debt or to obtain cash for other needs of the Atmel group from our foreign subsidiaries may be structurally impeded. Since a substantial portion of our operations is conducted through our 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 US parent corporation. These subsidiaries are separate and distinct legal entities and may have limited or no obligation, contingent or otherwise, to pay any amounts to the US parent corporation, whether by dividends, distributions, loans or other payments. However, the US parent corporation owes much of our consolidated long-term debt, including our two outstanding issues of convertible notes.

     In addition, the payment of dividends or distributions and the making of loans and advances to the US parent corporation by any of our subsidiaries could in the future be subject to statutory or contractual restrictions or depend on other business considerations and be contingent upon the earnings of those subsidiaries. Any right held by the US parent corporation to receive any cash or other assets of any of our subsidiaries upon its liquidation or reorganization will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors. Although the US parent corporation may be recognized as a creditor, its interests will be subordinated to other creditors whose interests will be given higher priority.

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

     Semiconductor companies that maintain their own fabrication facilities have substantial capital requirements. We intend to continue to make capital investments to support new products and manufacturing processes that achieve manufacturing cost reductions and improved yields. Currently, we expect our total 2005 capital expenditures to be approximately $170 million. We may seek additional equity or debt financing to fund further enhancement of our wafer fabrication capacity or to fund other projects. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for products, product mix, changes in semiconductor industry conditions and competitive factors. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms.

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     IF WE DO NOT SUCCESSFULLY ADJUST OUR MANUFACTURING CAPACITY IN LINE WITH DOWNTURNS IN OUR INDUSTRY OR INCREASES IN DEMAND, OUR BUSINESS COULD BE HARMED.

     We currently manufacture our products at our facilities in Colorado Springs, Colorado; Heilbronn, Germany; Rousset, France; Grenoble, France; Nantes, France; and North Tyneside, United Kingdom.

     During economic upturns in the semiconductor industry we may need to increase our manufacturing capacity to a level that meets demand for our products in order to achieve and maintain profitability. In light of losses incurred from 2001 through the first six months of 2005, we may not be able to obtain from external sources the additional financing necessary to fund the expansion of our manufacturing facilities or the implementation of new manufacturing technologies. If we cannot expand our capacity on a timely basis during economic upturns in the semiconductor industry, we could experience significant capacity constraints that would prevent us from meeting increased customer demand, which would also harm our business.

     During economic downturns in our industry, expensive manufacturing machinery may be underutilized or may need to be sold off possibly at significantly discounted prices, in order to reduce costs, although we may continue to be liable to make payments on debt incurred to finance the purchase of such equipment. At the same time, employee and other manufacturing costs may need to be reduced.

     Also, during economic downturns in our industry we may have to reduce our wafer fabrication capacity in order to reduce costs. However, reducing our wafer fabrication capacity involves significant potential costs and delays, particularly in Europe, where we have substantial manufacturing facilities and where the extensive statutory protection of employees imposes substantial costs and delays on their employers when the market requires downsizing. Such costs and delays include compensation to employees and local government agencies, requirements and approvals of governmental and judicial bodies, and losses of governmental subsidies. We may experience labor union objections or other difficulties while implementing a downsizing. Any such difficulties that we experience would harm our business and operating results, either by deterring needed downsizing or by the additional costs of accomplishing it in Europe relative to America or Asia.

     In December 2003, we re-evaluated the status of our Irving, Texas facility, which had been purchased in order to meet potential increased demand, and we reclassified the facility as “held-in-use.” At such time, we also re-evaluated the related fabrication equipment. Due to significant improvements in market conditions, we decided to utilize much of this equipment in other facilities to meet increasing demand. An asset impairment charge of $27.6 million to write down asset values to the lower of their then fair value or original net book value, prior to holding these assets for sale less depreciation relating to the period the assets were held-for- sale, was recorded in the fourth quarter of 2003. While this facility was held-for-sale, assets were not in use, and were not depreciated. During 2004, the facility and wafer fabrication equipment were depreciated at rates appropriate for each type of asset. Nearly all of the fabrication equipment was re-deployed to other manufacturing facilities that we own. During the fourth quarter of 2004, the building and related improvements were evaluated for impairment based on management’s estimates which considered an independent appraisal, among other factors, in determining fair market value. No additional impairment adjustment was required. As of June 30, 2005, the building and related improvements and land had a net book value of $56 million.

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     We continue to evaluate the current restructuring and asset impairment accruals as the restructuring plans are being executed and as a result, there may be additional restructuring charges or reversals of previously established accruals.

     IF WE ARE UNABLE TO EFFECTIVELY UTILIZE OUR WAFER MANUFACTURING CAPACITY AND 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 0.09-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. We may experience problems in achieving acceptable yields in the manufacture of wafers, particularly when we expand our manufacturing capacity or during a transition in the manufacturing process technology that we use.

     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 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.

     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, Freescale, Fujitsu, Hitachi, IBM, Infineon, Intel, LSI Logic, Microchip, Philips, Samsung, Sharp, STMicroelectronics, Texas Instruments and Toshiba. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. As we have introduced new products we are increasingly competing directly with these companies, and we may not be able to compete effectively. We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last three 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. We expect continuing competitive pressures in our markets from existing

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competitors and new entrants, new technology and cyclical demand, which, among other factors, will likely maintain the recent trend of declining average selling prices for our products.

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

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

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

• the rate at which customers incorporate our products into their system

• product introductions by our competitors

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

• the incumbency of our competitors at potential new customers, and

• general market and economic conditions

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

     WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.

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

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

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

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achieve market acceptance, and price expectations for our new products may not be achieved, any of which could harm our business.

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

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

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

     Sales to customers outside North America accounted for approximately 83%, 82% and 78% of net revenues in 2004, 2003 and 2002. Sales to customers outside North America accounted for 86% and 85% of our net revenues for both the three-month periods ended June 30, 2005 and 2004, compared to 86% and 84% of our net revenues for the six-month periods ended June 30, 2005 and 2004, respectively. We expect that revenues derived from international sales will continue to represent a significant portion of net revenues. International sales and operations are subject to a variety of risks, including:

• greater difficulty in protecting intellectual property

• greater difficulty in staffing and managing foreign operations

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

• greater risk of uncollectible accounts

• longer collection cycles

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

• sales seasonality, and

• general economic and political conditions in these foreign markets

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

     Approximately 73%, 72% and 75% of our net revenues in 2004, 2003 and 2002 were denominated in U.S. dollars. During the three-month period ended June 30, 2005 and six-month period ended June 30, 2005 approximately 78% and 77% of our net revenues, respectively, were

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denominated in U.S. dollars. In 1998, business conditions in Asia were severely affected by banking and currency issues that adversely affected our operating results. Approximately 48%, 49% and 43% of net revenues were generated in Asia in 2004, 2003 and 2002. During the three-month periods ended June 30, 2005 and 2004, approximately 52% and 50% of our net revenues, respectively, were generated in Asia. During the six-month periods ended June 30, 2005 and 2004 approximately 52% and 49%, respectively, of our net revenues were generated in Asia.

     REVENUE DENOMINATED IN FOREIGN CURRENCIES COULD DECLINE IF THESE CURRENCIES WEAKEN AGAINST THE DOLLAR, AND WE MAY NOT BE ABLE TO ADEQUATELY HEDGE AGAINST THIS RISK.

     When we take an order denominated in a foreign currency we may receive fewer dollars than initially anticipated if that local currency weakens against the dollar before we collect our funds. In addition to reducing revenues, this risk will negatively affect our operating results. In Europe, where our significant operations have costs denominated in European currencies, a negative impact on revenues can be partially offset by a positive impact on costs. However, in Japan, while our Yen denominated sales are also subject to exchange rate risk, we do not have significant operations with which to counterbalance our exposure. Sales denominated in European currencies and Yen as a percentage of net revenues were 25% and 1% in 2004, 26% and 2% in 2003 and 22% and 3% in 2002, respectively. For the three-month period ended June 30, 2005 sales denominated in European currencies and Yen as a percentage of net revenue were 21% and 1%, respectively. For the three-month period ended June 30, 2004 sales denominated in European currencies and Yen as a percentage of net revenues were 25% and 1%, respectively. For the six-month period ended June 30, 2005 sales denominated in European currencies and Yen as a percentage of net revenue were 21% and 1%, respectively. For the six-month period ended June 30, 2004 sales denominated in European currencies and Yen as a percentage of net revenue were 26% and 1%, respectively. We also face the risk that our accounts receivable denominated in foreign currencies could be devalued if such foreign currencies weaken quickly and significantly against the dollar.

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

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

     Currently, we enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on certain foreign currency assets and liabilities. In addition, we periodically hedge certain anticipated foreign currency cash flows. Our attempts to hedge against these risks may not be successful, resulting in an adverse impact on our net income.

     During the three-months ended June 30, 2005 we incurred a $30 million realized loss as a result of anticipated and hedged balance sheet exposures that were larger than those that materialized during the quarter. Also, the significant movement in the USD-EURO foreign exchange rate in May, when applied to the difference between our balance sheet exposures and outstanding hedge contracts contract contributed to the unfavorable impact of $4 million on

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interest and other expenses, net, on our Condensed Consolidated Statements of Operations for both the three and six-month periods ended June 30, 2005.

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

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

     We sell many of our products through distributors. Our distributors could experience financial difficulties or otherwise reduce or discontinue sales of our products. Our distributors could commence or increase sales of our competitors’ products. In any of these cases, our business could be harmed.

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

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

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

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

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

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

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

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

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

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

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     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. For example, in connection with our management’s evaluation of our internal control over financial reporting as of December 31, 2004, management identified two control deficiencies that constitute material weaknesses. As more fully described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2004, as of December 31, 2004, our management concluded that we did not maintain effective controls over:

• The accounting for income taxes, including the determination of income taxes payable, deferred income tax assets and liabilities and the related income tax provision. Our control procedures did not include adequate review over the completeness and accuracy of income tax accounts to ensure compliance with GAAP; and

• The accounting for inventory reserves and cost of revenues. We did not consistently apply GAAP, as the local review of inventory reserves at two of our sites did not identify that certain inventory reserves had been released without the related inventory being sold or disposed of, and there was no review performed at the corporate level to detect inappropriate releases of inventory reserves.

     Atmel’s management determined that these control deficiencies could result in a misstatement of income taxes payable, deferred income tax assets and liabilities or the related income tax provision, or inventory and cost of revenues, that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that these control deficiencies constitute material weaknesses. The above deficiencies resulted in audit adjustments to the financial statements for the fourth quarter of 2004. As a result of the material weaknesses identified, our management concluded that our internal control over financial reporting was not effective as of December 31, 2004. See Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2004. During the first and second quarters of 2005, we began remediating the accounting for income taxes and inventory reserve material weaknesses described in our 2004 Form 10-K, including the hiring of additional tax personnel. However, as of June 30, 2005, we have not completed the remediation of these material weaknesses. See Part I, Item 4. below.

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

     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

45

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

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

     BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS.

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

     SYSTEM INTEGRATION DISRUPTIONS COULD HARM OUR BUSINESS.

     We are currently making enhancements to our integrated financial and supply chain management system and transitioning some of our operational procedures at the same time. This transition process is complex, time-consuming and expensive. Operational disruptions during the course of this transition process or delays in the implementation of this new system could adversely 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 during the transition period.

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

     Certain provisions of our Restated Certificate of Incorporation, Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, voting rights, preferences and privileges and

46

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

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

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

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

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

     In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123. This Statement supersedes APB No. 25, which is the basis for our current policy on accounting for stock-based compensation described in Note 1 of Notes to Condensed Consolidated Financial Statements included in this report. SFAS No. 123R will require companies to recognize as an expense in the Statement of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees. Pro forma disclosures about the fair value method and the impact on net income (loss) and net income (loss) per share appear in Note 1 of Notes to Condensed Consolidated Financial Statements. Under the methods of adoption allowed by the standard, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123R. The fair value of unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123 except that amounts must be recognized in the Statement of Operations. Previously reported amounts may be restated to reflect the SFAS No. 123R amounts in the Statement of Operations.

     In April 2005, the Securities and Exchange Commission (“SEC”) announced that registrants previously required to adopt SFAS No. 123R’s provisions on share-based payment at the beginning of the first interim period after June

47

15, 2005 may now adopt the provisions at the beginning of their first annual period beginning after June 15, 2005.

     We are evaluating the requirements of SFAS No. 123R and we expect that the adoption of SFAS No. 123R will have a material impact on our consolidated results of operations and net income (loss) per share. We have not yet determined the method of adoption or the effect of adopting SFAS No. 123R, and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123.

     In March 2005, the SEC issued Staff Accounting Bulletin No. 107, (“SAB No. 107”). The interpretations in SAB No. 107 express views of the SEC staff regarding SFAS No. 123R and provide the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. We will consider the guidance in SAB No. 107 when we adopt SFAS No. 123R in the quarter ending March 31, 2006.

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

     We sponsor defined benefit pension plans that cover substantially all our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Long-term pension benefits payable totaled $41 million at June 30, 2005, and $42 million at December 31, 2004. The plans are non-funded, in compliance with local statutory regulations, and we have no immediate intention of funding these plans. Benefits are paid when amounts become due, commencing when participants retire. Cash funding for benefits to be paid in the third and fourth quarter of 2005 is expected to be approximately $0.6 million. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively impact our cash position and operating capital.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

     We maintain investment portfolio holdings of various issuers, types and maturities whose values are dependent upon short-term interest rates. We generally classify these securities as available for sale, and consequently record them on the balance sheet at fair value with unrealized gains and losses being recorded as a separate part of stockholders’ equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our investment portfolio or statement of operations through December 31, 2005. In addition, some of our borrowings are at floating rates, so this would act as a natural hedge.

     We have short-term debt, long-term debt, capital leases and convertible notes totaling approximately $512 million at June 30, 2005. Approximately $348 million of these borrowings have fixed interest rates. We have approximately $164 million of floating interest rate debt, of

48

which $124 million is Euro denominated. We do not hedge against this interest rate risk and could be negatively affected should either of these rates increase significantly. A hypothetical 100 basis point increase in interest rates would have had a $2 million adverse impact on income before taxes on our Condensed Consolidated Statements of Operations for both the three and six-month periods ended June 30, 2005, respectively. While there can be no assurance that fixed or floating interest rates will remain at current levels, we believe that any rate increase will not cause significant negative impact to our operations and to our financial position.

     The following table summarizes our variable-rate debt exposed to interest rate risk as of June 30, 2005. All fair market values are shown net of applicable premium or discount, if any (dollars in thousands):

													Total
													Variable-rate
													Debt
	Payments due by year												Outstanding at
													June 30,
	2005*		2006		2007		2008		2009		Thereafter		2005
30 day USD LIBOR weighted average interest rate basis (1) Capital Leases	$	4,261	$	5,207	$	3,056	$	—	$	—	$	—	$	12,524
Total of 30 day USD LIBOR rate debt	$	4,261	$	5,207	$	3,056	$	—	$	—	$	—	$	12,524
90 day USD LIBOR weighted average interest rate basis (1) Capital Leases	$	1,496	$	997	$	—	$	—	$	—	$	—	$	2,493
Total of 90 day USD LIBOR rate debt	$	1,496	$	997	$	—	$	—	$	—	$	—	$	2,493
90 day EURIBOR weighted average interest rate basis (1) Capital Leases	$	14,552	$	21,506	$	20,860	$	8,262	$	3,906	$	8,788	$	77,874
Total of 90 day EURIBOR rate debt	$	14,552	$	21,506	$	20,860	$	8,262	$	3,906	$	8,788	$	77,874
30/60/90 day EURIBOR interest rate basis (1) Senior Secured Term Loan Due 2007	$	3,040	$	6,081	$	6,081	$	—	$	—	$	—	$	15,202
Total of 30/60/90 day EURIBOR debt rate	$	3,040	$	6,081	$	6,081	$	—	$	—	$	—	$	15,202
2-year USD LIBOR interest rate basis (1) (2)	$	6,353	$	13,177	$	11,478	$	—	$	—	$	—	$	31,008
Total of 2-year USD LIBOR rate debt	$	6,353	$	13,177	$	11,478	$	—	$	—	$	—	$	31,008
Prime interest rate basis Revolving line of credit due 2007	$	—	$	—	$	25,000	$	—	$	—	$	—	$	25,000
Total of revolving line of credit due 2007	$	—	$	—	$	25,000	$	—	$	—	$	—	$	25,000
Total variable-rate debt	$	29,702	$	46,968	$	66,475	$	8,262	$	3,906	$	8,788	$	164,101

* Six months remaining in 2005

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

(2) Rate is fixed over three-year term

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     The following table presents the hypothetical changes in interest expense, related to our outstanding borrowings, for the three and six-month period ended June 30, 2005, that are sensitive to changes in interest rates. The modeling technique used measures the change in interest expense arising from hypothetical parallel shifts in yield, of plus or minus 50 Basis Points (“BPS”), 100 BPS and 150 BPS (in thousands).

     For the three-month period ended June 30, 2005:

	Interest expense given an						Interest expense		Interest expense given an interest rate
	interest rate decrease by X basis points						with no change in		increase by X basis points
	150 BPS		100 BPS		50 BPS		interest rate		50 BPS		100 BPS		150 BPS
Interest Expense	$	4,802	$	5,622	$	6,443	$	7,263	$	8,083	$	8,904	$	9,724

     For the six month period ended June 30, 2005:

	Interest expense given an interest						Interest expense		Interest expense given an interest
	rate decrease by X basis points						with no change in		rate increase by X basis points
	150 BPS		100 BPS		50 BPS		interest rate		50 BPS		100 BPS		150 BPS
Interest Expense	$	10,871	$	11,691	$	12,512	$	13,332	$	14,152	$	14,973	$	15,793

     The following table presents the hypothetical changes in fair value in our outstanding convertible notes at June 30, 2005 that are sensitive to the changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 BPS 100 BPS and 150 BPS over a twelve-month time horizon. The base value represents the fair market value of the notes (in thousands):

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	Valuation of borrowing given an						Valuation with no		Valuation of borrowing given an interest
	interest rate decrease by X basis points						change in interest		rate increase by X basis points
	150 BPS		100 BPS		50 BPS		rate		50 BPS		100 BPS		150 BPS
Convertible notes	$	220,255	$	219,170	$	218,085	$	217,000	$	215,915	$	214,830	$	213,745

Market Risk Sensitive Instruments

     During the first quarter of 2004, we began to use foreign currency forward exchange contracts to help mitigate the risk to earnings and cash flows associated with currency exchange rate fluctuations. We do not use other derivative financial instruments in our operations. The fair value of outstanding derivative instruments and the fair value that would be expected after a ten percent adverse price change as of June 30, 2005, are shown in the table below (in thousands):

			Fair Value after
	Fair Value		10% adverse Price Change
Cash Flow Contracts, (Euro Based)	$	194,158	$	213,573

     We recognize derivative instruments as either assets or liabilities on the Condensed Consolidated Balance Sheets and measure those instruments at fair value. Our objective in holding derivatives is to minimize the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. We do not enter into derivatives for trading purposes. Any change in fair value due to adverse exchange rate changes will be equally offset by the underlying exposure in either balance sheet translation or cash flows from operations that were the basis for the derivative contract. Therefore, adverse changes in the fair value of derivative contracts will not necessarily result in an adverse impact to our Condensed Consolidated Balance Sheets or Condensed Consolidated Statement of Operations.

     See Note 5 of Notes to Condensed Consolidated Financial Statements for more information concerning our accounting for derivative instruments.

Foreign Currency Risk

     Refer to the accompanying Notes to Condensed Consolidated Financial Statements for a discussion of our policy on and use of foreign currency derivative contracts to help mitigate the impact of foreign currency risks.

     When we take an order denominated in a foreign currency we will receive fewer U.S. dollars than we initially anticipated if that local currency weakens against the U.S. dollar before we collect our funds, which will reduce revenues. Conversely, revenues will be positively impacted if the local currency strengthens against the U.S. 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 U.S. dollar. The net effect of less favorable average foreign exchange rates for the three-month period ended June 30, 2005 compared to the average foreign exchange rates for the three-month period ended June 30, 2004 resulted in an increase in

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our loss from operations of $7 million (as discussed in this report in the overview section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations). The net effect of less favorable average foreign exchange rates for the six-month period ended June 30, 2005 compared to the average foreign exchange rates for the six-month period ended June 30, 2004 resulted in an increase in our loss from operations of $19 million. This impact is determined assuming that all foreign currency denominated transactions that occurred in the three and six-month periods ended June 30, 2005 were recorded using the average foreign exchange rates for the same periods in 2004. Sales denominated in foreign currencies were 22% and 26% for the three-month periods ended June 30, 2005 and 2004, respectively, and 23% and 27% for the six-month periods ended June 30, 2005 and 2004, respectively. Sales denominated in Euros were 21% and 25% for the three-month periods ended June 30, 2005 and 2004, respectively, and 21% and 26% for the six-month periods ended June 30, 2005 and 2004, respectively. Sales denominated in Yen were 1% for each of the three and six-month periods ended June 30, 2005 and 2004. Costs denominated in foreign currencies, primarily the Euro, were approximately 57% for both the three-month periods ended June 30, 2005 and 2004, and 59% and 57% for the six-month periods ended June 30, 2005 and 2004, respectively.

     For comparison purposes, the average foreign exchange rates in effect during the three-month periods ended June 30, 2005 and 2004 for the USD-Euro was 1.26 and 1.22, respectively. The average foreign exchange rates in effect during the six-month periods ended June 30, 2005 and 2004 for the USD-Euro was 1.30 and 1.23, respectively.

     We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the U.S. dollar. Approximately 26% and 30% of our accounts receivable are denominated in foreign currency as of June 30, 2005 and December 31, 2004, respectively.

     Accounts payable and debt obligations denominated in foreign currencies could increase if such foreign currencies strengthen quickly and significantly against the U.S. dollar. Approximately 49% and 56% of our accounts payable were denominated in foreign currency as of June 30, 2005 and December 31, 2004, respectively. Approximately 24% and 32% of our debt obligations were denominated in foreign currency as of June 30, 2005 and December 31, 2004, respectively.

Item 4. Controls and Procedures

(a) Evaluation 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 term is defined in Rule 13a-15(e) and Rule 15(d)-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective because we have not completed the remediation of the material weaknesses discussed in our Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 Form 10-K”).

     As discussed in more detail in our 2004 Form 10-K, as of December 31, 2004, we did not maintain effective controls over (i) the accounting for income taxes, including the determination

52

of income taxes payable, deferred income tax assets and liabilities and the related income tax provision, and (ii) the accounting for inventory reserves and cost of revenues.

     During the first and second quarters of 2005, we began remediating the accounting for income taxes and inventory reserve material weaknesses described in our 2004 Form 10-K, including the hiring of additional tax personnel. However, as of June 30, 2005 we have not completed the remediation of these material weaknesses.

(b) Changes in internal control over financial reporting.

     We continue to enhance our internal control over financial reporting by adding resources in key functional areas and bringing our operations up to the level of documentation, segregation of duties, systems security, and transactional control procedures required under the new Auditing Standard No. 2 issued by the Public Company Accounting Oversight Board. We routinely discuss and disclose these matters to the audit committee of our board of directors and to our independent registered public accounting firm.

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

PART II OTHER INFORMATION

Item 1. Legal Proceedings

     From time to time, the Company may be notified of claims that it may be infringing patents issued to other parties and may subsequently engage in license negotiations regarding these claims. Should the Company elect to enter into license agreements with other parties or should the other parties resort to litigation, the Company may be obligated in the future to make payments or to otherwise compensate these third parties which could have an adverse effect on the Company’s financial condition or results of operations or cash flows.

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

     Agere Systems, Inc. (“Agere”) filed suit in the United States District Court, Eastern District of Pennsylvania in February 2002, alleging patent infringement regarding certain semiconductor and related devices manufactured by Atmel. The complaint sought unspecified damages, costs and attorneys’ fees. Atmel disputed Agere’s claims. A jury trial for this action commenced on March 1, 2005 and on March 22, 2005, the jury returned a decision in favor of Atmel. This decision is subject to appeal.

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     Seagate Technology (“Seagate”) filed suit against Atmel in the Superior Court for the State of California for the County of Santa Clara on July 31, 2002. Seagate contended that certain semiconductor chips sold by Atmel to Seagate between April 1999 and mid-2001 were defective. Atmel cross-complained against Amkor Technology, Inc. and ChipPAC Inc., Atmel’s leadframe assemblers. Amkor and ChipPAC brought suits against Sumitomo Bakelite Co. Ltd., Amkor and ChipPAC’s molding compound supplier. The parties settled their dispute and in June 2005, the parties dismissed their respective complaints, with prejudice. The settlement amount did not have a significant impact on our financial position.

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

     None.

Item 3. Defaults Upon Senior Securities

     None.

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

     At our Annual Meeting of Stockholders held on May 11, 2005, proxies representing 446,964,627 shares of Common Stock or 93% of the total outstanding shares were voted at the meeting. The table below presents the voting results of the election of the Company’s Board of Directors:

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	Total votes for each		Total votes withheld from
	director		each director
George Perlegos		376,901,694		70,062,933
Gust Perlegos		376,899,842		70,064,785
Tsung-Ching Wu		376,860,557		70,104,070
T. Peter Thomas		394,374,345		52,590,282
Norm Hall		360,357,062		86,607,565
Pierre Fougere		394,404,159		52,560,468
Dr. Chaiho Kim		421,485,335		25,469,692
David Sugishita		413,803,205		33,151,822

     The stockholders approved the Atmel Corporation 2005 Stock Plan (an amendment and restatement of the Atmel Corporation 1996 Stock Plan). The proposal received 147,090,121 votes for, 106,691,261 votes against, 2,369,736 abstentions, and 190,813,509 broker non-votes.

     The stockholders ratified the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company for the fiscal year 2005. The proposal received 443,257,011 votes for, 2,653,051 votes against, 954,484 abstentions, and 100,081 broker non-votes.

Item 5: Other Information

     None.

Item 6: Exhibits

     The following Exhibits have been filed with this Report:

10.1	Atmel Corporation 2005 Stock Plan, as amended and restated, and forms of agreements thereunder (which is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 16, 2005).
10.2	Separation Agreement and Mutual Release dated as of July 7, 2005 between the Registrant and Francis Barton.
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

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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)
August 9, 2005	/s/	GEORGE PERLEGOS
		George Perlegos
		President & Chief Executive Officer
		(Principal Executive Officer)
August 9, 2005	/s/	ROBERT AVERY
		Robert Avery
		Vice President Finance &
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Exhibit Index

10.1	Atmel Corporation 2005 Stock Plan, as amended and restated, and forms of agreements thereunder (which is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 16, 2005).
10.2	Separation Agreement and Mutual Release dated as of July 7, 2005 between the Registrant and Francis Barton.
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